Alternative Road Financing Arrangements

Research conducted for the Canada Transportation Act Review

Report prepared by
Fred Nix

March 2001

Alternative Road Financing Arrangements

Prepared for:
The Canadian Transportation Act Review Panel

Prepared by:
Fred P Nix

With assistance from:
John Pearson
Michèle Delaquis

March 2001

EXECUTIVE SUMMARY

The mandate for this research was to examine "Alternative Road Financing Arrangements"-that is, alternative to the traditional reliance, at the provincial and territorial level, on consolidated tax funds and, at the local level, on property taxes and grants from senior levels of government. Three specific alternatives are investigated (there can be some overlap among these): toll roads, urban transportation agencies and road funds.

This research is descriptive; it examines how these institutions work. No conclusions are drawn about whether toll roads, urban transportation agencies or road funds are a better way to pay for roads than traditional methods.

To set the scene, the research documents current expenditures, revenues from taxes conventionally viewed as road user taxes, and provincial and territorial views on what alternatives they see. Road spending approaches $12 billion a year including spending on toll roads, which is not usually incorporated into summaries of federal, provincial, territorial and local government spending. Revenues from taxes conventionally thought of as road-user taxes and tolls exceed $14 billion. Most provinces, territories, major cities and road-user groups see one primary alternative to current arrangements: federal government involvement in road spending using the $4 billion in tax revenues it receives from the excise tax on road-motor fuels.

There are 19 toll facilities in Canada and four more are under consideration. From all accounts, the existing toll facilities are financially successful. This does not necessarily mean that tolls have paid all the costs as, in some cases, government money has been or is involved. There are close to half a million vehicle trips a day on toll facilities and a rough estimate of annual toll revenues is $279 million.

Several provinces are establishing new ways of financing local roads in major cities (or urban areas consisting of a number of contiguous municipalities). Much of the focus is on transit services. Two areas with what appear to be the most promising approaches are Montréal (the focus is almost all on transit) and Vancouver. Although there are some start-up difficulties, the long-term impact of these new arrangements appears to be a greater reliance on user fees to pay for local roads.

Many provinces have at one time or another experimented with the idea of establishing a road fund to pay for roads. The US Highway Trust Fund is the closest example and is often emulated. Some aspects of these funds, however, appear to have more to do with public relations than really new ways of paying for roads. Currently, the most innovative approach to road funds-albeit on a small scale-is in Saskatchewan where there is a program that allows truckers to operate large trucks in return for a payment that goes into a special fund and is only spent on road improvements. On a much larger scale, British Columbia has created a new crown corporation that is funded by dedicated taxes (a portion of the provincial fuel tax) and that has responsibility for paying for the capital costs of provincial highways (among other things).

Oddly, no one in Canada is paying much attention to the road funds advocated by the World Bank. New Zealand is, perhaps, the country with the most successful track record in establishing one of these road funds and possibly Canadian governments should look at this approach more closely.

CONTENTS

1. Introduction

2. Background and Current Practices

2.1 Newfoundland and Labrador

2.2 Prince Edward Island

2.3 Nova Scotia

2.4 New Brunswick

2.5 Québec

2.6 Ontario

2.7 Manitoba

2.8 Saskatchewan

2.9 Alberta

2.10 British Columbia

2.11 Yukon

2.12 Government of the Northwest Territories

2.13 Summary

3. Toll Roads

3.1 Introduction

3.2 Toll Roads and Public-Private Partnerships

3.3 Toll Roads in Canada

3.3.1 Halifax-Dartmouth Bridges

3.3.2 Cobequid Pass

3.3.3 Confederation Bridge

3.3.4 Saint John Harbour Bridge

3.3.5 Ontario-United States Links

3.3.6 Highway 407

3.3.7 Coquihalla

3.3.8 Other

3.4 Toll Roads in Other Countries

3.5 Summary

4. Urban Roads

4.1 Introduction

4.2 Vancouver's TransLink

4.3 Edmonton and Calgary

4.4 Montréal's AMT

4.5 Summary

5.1 Introduction

5.2 United States Highway Trust Fund

5.3 Road Funds Proposed by the World Bank

5.4 New Zealand

5.5 Canadian Road Funds

5.6 Summary

6. Summary Observations

References:

Endnotes

TABLES

Table 1: Road Expenditures Versus Fuel Taxes

Table 2: Summary of Aspects of Current and Past Highway Finance Policies

Table 3: Toll Roads, Bridges and Tunnels in Canada

Table 4: Toll Rates (CDN$)

Table 5: Financial Details of Toll Facilities

Table 6: Tolled Roads in Selected Countries

Table 7: Summary of Toll Road, Bridge and Tunnel Characteristics

Table 8: Countries with Road Funds or Countries Working to Establish Road Funds

Table 9: Transfund New Zealand, Annual Report 1999/2000

TEXT BOXES

Text Box 1: World View on Highway Finance

Text Box 2: Royal Commission & Toll Roads

Text Box 3: Nova Scotia Auditor General

Text Box 4: Urban Transportation Budget Crunch

Text Box 5: Greater Vancouver's TransLink

Text Box 6: Japan's Earmarked Taxes & Road Fund

Text Box 7: Transfund New Zealand

Text Box 8: Royal Commission's Views on New Zealand's Approach

1. Introduction

There is a growing awareness that nearly all countries which finance their roads through the consolidated fund are seriously short of revenues for investment and maintenance of roads . . . As a result, governments world-wide are attempting to generate additional revenues for roads by: (i) improving utilization of the existing budget; (ii) requesting additional resources from the government's consolidated fund; and (iii) introducing tolls on high-volume roads or inviting the private sector to build and operate such roads under concession agreements.

---------------------

Ian Heggie, 1999

Most roads in Canada are paid for with money from consolidated tax revenue funds. This is tax revenue collected without any legislated mandate as to how it is spent. There are only a few dedicated road taxes or tolls in Canada. Over the past decade, however, there has been a slight change in traditional practices as some urban areas and some new links in the highway network have adopted alternative methods of financing. Further, at least one province has begun to dedicate portions of the fuel tax to a number of areas of transportation spending.

Alternative or non-traditional financing sometimes includes public-private-partnerships for construction or operation of roads. These partnerships are clearly alternative financing arrangements where the private sector's responsibility includes financing. But, they might also be considered an alternative financing arrangement even when they do not include any financing responsibilities on the part of the private sector. A maintenance contract with a private operator, to the extent it represents maintenance being done at a lower cost than could be done with a public road agency, may free up government money for other uses.

Text Box 1: World View on Highway Finance

The alternative financing arrangements examined in this paper include 19 toll facilities in Canada (12 of which are border crossings to the United States), five new financial arrangements in urban areas (these typically involve transit financing as well as roads), and several road funds. Road funds act as a repository for dedicated user taxes and as a source of money for road maintenance or construction. The main such fund in Canada is in British Columbia where a crown corporation has been established that both owns the provincial roads and finances capital expenditures from, among other things, dedicated fuel tax revenues.

The result of these alternative financing arrangements is that motorists, on a few segments of the road network, now pay for roads in a more explicit fashion than they used to. The apparent advantage of these new arrangements is that they tap into new sources of money-that is, other than the traditional consolidated funds. They also, so it is claimed, may make the business of supplying roads more efficient. This commercialization of roads would have met the approval of both the 1992 Royal Commission on National Passenger Transportation and the 1993 National Transportation Act Review Commission.

This paper describes these alternative financing arrangements and attempts to assess how well these more-commercialized segments of the road network are performing. In doing this, road-financing methods in other countries-particularly the road funds advocated by the World Bank-are examined.

The next chapter provides a broad look at the background and current practices in each province and territory. Not surprisingly, the main observation is that provincial and territorial roads are financed mainly from consolidated funds. The next three chapters describe the three items included in the mandate for this research: toll roads, urban agencies-that is, alternative approaches to financing urban roads-and road funds. These three topics are not mutually exclusive and there is some overlap. For example, a national road fund could be set up to pay for all roads, including local ones. Or, the establishment of a road fund may have an impact on policies about toll facilities. The final chapter summarizes the observations on these matters.

This is descriptive research. There are no recommendations as to which method of financing roads is preferable.

2. Background and Current Practices

Canada appeared to be taking the path to a user-pay regime and dedicated taxes when roads and vehicles first appeared. From prior to World War I when automobiles and roads in their modern form first started to appear to about 1950, many provinces earmarked revenues from vehicle registration fees-the first explicit road tax-for the building and maintenance of roads. This established the idea that there is a link between the use of a road and the payment of certain taxes. Governments have made great use of this understanding about a link ever since, particularly when they wanted to raise these taxes. In the 1920s, there was no general sales tax so the establishment of a special tax on gasoline was unusual. Seven out of ten provinces (counting Newfoundland) had specific earmarking provisions in their initial legislation. Further, these acts all had provisions ensuring that only gasoline used on public roads was taxed.¹

This early reliance on earmarked taxes died out during and after the Second World War. By 1972, only five provinces retained vestiges of dedicated road-user taxes, and even these were tame compared to the original intentions. (Five retained legislative authority to use gasoline or other tax revenues for road-related purposes; how many actually exercised this power is difficult to tell.)

Further, toll financing never caught on as it did in the United States although there was a resurgence of this idea after the Second World War which is discussed in Chapter 3. Tolls are an even more explicit road price than dedicated taxes as the user sees a precise link between the payment and use. By the 1980s, roads were almost universally regarded as a public good to be paid for by the general taxpayer out of consolidated tax revenues.

The following description of current practices and views on highway finance starts with information collected in a 1995 study.² This has been up-dated with more recent information where available. Current views on highway finance have been gleaned from submissions made to the CTA Review Panel and other recent sources.

To set the scene, Table 1 provides an overview of road expenditures, road-related tax revenues and road lengths. Nunavat is included with NWT.

· Road Expenditures: Numbers shown are total provincial or territorial expenditures on roads plus local government expenditures with provincial or territorial transfers netted out.³ Expenditures for provincial and territorial governments include all activities associated with roads by the highway departments (construction, maintenance, compliance, safety, etc). The amount shown for the federal government is just expenditures by various federal departments on roads.⁴ It does not include transfer payments for roads to the provinces or territories (somewhere between $198 million and $345 million in 1998/99 depending on what is counted⁵) nor does it include any of the federal government's safety and policy expenses.

· Fuel Tax Revenues: Provincial revenues for 1998 are estimated on the basis of fuel sales. Statistics Canada provides the amount of fuel sales on which road tax has been paid although some numbers are estimated.⁶ Federal excise tax revenues are estimated on the basis of fuel sales times the relevant tax rates (10¢/litre for gasoline and 4¢/litre for diesel).⁷ Similarly, provincial and territorial tax revenues are based on 1998 tax rates times fuel sales.⁸ What may not be included (it is difficult to determine) in the amounts shown are some of the special fuel taxes in some urban areas. (Others who have made this comparison between fuel taxes and road expenditures often deduct a "sales-tax-equivalent" from the fuel tax revenues. This may or may not be appropriate, but it is not done here.)

· Road Length: Road lengths are in two-lane equivalent kilometres and only include local (municipal) and provincial-territorial roads for each jurisdiction. Federal roads are shown separately in their own row so that the ratios in the last two columns are not distorted. The original information (1995) is dated but appears to be the only national source.⁹ In a few cases, it has been up-dated with more recent estimates available from provincial and territorial departments of highways. This is difficult to do as most jurisdictions only report "route kilometres".¹⁰ More accurate 1999 figures would affect the calculations in the last two columns in a minor way. For the most part, toll road lengths are not included in these numbers (the exception is probably the Coquihalla).

Table 1: Road Expenditures Versus Fuel Taxes

The numbers in Table 1 are not perfect. For example:

· Fuel sales for some provinces are estimated;

· Taxes on fuels such as propane are not included;

· Some special fuel taxes-possibly the 1.5¢/litre in the Montreal area, the 4¢/litre in Vancouver or the 2.5¢/litre in Victoria-may not be included; and

· The estimates on road lengths could be more accurate if better data were available.

In addition, there are several other problems that are particularly significant in the context of this research. First, there is an understatement of expenditures to the extent that the operations of most toll facilities are not included in the amounts shown. This is complex as, in some cases, toll-road costs are probably included (eg, the Coquihalla and the maintenance portion of the Cobequid Pass) but in others they are not (eg, Confederation Bridge or any of the 12 bridges and tunnels between Ontario and the United States). Second, toll revenues associated with the 19 toll facilities in Canada are not included in the revenue columns. Third, vehicle registration fees, driver licence fees and other road-related taxes, fines and fees are also not included in the revenue column. No ready source for breaking these amounts down by jurisdiction has been found but, in total, in 1998/99 they accounted for $3.1 billion in government revenues.¹¹

Even with these problems, a number of observations can be made.

· Canada spends about $11.6 billion a year on roads. This figure does not include all costs associated with roads (eg, police and justice, the cost of operating vehicles, etc), nor is this figure equivalent to what a business or an economist would call a cost. A business would use an asset accounting framework and an economist would, in addition, include externalities.

· Second, although there are few true road-user taxes in Canada, taxes traditionally thought of as being in this category exceed by over $2 billion the annual amounts spent on roads. Total fuel tax revenues and vehicle/driver fees equal almost $14 billion. Even if an allowance is made for the "sales-tax equivalent" portion of the fuel tax (roughly $0.5 billion), the amount collected from road users still exceeds the amount spent on roads.¹² Historically, much of the burden of local roads has fallen on local property taxes, so the real difference between how much is paid by road users, including local property owners, and how much is spent on roads is considerably larger than $2 billion.

· Third, and just using fuel tax revenues as an indication of the level of all road-related taxes, it is apparent that the economics of roads varies considerably from one jurisdiction to another. At the extremes, fuel tax revenues in British Columbia equal only 63 per cent of annual road expenditures (BC has expensive roads) while in Ontario fuel taxes exceed road expenditures by 13 per cent (Ontario has high traffic volumes).

2.1 Newfoundland and Labrador

There is no direct link between taxes paid by motorists and road expenditures. Expenditures on local and provincial roads amounted to $194 million in fiscal 1998/99. All provincial money came from the consolidated revenue fund or federal transfers ($58-$67 million). In fact federal transfers account for a higher proportion of road expenditures in Newfoundland and Labrador than anywhere else.¹³

Past highway finance policies included dedicated taxes (1930s to 1950s), road funds ("Highroads Fund" abandoned in 1950) and procedures to share some dedicated tax revenues with local governments.¹⁴ The province's current view on highway finance is that there is a role for the federal government to play and that it should use revenues from the federal excise tax on fuel for this purpose.

2.2 Prince Edward Island

While there is no direct link between taxes paid by motorists and road expenditures, the province does sometimes compare road-related taxes with expenditures, presumably just to see what the relationship is. In fiscal 1998/98, $78 million was spent on local and provincial roads. Over the last few decades, federal transfers have provided an average of $6.9 million a year in highway funding. However, with the expiration of the Atlantic Freight Transition Program, all highway financing is now (fiscal year 2001/02) provided by the province from the consolidated tax revenue fund.¹⁵

The province's current view on highway finance is that the federal government should play a role. The Submission to the CTA Review Panel points out that $25 million a year is collected in federal excise taxes on fuels from PEI motorists, the implication presumably being that some of this money should be returned to the province. (The numbers in Table 1 suggest $21 million but, given the estimates involved, this discrepancy is not important.)

2.3 Nova Scotia

In fiscal 1998/99, Nova Scotia spent $270 million on local and provincial roads. Most provincial money was from the consolidated fund; federal transfers were $36-$42 million.¹⁶ Since the Department of Transportation and Public Works has a contract with the Cobequid Pass highway (the Atlantic Highway Corporation) for maintenance on this toll road, this is one of the few instances in Canada where dedicated user fees (tolls) are being used by a provincial department to pay for a road.

Nova Scotia has had a long history with various road funds, dating back to 1913 when the "Road Improvement Fund" received deposits from vehicle permit fees. Some form of road fund continued on until the end of the Second World War.¹⁷

Nova Scotia's current policies are similar to those elsewhere-no direct link between taxes and expenditures and roads financed from a consolidated fund. However, there are a few places where a more direct link has been or is made.

· There are currently three toll facilities in the province (Chapter 3) and, until about 1993, the Canso Causeway had tolls.

· In the past, the annual report of the department, then known as the Department of Transportation and Communications, contained a section that tallied road-related tax revenues (including ferries). This was a comparison only as these tax revenues did not actually fund the department.

· The province's Public Highways Act contains a provision that allows for the establishment of a Highway Fund (this is as of 1995-it is not known if any changes have been made).

· Under the Gasoline and Diesel Tax Act of 1989, a Transportation Trust Fund was established. Starting in 1990/91, this was used to accumulate an additional 2¢/litre gasoline tax and an additional 4.5¢/litre diesel fuel tax. These were expected to generate about $35 million in 1991/92 and the money was to be used to upgrade the higher class highways. A concern raised at the time was that the government would simply reduce the highway department's revenues in proportion to the amount raised in the trust fund so that there would be no net increase in highway expenditures. The idea of using this fund to pay for highways was abandoned a few years later. (Technically, it is understood that the fund still exists. But no fuel tax revenues go to the fund, and no roads are paid for with money from the fund.)

Nova Scotia's current thinking on highway finance is revealed in the Department of Transportation and Public Works Business Plan 2000-2001.

