User pay funding of transport infrastructure: a history of the English experience

"User-pay funding of transport infrastructure: lessons from London and England's long

history of road pricing”

Cameron Gordon Associate Professor of Economics

University of Canberra [email protected]

Presentation outline • English transport finance:

– Post Roman to pre-medieval – The importance of bridges – The medieval period – A transition: 1500s to early 1700s – The Turnpike Revolution (1700s to 1800s) – State-centered finance: twentieth century

• London – The Bridges Estates – The limits of charity

• Lessons – Beneficiary-cost matchups and mismatches – Thinking ahead about legal framework – The land use and value bundle – The Wider Economic Benefit conundrum – The importance of regulation

• The Roman Occupation of Britain saw the usual Imperial investment in a road network, financed by Roman taxes and levies

• This network almost completely disappeared after the Romans left and the network in place by the thirteenth century owed almost nothing to the Romans except for some of the route placements.

• http://www.probertencyclopaedia.com/photolib/maps/Map%20of%20Roman%20Roads%20in%20Britain%201906.htm

• Just a note on Roman roads in Britain: most of them were unpaved and, in fact, provincial Roman roads generally tended not to be paved but consisted of a metalled surface (e.g. gravel or pebbles) on a solid foundation of earth or stone.

• (The Agger is a well-drained base in the form of a bank of earth or other layered material. This diagram is a schematic of the case where an original Roman road has been followed and covered by a modern road.) http://www.brrp.bham.ac.uk/construction/construction.html

How did Medieval England build and maintain its roads?

• Despite the degradation of Roman roads, post-Roman and Medieval England managed to build and maintain a decent network of roads that managed both to evolve and deliver what most historians consider a reasonable level of service.

• How was this accomplished, especially given the turbulent nature of society during much of this period and undulating royal authority? http://www.arts.cornell.edu/prh3/257/images/Knownrds.gif

The original user-pay system • Collective transport provision and finance in Anglo-Saxon England

focused on in-kind contributions, particularly labour levies, delivered through traditional civil authorities and administrative units (counties, hundreds and vills) and landowners, both secular and religious. Essentially obligations tied to landownership put road finance imperatives on landowners and garnered co-contributions by residents in the form of work on construction and maintenance.

• As the economy developed in this period, transport needs increased, and technology changed; this basic arrangement had to be strengthened through both voluntary actions (especially charitable and other voluntary contributions), changing business practice (especially informal monetising of in-kind labor levies in the form of hiring of skilled craftspeople) and periodic central legislation.

• These were the main funding mechanisms during the Middle Ages; thus infrastructure finance was closely tied to local beneficiaries.

The importance of bridges • In a riverine territory like England water crossings are

particularly important. In fact many transport historians argue that it was bridges that actually contributed the most to efficiency in English movements of goods and people.

• Sir Frank Stenton has argued that in the medieval period it was ‘by the building of bridges that Englishmen set about improving their communications.’ Other historians have agreed.

• Roads obviously took time and money to make and maintain but prior to macadamized roads their construction was obviously simpler, especially since loads were limited by technology. Travel on roads was slow but impossible if there were no bridges. And bridges turned out to be expensive, sometimes requiring the most advanced technology of the time. Bridges required the mobilization of large amounts of capital sometimes with frequent infusions.

• Many bridges, particularly larger ones, often hosted other structures and enterprises. Chapels were quite typical and this is one reason churches, prior to the Reformation, were often responsible for upkeep of bridges. Such structures also generated revenue.

• One big technological shift was from timber to stone bridges, a shift which required a quantum leap in capital investment.

The Bridges of Medieval England: Transport and Society, 400-1800 David Harrison

Customary arrangements • Some bridge building was undertaken for strategic and economic

reasons and was led by the Saxon kings (and indeed, fortifications, often integral to bridges, were one basis of the labour levy).

• A more significant impetus came from charitable giving by landed and wealthy parties, e.g. an heirless merchant leaving a large bequest for a bridge or a lord bridging a now impassable ford to benefit his estate. As per capita incomes grew especially after the middle ages, such ‘surplus’ income became more widely available. And of course this same trend drove increasing demand for roads and bridges.

• Charitable impulses in this sense constituted a sort of supply meeting demand. Otherwise, as Harrison notes, substantial bridges would have often been built in odd places instead of the critical points they usually were built. Also most bridges remained well maintained, a further indication of their economic and not just charitable utility.

