New Ways to Fund Infrastructure Investment Needed

New ways to fund large infrastructure projects such as Crossrail, are proposed in a study published today by the Institute of Economic Affairs*.

So far, Crossrail and many other similar projects have floundered because the large sums of money required have not been forthcoming from government and there is a reluctance to pass the full costs to users of the services.

The study, edited by Fred Harrison**, suggests that there is a significant cumulative shortfall in infrastructure investment which some believe could be up to £70bn – much of this relates to transport infrastructure. However, this shortfall should not funded through increased taxes.

User charges on roads and rail fares at levels that ensure that passengers and freight users pay the economic costs of their journeys would generate revenue of £24bn per year. User charges would also lead to economic welfare gains of over £10bn per year as consumers were made to pay the economic price of road and rail journeys. With regard to Crossrail, changes to the detail of the proposed Crossrail scheme, the addition of extra lines, and higher fares for commuters, would make the Crossrail scheme, that successive governments have only talked about since the late 1980s, viable.

The study also proposes other forms of funding. The benefits of transport infrastructure not only accrue directly to users, but also indirectly to businesses and property owners. In the case of the extension of the London Underground Jubilee Line, for example, property owners in Southwark reaped huge financial rewards from the rise in property prices that resulted from the building of the extension. The study explores ways in which such beneficiaries may be required to at least partly fund projects.

Taxes on incomes to fund government investment could be replaced by levies on land values to fund shared infrastructure services. Alternatively, experience in Hong Kong and Japan, as well as historical experience in the UK and US, has shown that private mechanisms can ensure that those living near, and benefiting from, new infrastructure fund its development. Harrison argues that making transport infrastructure self funding through user charges and land levies, will substantially reduce booms and busts in housing markets – particularly in local areas where booms are linked to the development of new transport systems.

ENDS

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