"Recent research shows that a 1% increase in our country's highway stock would generate half a percent increase in business productivity, and highway investment can provide annual returns of 10-40%. More specifically, if Canada were to bring its National Highway System up to appropriate standards, benefits would exceed costs by a ratio of almost 2 to 1, with the beneficial impacts occurring through reduced travel time, lower vehicle operating costs, and fewer accidents, deaths and injuries."

While the Business Plan does not say how these investments are to be financed, it does point out that the federal government collects $5 billion in fuel taxes from motorists in Canada. Under "Communications," the Plan lists this "key message": "The federal government is obliged to return a greater portion of the $125 million in fuel tax it collects from Nova Scotians to be used for road construction." The Plan goes on at some length about the need to spend more on roads (ageing pavements, etc) but does not lay out specific proposals for finding new money. Under "Priorities" the plan lists this item: "Pursue a cost-sharing agreement with the Federal government on the National Highway System in Nova Scotia." The Plan also suggests the Department will look at privatizing aspects of road maintenance and it will "explore the potential for cost-sharing of infrastructure projects with the private sector."

These views are reiterated in Nova Scotia's submission to the CTA Review Panel with a more concrete suggestion that the federal government commit one-half the revenue collected from the excise tax on motor fuels for highway spending. This would give the province an additional $65 million a year.

2.4 New Brunswick

In fiscal 1998/99, $403 million was spent on local and provincial roads. The latest annual report (1999/00) shows total expenditures at the provincial level of about $349 million (versus the $304 included in the total of $403 for 1998/99). Most expenditures are met by appropriations from the consolidated fund, although about $34 million is paid by the federal government under the Canada/New Brunswick Highway Improvement Program. There may also have been other federal transfers for roads in 1998/99.¹⁸

New Brunswick has had a number of road funds and dedicated taxes throughout the years. In the 1920s it had a road fund that received revenues from the gasoline tax. This lasted until 1935. In 1947 the province created a special fund for winter roads and this lasted until 1952.¹⁹

Under current policies, there is no direct relationship between taxes and road expenditures. However, the Department of Transportation does list, in its annual report, a statement of revenues that includes various licences, permits and fines related to road users. This, it is assumed, is simply a convention as these amounts accrue to the consolidated fund.

In 1989, the province experimented with another road fund concept-the Arterial Highway Trust Fund. Certain fuel taxes, a few pennies per litre over and above the regular tax, were deposited in the fund and used to upgrade arterial highways. For unknown reasons, the fund was abandoned at the end of the 1992/93 fiscal year.

There is one toll facility in the province-Saint John Harbour Bridge (Chapter 3) and there is a new highway that was supposed to be a toll road (Fredericton-Moncton). A private developer built and operates this highway and is paid a fee according to traffic volumes.

In the province's submission to the CTA Review Panel, the province argues that the federal government has to share in the cost of the National Highway System.

2.5 Québec

In fiscal 1998/99 a total of $2,659 million was spent on local and provincial roads. The provincial portion ($1,227) is derived mainly from the consolidated fund, with only $20-$23 million in federal transfers.

While Québec had certain tax revenues tied to highway spending prior to the Second World War, as far as is known, the only formal road fund in Québec was created in 1950. (However, see final comment in this section.) It is not known whether or to what extent this fund was used or how long it lasted (it appears to have existed until 1960).²⁰ Currently, Québec has one of the few dedicated fuel taxes in Canada: a special 1.5¢/litre tax on fuel sold in the Montréal area (see Section 4.4).

Québec used to have more toll roads and bridges than any other province (not counting the dozen Ontario-United States toll facilities). These included the Autoroutes #10, #13, #15, #40, the Jacques Cartier Bridge and the Champlain Bridge, the later two being federal structures. The first of the roads (Autoroute des Laurentides) had its origins in 1957 legislation (Montréal-Laurentian Autoroute Act). In 1960, new legislation enlarged the scope of the Authority responsible for l'Autoroute des Laurentides and other toll roads were planned and built. In the 1980s (precise date unknown), the government changed its policy and tolls were removed.²¹

In commenting on this early period (1950s and 1960s), Nancy Byran notes that the reason for the first toll road was the idea that the specific group of people who would use it (Montréal residents driving to vacation spots) should pay for it. Later toll highways were built because large-scale construction projects were involved and the use of tolls accelerated the timing. However, these toll roads were not financially successful as, by the end of fiscal 1967/68 there was an accumulated, and growing, deficit of $49 million. "At the end of 1968 outstanding provincial advances to the Authority [responsible for the toll roads] amounted to more than twice the total of the Authority's bond obligations."²²

More recently, a 1994 report prepared for the Ministère des transports recommended that electronic tolls be considered to finance new roads. ²³ The report also recommended that the government consider letting road maintenance contracts out to the private sector.

Québec established a road fund in 1996. It is understood to be mainly an accounting exercise that allows capital projects to be amortized over a number of years. There are no dedicated tax revenues placed in the fund. Rather annual appropriations from the consolidated fund are the source of revenues. The fund appears to an accounting framework to track road costs.²⁴

In the fall of 2000, Québec passed legislation (Bill 164) that established standards for public-private highway partnerships and guidelines for establishing and collecting tolls. The Bill allows the private sector to be associated with the construction, rehabilitation and operation of transport infrastructure. Toll facilities will be allowed where the public has the choice of an alternate, non-toll route. Discussion of possible routes to date has been limited to two highways: a 10-kilometre, six-lane extension of Autoroute 25, and the completion of the Autoroute 30 South Shore ring road.

"Quebec has no toll facilities now, but three companies have formed a consortium to bid on any projects the government initiates. The consortium has jumped the gun by proposing two new toll bridges connecting the island city of Montreal with its suburbs to the north and south for a total of CND $900 million. The provincial government is considering the consortium's plan. A toll of CND $2 a trip or less, administered electronically, would repay the cost over 30 years. However, there is resistance from people who fear that making access easier could lead people to move from the city to the suburbs. Public transit advocates are also arguing for their option."²⁵

2.6 Ontario

In fiscal 1998/99 Ontario spent $3,536 million on local and provincial roads. Almost all provincial money was from the consolidated tax revenue fund ($15 million in federal transfers). In addition to these road expenditures, there are considerable expenditures associated with the 13 toll roads, bridges and tunnels in Ontario (Chapter 3).

Ontario's policy towards highway finance has gone through a number of phases. The province used to have a road fund-the "Highway Improvement Fund" from 1920 to 1952. As far as is known, this was not in the same league as the funds described in Chapter 5, but it did have the essential characteristic that certain tax revenues were deposited to a special account and the money was used to pay for road construction and maintenance. Although the fund underwent several changes throughout its existence, the main source of revenue was the gasoline tax, federal grants and annual appropriations from the consolidated fund. The fund actually continued after 1952 (it went through various name changes) but, at this point, it was mainly an accounting entity as its only source of revenues was annual appropriations.²⁶

In the 1950s and 1960s, annual appropriations were the main source of provincial road expenditures, however during this period there was a resurgence in the idea of using tolls. A 1957 committee of the legislature made recommendations in this direction; two major bridges along the Queen Elizabeth Way (the highway from Toronto to the US border at Fort Erie) were built as toll bridges and there was even consideration given to making the new bypass to the north of Toronto (Highway 401) a toll road.

This re-kindled interest in a user-pay system of highway finance disappeared in the 1970s and 1980s. Tolls were removed on all but the border crossings to the United States and, although there was occasional consideration given to undertaking highway cost allocation studies, the main finance policy continued to be annual appropriations from the consolidated fund. In 1986, the retired deputy minister of transportation, in addressing the annual Roads and Transportation Association of Canada conference in Toronto, noted that the prospects of highway departments holding their own in light of the financial needs of departments responsible for health and education did not look good. He suggested " . . . most provinces have gotten away from toll roads and toll bridges, but we should take another look at this."²⁷

A major shift occurred in 1993 with the creation of the Ontario Transportation Capital Corporation that was to be responsible for building the new Highway 407 to the north of Toronto. According to press reports, "The Ontario Transportation Capital Corporation (OTCC) is a Crown corporation created by the province to manage investment in transportation infrastructure. It has a mandate to secure the financing for the almost $1-billion project." And, continuing on to quote the executive vice-president, "(The OTCC) is a good vehicle to manage public-private partnerships," he says, adding that this joint project won't likely be the last. "The 407 is just one form of partnership and there are other possibilities which are open to us."²⁸

While it is not known what happened to the OTCC, it appears that Highway 407 (ETR) was its only accomplishment (see Chapter 3). (Links in the Ontario Ministry of Transportation's web site to the OTCC lead to "www.407etr.com/html/history.html".)

In terms of Ontario's current policy on highway finance, the latest annual report from the Ministry of Transportation contains the following (1996/97 is the latest report posted on the web site):

"To stretch provincial highway funding as far as possible, and ensure that its limited resources are invested as efficiently as possible, MTO announced during the year that the role of private sector contractors in highway design and construction will be expanded. Private companies perform about 50 per cent of highway design, 60 per cent of maintenance work and 100 per cent of construction. MTO still handles most construction supervision and inspection."²⁹

A report completed in 2000 makes the following observation about road financing in Ontario:

"An important point about road-funding in Ontario is the decision made several years ago (early 1990s) that major additions to capacity, such as the Hwy 407 (ETR), could be built with private sector design/build contracts and future toll revenues used to finance the work. This same approach may be used for a new road on the Niagara Peninsula. Another important change that has occurred is that some on-going maintenance work has been privatized; that is, contracted out to private firms. This change in delivery mechanisms-from MTO staff to private firms-is noted by MTO to have an impact on road funding levels by lowering costs."³⁰

In addition to these policies on highway finance, Ontario also argues that the "alternative" is the federal government. According to press reports in May 2000, Ontario's Transportation Minister advocated that "the federal government come to the table with real money to invest in hard infrastructure" such as highway improvements in the Greater Toronto Area. ³¹.

2.7 Manitoba

In fiscal 1998/99, spending on local and provincial roads amounted to $468 million. Although there were attempts to dedicate receipts collected under the Motor Vehicle Act in the 1920s, it does not appear that Manitoba has had any policies on highway finance that incorporate dedicated taxes or road funds.

Currently, provincial roads are funded entirely from the consolidated fund. However, in the past few years there have been several indications that changes are being considered. One report recommended urban road finance policies similar to those in Vancouver be considered for Winnipeg.³² The Department of Highways and Government Services is looking at the possibility of introducing a scheme similar to one now in place in Saskatchewan. Under this plan, trucking companies could apply to operate permit trucks, trucks larger or heavier than the ones generally allowed, in return for a payment into a road fund. The payment would be based on a calculation of the benefit created by operating such trucks. Revenues from these permits would be spent on road improvements.³³

2.8 Saskatchewan

In fiscal 1998/99 the province and local governments spent $499 million on roads. In considering the numbers shown in the last two columns of Table 1, a large part of the Saskatchewan road network consists of minor roads (eg, farm access roads). This accounts for the relatively low expenditures or revenues per kilometre.

Most provincial roads are funded from the provincial consolidated fund. However, Saskatchewan has a unique program, noted above in the discussion of Manitoba policies. Under its "Transportation Partnership Policy" it has found a way to both allow larger and more efficient trucks to operate and to put money paid for this privilege back into the roads. The origins of the program go back to 1977 under what was known as a "bulk commodity policy." Companies were allowed to operate large trucks if they agreed to pay a fee based on a calculation of the added road costs (primarily pavement). To ensure that this money was spent on road improvements, the Highways Act established a "Transportation Partnership Fund" In simple terms, this, in effect, was a device that could keep the fees paid separate from the government's other tax revenues. Money in the fund could sit there until the highways department and the trucking company agreed on some needed road improvement. The latest policy-the Transportation Partnership Policy-is similar to the earlier one except that the basis for establishing the fees has changed. Under the new policy, there is a calculation of the "benefit"-that is, the reduction in transportation costs realized by operating the larger, more efficient trucks. There then is a calculation of any incremental road costs, which forms the first part of the fee paid. The second part of the fee paid is the one half the benefit minus these incremental road costs.³⁴

The size of this program is not known. The Department's 1999/00 annual report refers to 22 new agreements adding half a million dollars to the department's annual revenues. It is not clear whether this is the total revenue from the program or only the additions made in fiscal year 1999/00. The annual report does mention that there are 80 agreements for special permit trucks and casual conversation with Departmental contacts suggests the fund currently only contains a few million dollars. Whatever the correct annual amount, it is a relatively small-scale program. The reason for giving it attention is that it is the only program in Canada that ties a specific fee for the use of the road to a particular vehicle type and that, further, then dedicates the revenues to highway spending with the users having some say on the spending decision.

2.9 Alberta

In fiscal 1998/99, $1,472 million was spent on roads in Alberta.

Alberta has had highway finance policies in the past that have included dedicated taxes and road funds. From 1924 to 1966, under the Main Highways Loan Act, up to one half of "motor vehicle receipts" (presumably registration fees) were dedicated to debt charges related to highway construction. In the 1950s, the province had legislation that dedicated various amounts (they varied throughout the decade) of the fuel tax to a special account to be used for grants to local governments.³⁵

In 1994, Alberta Transportation and Utilities, now part of Alberta Infrastructure, announced significant changes to the way it financed roads.

"Revenues from road user taxes and fees (fuel taxes, vehicle registration and drivers' licenses) are being dedicated to departmental requirements; the Department will also be able to access funds it generates (e.g., log haul fees to improve roads and bridges that serve the industry). Net budgeting will improve accountability to the public; users will know where and how their dollars are spent. Transportation and Utilities will operate on a business-like user pay basis."³⁶

This user-pay framework may not have been quite as tight as the above statements suggest. First, the department's numbers indicated that, in fact, road-user taxes were projected to exceed expenditures. Road users were actually paying for more than the Department's annual expenditures. Second, it is understood that Alberta Transportation and Utilities did not have the means to carry over funds from one year to another. Presumably, then, once a budget is set-and the budget includes both capital and operating amounts-it must be spent or lost. If this is the case, this reinforces the first point-there is not an exact equation of dedicated tax revenues with road expenditures-and it probably explains the second point-capital almost has to be treated as an annual expense item.

(The preceding is based on material written in 1995³⁷; it is not known if things changed between then and now. Alberta officials have made statements to the effect that "we have dedicated taxes." At the time (1995) this information was written, Alberta was planning to more formally dedicate fuel and other taxes to roads once all debt had been paid off. Whether this happened or not, is not known. The suspicion is that-in 1995 and possibly still today-Alberta has a policy requiring its highway department to compare certain tax revenues with road expenditures. This is not quite the same as dedicating taxes in a legislative sense. Indeed, casual conversations with finance officials in Alberta seem to indicate that fuel (and other) tax revenues are deposited in the consolidated fund just like any other tax revenues.)

In the mid-1990s Alberta looked at the possibility of building new urban freeways in both Edmonton and Calgary using a public-private-partnership and toll financing.³⁸ This never happened and it is understood that the reason was because traffic volumes were not high enough to justify a toll road.

The latest policy announced by the government was in September 1999. Under this, Edmonton and Calgary are to receive transportation grants based on 5¢/litre of fuel sold within each city. Other municipalities are to continue to receive a per capita grant. The province also took over responsibility for some highways that had previously been the responsibility of local governments. The concept of giving local governments grants based on a portion of the fuel tax for fuel sold in the areas is discussed in Chapter 4.

(Whatever the 1995 policy of dedicating fuel taxes to the highway department, it does not prevent the government from apportioning a certain amount of this revenue to Edmonton and Calgary.)

2.10 British Columbia

In fiscal 1998/99, $1,769 million was spent on local and provincial roads in British Columbia.

British Columbia has an interesting history of highway finance policies. It is interesting in several ways: (1) it has been characterized by significant changes from time to time, (2) at certain periods it has been one of the most user-pay policies in the country, (3) it currently encompasses the closest thing that Canada has to a broad-based provincial road fund, and (4) it is one of the few provinces to establish urban agencies with responsibilities for roads (and other things) and with funding sources related to road use.

Although there is no point in going too far back in history, it is interesting to note that British Columbia had a toll road act back in 1899. During the first half of the 19^th century, there was a series of legislation dedicating a portion of vehicle fees to local governments. In 1935 the province passed an act to allow a toll bridge to be constructed across the Fraser River. From 1950 to 1959, there was a road fund that received 3¢/gallon from the gasoline tax. In 1953, the province established the BC Toll and Highway Authority that, at its peak, operated seven major water crossings on a toll basis. In 1964 the province abandoned both the dedicated fuel tax and the road (bridge, tunnel) toll concepts. Tolls were re-introduced as a funding mechanism in 1986 with the building of the Coquihalla (Chapter 3). The concept of user pay and/or dedicated revenue sources is quite common in terms of the provision of other services: BC Hydro, BC Ferry Corp, BC Rail and BC Transit.³⁹

More recently, British Columbia made a significant change to the way it finances roads in the establishment of the BC Transportation Financing Authority (BCTFA). The BCTFA was established in 1993 and given broad powers to undertake a variety of transportation infrastructure projects (more than just roads). The initial focus was on additions to highway capacity. The BCTFA was originally funded through a 1¢/litre tax on gasoline and diesel and a $1.50/day tax on vehicle rentals. This brought in $55 million annually. The fuel tax rate has been increased to 3.25¢/litre (April 2000) and the latest annual report (fiscal year 1999/2000) shows a total of $177 million in revenues from both the fuel tax and the vehicle charge. A more detailed description of the BCTFA is left for Chapter 5.