Source: Harrison

Source: Harrison

• By the 1500s this customary system was under strain. It might be OK for existing bridges and maintenance but new bridges in new places could be problematic. Harrison refers to a ‘fossilization’ of liabilities where traditional obligation systems essentially froze and were incapable of financing new bridges at new sites after the eleventh century.

• Technology played a role too: stone bridges were now the norm and older limited financing mechanisms were not sufficient for building these outside a very few cases.

• The Reformation also was critical in removing church lands and obligations to bridges. New landholders generally did not honour old church obligations to bridge upkeep.

• Even before 1500, new institutions such as towns and gilds were becoming increasingly active in bridge building. By the 1300s town officials, usually bailiffs, often oversaw the repair of bridges.

• Grants of tolls were frequently issued to them for this purpose and they likely collected rents from property given to the bridge and managed that property. Bridge wardens, chosen by the townsmen, were common.

• Private gilds meanwhile developed the Estate Trust to manage and disburse their increasing wealth.

• A 1391 Act extended the terms of the original mortmain legislation to cover gilds and fraternities, cities, boroughs and market town requiring them to seek Crown licenses to acquire land for themselves, but also formalizing and encouraging the use of Bridge Trusts.

Norwich City Walls http://www.britainexpress.com/History/Townlife.htm

A note on medieval tolls

• There were two main sources of authority for tolls. Ancient custom was one. This seems to be the basis for London Bridge tolls and other major bridges through to the fifteenth century.

• A Royal grant was the other source, called a pontagium or pontage grant. These appear to have originated in the 1200s. This pontage grant was the companion of the murage grant, a contemporary innovation, which was the licence to levy tolls on good coming in for sale in the town and meant to defray town defence costs.

http://www.walesonline.co.uk/lifestyle/nostalgia/welsh-history-month-the-tollgate-3415361

• They were never meant to be a general levy on travelers and there were penalties for ‘misappropriation,’ i.e. the use of tolls for purposes other than maintenance and repair. In particular these grants were most often made in times of crisis. One had been obtained by the London bridge shortly before it collapsed in 1282.

• The sums raised by these grants and their corresponding toll revenues remained small in any case. By the end of the 15th century, the London Bridge estate’s income derived from tolls was less than 5% of the total. Such low yields probably were due to the many exemptions, possibly spotty enforcement and, in some cases, low traffic.

Pontage grants tended to be small and for short duration until their heyday in the 1300s, that of murage grants a little earlier. The grant on behalf of the Ferrybridge is typical, stating that the sums raised are to be spent on repairing or occasionally rebuilding the bridge. http://www.johnhmoore.co.uk/hele/turnpikes.htm

1530 – 1760: from User Finance to General Finance

• 1530-1760 is one clear phase change in the English bridge finance system. The Statute of 1510 removed traditional bridge funding obligations and shifted them to the general tax base of the county, which was, of course, a property tax base.

• The Statute for Mending Highways was passed in 1555 and made all parishes or townships responsible for road maintenance in their jurisdictions and gave them authority to force local inhabitants to work on the roads for up to six days per year. The Chantries Act of 1547 suppressed the religious gilds and along with the dissolution of the monastic estates there came an end to church finance.

• Wider revenue bases were thus tapped with the imposition of liabilities on local counties, a broadening to a general tax base composed of users and non-users (using that term in the broadest sense).

1760: beginning of a new era • After 1760 really major breaks and changes occur in transport

finance. There was a large increase in expenditure on county bridges, an apparent doubling from 1640-1760 to 1760-1800 and another doubling from 1800-1830.

• Many bridges previously repaired by owners now transferred to county care, such as the three Surrey bridges at Cobham, Leatherhead and Godalming in 1782. This was driven by extensive reconstruction of bridges during this period as well as an expansion of the road system.

• But it should be noted that the more traditional system of subscriber based finance remained, though often supplemented by Trusts when subscriptions proved insufficient (e.g. in Shropshire). Small bridges in particular remained polyglot in their funding sources. Even at the beginning of the 20th century many bridges were still being repaired by landowners who had acquired an obligation from over 1000 years ago.

The Turnpike Revolution • Turnpike Trusts were statutory creations of Parliament

and had access to external finance with externally created boards.

• A Trust board of trustees had power over a road that was previously maintained by several parishes. They could levy tolls, issue secured bonds and purchase land.

• Toll revenues had to be devoted entirely to road maintenance, salaries, interest and debt payments.

• The first turnpike act was passed in 1663, but these became regular features of legislation only in the 1690s and 1700s and grew in surges from there. By the 1830s there were over 900 trusts managing approximately 20,000 miles of 17% of the entire network.

