Resource Allocation Issues: Investment in Transport

THE RESOURCE ALLOCATION PROBLEM IN TRANSPORT:
-The needs for transport are in certain respects unlimited, yet there are only limited resources that can realistically be allocated to them. This is particularly true when dealing with the responsibilities of the public sector. Transport is therefore a clear example of an economic problem.
-Deregulation and Privatization of the past 20years have provided the private sector with the opportunity to operate and invest heavily in transport.
-The sale of UK airports to the BAA has put the responsibility of funding airport development firmly in their hands, albeit with govt involvement from a strategic standpoint.
-M6 Toll Road (2004) if the first of its kind as far as funding has been from private sector sources.
-As the ten year transport plan shows, The govt is looking to the private sector as a partner in increasing the total resources that are being allocated to transport. The Private Finance Initiative has had a particular role to play in this respect.
-Typically the public sector has allocated around 6%of spending on transport.
-Total investment in national rail infrastructure is almost three times as much as in 93/94, prior to privatization, while investment in rail rolling stock is up by one fifth and is now mainly the responsibility of the private sector. (2004)
-Total investment in airports and air traffic has increased by almost 300% since 93/94 (2004)
-Road investment has increased substantially since 98/99 although it remains at the same level as in the early 90's.
-Private sector road investment was substantially higher prior to the opening of the M6 toll road.
TRANSPORT INVESTMENT HAS CERTAIN COMMON INHERENT CHARACTERISTICS:
-Most forms involve vast sums of capital expenditure.
-Any appraisal of new investment, especially in infrastructure, is made over a long time period. 30 years is typical for a new stretch of road and it the case of major projects it could be as long as 50 years.
-Involves many risks and uncertainties, particularly in the case of public transport infrastructure projects.
-Cost escalation is a major concern and can partly be explained by the long period of time taken in the design and construction of projects.
-All new transport infrastructure projects produce negative and positive externalities, which are invariably controversial.

PRIVATE FINANCE INITIATIVE:
-PFI aims to identify projects that can attract private sector finance that can be used alongside public sector funding. Transport sector is a leading area where this general principle has been applied , and has been partly responsible for the surge in investment in transport over the past ten years.
2 main types of project have resulted:
-Schemes largely funded by the private sector but with some investment by central and local government, eg. Channel Tunnel Rail Link and new light rail systems such as Croydon Tramlink, Midland Metro, Nottingham Express Transit.
-Schemes funded by the private sector but where the assets are transferred to the government when the projects concession ends. Eg. The Second Severn Crossing, the Dartford Bridge, improvements to the West…