At the local level, British Columbia has established two urban areas (Victoria and the municipalities in the Greater Vancouver Regional District) that also have a form of dedicated user taxes-transit taxes of 2.5¢/litre in Victoria and 8¢/litre in the Vancouver area. The agency in the Vancouver area (TransLink) is considering the use of tolls for major new roads (South Fraser Perimeter Road).⁴⁰ These urban arrangements are described in Chapter 4. BC Ferries also receives 1.25¢/litre from the fuel taxes (gasoline and diesel) on province-wide sales. (The tax in the Vancouver area, the BC Transit tax, used to be 4¢/litre with the result that the tax rate in the area was 4¢/litre higher than elsewhere. Effective April 1, 1999, the province eliminated the BC Transit Tax in the Vancouver area and starting giving TransLink 8¢/litre, but the net effect is still that the tax rate in the area is 4¢/litre higher than in the rest of the province.⁴¹)

Other provincial road costs in British Columbia-maintenance, rehabilitation and operations-are funded in the traditional fashion. That is, the Ministry of Transportation and Highways lines up with other Ministries for its share of revenues out of the consolidated fund. However, a 1999 committee established by the BC government has recommended "That the provincial excise tax on gasoline be dedicated to highway infrastructure in the province . . ." It also recommended "that the Province urge the federal government to do likewise [ie, dedicate] with the federal excise tax."⁴²

2.11 Yukon

In fiscal 1998/99, Yukon spent $66 million on roads from general tax revenues although it might be noted that: (1) at certain points in the past it is understood that the state of Alaska actually made significant contributions to the road budget, and (2) there was at least one time when Yukon considered tolls for one possible bridge project.

2.12 Government of the Northwest Territories

Most roads are financed from general tax revenues. In 1998/99, $41 million was spent. The only known exception is the Lupin winter road that is paid for by some form of a user fee. Currently, there is $16 million a year allocated to the highways capital program. The Department of Transportation has a vision calling for a road down the Mackenzie Valley, a Slave Geological Province Transportation Corridor, plus other roads. The estimated cost approaches one billion dollars. According to the Department, most hope for financing these roads rests with the federal government. "The development of new roads in the Northwest Territories is an acknowledged federal responsibility. It is therefore essential that federal assistance be obtained."⁴³ However, referencing the Lupin winter road as a model, the Department sees some possibility that the Slave Geological Province Transportation Corridor might be partially financed with user fees (tolls from mine development). But even if this were feasible, the Department says there would have to be seed money from Ottawa.

2.13 Summary

Table 2 shows a summary of finance policies since the 1920s or earlier in some cases.⁴⁴ Not everything can be shown. For example, a number of provinces had legislation on toll roads dating back to the early years of the 20^th century. In most cases this was legislation allowing governments to take over early toll roads or abolishing tolls. This type of information on finance policy is not shown on the table. By contrast, the 1899 legislation in British Columbia specifically authorized the construction of toll roads and required these to be self-financing. The table only contains known information (hence the "? no" for places where no evidence of a policy has been found). It is possible that some aspects of past policies have been missed.

The main features of current policies are as follows:

· Most roads at the federal and provincial-territorial level are paid for with appropriations from consolidated tax revenue funds.

· Provincial-territorial road spending, which amounted to $5.8 billion in 1998/99, does benefit from a small amount of federal grants. In 1998/99 total these grants were from $212 to $345 million and they are estimated to have fallen to $168 to $229 million in 1999/2000 (the variation depends on what is counted as a transfer for roads).⁴⁵

· Local roads, 73 per cent of the total network on a two-lane equivalent basis, are paid for through local property taxes and grants from provinces or territories. No information has been found to sort out how much comes from each source (or any other source).

· Although provinces and territories rely primarily on annual appropriations from consolidated funds to pay for roads, many have had experience with dedicated taxes and road funds. Admittedly, for most provinces, much of this experience was a long time ago. However eight provinces, counting Saskatchewan's Partnership Fund, have had road funds since the Second World War.

Table 2: Summary of Aspects of Current and Past Highway Finance Policies

	Current And Historical Experience With:
	Dedicated road-use taxes	Road Funds	Toll Roads	Sharing road-use taxes with local governments
Nfld	1920s - licence fees 1933 - import duty on fuel	1920-1932 - Road Commission 1932-1950 Highroads Fund	? no	1920 - Road Commission, grants to St John's 1920s-1930s - grants from Road Fund
PEI	1920s - some taxes pay highway loans	? no	No, other than Confederation Bridge	? no
NS	1920s - some taxes pay for highway loans 1990 - special tax on motor fuels	1913-1926 1990 - Transportation Trust Fund	4 toll roads/bridges since WW II	? no
NB	1926-1935 - gas tax 1947-1952 - special gas tax 1989-1993 special tax on motor fuels	1926-1935 highway fund 1947-1952 winter road fund 1989-1993 - Arterial Highway Trust Fund	Currently 1 toll bridge 1990s - started a toll highway (Fredericton-Moncton) but removed tolls in 2000	1952 - some grants to local gov't under Gasoline Sales Tax Act
Que	1939-1964 - could use road taxes for interest on highway loans 1950-1960 - some gas taxes	1950-1960 fund for deposits of gas tax, used for winter roads and to pay debt. 1996 - new `accounting' road fund	1950s-1960s - toll road authority 2000 - new legislation on toll roads	1920s - Montréal - special vehicle tax 1995 - creates the AMT in Montréal area
Ont	1926-1952 gas tax deposited in Fund	1920-1952 - Highway Improvement Fund	1958 - new Act on designating roads & bridges as toll facilities 1993 - 407(ETR)	?
Man	1920-1925 - some vehicle fees	? no	? no	?
Sask	1977 - permit truck fees	1977 road account for permit truck fees	? no	? no
Alta	1924-1966 - some fees/taxes used to pay highway loans 1994 - announced that road taxes were dedicated 1999 - portion of fuel tax dedicated to urban roads	1924-1966 - Main Highway Fund	? no	1951-1958 4¢/gal used to fund grants 1999 - Calgary & Edmonton - 5¢/litre on fuel sold with city
BC	1950-1959 - 3¢/gal to road fund 2000 - 3.25¢/litre to BCTFA, other amounts given to BC Ferries & cities	1920-1921 - special account in Consolidated Fund 1950-1959 Highway Development Fund 1993 - BCTFA	1899 - Toll Roads Act 1953 - toll authority (7 facilities ) 1986 - Coquihalla	1921 - local gov't receives 1/3 of vehicle fees 1999 - transit tax on fuel sold with Victoria & Vancouver
Yukon	No information, but it is unlikely that there have been any dedicated taxes, funds, tolls
NWT	? no	? no	One winter road with some user fee	? no

· While the period after the Second World War generally saw the ascendance of the idea that roads were public goods to be paid for by general tax revenues, there was a resurgence in the 1950s and 1960s of the idea that tolls should be used in some cases. However, most toll roads had disappeared by the 1980s, the main exception being the bridges and tunnels between Ontario and the United States. The other known exceptions were the bridges between Halifax and Dartmouth, the Canso Causeway and the Saint John Harbour Bridge. While exact dates are not known, it is believed that by the late 1980s Québec had removed the tolls on its highways, the tolls on the two federal bridges in Montréal had been removed, Ontario had removed the tolls on two bridges on the Queen Elizabeth Way, and British Columbia had removed the tolls on seven bridges and tunnels operated by its toll authority. The Coquihalla in 1986 was the first new toll facility to be built in Canada.

· Over the last decade, there has been a shift away from traditional policies (consolidated funds and no dedicated user fees). This shift is discussed in Chapters 3, 4, & 5. Although this shift to a more commercial finance policy can be seen as the outcome of the 1992 report of the Royal Commission on National Passenger Transportation and, to a lesser extent, the report of the National Transportation Act Review Commission in 1993, it is more accurate to portray it as a consequence of the financial condition of the provinces. Their goal was to rein in expenditures. This meant that financial necessity was generally the driving force for looking at alternative highway finance policies (tolls, new dedicated taxes, some new urban arrangements and possibly the road fund in British Columbia).

· Also over the past decade, the provinces and territories have invested considerable effort in defining a National Highway System and the standards for such roads. This work included a discussion about the possibility of establishing a national road fund and various ways of distributing money from the fund to the provinces and territories. While the group that did this work did not reject tolls or private sector financing as a source of funds for the NHS, it felt the opportunities for such financing were limited. The final recommendation of this group was "that a National Highway System Fund be established by the federal government based on an amount equal to the revenue generated by 2 cents per litre of fuel consumed for road use nationally."⁴⁶

· The current, almost universal view of the provinces and territories about alternative highway financing is that the "alternative" is the federal government.

3. Toll Roads

3.1 Introduction

"An appropriately managed and regulated (including the monopoly nature of toll setting) toll road system can promote efficiency in using a given road capacity in the short run, and the attendant market forces will pressure the road authority into putting optimal capacity in place in the long run."⁴⁷ This is an observation made by Gillen and Oum in their work for the 1992 Royal Commission on National Passenger Transportation. ". . . we recommend that: Conventional tolling systems be considered when new or expanded limited-access highways are required, with tolls set to cover any costs of the road link in question that exceed those recovered by fuel taxes. In addition governments could use tolls to levy a higher charge on peak-period users if congestion is a problem on a road."

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Royal Commission on National Passenger Transportation (1992) Vol 1, p 105

They went on to write:

"If they implement peak-period pricing, toll roads have essentially the same characteristics as implementing congestion tolls on the existing roads. Constructing toll roads allows private-sector participation for large project financing. As collection technology improves, toll collection costs become quite moderate. New toll roads benefit not only those who switch to the toll road but also those who continue to use the old non-toll roads (due to reduced travel time). This is a Pareto improvement. Construction of toll roads can be considered an equitable method since lower-income users gain by travelling on non-toll facilities. In reality, toll roads can solve financing problems for specific projects only."⁴⁸

Text Box 2: Royal Commission & Toll Roads

But do toll roads represent much of an alternative to conventional road financing policies in Canada? According to the group that put together the National Highway Policy Study, "Conventional toll collection facilities would have limited application to the National Highway System in Canada because very little of the system has full access control and most sections would not have sufficient traffic volumes to be economically viable. In the face of already high fuel taxation levels, introduction of toll facilities on only parts of the system would raise the issues of double taxation and regional inequity."⁴⁹

This chapter describes the 19 toll roads, bridges and tunnels that operate in Canada and gives an overview of toll roads in other countries.

3.2 Toll Roads and Public-Private Partnerships

Although the subject of public-private-partnerships (PPP) is not dealt with directly in this paper, there is a close connection between it and the subject of this chapter.⁵⁰ Public-private-partnerships and tolls are not necessarily the same thing. For example, in a 1999 study of Canadian public-private-partnerships, six of nine projects documented do not involve tolls. The 1988 decision of the BC Ministry of Transportation and Highways to privatize road maintenance is one of these. In this case, the responsibility for road maintenance passed from a government agency to a number of privately owned companies. No tolls were involved in the method used to pay for this work

Secondly, the use of tolls to finance a road does not necessarily involve the private sector. The Coquihalla was built by the government using ordinary procurement policies and was (and is) operated as a part of the provincial road network. There is no private operator.

Thirdly, and notwithstanding the first two points, there is still an obvious link between public-private-partnerships and tolls. This is described by the US Department of Transportation:

"But toll financing concepts are changing in other ways. In some circles, the proposition is put forward that goods and services currently provided by the public sector could also be provided by the private sector, perhaps with gains in efficiency. Highway facilities are identified as one of the areas where the private sector might be willing to invest if there were a high probability of recouping the investment through the collection of tolls. With the possibility of privately financed toll roads, some large engineering and construction management firms believe that a highway market might exist that had not been explored by their firms. Under typical public provision of U.S. highways, the State does (or contracts out) the design work and then awards distinct contracts to carry out parts of the completed plans. If the project meets certain criteria, it is eligible for Federal-aid reimbursement (Federal-aid pays the State back a portion of its costs of construction). Some private firms, however, have proposed to do the whole process themselves and take advantage of efficiencies such as simultaneous design and construction. Furthermore, there was the feeling by these firms that the time might be right to put some of their own equity into these projects, and finance, build, and operate the entire facility themselves."⁵¹

While this paper does not deal directly with public-private-partnerships, these could well be the means for a greater reliance on toll roads.

3.3 Toll Roads in Canada

The 19 toll roads, bridges and tunnels are shown on Table 3, Table 4 and Table 5. Information has been collected from a variety of sources and, in some cases, the accuracy or comparability of information shown varies. In some cases traffic volumes-average annual daily traffic (AADT)-on Table 3 are estimated. "Daily trips" shown for Ontario's Highway 407 is a different concept. Details on how these numbers were developed are explained in an endnote.⁵² In the same way, toll revenues shown on Table 5 are also a mixture of actual numbers (from annual reports), estimates and, in a few cases, guestimates. Details are also left to an endnote.⁵³

To put this subject in perspective, a rough calculation has been made of annual travel on toll roads. Ordinarily, this would be difficult to do where AADT figures had to be combined with daily trips. However, in the case of Canada's toll facilities (all except Highway 407), daily trips are synonymous with AADT. Even on Nova Scotia's Cobequid Pass and British Columbia's Coquihalla, almost all vehicles entering the facility at one end, exit it at the other. Using this, then, it is estimated that there are 1.5 billion vehicle-kilometres of travel (vkt) on toll roads annually in Canada. This counts only half the distance of the travel on international bridges and tunnels as, in most cases, the border is half way across.⁵⁴ The three highways (Cobequid, 407 and Coquihalla) account for 92 per cent of this activity-in fact Highway 407 alone (using very rough estimates) accounts for 49 per cent of the total. This 1.5 billion vkt is about 0.5 per cent of total travel in Canada or, looking at it another way, 1.9 per cent of the travel on the National Highway System.⁵⁵

Another point helps to put the subject of toll roads in perspective. It would be nice to think that some theory of highway finance or some principle of public policy guided the decisions to put tolls on a road, bridge or tunnel. Hopefully, in examining the circumstances of the 19 facilities described in this chapter, these theories or principles will become evident. The truth appears to be that the decision to use tolls in many cases is more political than it is based on any theory or principal. Nancy Bryan, looking at the resurgence of the use of tolls in the 1950s and 1960s, noted that in many cases the reason for using tolls involved the fact that many non-residents would be using the road-for example, a route to the border-or that the particular situation involved divided jurisdiction.⁵⁶ She cites as an example the decision to make the access road to the Vancouver International Airport a toll road. The airport was federal, the road network was local/provincial and when local/provincial officials refused to build the access road, the federal government decided it had no business spending general taxpayers' money on something that would only benefit local traffic. This same thinking may have been responsible for the toll bridges in Montréal and other places where there is federal/provincial divided jurisdiction. Further, one wonders if both factors (non-resident traffic, divided jurisdiction) accounts for the fact that all the bridges and tunnels between Ontario and the United States are tolled.

3.3.1 Halifax-Dartmouth Bridges

The Halifax-Dartmouth Bridge Commission was incorporated in 1950. The MacDonald Bridge opened on April 2, 1955 and the MacKay Bridge on July 10, 1970. Combined, the two bridges have seven lanes. With one reversing lane on the MacDonald, the two bridges provide four lanes of traffic in each direction during the peak periods.

The Commission is a public utility and tolls are regulated by the Nova Scotia Utility & Review Board. The provincial government approves borrowing. A clause in the enabling legislation allows the provincial government to take over the bridges once all debt has been retired.

Traffic volumes have grown from 2.8 million vehicles in the first year of operation to 29.8 million in 1999.

Table 3: Toll Roads, Bridges and Tunnels in Canada

	TOLL FACILITY	LOCATION	AADT	OWNER/OPERATOR
1 2	Angus L. MacDonald A. Murray MacKay	Halifax-Dartmouth, NS	81,732	Halifax-Dartmouth Bridge Commission
3	Cobequid Pass	NS 104, 45 km from Thomson Station to Masstown	7,487	Owned by NS gov't. Operator is Highway 104 Western Alignment Corp which subcontracts work to the Atlantic Highways Corp.
4	Confederation Bridge	NB-PEI	about 4,000	Straits Crossing Development Inc owns the bridge and a subsidiary, Straits Crossing Bridge Ltd, operates it
5	Saint John Harbour Bridge	Saint John, NB	26,714	Saint John Harbour Bridge Authority
6	Seaway International Bridge	Cornwall, ON - Rooseveltown, NY	5,793	Operated by a subsidiary of Federal Bridge Corp under an agreement with St. Lawrence Seaway Development Corp (USA)
7	Ogdensburg-Prescott Bridge	Prescott, ON - Ogdensburg, NY	1,417	Ogdensburg Bridge Authority
8	Thousand Islands International Bridge	Ivy Lea (Gananoque), ON - Collins Landing (Alexandria Bay), NY	4,765	Thousand Islands Bridge Authority (US-based public benefits corporation) operates bridge, Cdn portion owned by Federal Bridge Corp
9	Highway 407	North of Toronto, ON	240,000 daily trips	407 International Inc, a consortium of three companies, owns, manages and operates the highway. The province owns the land.
10	Lewiston-Queenston Bridge	Queenston, ON - Lewiston, NY	11,923	Niagara Falls Bridge Commission, created under US federal legislation. Board consists of 4 people appointed by NY Governor and 4 appointed by Ont Lieutenant Governor
11	Whirlpool Rapids Bridge	Niagara Falls, ON - Niagara Falls, NY	1,189
12	Rainbow Bridge	Niagara Falls, ON - Niagara Falls, NY	11,245
13	Peace Bridge	Fort Erie, ON - Buffalo, NY	21,855	Buffalo and Fort Erie Public Bridge Authority, a bi-national commission
14	Ambassador Bridge	Windsor, ON - Detroit, MI	34,247	The Canadian Transit Company and The Detroit International Bridge Company
15	Detroit-Windsor Tunnel	Windsor, ON - Detroit, MI	24,658	Jointly owned by the city of Windsor and Detroit & Canada Tunnel Company (or possibly the city of Detroit).
16	Blue Water Bridge	Sarnia, ON - Port Huron, MI	15,193	Blue Water Bridge Authority (Can) and Michigan Dept of Transportation (US)
17	Sault Ste Marie Bridge	Sault Ste Marie, ON - Sault Ste Marie, MI	7,166	International Bridge Authority (US)
18	Fort Francis-International Falls Bridge	Fort Francis, ON- International Falls, MN	2,539	Minnesota, Dakota & Western Roadway Co and International Bridge & Terminal Co. Ltd.
19	Coquihalla Highway	Hope-Kamloops, BC	7,397	BC Ministry of Highways (as of 1999, owned by BCTFA)

The Highway 104 Western Alignment project represents one of the government's first major experiences with public-private partnering. We have observed that there are advantages in the uses of this approach, including the sharing of project risk, the leveraging of private-sector expertise, and the mobilization of greater amounts of physical and financial resources towards a project.

