Reg­u­lat­ing Ja­maica’s high­ways

Jamaica Gleaner - - OPINION & COMMENTARY - Peter-John Gor­don GUEST COLUM­NIST Peter-John Gor­don is a lec­turer in the De­part­ment of Eco­nom­ics, Univer­sity of the West Indies, Mona. Email feed­back to col­umns@glean­erjm.com.

The fol­low­ing is a com­men­tary on reg­u­la­tion ahead of the Or­gan­i­sa­tion of Caribbean Util­ity Reg­u­la­tors 14th an­nual con­fer­ence set for Mon­tego Bay, St James, be­tween Oc­to­ber 26 and 28 at the Se­crets Re­sorts and Spa.

MANY COUN­TRIES, in­clud­ing Ja­maica, have utilised the pri­vate sec­tor in the con­struc­tion and op­er­a­tion of vi­tal in­fra­struc­ture. In many in­stances, the con­ces­sion­ary agree­ment utilises a BOOT agree­ment. This agree­ment al­lows a pri­vate en­tity to build, own and op­er­ate some in­fra­struc­ture and then to trans­fer those in­fra­struc­ture to the Gov­ern­ment after a pre­scribed pe­riod of time.

Gov­ern­ments usu­ally find this model at­trac­tive be­cause they are un­able to fi­nance all in­fra­struc­ture de­vel­op­ment on their own. The Gov­ern­ment of Ja­maica was not in a fi­nan­cial po­si­tion to build High­way 2000 on its own. It sought pri­vate-sec­tor par­tic­i­pa­tion, whereby pri­vate money was used in the ex­e­cu­tion of the pro­ject. Many coun­tries fol­low this model in build­ing out their high­way sys­tems. The con­ces­sion­aire owns the high­way, op­er­ates it, and col­lects toll as a way of re­coup­ing its in­vest­ment. After a cer­tain pe­riod of time, the own­er­ship and op­er­a­tion of the high­way are trans­ferred to the gov­ern­ments. The peo­ple of th­ese coun­tries get ac­cess to mod­ern roads be­fore their gov­ern­ments are able to pro­vide them. In spite of the high­ways be­ing built, owned and op­er­ated by pri­vate-sec­tor com­pa­nies, they are reg­u­lated by reg­u­la­tory bod­ies ap­pointed by gov­ern­ments.

Dif­fer­ent coun­tries have dif­fer­ent rules con­cern­ing the op­er­a­tion of a toll road. In some coun­tries, an al­ter­na­tive to the toll road must ex­ist. In oth­ers, this re­quire­ment is nec­es­sary if, and only if, a road which was pre­vi­ously a free ac­cess road is in­cor­po­rated into a toll sys­tem. If a new fa­cil­ity is opened, for ex­am­ple, if a tun­nel is dug through a moun­tain open­ing up a new trans­porta­tion cor­ri­dor where none ex­isted be­fore, there is no re­quire­ment to pro­vide an al­ter­na­tive to this toll fa­cil­ity.

The reg­u­la­tors, in set­ting the ini­tial toll, take ac­count of the cap­i­tal cost of con­struct­ing the road, the cost of main­tain­ing it, pro­jected traf­fic flows and the length of time for which the con­ces­sion will be in force. Some tar­geted rate of re­turn is of­ten a part of the cal­cu­la­tion. Other fac­tors taken into ac­count in­clude the dis­tance trav­elled; the type of ve­hi­cle, for ex­am­ple, pas­sen­ger cars, com­mer­cial trucks; buses, etc (and, in some cases, the num­ber of axles). Vary­ing the toll rate ac­cord­ing to the type (and weight) of ve­hi­cle is an at­tempt to have users of the toll road pay pro­por­tion­ally to the wear and tear caused by their us­age.

Pe­ri­od­i­cally, the toll reg­u­la­tor will ad­just the amount of the toll. The fre­quency and the mag­ni­tude of th­ese ad­just­ments are pri­mar­ily driven by changes in the value of the cur­rency, nor­mally mea­sured by move­ments in the in­fla­tion rates. Com­pa­nies which op­er­ate toll roads in for­eign coun­tries also use ad­just­ments in the ex­change rates as a ba­sis for ad­just­ing toll rates. In Ja­maica, much of the money used in the con­struc­tion and main­te­nance of high­ways orig­i­nate out­side the coun­try in for­eign cur­rency. The fi­nanc­ing ar­range­ments re­quire re­pay­ments in for­eign cur­rency. A change in the ex­change rate be­tween the Ja­maican dol­lar and the for­eign cur­rency changes the abil­ity of the ex­ist­ing toll to meet the fi­nan­cial obli­ga­tions of the con­ces­sion­aire.

TIME-BOUND CON­CES­SION

Many per­sons have ar­gued that the op­er­a­tor of the toll roads should lower the toll, thereby en­cour­ag­ing more users of the toll road. More users of the road cer­tainly in­creases the main­te­nance cost of the road. More users, how­ever, do not nec­es­sar­ily mean more rev­enue. The max­i­mum amount of use would oc­cur at a zero toll, but that is also the toll level which would re­sult in the min­i­mum amount of rev­enue and the max­i­mum loss. Hote­liers could in­crease their oc­cu­pancy by low­er­ing their rates; this would not nec­es­sar­ily in­crease their prof­its. Pri­vate-sec­tor en­ti­ties that invest in in­fra­struc­ture projects are driven by the profit mo­tive like any other pri­vate com­pany in­vest­ing in any busi­ness.

When­ever there is to be an in­crease in toll rates in Ja­maica, the cho­rus goes up to post­pone the in­crease, fol­lowed by the rea­son­ing that the com­pany can re­coup its in­vest­ment over a longer pe­riod of time. Th­ese voices seem to for­get that the con­ces­sion is time bound, which means that the in­vestor must re­coup his in­vest­ment within that time. Also, there is a fi­nanc­ing obli­ga­tion. Loans used to fi­nance the pro­ject must be ser­viced. The reg­u­la­tor fail­ing to ar­rive at the ap­pro­pri­ate toll, whether by in­com­pe­tence or as a re­sult of po­lit­i­cal pres­sure, jeop­ar­dises the vi­a­bil­ity of the pro­ject and the abil­ity of the coun­try to ac­cess mod­ern fa­cil­i­ties which are be­yond the ca­pa­bil­ity of the Gov­ern­ment to pro­vide.

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