• One issue that arises is the match between beneficiaries and cost-bearers. Parishes, for example, were funded by communities while users of roads who were not part of that community often benefited from road and bridge investments without paying for them. Also parishes were drawn around traditional boundaries.

• Turnpikes trusts could be and were drawn for larger areas that sometimes more closely matched transport areas. Economies of scale in both financing and operations allowed trusts to make investments and pay operating and maintenance expenses much larger than traditional authorities could handle. Realisation of network effects was also generally more possible with trusts which could create interlocking directorates to help coordinate investment across trusts.

Gouging? • Turnpike trusts could exercise more

monopoly power than older traditional authorities. Parliament did try to legislate protections against the abuse of such powers, including setting maximum tolls, and forbidding trustees from earning profits. Parliament also required trustees to own property which could provide incentives for trusts to keep tolls low so as to maximise returns from those investments. (This strategy may also have captured agglomeration economies).

• There was, of course, conflict of interest and rent-seeking that might have been engendered by such strategies. Indeed Adam Smith wrote of these abuses claiming that trustees charged tolls twice as high as needed to maintain the roads.

http://www.openairclassroom.org.uk/Further%20information/information-turnpike%20trusts.htm

The land value nexus • Trustees were typically local landowners and

merchants who had a direct interest in road improvements.

• Although prohibited from earning profits directly from tolls, trustees generally profited from indirect returns to property value gains In a sense this is a proto-value capture scheme that may have allowed investments to be profitable through indirect returns.

• Turnpike trusts were responsible for at least 20 percent of total growth in land rents between 1690 and 1815.

The payoffs • Bogart estimates that

‘social savings’ from all transport innovations, including trusts, equaled 1.2% of national income in 1800 and 2.0% in 1820. He estimates that the invention of the trusts accounted for around 30% of that improvement (and around half of the 40% reduction in freight charges during the period, even with tolls being imposed).

http://www.turnpikes.org.uk/The%20Turnpike%20Roads.htm

The end of the trusts

• Many turnpike trusts were wound up under General Acts of Parliament between 1873 and 1878. The transfer of resources and sale of assets to repay loans were supervised by the Local Government Board which acted as arbiter in the case of disputes. Toll-houses were sold, gates torn down and responsibility for the main roads passed to Highway Boards. Bond-holders were paid off with any residual funds, though sometimes with losses.

• Under the Highways Act of 1878 all disturnpiked roads became "Main Roads" as did some ordinary highways. By the Local Government Act of 1888 the entire maintenance of main roads was thrown upon the County Councils.

http://www.schoolshistory.org.uk/year9/industrialrevolution/images/roads3.jpg

State-centred transport in the 20th century

• In the 20th century the central government took more of a leading role. The Roads Act 1920 created the Road Fund, with the Government receiving revenue from excise duty on road vehicles and from the sale of licences for horse-drawn carriages and driving licences.

• As road traffic began to grow, the condition of the road network became an issue and the new Ministry of Transport created a classification system for the important routes connecting large population centres or for through traffic.

• This pattern of oversight and road investment quickened after World War 2.

The London situation • In 1097 William Rufus, second son of William the

Norman, raised a special tax to help repair the London Bridge. Proper maintenance and then the building of new stone bridge allowed for the addition of shops and houses which by the twelfth century were building increasing cross-river trade and perhaps more importantly increased taxes, rents and bequests.

• The increasing surplus generated was managed by a building on the south side of the bridge known as Bridge House. Hence the creation of the Bridge House Estates and its related Trust. The City of London was confirmed as Trustee formally in 1957 but its leading role in managing the bridge and its revenues came long before then.

• London Bridge originally contained houses, hostelries, shops and even brothels, 138 enterprises at the peak. There were also bakeries, water-wheels, corn mills and a chapel.

• An Order of monks was set up to look after the bridge and tolls were imposed on carts going over the bridge, boats going under it and fines imposed for fishing and dumping rubbish off the bridge.

• As funds from rents and tolls built up, large swathes of land and property were bought in Southwark, the Square Mile and the area that later became Mayfair.

http://www.elfinspell.com/AndrewsBridges.html

(A variety of income sources beyond these contributed to the bridge’s revenue. The oddest was the practice of charging the City and the Tower of London a shilling to display the heads of traitors on poles on the draw-bridge on the Southwark side.)