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Report of the Auditor General, Nova Scotia, 1996

3.3.2 Cobequid Pass

According to the operators of the Cobequid Pass, a 45-kilometre section of NS 104, this was the first highway to be built in Canada without any government guarantees. This may be true, but there was government money involved.

Text Box 3: Nova Scotia Auditor General

The company responsible for the financing, design, construction, operation and maintenance is the Highway 104 Western Alignment Corporation (HWAC), wholly owned by the Nova Scotia government. The contractor that actually built and operates the highway is the Atlantic Highway Corporation (AHC), a subsidiary of Canada Highways International Corporation. The company that runs the toll operation is the Atlantic Highways Management Corporation, a subsidiary of AHC. The NS Department of Transportation and Public Works has an annual maintenance contract. The contract between HWAC and the private operator specifies that the highway is to be returned to the province in 30 years and it specifies the condition of the highway at that date.

Of the total $112.9 million construction costs, Nova Scotia contributed $27.5 million, the federal government $27.5 million, the NS provincial pension fund purchased $5.5 million in subordinated notes, and bonds were sold for $60.9 million. Annual maintenance costs are $656,600. The bonds are not guaranteed by the province and payment on the bonds is through the collection of tolls only.

Under an agreement entered into by the province, HWAC and the operator, the province sets the toll rates. The province is required to increase tolls in response to inflation or if required to maintain required debt service ratios. The bondholders are entitled to compel toll increases in six additional situations.⁵⁷

The explanation for these financial arrangements provided on the web site is (complete with a possible misprint): "In 1993 the province has done one of the highest per capita public debts and deficits in Canada, and the federal government was reining in its spending. Both circumstances eliminated traditional options for the badly needed highway: capital borrowing and federal cost sharing. A public-private partnership allowed the government to make a financial contribution it could afford. A further benefit of a partnership was timing. With private investors, the funding was in place at start-up, allowing the highway to be built in 20 months with economies of scale efficiencies."⁵⁸

There are a number of issues surrounding the structure of this public-private-partnership (the 1999 SG Hambros report has 30 pages on them). One is whether or not HWAC is a crown corporation or a crown agency. The NS Auditor General agreed that HWAC was not a crown corporation or a crown agency and, therefore, not subject to ordinary government procurement policies.⁵⁹ However, the Auditor General also concluded that HWAC was, for accounting purposes, a government-owned corporation, and that assets, liabilities and operations of the corporation should be included in the accounts of the provincial government.⁶⁰ It is not known whether this is the final word on the subject. The importance is that it seems to strike at the rationale as why the government structured this PPP the way it did (to keep the liabilities "off the books.")

A second issue is whether or not this PPP lowered or increased the cost of borrowing. There is disagreement as to exactly what the consequences of this PPP were. On the one hand, some suggest that if the government had built the highway in the ordinary fashion, total construction costs would have been $10 million higher ($123 million instead of $113 million). In fact there are even some estimates that construction costs would have been as high as $140-$160 million.⁶¹ But, and on the other hand, there are also opinions that the cost of borrowing was increased significantly. The provincial Auditor General suggests that borrowing costs (NPV of interest payments over 30 years) were $20-to-$25 million higher than if the government had simply borrowed the money itself.⁶² The counter argument to this is that, if the government had borrowed the money, there would have been an adverse impact on the province's own credit rating and cost of borrowing.⁶³ Some disagree with this contention, pointing out that this did not happen in the case of Ontario when it borrowed money to build Highway 407. In Nova Scotia's case, however, there is an argument to suggest that the improvement in credit rating for the province that occurred sometime after 1996, when the contract for the highway was finalized, owes something to the very fact that the province structured the financing in the way it did-that is, HWAC, and not the government, was responsible for the debt.⁶⁴ One result of the arrangement that does not seem to be in doubt is that the highway was built a lot quicker than it would have been if government used its ordinary procedures.

In this paper these and other issues surrounding the use of public-private-partnerships are not resolved. In fact, in some sense, they are not even important for this paper. What is important is whether or not the use of tolls-whether the agency was government, private or some partnership between the two-had an impact on highway financing. The only reason for outlining the two issues above is that the cost of borrowing and the imposition of government procurement policies are important to the question of financing to the extent they raise or lower the cost of building roads. But on the broader issue of the use of tolls, the evidence seems to indicate that tolls did make more money available in a shorter period of time for highway building in Nova Scotia than otherwise would have been the case.

3.3.3 Confederation Bridge

Confederation Bridge is one of the better known toll facilities in Canada, yet it probably does not require much attention here. That is because it was (and is) a special case, something not likely to be repeated. The bridge opened in June 1997 and was financed, designed, built and operated by Straits Crossing Development Inc (or various associated companies). It will be turned over to the federal government in 2032 when the bonds that financed its construction mature. While on the surface this appears to be a new link in the road network paid for by tolls, the actual facts are more complicated. First, the federal government had a constitutional responsibility to provide transportation between Prince Edward Island and the mainland. One consequence was that a federal crown corporation provided a subsidized ferry service. The key to the financing of Confederation Bridge was actually an agreement, and special legislation in Ottawa, to continue these subsidy payments.

"The final agreement between Strait Crossing Development Inc. and the federal government stipulated that the annual subsidy will be $41.9 million in 1992 dollars, adjusted each year in accord with the Consumer Price Index. Discounting the future value of this stream of yearly payments, fully indexed to inflation and guaranteed by the government of Canada, made it possible to issue Bonds yielding a guaranteed "Real Rate" of return in the Canadian Capital Markets."⁶⁵

Second, while users of the bridge pay tolls, these were based on the ferry rates that the bridge replaced. From the user's perspective, little has changed except, of course, for the obvious differences in time, vehicle operating costs and convenience. Tolls are regulated by a bridge operating agreement. "For the first year of operation, the toll schedule and toll rates were set based on the 1992 ferry toll revenue, adjusted for the Consumer Price Index (CPI). Subsequently, toll rates may increase by 75 per cent of the increase in CPI. Other grounds for toll rate increases are demonstrated increases in insurance costs, or toll revenues in any year which are lower than the inflation indexed 1996 ferry toll revenue."⁶⁶

Third, to put the issue of guaranteed federal subsidies and toll payments in perspective, consider the following. Current information on toll revenues is not available (the company operating the bridge does not make this public) but, at the time of construction, estimated toll revenues for fiscal year 1997-1998 were $18 million.⁶⁷ This compares to the (initial) payment from the federal government of $42 million. Also, it might be noted that "The subsidy payments to be made by the federal government equal exactly the principal and interest repayments provided under the bond issue, and correspond exactly to the payment schedule."⁶⁸ In other words, it is really the subsidy payments from Ottawa that are paying the construction costs. Tolls pay for the operation and maintenance of the bridge and, of course, the operator's profits.

There is nothing wrong in any of this (although, as in the case of Cobequid, there is some question as to whether these financial arrangements increased the cost of borrowing⁶⁹) but it does mean that there is not a lot to draw on here for any future considerations of highway finance in Canada. Confederation Bridge is a unique situation.

3.3.4 Saint John Harbour Bridge

The Saint John Harbour Bridge was completed in 1968. It is owned and operated by the Saint John Harbour Bridge Authority, established in 1962 through a New Brunswick statute. The seven-member board is made up of municipal, provincial and federal representatives. Total long-term debt of the Authority ($26 million) consists of non-interesting bearing loans from the federal government and the agreement with the federal government is that the Authority makes an annual payment on the principal equal to net earnings, before deprecation and after deducting any capital acquisitions during the year.⁷⁰ Tolls for trucks vary by the number of axles.

Table 4: Toll Rates (CDN$)

	TOLL FACILITY	AUTOMOBILE	TRUCK (3-AXLES, 12,700 KG)	TRUCK (5-AXLE TRACTOR-SEMITRAILER, 36,287 KG)	TRUCK (8-AXLE TRACTOR-SEMITRAILER, 59,000 KG)
1 2	Angus L. MacDonald Bridge A. Murray MacKay Bridge -cash -token	0.75 0.75 0.60	3.50 3.00	Not allowed	Not allowed
				5.25 4.50	5.25 4.50
3	Cobequid Pass - Jan 1/2001 - no transponder - Dec/2000 - transponder	3.50 1.50	7.50 4.50	12.50 7.50	20.00 12.00
4	Confederation Bridge (2-way toll)	37.50	42.25	52.75	105.50
5	Saint John Harbour Bridge	0.25	0.70	1.40	1.75
6	Seaway International Bridge	2.25	6.25	8.50	10.75
7	Ogdensburg-Prescott Bridge	3.00	8.25	12.00	18.75
8	Thousand Islands International Bridge	3.00	9.00	12.00	16.50
9	Highway 407 (rate/km) -peak (6:00am - 11:00pm) -off-peak (11:00pm - 6:00am)	0.11 0.06	0.22 0.12	0.33 0.18	0.33 0.18
10	Lewiston-Queenston Bridge	3.50	4.44	12.70	104.65
11	Whirlpool Rapids Bridge	3.50	not allowed	not allowed	not allowed
12	Rainbow Bridge	3.50	not allowed	not allowed	not allowed
13	Peace Bridge	2.75	7.14	20.40	33.15
14	Ambassador Bridge	3.00	7.28	20.80	39.00
15	Detroit-Windsor Tunnel	2.75	6.16	17.60	28.61
16	Blue Water Bridge - to US - to Can	1.75	6.00	10.00	16.00
		2.00	7.50	12.50	20.00
17	Sault Ste Marie Bridge	1.75	9.75	17.75	30.00
18	Fort Francis-International Falls Bridge	4.50	12.00	12.00	12.00
19	Coquihalla Highway	10.00	30.00	50.00	50.00
In most cases, tolls shown are the basic published rates. Many facilities offer discounts for volume purchases or, sometimes, for various forms of tokens, toll cards or electronic transactions.

3.3.5 Ontario-United States Links

There are 14 road connections between Ontario and three neighbouring states. All but two-the two that do not involve a river or a lake-are toll bridges or tunnels. In 1999, there were 26.5 million vehicles entering Canada on these 14 road connections (a minor amount of this was by five ferry services) and 97.7 per cent of this traffic was over the toll facilities.⁷¹ Assuming roughly balanced flows, it is estimated that 51.7 million vehicles, or 141,774 per day, paid tolls in 1999. The estimated total toll revenue on the 12 toll bridges and tunnels is $170 million.

Table 5: Financial Details of Toll Facilities

	TOLL FACILITY	ANNUAL TOLL REVENUES (MILLION)	NOTES
1 2	Angus L. MacDonald Bridge A. Murray MacKay Bridge	$21.6	1999 annual report shows $123 million in long term debt; gov't can take over bridges once debt is retired.
3	Cobequid Pass	$11.0	Total debt issued was $66.4 million; NS & fed gov't contributed $55 million to construction. When debt is retired (2026), highway reverts to gov't.
4	Confederation Bridge	? > $18	Revenues are the initial forecast for first year. Construction costs were $515 million. Bonds are being re-paid with money from a federal subsidy. Bridge reverts to gov't in 2032.
5	Saint John Harbour Bridge	$2.4	Payment on long-term debt ($26 million, zero interest) is fixed as the net earnings before depreciation less any capital projects during the year.
6	Seaway International Bridge	Est $4.1
7	Ogdensburg Bridge	Est $1.7	When debt is retired, bridge reverts to NY state.
8	Thousand Islands International Bridge	$8.2
9	Highway 407	Est $100	Original forecasts were for revenues of $89 million in 1999. This has probably been exceeded. Road was sold in 1999 for $3.1 billion.
10	Lewiston-Queenston Bridge	Est $5.6
11	Whirlpool Rapids Bridge	Est $0.6
12	Rainbow Bridge	Est $5.3
13	Peace Bridge	$22.5	Bridge is supposed to revert to gov't ownership when debt is retired but there is some question as to whether that will ever happen
14	Ambassador Bridge	Est > $40	Financial records are not public.
15	Detroit-Windsor Tunnel	Est $38
16	Blue Water Bridge	Est $29.3	Cdn half of the bridge became the property of the federal gov't following retirement of the original construction debt (1962-1964). However, major work after 1997 added another $100 million or so to the costs.
17	Sault Ste Marie Bridge	$9.9	When debt had been retired (2000), ownership was to revert to Michigan and Ontario. However, US legislation (and Ont's agreement) allowed operator to continue to collect tolls.
18	Fort Francis-International Falls Bridge	Est $4.5	Toll revenue estimated on basis of Oct 1/00 tolls times # cars & # trucks in 1999.
19	Coquihalla Highway	$40.9	Toll revenues are not dedicated to road expenditures.

The ownership, operation and institutional structure of the 12 toll facilities vary considerably from one crossing to another. While not all the details are known, the following is a partial summary:

· Seaway International Bridge: "The Seaway International Bridge Corporation, Ltd. (the Joint Venture) is an agent of The Federal Bridge Corporation, Ltd. and its U.S. counterpart, the Saint Lawrence Seaway Development Corporation. The purpose of the Joint Venture is to operate and manage the international toll bridge system between Cornwall, Ontario and Rooseveltown, New York, based on a September 1957 joint venture agreement."⁷² Tolls are $2.25 for an automobile and a function of the number of axles for trucks over 7,000 pounds.

· Ogdensburg-Prescott Bridge: The bridge is operated by the Ogdensburg Bridge Authority (the name given in the NY state enabling legislation) or the Ogdensburg Bridge and Port Authority (the name used on the web site). Whatever the correct name, this is a US-created (NY law) public benefit corporation. Under its enabling legislation, the bridge reverts to New York State once the bonds and any other liabilities have been paid in full.⁷³ Tolls are in US $ (but have been converted on the table) and the rate for trucks is based on the number of axles.

· Thousand Island International Bridge: The Thousand Island International Bridge (TIBA) is a New York State public benefit corporation. Its seven-member board is comprised of four US citizens and three Canadians who serve for five-year terms. The owner of the Canadian portion is the Federal Bridge Corporation Limited (FBCL) but it appears that FBCL but has entered into an agreement with TIBA to operate and manage the structures. Tolls start at $3.00 for automobiles and, for trucks, increase with the number of axles.

· Niagara River Bridges (3): The Niagara Falls Bridge Commission operates three bridge across the Niagara River-the Lewiston-Queenston Bridge (sometimes referred to as the "Queenston-Lewiston Bridge"⁷⁴), the Whirlpool Rapids Bridge and the Rainbow Bridge. The Commission was created in 1938 under US federal legislation and licensed under the Extra Provincial Corporations Act of Ontario. It operates with an eight-member board, four appointed by the Governor of New York State and four appointed by Lieutenant Governor of Ontario.⁷⁵ The Commission first built the Rainbow Bridge (opened in 1941) and then subsequently purchased the Whirlpool Bridge (opened in 1897) and the Lewiston-Queenston Bridge (latest bridge opened in 1962). Tolls for all three bridges are CDN $3.50 for an automobile and CDN $0.35/tonne for commercial trucks plus a surcharge for trucks over 100,000 lb. On Table 5, revenues for each bridge have been estimated based on the known 1994 toll revenues of the Commission, split among the three bridges in proportion to traffic. This will result in an underestimation of the Lewiston Queenston Bridge because that is where trucks cross and an overestimation of the other two bridges where trucks are not allowed. But the total amount shown for the three bridges is accurate (1994 data).

