The Toll system – the new Grand Slam design. Part One

toll

 

If the main argument for setting up the toll system is the lack of adequate current control at the border crossings – where taxes are not collected and are kept low – and the government admits that it can’t handle the problem – this part of the border traffic control and tax collection could be conceded to public-private partnerships, without the need to invest big in a toll system throughout the country. Given the abundance of similar practices, it should be easy to hire an experienced operator.

 

The Bulgarian media overflows with superfluous articles criticizing foreign concessionaires for the huge salaries of the companies’ managers and for gross overspending on operational costs. However, in most instances the problems are overblown. Once the grand spending on the toll system is complete, there is no chance for remedial action. The costs sink and the next government would face the Belene syndrome – bailing out past mistakes with more spending, justifying greater vignette and toll payments – just to make ends meet. Like a drug addict – throwing good money after bad.

 

We should admit certain PR virtues of the toll system project plan – the population at large is totally in the dark on the hidden and mostly negative implications, totally unaware of risks and alternatives. Thereby, it remains passive. The story sold to the public is that toll payments will only concern heavy trucks of over 3.5 tons of loading capacity and that these taxes will increase 5-6-fold. Most importantly the traffic will remain the same or increase.

 

The whole case reminds me of the classic case of cooking the frog while slowly increasing the water temperature. First, spend lavishly and build the toll system and then provide justification for further spending and tax increase by referring to lower than expected traffic data and revenue reports. In the end, in one or two years, the government will, in all likelihood, decide that the toll taxes will have to be paid by everyone and the cumulative payments for car owners at the year-end will substantially exceed the current vignette costs.

 

Let us engage is some basic math to back our assertions.

 

Again, let us start with the pretext that the main objective is to collect hiked taxes from the heavy trucks that amortize the road system more aggressively than normal cars. At present, proponents of the toll system claim the share of cars versus trucks in the total revenue collected from road taxes is 70/30 percent. The revenues total on an annual basis BGL 350-400 million – i.e. BGL 110-130 are collected from heavy trucks.  The forecasted annual revenues for the toll system exceed BGL 850 million, with some recent estimates from the Regional Ministry reaching BGL 1 billion. If the new figure of 1.5 billion leva is true for the total revenues, then the heavy trucks traffic will have to generate the stratospheric 1.3 billion leva !? This is a hallucination.

 

If the revenues from cars are due to remain the same – that is the premise which has kept the public passive – then the whole difference should be borne by the heavy trucks, i.e. more than BGL 600 million should be collected from heavy trucks – mostly from transit traffic.

 

The feasibility of the toll system assumption hung on the prime assumption that the traffic will essentially remain the same after a 5-6-fold increase of taxes – from BGL 25 to over the BGL 120. Although transit through Bulgaria will remain without alternative for many cars and trucks, a substantial chunk could deviate via alternative routes – Greece and via Ignatia. The potential increase in diverted traffic might trigger road tax reductions in Greece. At any rate – such a shock increase in taxes will inevitably reflect on the traffic using the toll system. To assert that revenues will fly through the roof is both unrealistic and unprofessional. Henceforth, the linear revenues forecasts are risky and require mitigation and contingency planning.

 

At any rate – the pressure on the toll system will raise exponentially in line with debt servicing needs in the toll system operation.  Ultimately, what matters most are the net revenues – the part that can be used to pay debts and to fund maintenance and development costs.

 

Ultimately, if the revenues expectations from the heavy trucks fail to materialize, then the only natural outcome will be to expand the scope of the affected toll system users into the ordinary car owners group. As the net revenue gap in forecast and real data might be essential, this would simply imply that all Bulgarian car owners would have to pay well over what they currently pay for vignettes. Essentially, they will be asked to pay for the toll system Grand Slam project.  As you will probably note, things have not changed dramatically over the last 27 years – since we did the estimate of the toll system feasibility study for the Sofia-Plovdiv segment. Then the government decided to remain cautious and prudent.

 

Additionally, the toll system is due to cover roads in the first, second and third-class categories – with less traffic and deferred maintenance costs. The road system network will cover almost 7,000 km in dire need of upgrade and overdue maintenance.

 

Instead of painting a bonanza in new revenues that translate into funds for the Road Administration Agency, the argument ought to be that things will dramatically differ in the next 4-5 years. It is worthwhile to revisit the calculations and the assumptions base and reconsider the cost-benefit and alternatives. The switch to a toll system in Bulgaria would have long lasting ramifications, some with huge negative potential.

 

Given the recent history of public spending on infrastructure – negative scenarios come more naturally than positive ones.

 

The alternatives are appealing and should not be overlooked.

 

First, increase the vignettes for transit heavy trucks – both annual and more short-term to par those in competitor countries. Initially increase by 2-fold, and then if traffic is not affected, continue with another increase – always keeping the competitive edge of transit through Bulgaria, safeguarding against traffic diversion to Greece.

 

Furthermore, increase excise duties on fuel, which are the lowest in the EU, making sure that it does not translate in proportionate hikes to end prices, by concurrently increasing tax and regulatory control over Lukoil and other major distributors, who unjustifiably collect a price surcharge through price parallelism. The Lukoil refinery has not paid profit tax in the last ten years, yet it pays regular profit tax in the way of its parent company in Moscow.

 

One can only speculate as to whether parts of such ‘price premiums’ do not end up oiling the ‘good will’ along the administrative chain of control and regulation. Different estimates that circulate in the Bulgarian media put the figure of the price premium in the fuels’ market, which could translate in greater budget revenues, in the range between BGL 500 million and BGL 1 billion – well above what the Toll System could generate in the most optimistic scenario.

 

Yet it seems the introduction of the toll system has the benefit of sidelining the price premium saga, effectively transferring the burden of maintenance and development of the Bulgarian National Road System to the regular taxpayers and ordinary car and truck owners – who represent one of the few successful Bulgaria-based international businesses.

 

Why should it be made simple when a more complicated solution is at hand?

This is where the NPP Belene and the Toll System grand thinking are a full match.

Think big, let the others pay, end up a millionaire.

 

You have been warned – you will pay the next Grand Slam project.

 

By Ilian Vassilev

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