A bridge trust as charity • William Rufus had the intent of providing Londoners

with a stone bridge, which was a clear public benefit. This original intent means that the Trust has to stay focused on bridges only and things like roads had to be left to someone else (in the modern era this being the Highways Agency.)

• Since income generated went far beyond bridge needs the Charity Commission eventually approved a cy-près scheme which enabled the Trust to apply such surplus to the broader charitable activities it carries out today. (this being the legal doctrine that when the original objective of the settlor or the testator became impossible, impracticable, or illegal to perform, the terms of the charitable trust could be amended as closely as possible to the original intention of the testator or settlor to prevent the trust from failing).

• The Trust built some and now maintains five bridges that cross the Thames into the City of London – Blackfriars Bridge (built between 1760 and

1769 and replaced between 1860 and 1869) – Millennium Bridge (a pedestrian bridge built

in during the Millennium celebrations and funded jointly by the Bridge House Estates and the Millennium Commission)

– Southwark Bridge (built between 1814 and 1819 and purchased by the Trust in 1868; replaced in 1912-1921)

– London Bridge (the first stone bridge across the Thames built between 1176 and 1209 and replaced between 1967 and 1972)

– Tower Bridge (opened in 1894). (Tower Bridge Tourism operates the substantial visitor activities and income generated by that complex.)

A fast-forward to London today • The London Bridge House Estates 2012 Annual

Report notes that only 25% of expenditure was on repair and maintenance of the bridges under its purview (6.4 million pounds).

• 69% of its total spending was on grants to voluntary organisations. Its other working names include Bridge House Estates Trust Fund; Bridge House Trust; Bridge House Grants; The City Bridge Trust.

• Its public benefit statement notes that ‘the objects of the charity are the maintenance of the river bridges and grant making and related activity for the benefit of Greater London.

Lesson 1: Beneficiary-cost matchups and mismatches

• A key finding of the England/London transport history is how important matching beneficiaries and cost-bearers are in institutional and financing arrangements.

• Many of these connections are very subtle and interwined and they are continually evolving.

• England’s focus on custom and tradition initially provided very close cost-beneficiary matches. When they didn’t new practices sometimes emerged organically and when that was not enough legislative solutions were offered. But they generally extended rather than replaced customs.

• Also boundaries were very important. Early on parishes captured most of the beneficiaries but later on counties and trusts became more viable and effective administrative units (though there was an issue of diffusion of benefit/cost as well).

Lesson 2: Thinking ahead about legal framework

• England’s transport arrangements have been very law-bound and typically are creatures of law.

• The bridge estates are important examples of this. Charitable law allowed for the extension of private and limited charitable acts into powerful and wealthy institutions capable of funding and maintaining large infrastructure.

• However this same legal basis became a constraint in the modern age as the London Bridge Estates now has to spend the greater part of its surplus on non-bridge related activity.

• Adaptability of legal framework over time is critical.

Lesson 3: The land use and value bundle

• Although there is a modern renaissance in land-value capture finance, the history of English transport finance indicates that this notion was recognised long ago.

• Medieval transport finance was built on land property rights and it grew with this as its ongoing foundation.

• Turnpike Trusts could be seen as land trusts that built roads and having landed interests driving transport facility investment had the advantage of such investments being closely tied to development potential. It also offered diversification of revenues and returns (something also present in the London Bridge Estates).

Lesson 4: The Wider Economic Benefit Conundrum

• Wider Economic Benefits (WEB) are a key aspect of many large scale transport projects today. With government-centric finance, these must be estimated by benefit-cost analysis, not always easily.

• Older English transport institutions were inherently private and in many ways ‘organically’ considered and captured agglomeration economies from the inception of an investment. Or managed to evolve to capture them later on.

• Thus potential WEB might be, if possible, weaved into institutional arrangements from the outset of a project.

Lesson 5: The Importance of Regulation

• Although glacial in pace by modern standards, English legislation did intervene at various points to address problems and limitations that arose from the actions and practices of customary institutions.

• The 1391 extension of mortmain to include the ‘new’ actors in bridges of towns and gilds is an example of liberalisation of regulation to evolve with changing times.

• The various features of the Turnpike acts to address toll gouging and self-dealing are an example of fetters (not always effective) being placed on private initiative to protect the public interest.

A final takeaway • So is the answer to modern day transport

finance to return to customary English practices? Of course not.

• But there is much in that history that can inform, sometimes directly, the current subtleties of user-pay finance in a flexible, subtle and full-bodied way.

• In particular, English history shows that a fully funded user-pay system of investment was never really possible yet at the same time user pay implicitly was a fundamental building block.