· Peace Bridge: The Peace Bridge is operated by the Buffalo and Fort Erie Public Bridge Authority, which dates back to about 1925. The Authority was created under Canadian federal legislation as a bi-national commission. There are 10 members on the Board, five appointed by New York State and five appointed in by the federal government. "The legislation creating the Public Bridge Authority provided that it shall remain in existence as an independent public authority until its bonds are paid and its debt retired." ⁷⁶ Apparently, there is little hope that the debt will ever be retired, particularly given the current plans for increased capacity and facilities. There has been a plan since about 1997 to twin the span. According to the Peace Bridge's operator, "No public funds have ever been granted or used for construction, operation, maintenance or capital expenditures. All capital improvements and operating expenses are funded by tolls and rentals of Peace Bridge-owned property and buildings. In accordance with its legislation, the Peace Bridge operates without share capital; all current and future surpluses are committed to capital projects and repayment of outstanding bonds."⁷⁷ That may be true, but one commentator notes that the current Financial Plan, which calls for capital expenditures of US $ 150 million through to 2005 (to twin the structure) includes US $25 million "from U. S. and Canadian government funding sources."⁷⁸ Toll rates are $2.75 for an automobile and $0.51 per ton ($0.562/tonne) for trucks.

· Ambassador Bridge: The Ambassador Bridge is one of only two privately owned road connections between Canada and the United States. The owners are The Detroit International Bridge Company in Detroit and The Canadian Transit Company in Windsor. No financial information is available, so the estimate of revenues on Table 5 is just a guess. Even traffic volumes are confidential, although they are fairly easy to estimate. Toll rates start at $3.00 for an automobile. For trucks with two to seven axles, the toll is $0.02 per 100 pounds. For trucks with more than seven axles, the toll is $0.03 per hundred pounds. One problem has been that, as a private bridge, no US federal funds could be used to up-grade the roads connecting the bridge to the Interstate highways (I-75). It is understood this difficulty was resolved in the latest reauthorization of US highway funding (TEA-21) and there are now plans for major construction projects on the US side of the bridge.

· Detroit-Windsor Tunnel: The tunnel, which opened in 1930, was built entirely by US private interests. "In 1990 ownership of the Canadian half of the Detroit-Windsor Tunnel reverted to the city of Windsor, ending a 60 year franchise agreement with the Detroit & Canada Tunnel Corp. The Detroit side remains in private hands."⁷⁹ (The web site for the tunnel actually says the tunnel is jointly owned by the cities of Windsor and Detroit. It may be that the Detroit & Canada Tunnel Corp is owned by the city.) Current tolls start at $2.75 for an automobile; for trucks they are $0.022 per hundred pounds.

· Blue Water Bridge: The bridge was built under the authority of 1930 Michigan legislation and opened to traffic in 1938. According to Michigan sources, there was an agreement between Canada and the United States that the bridge would become toll free once the debt was retired. This happened in 1962. At this point, the Canadian operator, Blue Water Bridge Authority, began collecting tolls in both directions. Prior to this, it is understood, each operator only collected tolls in one direction. Under 1970 US federal law, the Michigan Department of Transportation was authorized to re-institute tolls on its side of the bridge. Canadian sources have a slightly different slant on this story: "In 1964, following retirement of the construction debt, the Canadian half reverted, at no cost or expense, from the State of Michigan to the federal government in accordance with the provisions of a 1928 special Act of Parliament authorizing construction and operation of the bridge." This source makes no mention of an agreement to cease collecting tolls or anything about the Canadian side of the bridge collecting tolls in both directions in 1962.⁸⁰ The current organizational structure of the Canadian operator is governed by federal legislation-Blue Water Bridge Authority Act of May 1964. In 1995 both operators of the bridge agreed to twin the existing span and redeck the original bridge at a total cost of roughly CDN $100 million.⁸¹ The Blue Water Bridge Authority paid its share through reserve funds and bank loans. The Michigan Department of Transportation paid for its share through a sale of bonds and with a grant or loan from the US Department of Transportation.⁸²

· Sault Ste Marie Bridge: The bridge is operated by the International Bridge Authority of Michigan. Under US Public Law of 1940, the Authority was allowed to construct and operate a toll bridge. Once the debt was retired, ownership was to revert to Michigan and Ontario. Apparently, the debt would have been retired in the year 2000. But, under an amendment to US legislation (ISTEA) Michigan was allowed "to continue to administer a toll on International Bridge crossings, and use this revenue as a source of funding for maintenance, operations, and future capital improvements to the bridge."⁸³ The press release making this announcement notes that the continuation of tolls was also the wish of Ontario. Toll rates vary from $1.75 for an automobile to $30.00 for a truck with eight or more axles.

· Fort Francis International Falls Bridge: The bridge is privately owned and, other than the toll rates, no other information is known about its finances. (The full name of the owner, according to the US Department of Transportation, is "MN, Dakota & Western Rdway Internatl Falls Co & Internatl Brdg & Terminal Co Ltd (Boise-Cascade Corp)")⁸⁴

3.3.6 Highway 407

Ontario's Highway 407 began in 1993 with the formation of the Ontario Transportation Capital Corporation (OTCC), although the need for the highway had long been anticipated and some of the land assembled. There are a number or reasons why the highway was financed the way it was but two stand out. The government was in financial difficulty and could not commit the necessary resources and, secondly, Ontario was in recession, or just coming out of one, and the government wanted to create jobs. Conventional procurement policies-in particularly, waiting for annual appropriations from the consolidated fund-would have meant a 20-year construction process.⁸⁵

As a result, the province opted for a public-private-partnership. One of the goals of doing it this way was that the private sector was supposed to build the highway at a lower cost. Another goal of having the private sector arrange financing up-front was that it was supposed to speed up construction. The original Request for Proposal, in September 1993, asked bidders to finance, design, build, maintain, operate and eventually transfer the road back to the government. Both groups who made it to the list of companies asked to write proposals had the financial parts of their proposals fail the government's scrutiny.

"Both proposals were considered to consist primarily of debt with only nominal equity. Both proposals were considered to require substantial support from the government. OTCC concluded that private sector financing would result in higher project costs because of higher private sector borrowing costs. The government elected to finance the project itself, and removed financing as a consideration in the selection of the successful proponent."

In the end, OTCC awarded a design, build, and operate agreement. It financed the road itself (the claim is that it borrowed the money at 75 basis points lower than the private sector bidders could have), and the contract for maintenance of the highway was a separate agreement. Further, the government entered into a separate agreement with one of the parties in the losing proposal for the electronic tolling component of the highway.

The 1996 report of Ontario's Office of the Provincial Auditor, in its review of Highway 407, stated: "We observed that, although cited as a public-private partnership, the government's financial, ownership and operational risks are so significant compared to the contractual risks assumed by the private sector that, in our opinion, a public-private partnership was not established."

There is a disagreement over the issue of whether these arrangements resulted in a highway being built at a lower cost than if the government had built it using standard procurement policies. The figure of a "$300 million saving" is sometime quoted, but the truth appears to be that much of this saving was made by cutting back on aspects of the design (eg, the number of intersections). Whether or not the road was built at a lower cost, there is little doubt it was built much faster than it could have been if government handled it in its usual fashion.

The debate over the way Highway 407 was financed will probably continue. In some sense, however, the decision made in 1999 overshadows these earlier decisions. In April 1999 Ontario announced that a consortium comprised of Spanish company Ferrovial and its subsidiary Cintra Concesiones de Infraestructuras de Transporte, SNC-Lavalin, and Capital d'Amérique CDPQ, a subsidiary of the Caisse de dépôt et placement du Québec purchased the 407 ETR Concession Company from the province for $3.107 billion. "The province will continue to own the Highway 407 lands. The consortium will lease the lands from the province for a period of 99 years and will own the road, buildings and other structures on the Highway 407 lands. These will become the property of the province at the end of the lease."⁸⁶

In terms of tolls, the original enabling legislation required the removal of the toll charges on the retirement of project debt. Presumably the sale of the highway has changed this condition. Here is what the government's April 1999 press release said:

"The new owners will have the authority to set toll rates. However, they will be required to achieve pre-set traffic congestion relief targets established by MTO in order to increase rates above a specified toll level. The specified toll level is set at the current price of $0.11 per kilometre. This level can be increased by 2% per year plus CPI for the first 15 years, and thereafter, by CPI only. This means that the specified toll level can only increase by about three cents per kilometre over the first 15 years. The specified toll levels are connected to congestion relief targets. Toll rates above the specified toll level will only be permitted if the traffic volumes are at or above target levels. If the required traffic volumes are not met, any income from tolls charged above the specified toll level will be clawed back by the province along with an additional penalty of the same amount. Toll rates for trucks will continue to be two times the automobile rate for single unit trucks and three times the rate for multiple unit trucks. "

3.3.7 Coquihalla

The Coquihalla opened in 1986. It was the first new toll facility to be built in Canada in about two decades. British Columbia itself had abandoned the idea of tolls in 1964 and the only other toll facility built was the Saint John Harbour Bridge in 1968. In 1984 dollars, the total cost of the Coquihalla was $375 million.

Unlike other toll roads, bridges or tunnels described here, the Coquihalla is unique in the sense that it was built by the BC Ministry of Transportation and Highways using ordinary procurement policies. In fact, as far as is known, to this day toll revenue from the Coquihalla are treated just like any other tax in the government's consolidated fund. The Ministry's annual report lists the tolls from the Coquihalla as a "revenue," but it also lists a wide variety of other road-related permit fees and fines as revenues.

The precise reason why a decision was made to use tolls on this road is not known. However, some of the factors influencing this decision are known. The Coquihalla had been planned for a long time and some construction had actually started in 1979. But British Columbia was hosting a major international transportation event (EXPO86) and a decision was made in 1983 to accelerate the construction schedule. ⁸⁷ It is possible, then, that as with other toll facilities the decision to use tolls had something to do with borrowing money and moving the construction schedule ahead. But in the particular case of the Coquihalla this does not appear to be the case as the enabling legislation, which did provide for borrowing, and the actual decision to start construction all preceded the decision to introduce tolls.⁸⁸ It may be that, since the British Columbia economy was either in recession or coming out of one in 1984, the government decided this was a new revenue source it could tap. It did not have any extra money to throw into highway building. The original spending plans for the Ministry of Transportation and Highways for fiscal 1984/85 were $564 million, down from $790 million a year earlier.⁸⁹ With the approaching EXPO86 and the expected large influx of tourists using the already capacity-limited existing east-west highways, the decision to spend a lot of money fast was seen as a good counter-cyclical policy.⁹⁰ A final reason why a decision to use tolls was reached may have been the fact that possibly up to 30 per cent of motorists using the new highway (in 1986) would have out-of-province plates. That, at least, is the opinion of some: "Without a toll, the residents of B.C. would be incurring costs for the benefit of non-residents. The tolls are a way of capturing some of the benefits for B.C."⁹¹

The tolls themselves are authorized under the Ministry of Transportation and Highways Act. In fiscal 1999/2000, total revenues from tolls amounted to $40.9 million. The original forecast revenues for 1986 were $20 million-it appears that traffic volumes have built from a (forecast) of about 1.7 million vehicles in 1987 to about 2.7 million in fiscal 1997/98.⁹²

3.3.8 Other

There is one other almost toll road-the Fredericton-Moncton Highway-portions of which opened in 1999. A private developer, the Maritime Road Development Corporation, is building and operating the road. The original plans for tolls were scrapped with a changing government in New Brunswick. Following the signing of Amended and Restated Project Agreements and amendments to the Loan Agreements, tolls were removed from the Highway on March 1, 2000. They were replaced with a monthly traffic volume payment by the New Brunswick Highway Corporation. As understood, then, the government is still using the consolidated tax revenue fund to pay the operator.

3.4 Toll Roads in Other Countries

To put the 19 toll facilities in Canada, only seven of which are entirely in Canada, in perspective, Table 6 shows the extent of tolled facilities in other countries.

There are 7,589 kilometres of tolled roads, bridges and tunnels in the United States and a large portion of these-3,213 kilometres-are on the Interstate highways. Almost all are within the US National Highway System. These tolled facilities represent approximately 154 bridges and tunnels and 90 roads and, of the combined total, 118 use electronic toll collection technologies. In addition, as of January 1 1999, there were a further 42 tolled facilities either under construction or at some stage of planning in the United States.⁹³ Total toll revenues (1995) are over US $3.5 billion.⁹⁴

Table 6: Tolled Roads in Selected Countries

There is a long history of toll roads in the United States, but this does not need to be recounted here. Rather, from the perspective of looking at alternative road financing arrangements in Canada, perhaps the most important aspect of US experience is federal policy. Current US federal policy towards toll roads is described by the US Department of Transportation (this is a considerably condensed version of the original):

"The Federal-Aid Highway Program has operated under the assumption that tax-supported roads were preferable to toll roads. With the implementation of the 1956 Highway Act legislation, a method for dealing with State toll roads that were to be incorporated into the Interstate System routes was developed. These toll roads were signed as Interstate routes, but continued to collect tolls under agreements which specified that when the toll road bonds were paid off, the toll facilities would revert to toll-free status. Since 1987, Federal legislative actions have revealed a changing attitude about toll roads. [A 1987 Act] . . . provided a toll road pilot program in which nine States were given the authority to pursue development and construction of toll roads with up to 35 percent Federal-aid funds. . . . In 1991, the U.S. Congress passed . . . the Intermodal Surface Transportation Efficiency Act (ISTEA) . . .[that, among other things] . . .was designed to provide State and local governments with more flexibility in generating new capital for needed highway investments. [various sections gave new directions for toll highways, public-private cost sharing and for a congestion pricing pilot program.].

". . . Beginning with ISTEA, States have more flexibility to co-mingle Federal-aid funds with State and private funds to implement projects. For example, States may make Federal-aid reimbursable loans to a public or private entity which is constructing a toll project that is eligible for Federal-aid funding. . . . . ISTEA provided cost-sharing incentives to get projects built. Cost-sharing can take many forms. The form most discussed has been public-private cost sharing, which is not tax exempt. Another type of cost-sharing is between two or more public entities, such as toll authorities and State Departments of Transportation, which could be tax-exempt.

"ISTEA allowed FHWA [the Federal Highway Administration] to provide Federal-aid to either of these kinds of projects, and there are now examples of Federal investment in public toll roads under construction. Several private toll roads are under development and may lead to State requests for Federal-aid participation to assist these projects.

". . . . Also during the ISTEA period, FHWA used its regulatory and statutory flexibility, and general discretion to conduct financing research and development . . . to develop an innovative finance test and evaluation program. . . . . The approach taken was to identity specific projects, develop a plan of finance, and offer those projects as examples of creative financing solutions. To stimulate and advance this effort, FHWA established the Test and Evaluation Project . . . [under which, among other things, Federal-aid money could be loaned to private entities such as toll roads.]

". . . . The Transportation Equity Act for the 21st Century (TEA-21) provides several new provisions that influence Federal toll road policies. . . . . [credit assistance, etc]

" . . . . TEA-21 also creates a pilot program under which a State may collect tolls on an Interstate highway for the purpose of reconstructing or rehabilitating the Interstate highway that could not be adequately maintained or functionally improved without the collection of tolls. A maximum of three projects may be included in the pilot program and they must be in different States. An agreement between the State and FHWA covering use of toll revenues must be executed for each Interstate toll pilot project.

"In addition, TEA-21 establishes a new State Infrastructure Bank (SIB) pilot program under which four States--California, Florida, Missouri, and Rhode Island--are authorized to enter into cooperative agreements with the Secretary to set up infrastructure revolving loan funds eligible to be capitalized with Federal transportation funds authorized for the FY 1998-2003 period. SIBs provide various forms of non-grant assistance to eligible projects (including toll roads). This assistance includes below market rate subordinate loans, interest rate buy-downs on third party loans, and guarantees and other forms of credit enhancement."⁹⁶

3.5 Summary

A number of observations may be made about toll roads, bridges and tunnels in Canada (or between Canada and the United States):

· First, there are a wide variety of organizational structures used for toll roads, bridges and tunnels-from the completely private operator on the one hand (Ambassador) to government departments on the other (Coquihalla) with a variety of government-owned public utilities (Halifax-Dartmouth) and "Authorities" and "Commissions" in between. This is not unique to Canada, as the US Department of Transportation notes the same thing about toll facilities in that country.

· Second, the scale of toll road activity is significant although there are difficulties in trying to estimate this. Even if the estimate of $100 million in revenues for Highway 407 is inaccurate (if anything, it is probably on the low side), total revenues (Canadian portion only) of $279 million are significant. This puts total toll payments at a level higher than highway expenditures in the five smaller provinces and territories. But, to put this figure in perspective, the toll revenues for the New York State Thruway in 1999, in Canadian dollars, were $592 million⁹⁷ and total toll revenues in the United States exceed CDN $5.3 billion.

· Third, there are only eight facilities where AADT figures are above 15,000. This is the rule-of-thumb for highways that have enough traffic for tolls to pay both the capital and operating costs of a highway. An AADT of 10,000 is the rule of thumb for roads where tolls can pay operating costs and only ten of the 19 facilities are in this category. The average AADT for the whole National Highway System in Canada is only 8,900.⁹⁸ In only two provinces are average AADT figures above 10,000. Conventional wisdom, then, suggests that there are only small portions of the Canadian road network where tolls could work.

· Have the Royal Commission's recommendations been followed-that is, that toll facilities be used on major new links with tolls set to cover the costs over and above what the fuel tax revenues covered? This is difficult to judge as only four toll (or possible toll) facilities have been completed since the 1992 report (Confederation Bridge, Cobequid Pass, Fredericton-Moncton and 407) and the planning for several of these facilities (Confederation, 407) had already begun before the Royal Commission made its recommendations. That aside, what is clear is that (1) no one has taken the suggestion that tolls be set to pay for the facility above what the fuel tax pays for, (2) in one case (Moncton-Fredericton) it is the consolidated tax revenue fund that pays for the facility, and (3) in two cases (Confederation Bridge and Cobequid) major government guarantees of funding or grants were more important than toll revenues in paying for the facility. So far it does not appear that anyone has taken the Royal Commission's recommendations seriously. Admittedly, there are four more toll facilities under consideration-two in Québec, mid-Peninsula in Ontario and the South Fraser Perimeter in the lower mainland of BC-and it may be too early to reach conclusions.

· On the question of whether or not tolled facilities revert to the government when debt is retired, the evidence is slim but it appears that it is unlikely for a toll facility to ever become a public road with no tolls.

· As a final comment, a significant difference between Canada and the United States has to be noted. In the United States, there are a number of formal mechanisms-tax exempt bonds, Federal-aid money, etc-that facilitates the development of toll roads. In Canada, while it is true that government money is usually involved in one way or another with the development of toll facilities, this is on the basis of ad hoc policy.

Table 7: Summary of Toll Road, Bridge and Tunnel Characteristics

4. Urban Roads

4.1 Introduction

In 1998, the Transportation Association of Canada proposed a model for financing urban transportation based on Montréal's new agency (AMT - see Section 4.4). Since then, Vancouver has created a similar structure using this model as a guide (Section 4.2).

Text Box 4

After commenting on the deficit reduction program of senior levels of government, decreasing transfer payments, the trend to downsizing government and the growing resistance to tax increases, TAC's Briefing continues . . . .

"Urban transportation is caught up in this budget crunch. Local governments have less money available for transportation and (in some cases) more road and transit responsibilities assigned by the provinces. In various locations, roadway maintenance is being deferred, capital funds are being used for maintenance, new construction is being delayed or cancelled, and transit budgets are being reduced.

"Meanwhile, automobile demand continues to grow. Urban populations, the number of automobiles and the average annual kilometers driven per automobile are all increasing, while the average number of occupants per automobile is decreasing. It is becoming obvious that governments will not be able to finance transportation systems to serve increasing vehicle demands the same way they did in the past."

------------------------------------------------

Transportation Association of Canada, 1998

: Urban Transportation Budget Crunch

Essential elements of the model include: (1) transparency-that is, the source and allocation of funds has to be open and understandable, (2) simplicity, (3) user pay, and (4) dedicated payments-that is, user fees that are spent only on transportation. These four points are an oversimplification. To oversimplify even further, the model proposed is really the same as the financing model used for public utilities-users pay a fee based on consumption and utilities provide the service in a business-like manner.

Three obvious sources of these user fees are the federal excise tax on fuel, provincial fuel taxes and vehicle registration taxes. The urban portion may not take all of these tax revenues, but it was to be a clearly identified portion and the total amount would be based on activity within the urban area. Other possible new fees would include special (or add-on) fuel taxes, tolls, parking charges, new vehicle fees, property development charges, right of way fees (for things like sewer lines that used the road allowance), auto commuter levies (a special levy on any vehicle used for commuting) and congestion charges (an example might be those used in Singapore).

What follows is a description of four urban areas that have adopted new approaches to financing roads. Other urban areas-for example, Toronto and the surrounding municipalities-have created similar institutions in some cases. They are similar in the sense that they create a regional approach to planning or, perhaps, provide some transit services. The Greater Toronto Services Board co-ordinates regional planning and overseas the finances and operation of the regional commuter train services. But this is not in the same league as the following four urban areas where new mechanisms have been created to put money into roads. A fifth urban area, the municipalities in the Victoria area, also has a new financial arrangement-a transit tax on fuel sold in the area. This, while not discussed in the following sections, should also be added to the list of new, alternative financing arrangements. (In Victoria's case, it is not known if this is just transit funding or both transit and road funding.)

4.2 Vancouver's TransLink

Text Box 5: Greater Vancouver's TransLink              

British Columbia passed legislation in 1998 giving the Greater Vancouver Transportation Authority-"TransLink" as it is now known-responsibility for transit, 2100 lane-kilometres of the more important roads, bridges and ferry services in the Vancouver area

In the 1998 Legislative session the Greater Vancouver Transportation Authority Act (Bill 36) was passed, and on April 1, 1999, the GVTA took over responsibility for transit and a number of transportation programs in the region. The Authority adopted the name TransLink.

This authority has the power under the Act to raise revenues to pay for infrastructure and services. GVTA receives a share of the provincial fuel taxes collected in the Greater Vancouver region initially at eight cents per litre but rising to ten cents over the next five years. The authority may acquire and dispose of assets, borrow and hold debt, identify projects and negotiate cost-sharing agreements with the Province, and establish subsidiaries. It is governed by a 15-member board, with 12 members appointed by the GVRD and three by the Province.

The creation of the new regional authority had significant implications for the Ministry. TransLink now provides funding, coordination and planning for 2100 lane kilometres of former provincial highways and municipal roads that make up the Major Road Network. TransLink is also responsible for the Knight Street, Patullo and Westham Island bridges, the Albion Ferry, and 187 traffic signals. Former Albion Ferry employees were transferred to a new TransLink operating subsidiary (Fraser River Marine Ltd).

TransLink also took over AirCare (a formerly provincial program most recently administered by ICBC), West Coast Express, transportation demand management programs formerly administered by the GVRD and programs to promote transportation alternatives such as cycling, car and van pooling as well as the Vancouver Regional Transit System formerly administered by BC Transit (including bus, SkyTrain, SeaBus and handyDART). The Province retained the power to design and construct the SkyTrain extension through Rapid Transit Project 2000 Ltd.

There are a number of joint projects that have been identified by the ministry and TransLink staff, some of which are now under way including Highway 17/99 HOV lane conversion, Highway 99/ Steveston Highway passenger transfer facilities, South Surrey interchange/park and ride relocation (recently completed). Ministry staff are in active consultation with TransLink on a range of projects.

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BC Ministry of Transportation and Highways, Annual Report 1999-2000

TransLink receives a share of the provincial fuel tax (8¢/litre) and certain other amounts (for example, the province's sales tax revenues on parking in the area). It has the power to raise other revenues-vehicle charges, tolls and parking taxes -to pay for infrastructure and services. It also has the authority to take on debt.

In the first nine months of operation in 1999, fully 86 per cent of its expenditures were on transit.⁹⁹ It is not known if this concentration on transit will always be the case (in its first nine months of operation, the focus had to be transit given the services taken over). In terms of revenues-again, only judging on the basis of the budget for the first nine months-transit operating revenues account for 36 per cent of the total and the fuel tax account for 33 per cent. One of the first things the new organization did was to approve a paper proposing that the federal government turn over some money it collects from the excise tax on gasoline.¹⁰⁰

In TransLink's first strategic plan-concentrating only on those aspects that related to roads-the following are the key points:

· Many aspects of the plan, on such things as improvement to transit services or managing traffic demand-are important to the subject of roads but do not need to be described here (the focus here is on alternative financial arrangements).

· Of the 14 objectives listed in the plan, one deals with roads: "Provide a well-maintained and financed major road network."¹⁰¹

· Road spending identified is for a "Major Road Network"-the major arterials in the lower mainland including some highways formerly operated by the province. The spending envisaged includes raising on-going maintenance spending to $12,000/lane-kilometre/year, spending upwards of $45 million on the three bridges included on the network, and developing major capital expenditures for new roads or added road capacity.

· In terms of paying for this, the plan starts with the given tax sources (for example, 8¢/litre fuel tax), mentions in a querulous manner that the federal government collects a great deal of excise tax money from motorists in the area, and then goes on to document specific plans to increase user charges for motorists. These include vehicle taxes-$40-to-$120 a year for non-commercial vehicles and an average of $190 a year for commercial trucks-and such things as new parking taxes. While the plan itself only shows these new user fees adding up to about $177 million a year by 2009, other information from TransLink indicates that the expectations are that these new user fees would amount to more than $1 billion a year by the year 2021.¹⁰² This is not an inconsiderable amount of money-it would exceed the road budgets of all but the four largest provinces. (Admittedly, in noting this, it is not entirely clear these are all road user taxes-it may include all forms of tax increases-and it is not clear that all of this money is intended for roads-some of it may go into transit services.)

Strategic plans notwithstanding, this new urban agency has run into problems. A recent decision of TransLink shows that there may be a significant gap between the idea of creating urban transportation agencies with taxing powers and actually seeing these agencies collect taxes. According to press reports, TransLink's decision to levy a fee on vehicles registered in the region, and ultimately all vehicles operating through the region, may founder on its inability to actually collect the tax. The logical agency to collect new fees would be the provincial agency that registers vehicles (ICBC in this case). But, press reports suggest ICBC has refused to do this.¹⁰³ The press report goes on to suggest a cynical interpretation of this idea of a local transportation agency assessing vehicle taxes. "In truth, though, the TransLink board may have gone through the process of getting the [vehicle] levy plan approved in order to establish a fallback funding option for the [regional Strategic Transportation Plan]." The "fallback" is to press the provincial government for a larger share of the fuel tax collected from motorists in the region and to press the federal government for a share of the (according to TransLink's figures) $300 to $400 million in excise taxes collected from motorists in the Vancouver area.

It may be too early to tell whether TransLink will be a success in terms of developing alternative financial arrangements for urban roads.

4.3 Edmonton and Calgary

In September 1999 Alberta announced it would replace an existing per capita grant system in Edmonton and Calgary with a new transportation grant based on 5¢ per litre of fuel sold with each city. The estimated amount of these grants was $65 million for Edmonton, up $31 million from the per capita grant formula, and $85 million for Calgary, up $34 million from the old formula. Additionally, the province took over responsibility for several highways through the two cities so that, in effect, the amount of provincial money made available for roads is even larger than these figures suggest.¹⁰⁴

This may be an interesting policy, but it is not clear it is of major importance here. It really is just a replacement of one grant formula by another. There is nothing particularly "dedicated" about the tax revenues in the sense that the provincial government (presumably) is free to change the formula at any time. It may make the road-user slightly more aware that he/she has to pay for the use of the roads, although given that in the past the Alberta government has usually equated fuel tax revenues with road expenditures, it is not clear the road user really sees much difference-the tax revenue is now just funnelled to different roads. Finally, it is not clear this grant program will have much impact on the efficiency of road investments.

4.4 Montréal's AMT

L'Agence métropolitaine de transport (AMT) was formed in 1995 with a four point mission: (1) to sustain, develop, co-ordinate and promote public transport; (2) to improve services and promote the use of suburban trains; (3) to integrate services between transport modes; and (4) to increase the efficiency of urban road transport corridors.¹⁰⁵ In terms of road transport corridors, the AMT can restrict access to a number of traffic lanes to transit and multi-occupant vehicles; have traffic lights synchronized; and designate roads for one-way traffic. Nothing in the legislation mentions any jurisdiction over infrastructure construction or maintenance.

The Agency is made up of a Board of Directors whose five members are government appointed for a period of up to five years. Two of the five members are to represent the municipalities that are covered by AMT and are named after consultation with Montréal and Laval. The government names a president-CEO from among the member of the Board.

AMT activities are financed through public transport revenues as well as dedicated tax revenues: contributions for public transport from motorists; fuel tax; and annual parking taxes.

Responsibility for the AMT was transferred to the ministère des Transports in December 2000 (Loi 170). It was given responsibility over construction of any new metro lines.

Revenues for AMT's first-year budget, $158 million, came from several sources: (1) a new dedicated fuel tax of 1.5¢/litre on fuel sold in the Montréal region. (2) a vehicle surcharge of $30/vehicle, (3) property levies on municipalities that receive commuter train service, (4) property levies on municipalities for a capital asset fund, (5) transit and commuter rail revenues, and (6) a provincial commuter rail infrastructure subsidy.¹⁰⁶

4.5 Summary

Local governments account for 48 per cent of road spending in Canada and 73 per cent of all roads. Many argue that more money and, in particular, new sources of money have to found for local roads-primarily in large urban areas. The traditional source of funding for local roads has been the property tax and grants from senior levels of government. Some suggest these are not adequate to fund the levels of road spending needed.

From a causal examination of studies and other documents at the local level (primarily TransLink in Vancouver and the Greater Toronto Services Board (GTSB)), it is evident that the first choice in alternatives for some groups is the federal government with its revenue from the excise tax on fuel. This research has not established that more money is required for urban roads or that the traditional sources of funding have been exhausted (or, for that matter, whether they are appropriate). All this research has shown is that, in a few cases, new approaches are being taken to develop alternative financing arrangements.

In some situations-the 30 municipalities (plus, for transportation purposes, Hamilton) that make up the GTSB-new regional agencies have been created with mandates to co-ordinate transportation planning. One of the first things the GTSB did was develop a strategic transportation plan that concluded (among other things) there was not enough money available from the tax base its constituent municipalities had. Its studies suggest that capital spending on transportation will have to increase from the current $570 million a year to $1.4 billion a year. For that reason, one of the GTSB's primary objectives is to develop a "transportation investment partnership involving the federal, provincial and municipal governments and the private sector."¹⁰⁷

In other cases-Edmonton and Calgary-provincial governments have given urban areas a portion of the provincial fuel tax collected within their borders. If this is additional money, then presumably it qualifies as an alternative financial arrangement for the purpose of this research. However, in some cases (Edmonton and Calgary) it appears to be just another way of calculating grants that the cities were already receiving.

In only three cases have really new financial arrangements been attempted. In both the Montréal and Vancouver areas, transportation planning and funding agencies have been set up along the lines suggested in the Transportation Association of Canada's model. What is significant here is that not only is there a form of dedicated users taxes (or grants) flowing from provincial governments to these agencies but also these agencies have been given their own taxing power. Victoria also has a special dedicated fuel tax for fuel sold within its area (it is not known, however, whether it has an agency similar to those in Vancouver and Montréal). While there evidently are some teething problems, the long run consequences of these institutions will be a more user-pay tax regime in the supply of transit and road services.

5. Road Funds

5.1 Introduction

Text Box 6: Japan's Earmarked Taxes & Road Fund      

Japan introduced a special funding system for roads in 1954 when it became apparent that a great deal of money was needed to pay for road building. The new system involved earmarking road-related taxes and depositing them in a special account, or road fund. This is "based on the concept that road users who enjoy the benefits of improved roads should bear the burden for their improvement."

The road fund employs an elaborate system of earmarked national and local taxes to finance the maintenance, improvement and construction of national, prefectural (provincial) and local roads. Earmarked revenues are supplemented by general tax revenues. Revenue from user fees in 1995 was roughly $30 billion.

Funds are provided to road authorities on a cost-share basis. For example, these pay for half the maintenance on national highways and 70% of the cost of improvements on the national expressways.

Road spending is based on Five Year Road Improvement Programs prepared by the Ministry of Construction (MOC). The development of these programs helps establish the level of user taxes. In developing these programs, the MOC listens to the views of a Road Council. This Council was established in 1952 and consists of a chairperson and twelve others appointed by the Minister of Construction. Board members include representatives of the motor industry, business community, trades unions, academia and local government.

Day-to-day management of the road fund is carried out by the General Affairs Division of the Roads Bureau with about 12 staff who are responsible for forecasting revenues, liasing with Ministry of Finance and monitoring use of funds by the other divisions of the Roads Bureau and the prefectures. Each of these divisions (eg, the Expressway Corporation, Highway Division, etc.) and the prefectures have two or more accountants who monitor the expenditure programs and report back to the General Affairs Division. Expenditures on roads in cities, towns and villages are monitored by the prefectures who then report back to the General Affairs Division on programs supported by the road fund.

The road fund acts like a line of credit. Once the overall spending limits have been approved by parliament, MOC can draw down the funds, regardless of the actual revenue in the road fund account at the Central Bank (ie, the government provides working capital).

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Abridged version of text from Ian Heggie, et al (1999)

On Table 8, 55 national road funds are shown along with the lone entry from Canada-British Columbia (if, indeed the BC Transportation Financing Authority qualifies as a road fund). Road funds have been identified from various places in two publications authored or co-authored by Ian Heggie.¹⁰⁸ Where possible, certain descriptive information about the fund is shown in the third column of the table. The text box describing Japan gives more detail on one country and two later sections describe the funds in the United States and New Zealand.

It is best to regard the Table 8 list as somewhat fluid as Heggie makes the point that, in many cases, there is a large gap between intentions and actually having a well-functioning road fund.

Heggie, who worked for the World Bank, is primarily concerned with road financing in developing countries. This is important as it is suspected that not everything written about road funds necessarily applies to the situation in Canada. However, it can be seen from the table that a significant number of industrialized countries-the United

Table 8: Countries with Road Funds or Countries Working to Establish Road Funds

States, Belgium, the Netherlands, New Zealand, etc-also use these funds to finance roads. In some cases road funds in the industrialized countries have been around for quite a while and do not qualify for what Heggie refers to as "commercially managed road funds."

Although Heggie's focus is on the developing world, the abstract from one of his papers is the best introduction to the subject of road funds for this paper. It puts the Canadian situation into context: Canadian provinces and territories are not the only jurisdictions having problems with financing roads.

"Nearly all countries are seriously short of revenues for investment and maintenance of roads. Improving utilization of the existing road budget has helped to narrow, but not eliminate, this financing gap. Requests for additional resources from the government's budget have fallen on deaf ears, because the road sector has grown too large to be fully-financed through general tax revenues. Government tax systems were not designed to finance major economic sectors like roads. Faced with an acute shortage of funds, many road agencies have introduced tolls on high-volume roads and have invited the private sector to build and operate such roads under concession agreements. Although this has narrowed the financing gap, tolling is only economic on a small part of the road network. Tolls have thus had a relatively small impact on the financing gap. Against this background, and mindful of the fact that roads are now `big business' on the scale of the Fortune Global 500, a growing number of countries have started to `bring roads into the market place, put them on a fee-for-service basis and manage them like a business.' The fee-for-service concept, though superficially like the user-pay principle and the associated road funds which became popular during the 1950s, differs from user-pay in a number of important respects. The key differences are that (i) only road user charges go into the fund (there are no earmarked taxes); (ii) the fund is managed by a representative board with half or more members representing road users and the business community; (iii) members are nominated by the constituencies they represent and there is an independent chairperson; (iv) financing arrangements are designed to ensure that money is not diverted from other sectors; (v) funds are managed pro-actively by a small secretariat; (vi) there are published financial regulations governing the way funds are managed; (vii) charges are adjusted regularly to meet agreed expenditure targets; and (viii) there are regular technical and financial audits. Other important characteristics are that most commercially managed road funds are managed through a separate road fund administration, funds are channelled to all roads . . . and they are introduced as part of a wider agenda to commercialize road management."¹⁰⁹

For all of Heggie's conviction, there may well be arguments against road funds. People in government finance departments would probably argue that cutting some taxes out of government revenues and assigning them to a quasi-independent agency and, perish the thought, allowing that agency some freedom in setting those tax rates reduces the amount of flexibility governments have in setting fiscal policy. Certainly in Canada there has been a long history of using road spending as a pump primer (recall the description of Highway 407 and the Coquihalla in Chapter 3). Others might argue that there is a social function to roads funds-developing certain regions, helping depressed areas, etc-that may be lost if road spending is put on a completely commercial basis.

While Heggie is mainly concerned with the developing world-where the issue is how to set up agencies to supply road services efficiently-a somewhat different perspective is taken by Clifford Winston of the Brookings Institute. Because the situation in the United States is similar to that in Canada, his views are also worth examining. In brief, whereas Heggie is concerned with setting up agencies that can supply roads-notice that his opening premise is that there is a shortage of money being spent on roads-Winston's perspective is more a concern with the difficulty governments have had either regulating the market or acting as suppliers in a market. Both situations, particularly in the area of transportation, have led to gross inefficiencies.

"I have come to believe that infrastructure inefficiencies will persist unless managing authorities face some competitive discipline. The limited evidence bears me out: when private firms are hired to perform highway maintenance, collect tolls, and manage airports, cost savings total 20-30 percent. New Zealand is considering a bold first step, called commercialization, where the government turns its roads over to commercial road companies, which would be expected to charge for their use and earn a return on capital while being regulated as public utilities. Such a policy would be problematic in the United States, where government regulation of public utilities is renowned for creating inefficiencies. But pure privatization raises the fundamental problem of a lack of competitive options to curtail monopoly abuses. Could that problem be addressed? Suppose the government distributes roads to commercial companies, as in commercialization, aiming to allocate potentially competitive sections (for example, California's Highway 101 and Interstate 5) to different companies. Private companies would be free to establish their own investment and maintenance policies, but they would negotiate prices (long-term contracts) with private local and state organizations representing motorists, truckers, railroads, and private transit companies. Government transportation would also be represented by a bargaining organization. Thus public and private users en masse would be able to bring competitive discipline on prices, and private companies would have a financial incentive to minimize costs and provide high-quality service.

"Although such a scheme may seem far-fetched, there is a growing reason for considering something like it."¹¹⁰

If anything, Winston, unlike Heggie, is concerned with governments throwing too much money at roads. This concern is shared by Todd Litman, but his views on "dedicated funds" are examined in the next section because they are specific to the situation in the United States. Winston and Heggie would agree, however, that a more commercial approach-in Winston's case, outright privatization-would act to correct the problems.

Winston's argument in the above passage concerns intercity roads. In another article, he argues that privatization might also be looked at in the case of urban roads mainly because of government's failure to price the use of the roads correctly. There are no congestion charges and the result, other than congestion, is that governments' only response is to keep spending more money on capacity. But Winston does not actually advocate privatization of urban roads just yet: "A conceptual case for privatizing roads can be made, but it needs empirical analysis."¹¹¹

For this paper the issue is not whether roads, intercity or urban, should or should not be privatized. Rather, the issue more simply is how road funds work. The best known example of a road fund, to Canadians, is the US Highway Trust Fund.

5.2 United States Highway Trust Fund

The United States established the Highway Trust Fund in 1956 to finance the federal share of the Interstate highway network and support most other federal-aid highway projects.¹¹² Later amendments extended funding to other transport programs (road safety, mass transit, high-speed rail and bike trails). The funding system involved earmarking certain road-related taxes and depositing them into a special account.

The Highway Trust Fund exists only as an accounting mechanism. The taxes earmarked for the Trust Fund are deposited into the general fund of the US Treasury and a paper transfer of these taxes is made to the Trust Fund twice per month as liabilities are incurred. Earmarked tax revenues in excess of those required to meet current expenditures are invested in public debt and interest earned is credited to the Trust Fund. The Trust Fund finances the federal-aid highway program administered by the Federal Highway Administration (FHWA). Since 1982 a portion of the Fund has also been used to finance mass transit projects administered by the Federal Transit Administration. Revenues from the highway portion of the Trust Fund are used to reimburse states for expenditures on approved projects. These include heavy maintenance (reconstruction, rehabilitation and resurfacing), road improvement, new construction, road safety programs, studies, and other highway related expenditures. The Trust Fund does not currently finance regular maintenance.

Trust Fund revenues are derived from a variety of highway user taxes, including: (1) motor fuel taxes on gasoline, diesel, and gasohol; (2) a graduated tax on tires weighing 40 lbs. or more; (3) a retail tax on selected new trucks and trailers; (4) a heavy-vehicle use tax on all trucks with a gross vehicle weight over 55,000 lbs; and (5) interest on the Trust Fund balance.

The federal-aid highway program is a reimbursable program. States are allocated a line of credit against which they can draw to meet obligations. Funds are allocated on the basis of formulae, which, though not perfect, are difficult to change. The US Government Accounting Office (GAO) has criticized the formulae, but concluded "Because the selection of a highway apportionment formula is a judgement for the Congress, GAO is making no specific recommendations." The formulas are relatively simple and generally use variables like population, road mileage, and traffic density.

Allocations do not cover all costs, but generally cover 80 per cent of costs or, in the case of maintenance, 90 per cent of costs-that is, funds from the Highway Trust Fund are provided on a cost-share basis.

Payment for work financed through the Highway Trust Fund is made in the following way: (1) Work is done by a contractor, (2) Contractor is paid by the state, (3) Vouchers for reimbursement (usually covering several project withdrawals) are sent to FHWA for review and approval, (4) Claims are certified by FHWA (this is a formality and certification is automatic), (5) Certified schedules are submitted to Treasury, (6) Federal share is transferred to state bank account by electronic funds transfer.

Each state participating in the scheme is required by law to have an annual audit carried out. FHWA is also subject to an annual audit to ensure it follows laid down procedures and can account for funds spent. About 3,000 staff manages the federal-aid highway program. They are stationed in Washington and in each of the states.

Comparing these financing arrangements with those in Canada, there are some differences. The federal government involvement in the United States is the most obvious. The federal government in Canada also has a long history of funding roads, but this does not compare in scale or level of formality to that in the United States. Second, the Highway Trust Fund has pumped billions into highways in the United States. The latest legislation (TEA-21) in 1998 authorizes US $217 billion over six years of which about $175 billion will be spent on highways. Third, in the United States the road user has a more direct understanding of why certain taxes are paid. And given that every so often a cost-allocation study is done, the latest in 1997, there is even a relationship between tax rates and the characteristics of various vehicle classes.

But there are critics of the approach taken in the United States, Clifford Winston being a good example. The method used to determine the amount spent on roads is highly political and the formulae used to ensure that each state receives a certain amount of money from the Trust Fund mean that highway spending is not subject to the market forces so favoured by the economist (if not the engineer, the road user and the politician). Todd Litman, coming at the subject from a slightly different angle than either Heggie or Winston-his perspective is that government involvement in transportation has caused market distortions, chief of which is that roads and automobile travel has been unduly favoured-summarizes the arguments against the "dedicated funds" used in the United States. (Most states also have funding arrangements similar to the US federal government in the sense that they use dedicated road taxes and special accounts.) In the following passage from Litman's paper¹¹³, his references (author only) are noted in parentheses:

"Current transportation funding practices favor expenditures on highways over alternative modes, and capital projects over operations and maintenance. (Hank Dittmar, 1998) Although some U.S. federal transportation accounts are now flexible (available for transit and TDM [transportation demand management] projects as well as highways), most transportation funds in the U.S. are dedicated to roads. Federal highway funding "results in excessive demands for expensive facilities, because to the states, which are nominally responsible for expenditure decisions, federal funds are costless, and state officials are accountable to their voters only for state funds." (Gabriel Roth, 1996) State funds dedicated to roadway programs cause similar distortions at the local level. This "leverages" highway projects when alternatives may be more cost effective overall.

"These funding practices tend to be unfair. They result in more per capita government transportation expenditures in automobile-dependent suburban areas than in multi-modal urban communities. (Don Chen, 1996) They also result in far more funding for motorist safety than for pedestrians and cyclists safety. (1998 article entitled "Mean Streets") The availability of these "free" funds from outside a jurisdiction discourages the use of tolls to finance highways, which are generally more economically efficient and equitable but represent local funding. These practices result in excessive amounts of land being devoted to roads. (Alex Anas, 1997) The lack of dedicated funds for traffic management and traffic calming is a major barrier to the implementation of such projects, which further favors automobile travel over other modes. (Asha Weinstein & Elizabeth Deakin, 1999)"

5.3 Road Funds Proposed by the World Bank

Ian Heggie lists 13 elements that he considers responsible for the success of commercially-managed road funds. Before summarizing these, two general observations might be made.

First, while the dividing line between road funds that qualify as "commercially managed" and road funds that do not is a little vague, important aspects of this division involve (1) the source and nature of the money and (2) the manner in which decisions to spend money are made. On the first point, the distinction for commercially-managed road funds seems to be that levies paid by motorists (Heggie uses the term "tariff") are not simply some earmarked taxes (as they are in the US). Rather, they have to be a specific payment to an agency that operates the road and the motorist has to see them as such just as the motorists sees the payment for any other good or services as a commercial transaction. These tariffs are not a part of government tax revenues. On the second issue, the important point seems to be that the road fund is managed by an agency that is arms length from government and that includes road users on its governing board.

Second, given the large number of road funds that exist, it may not be possible to say that there is one model that fits all cases. For that reason, the listing of Heggie's 13 points is somewhat general-these are typically the elements of successful road funds, but each jurisdiction may have to develop its own practices in a way that fits best the institutional and other situations encountered.

These, then, are Heggie's 13 elements¹¹⁴:

Strategic Elements

1. Scope of the road fund: what does it finance? Commercially-managed road funds generally finance expenditures on all public roads. In Canada, then, this would mean road funds that had the means to grant money to local governments.

2. Type of legal basis: Commercially-managed road funds that are established under their own legislation (as compared, for example, to accounting decisions made under current authority) are on a firmer legal basis than other road funds. The analogous situation in Canada may be the way provincially operated insurance agencies are established. These are separate legal entities and there is no confusion about what the payments made by motorists to these agencies are; and the money collected by these agencies are not mixed in with other government tax revenues.

3. Type of oversight arrangements: This, according to Heggie, is the main thing that distinguishes commercially-managed road funds from their predecessors ("first generation road funds"). Commercially-managed funds all have boards that advise Ministers on the road fund or else manage the road fund themselves. Heggie then goes on to identify a lengthy list of characteristics of these boards: composition of boards, public minutes of meetings, members of boards representing outside interests (eg, other government departments, road users, etc), published terms of reference for the board; etc.

4. Managing the road fund: Road funds that finance roads of different agencies (eg, provincial and local roads) are best managed by separate road fund administration, not just a group within the national-or, in Canada's case-provincial road department.

5. Which expenditures does the road fund finance? Some road funds finance maintenance; some finance maintenance and rehabilitation; some finance maintenance, rehabilitation and new road building. Whatever the case, there seems to be a need to ensure that routine maintenance be given the highest priority.

Technical and Policy Elements

6. Dividing funds between different road agencies: Almost all commercially-managed road funds provide some funds for local roads. But, there are many different ways of doing this. In Latvia, for example, 27 per cent of vehicle registration taxes and 30 per cent of fuel taxes go to municipal governments. The point seems to be that there is not one single way to set how these funds finance local roads. (The method used in New Zealand is described in the next section.)

7. Source of revenues: It is important that road funds receive their revenues from clearly-identified road-user charges. This does not mean that governments cannot also top up the funds with moneys from consolidated tax revenues, but it does mean that the fund should not receive money from earmarked general taxes (eg, all or a portion of general sales taxes or excise taxes).

8. Adjusting the road tariff: All commercially-managed road funds have a formal mechanism for adjusting the road tariff to ensure that revenues keep pace with inflation and that the fund generates sufficient revenues to meet approved expenditures.

9. How non-road-users are exempted from paying the fuel levy: This probably is not an important point in Canada where there are long-established mechanisms to ensure that provincial fuel taxes are only assessed-or mainly assessed-on fuel used on the roads.

10. How funds are disbursed to each road agency: There are a number of methods road funds can use to disburse money: (i) disburse funds directly to road agencies and audit the use of funds (New Zealand's system is described in the next section); (ii) issue approvals for work and then reimburse the road agency after the work is done (eg, the US Highway Trust Fund); or (iii) pay contractors directly. Whatever method is used, it is important that the disbursement process be used to strengthen financial discipline and encourage high quality, cost-effective road works.

Operational Questions

11. Day-to-day management of the road fund:

12. Financial rules and regulations:

13. Auditing arrangements:

Heggie discusses a long series of issues that relate to the day-to-day management of road funds, financial rules and regulations and auditing arrangements. These are important but can be overlooked here given the common-sense understanding that there are a number of governance and/or management issues that have to be considered and that (in Canada) would not be found to be too different for a road fund than for any other public or quasi-public agency.

5.4 New Zealand

New Zealand appears to have one of the more successful, if not the most successful, commercially-managed road fund in the world. "Appears" is used in the sense that: (1) material from the World Bank and the New Zealand road fund (Transfund) give the impression that this is a successful fund, but (2) no critical evaluation of Transfund has been located (eg, some academic article, some comparison with financing arrangements before the current Transfund, some comparison of Transfund's performance with other road funds, etc). This is not to dismiss the World Bank or Transfund information. Rather, it is just to sound a precautionary note that there does not appear to be (or the author has not found) any material providing an evaluation of the advantages or disadvantages of commercially-managed road funds in developed economies.

The perspective of the World Bank is that many attempts to put road finance in developing countries on a firm basis have not been successful. This, it argues, is one of the reasons for advocating commercially-managed road funds. While it is true that some developed countries use these-witness the World Bank's particular attention to New Zealand-it still is true that nothing located to date suggests developed countries without road funds are doing any better or worse than those with road funds. The empirical question-do developed countries with road funds have more money available for roads and do they make their spending decisions more efficiently than developed countries without road funds?-has, apparently, yet to be asked.

Text Box 7: Transfund New Zealand

Transfund New Zealand is a stand-alone government agency created by the Transit New Zealand Act 1989. The mandate is to purchase safe and efficient roads. In practice, this involves the investment and allocation of funds: (1) to road agencies (road controlling authorities) for road construction and maintenance; and (2) to regional councils, for passenger transport services and other "alternatives to roading" projects or services.

Funds are obtained from the National Roads Fund, a dedicated fund comprising revenue from road users: the fuel excise tax, road user charges (a weight-distance fee) and motor vehicle registration fees. Road safety enforcement is a first charge on this fund, with funding for the road safety activities of both the Police and the Land Transport Safety Authority being drawn from the fund. The balance of the fund is transferred to the National Roads Account, which is under the direct control of Transfund. It is from the National Roads Account that the costs of the National Roading Programme (NRP) and Transfund's administration costs are met. Transfund's budget for fiscal year 2000/2001 is $940 million (CDN $631 million).

All NRP project expenditure is subject to approval on the basis of a formal cost/benefit analysis. The full costs of all approved work on the State highway network are met from the NRP, while funding for approved local road maintenance and construction projects averages 50 per cent of the project costs. Provision is made for the funding of alternatives to roading, for both freight and passenger services, where other forms of transport-such as bus, rail, ferry or barge services-may be more efficient than road transport. Transfund also contributes to the funding of subsidised passenger transport services operated or funded by regional councils. The amount varies between 40 per cent for approved on-road and 60 per cent for approved off-road services.

For the purposes of the NRP, Transit New Zealand and territorial authorities are known collectively as road controlling authorities (RCAs). There are 75 RCAs throughout New Zealand. Transfund also allocates funds to regional councils for the provision of passenger transport services. Each December, RCAs submit detailed applications for funding for road maintenance and construction projects in accordance with Transfund's policies and procedures.

The number of potentially worthwhile projects usually exceeds the amount of money Transfund has available to distribute. For this reason, it has to rank projects in order of priority on a national basis before the Transfund Board considers them for approval. In the case of road, the benefit-cost ratio (BCR) is a tool Transfund uses to do this. For projects that are alternatives to roading, it uses an efficiency ratio.

A project's benefits are identified in terms of its potential to reduce accidents, travel times and vehicle operating costs. Strategic factors, intangible benefits (including environmental factors) and innovative features can also be considered. Costs include the project's price in dollar terms and environmental impact. On the basis of these factors, a BCR is calculated for each project.

The number of projects Transfund approves each year depends on the anticipated flow of revenue into the National Roads Account. Projects are prioritised based on their BCR. For 2000/01, new roading projects with a BCR above 3.0 will be funded (previously, Transfund had used 4.0 as a cut off).

Road maintenance funding is determined in accordance with nationally consistent standards through implementation of Transfund's new road maintenance funding policy. Transfund negotiates an appropriate level of funding with each of the 75 RCAs, largely based on the funding requirements of its asset management plan and an indicative allocation from Transfund's structural maintenance allocation model. This model is adapted for local conditions, ensuring that maintenance strategies are robust and appropriate to road network conditions and needs.

------------------------------------------------------------------

Adapted from www.transfund.govt.nz in January 2001

Text Box 8: Royal Commission's Views on New Zealand's Approach

New Zealand's approach shows how a Crown corporation can be used to encourage greater efficiency, and to increase accountability and transparency in the pricing and investment decisions.

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Royal Commission on National Passenger Transporation (1992), Vol 1, p 130

The current operations of Transfund date from 1996 when the administration of the road fund was separated from Transit New Zealand, the national road agency. The separation of the administration from the national road agency occurred because of concerns that there might be a conflict of interest when the road agency manages its own road fund.¹¹⁵

The main characteristics of Transfund are shown in the text box on the previous page. Three points not mentioned are the composition of the board, the setting of road-user fees and borrowing.

In terms of the composition of the Board, an important issue according to World Bank authors, Transfund has two representatives of Transit New Zealand, one representing road users, one representing "other aspects of the public interest," and one representing local governments. "Members are appointed by the governor-general on the recommendation of the Minister, following consultations with people from the land transport industry and elsewhere. The Chairman is appointed by the governor-general from among the existing members of the board."¹¹⁶

In terms of setting road-user fees, the material available from the World Bank and Transfund is vague but it appears that Transfund at least has the ability to "advise" the Minister on this subject. A World Bank document notes "Government still sets the charges which determine the inflows to the road fund, but no longer [since the reorganization in 1996] determines the outflow."¹¹⁷ It then goes on to note that one specific responsibility of Transfund is "to recommend to Government income and expenditure levels needed to support the Plan." Presumably, recommending income levels entails some comment on the rates for fuel tariffs, weight-distance tariffs and vehicle registration tariffs ("tariff" used here in place of "tax" in deference to Heggie).

In terms of borrowing, it appears that Transfund pays for roads in New Zealand on a pay-as-you-go basis. There is no debt used. (This point bears further checking.) Details from the 1999/2000 annual report (fiscal year ending June 30, 2000) are shown in Table 9.

One final point to note about highway finance in New Zealand is that there is no match between road-user revenues (the taxes put into the National Roads Fund) and actual expenditures in any particular area. In general, road agencies spend more money in rural areas than motorists pay in the form of road taxes. According to one analyst, "This is not unexpected and reflects the fact that the roading system operates as a network and expenditure is based on needs rather than necessarily tied to where income is generated."¹¹⁸ This final point is possibly of minor interest but it would be important in Canada. In fact, with or without a road fund operating in Canada, this same point is probably valid-"probably" in the sense that for it to be completely valid there would have to be some agreement as to what, if anything, actually constituted a road-user tax.

Table 9: Transfund New Zealand, Annual Report 1999/2000

5.5 Canadian Road Funds

Many provinces have had road funds at one time or another (Table 2). However whether these were just accounting entities or actual road funds as the term is now used-that is, funds that are actually separate from other government revenues-is not known.

In more recent times, Nova Scotia and New Brunswick (1990 and 1989 respectively) set up road funds at a time when they increased fuel taxes. These both disappeared within a few years; the increased tax rates remained. A road fund was created in Québec in 1996 but few details about it are known. It appears to be largely an accounting exercise.

The most innovative recent road fund is Saskatchewan's permit fees for large trucks. It is innovative in the sense that: (1) the fee paid is based on specific vehicle characteristics and road-use factors, (2) the money paid is kept separate from other government revenues, and (3) the decision on how to spend the money is based, in part, on the recommendations of a committee consisting of (among others) road users.

The largest road fund in recent times in Canada is British Columbia's BCTFA, a provincial crown corporation. The mandate of the BCTFA is set out in the 1993 enabling legislation: "to plan, acquire, construct, improve or cause to be constructed or improved transportation infrastructure throughout British Columbia and to do such other things as the Lieutenant Governor in Council may authorize." The "to do such other things" is (apparently) important.

According to a BCTFA spokesperson¹¹⁹, the most significant change brought about by the creation of the BCTFA is that it was now possible to amortize construction costs over the life of a project rather than treat all capital expenditures as an annual cost in the year incurred. This allows a more appropriate calculation of costs and assists in borrowing requirements. That is, the BCTFA is able to borrow for specific projects and, assuming a revenue source, can plan a repayment schedule. The BCTFA has powers to establish tolls for transportation facilities, although tolls may not be the primary source of new funds: "[tolls] are viewed by some as an easy funding option, [however] other equally promising methods exist . . ."¹²⁰ These include "land appreciation capture" and "public/private sector partnerships".

For fiscal year 2000/01, it is expected that dedicated taxes will be $208 million and net financing costs will be $107 million (that is, the interest BCTFA is paying on borrowed money).¹²¹ The annual report of the BC Ministry of Transportation and Highways (MoTH) for 1999/00 shows that out of a total budget of $898 million, $425 million or 47.3 per cent was provided by BCTFA and all of it was used for highway capital projects.

These arrangements in British Columbia appear to be quite different than anywhere else: a dedicated fuel tax of 3.25¢/litre plus a rental car tax, a separate crown corporation acting as a financier in terms of road capital projects, the capital markets tapped for money (BCTFA's annual report for 1999/00 shows $1.8 billion in capital debt), innovative ways of getting non-traditional sources to contribute to highway spending (one road improvement is being paid for with a tax on lift tickets at a ski resort), and an accounting framework that allows for a more business-like amortization of capital costs.

There are, however, peculiar aspects to the BCTFA:

· The Board of Directors consists of five members-all five are MLA's appointed by the government. Four are cabinet ministers.¹²² It is not obvious how this makes road spending in British Columbia any better than in other provinces where a highway department reports to cabinet through one minister. Further, in terms of the criteria Heggie sets up for commercially-managed road funds, five members from the governing party is not quite the same as having road users represented on the Board.

· It is not clear why the BCTFA has been structured as a crown corporation. Although there are a wide variety of crown corporations used by the federal and provincial governments, typically they are set up in situations where there is something like a commercial operation to run, rather than a government department with changeable policy mandates. Bodies such as the Federal Bridge Corporation Ltd or the Insurance Corporation of British Columbia come to mind. Presumably, the intent of setting BCTFA up as a crown corporation is to put the job of road building one step removed from government. "Road building is a job that has to be done; here's a dedicated source of revenue (portion of the fuel tax); use some commercial (or other) criteria to decide where to spend this money; and get on with the job." The difficulty with this chain of reasoning is that there are aspects of BCTFA that do not appear to fit, as explained in the next few points.

· The mandate of the BCTFA, as outlined in the Performance Plan, contains five specific things, all of them laudable. But one of them is to support "economic development throughout the province through creation of employment opportunities for local workers and individuals from groups traditionally under-represented in the transportation construction industry."¹²³ Nothing wrong with this as a goal of government policy. What is peculiar is why it is a mandate of the agency in charge of spending money on roads. Presumably, as a goal of government policy, it ought to apply to all activities of government or, indeed, the private sector.

· The Performance Plan continues on to list nine strategic goals. This is where the vision of the BCTFA as a road fund, with a narrowly construed mandate to pay for roads, breaks down. Five of the nine goals are: (1) supporting local and regional economies which are recovering from the downturn in the resource industries, (2) facilitating economic development in the North and Interior, (3) supporting regional growth management strategies, (4) supporting employment-creating developments, and (5) supporting employment equity. Again, all are presumably legitimate goals of government policy but (again) the question is why have a crown corporation responsible for road capital projects charged with these. If they are worthwhile goals, surely activities other than road building should be involved.

· The idea of an agency being established to manage a road fund with a dedicated source of tax revenues is appealing (the amount BCTFA receives from the provincial fuel tax is set by legislation). But this vision needs closer examination. First, the relationship between the dedicated tax and road spending is somewhat fluid. The government was spending money on roads before BCTFA was established and it continued to spend money after it was established. The difference now is that a certain portion of this spending can be shown to derive from a portion of the already-existing fuel tax-the fuel tax did not change because BCTFA came into existence. The portion given to BCTFA has changed at least four times since BCTFA was established (1¢, 2¢, 3¢ and 3.25¢/litre), demonstrating that government can change its mind on how much road spending it wants fairly readily. Second, while the idea that a dedicated portion of the fuel tax determining capital expenditures on roads on BC is the apparent plan, it is actually the government that tells the BCTFA what its capital spending limits are. "The province has established a 2000/01 capital expenditure limit of $485.5 million for BCTFA investment in highway projects."¹²⁴ It is difficult to see how this-setting the capital budget for road spending (and then, presumably, deciding how much of the fuel tax to call a dedicated tax)-is making road spending in BC any more disciplined.

· As of 1999, the ownership of the roads was given to BCTFA. The reason for this is not known. However, it can be noted that one of the ideas of creating a road fund-at least a road fund as advocated by the World Bank-is to separate road financing from road building and operation. It is not clear that having BCTFA both own and finance (capital expenditures) the roads does anything for efficiency. (There are probably aspects of this issue that bear further investigation.)

· Finally, the idea of establishing an agency that, on the strength of a guaranteed income stream (a dedicated tax), can borrow money to speed up highway construction projects is also appealing. But in BCTFA's case, all capital debt is owed to the province. It is actually the Provincial Treasury that borrows the money and guarantees it.¹²⁵ Presumably, there are good reasons for doing it this way (lower cost of capital?) but what seems puzzling is this: if the government is going to borrow money to build roads, why cannot it do this directly with a highway department instead of creating an intermediary crown corporation?

The above comments appear critical of highway financing arrangements in British Columbia and, indeed, based on the somewhat limited time given to this subject in this research, there are reasons for thinking that someone ought to do a good, critical examination of just what the BCTFA does or can accomplish. This is not the mandate here. The present interest is to determine whether or not the BCTFA really represents an alternative highway financing arrangement. Certainly, it is an alternative institutional arrangement. It is less clear that it represents a new way to finance roads. Why could not everything given to BCTFA in its mandate simply be given to an existing highway department? Indeed, how far away from these arrangements in BC are those highway departments that, in their annual reports, dutifully add up expenditure in one column and then add up "revenues" in another column, even though there really are no legislated dedicated taxes or even separate accounts? Whatever the answers to these questions, what is clear is that the arrangements in British Columbia are a long way from the commercially-managed road funds advocated by Ian Heggie.

There is one final (potential) road fund in Canada to consider. The National Highway Policy Study Steering Committee has proposed that a National Highway System Fund be established with an amount equivalent to 2¢/litre of fuel used on the road. Strictly, this would not be a dedicated tax as the proposal is only that the federal government contribute an amount "equivalent to." But the idea here is that the revenues earned on the existing federal excise taxes would be the source of the fund. The proposal continues on to suggest a method of allocating money from this fund-a two step allocation that, among other things, would ensure every province and territory received at least 80 per cent of the fuel tax revenues collected within its borders. All of this may make eminent sense-assuming the federal government is willing to agree to such an arrangement-in terms of the practical realities of Canadian politics. The point to note here, though, is that this arrangement emulates the structure of the Highway Trust Fund in the United States. As such, it would be open to the same criticisms: such arrangements do little to ensure the appropriate overall levels of money are spent on roads and probably little to ensure that individual projects are efficient.

5.6 Summary

Whether or not road funds as proposed by the World Bank are suitable as an "alternative financial arrangement" for Canada or for any province or territory is something this research cannot establish. For one thing there is a rather large policy issue that would have to be decided: do we want roads-all roads, main highways, some sub-network-supplied on a more commercial basis (like air service or rail service), or do we want to have, as in the past, a social-policy element in the decisions on road spending? Certainly if the arguments of the Heggie's, Winston's, Litman's and quite a few others are accepted, the current method of supplying roads is less efficient than it could be. This is using the term "efficient" in the strict meaning an economist would give to it. It is assumed, however, that there are many groups in Canada who would argue that efficiency is not the only criteria on which to base road-spending decisions.

What does fall within the mandate of this research is the observation that there are many countries that have established, are in the process of trying to establish new, more commercially-oriented systems for supplying roads. Other than the small-scale program in Saskatchewan, there has been little apparent interest in this subject in Canada. Where road funds do make the occasional appearance-either in situations where a jurisdiction actually establishes one or where important groups call for the establishment of such funds-the interest seems to be more in the direction of the establishment of a fund modelled after the practices in the United States (either the federal or state level). This is a kind interpretation. A less kind interpretation might see a large element of public relations in some of the funds created in Canada.

6. Summary Observations

1. Most provincial and territorial roads are funded with money from appropriations from consolidated tax revenue funds and most local roads are funded with money from property taxes or grants from senior levels of government.

2. In total, road expenditures amount to $11.6 billion annually in Canada. This, however, does not include expenditures on most toll facilities. The 19 toll facilities in Canada, or between Canada and the United States, spend in excess of $364 million a year-the Canadian share, dividing the international bridges and tunnels in half, is about $279 million. (These are actually toll revenues but, for here, the assumption is they also represent expenditures including capital costs.) So, a rough estimate of road spending is closer to $11.9 billion.

3. Dedicated taxes, such as tolls or taxes specifically earmarked for roads, make up a small portion of what is spent on roads. A rough estimate is that they account for $840 million or 7.0 per cent of expenditures.¹²⁶

4. In addition to dedicated taxes, there is a "public relations" dedicated tax for road use in Canada. This public relations component also appears to apply to some road funds. Some of the $840 million noted above may be in this public relations category. Governments tell road users there is a link between specific taxes and road expenditures that really is not quite as fixed as politicians pretend. They may require, for example, highway departments to make a comparison between road expenditures and certain tax revenues. This may be good public relations-it informs the public why they have to pay taxes-but there is nothing really dedicated in this approach and there is no evidence that it introduces any market discipline into the supply of roads.

5. Also beyond dedicated taxes, real or imagined, there are what are conventionally known as "road-user taxes." These are taxes where, although the revenues are not specifically dedicated to road expenditure, the conventional view is that they constitute a tax on road users. There is disagreement about how to calculate the sum of these revenues (should there be a "sales-tax equivalent" deducted?). But, even with this disagreement, there is little doubt that tax revenues exceed what is spent on roads. Together, dedicated taxes and other road-user taxes amount to $14.2 billion a year.¹²⁷

6. As in other parts of the world, questions have been raised in Canada as to whether or not the traditional sources of highway finance (consolidated funds and property taxes) are adequate to meet the perceived needs of highway maintenance and building. Overlooking the few dedicated taxes and the conventional view about road-user taxes, this is a difficult point to adjudicate when the price of road use is mainly free. There are no prices to guide investment decisions.

7. Whether or not there are adequate funds for road maintenance and building, the other question that has been raised about road financing is whether the funds that are available are being spent efficiently.

8. Both questions (adequacy of funding, efficiency of spending) have led some to suggest that road operations should be put on a more commercial footing. This was the thrust of the recommendations made by the Royal Commission on National Passenger Transportation and the National Transportation Act Review Commissions seven or eight years ago.

9. Indeed, over the last decade, there has been a shift in policy towards a more commercial approach to roads. Much of this shift, however, was driven by the fiscal restraint being exercised by governments. It does not appear to have been driven by any reliance on economic principles or regard to the recommendations of Commissions.

10. Still, almost everyone is suggesting that new or alternative road financing sources have to be found. And the overwhelming consensus is that this should be the federal government that collects in excess of $4 billion from motorists through its excise tax on fuels. The Royal Commission itself recommended that the federal government abandon this tax unless it could justify it as an environmental charge. The federal government has not done this and almost all provinces, major urban areas and many road-user groups are now insisting that it give some of this revenue to the provinces and territories, and even local governments, for roads.

11. The anomaly here is that, while almost everyone is calling on the federal government to use some of its tax revenues to pay for roads or to establish a road fund, few have examined the suggestions made by the World Bank for the establishment of road funds. The other part of this anomaly is that those who have suggested the federal government establish a road fund are basing their model on what the World Bank would call a "first generation" road fund (the primary model is the Highway Trust Fund in the United States). This is odd given the known criticisms with this approach (road spending decisions tend to be quite political and there is no assurance that spending is as efficient as it could be).

12. There are some exceptions to the previous point and some provinces have established practices or institutions that may offer viable alternatives to traditional highway finance sources. The most promising of these, while admittedly small scale, is the Partnership policy in Saskatchewan. Other promising alternatives are the increasing number of toll facilities (four new ones are being discussed), although traffic densities are such in Canada that these types of alternatives will probably only be suitable in a few places. At the urban level, the new institutions in Montréal and Vancouver also appear promising, even if there are a few teething problems.

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