How to fund the Lower Thames Crossing

When to use private finance for infrastructure

Britain’s transport infrastructure needs an urgent upgrade. Too many Brits lack fast and frequent public transport connections that get them where they need to be. To that end, Britain Remade just published a guide on how more British cities can have their own trams networks – just like their French, German, and Spanish counterparts. (Read it here.)

But, even if Britain followed France in ensuring every single city with 150,000 or more residents had their own tram, most people will still rely on cars to get to work and visit family. Our road network still needs investment. Nowhere is that clearer than at the Dartford Crossing between Kent and Essex.

Almost everyone agrees the Dartford Crossing is no longer fit for purpose. On its busiest days, 180,000 or so vehicles cross it – that being over 50,000 more vehicles than the road was designed for. The road, which connects Kent and Essex, is essential for road freight due to its position between two major ports. Almost half of the vehicles that cross it every day are HGVs and shifting that freight to rail would be extremely difficult given the nature of goods entering at Tilbury and Dover and their intended destinations.

The case for a new eastern Thames Crossing to alleviate extreme levels of congestion on the Dartford Crossing is clear. Consultations over the exact route began more than 10 years ago.

But, the saga of the Lower Thames Crossing encapsulates everything that’s wrong with infrastructure in Britain.

Nearly £300m has been spent on the Lower Thames Crossing’s mammoth 359,000 page planning application. This is, almost certainly, the longest planning application in British history. It could well be the longest planning application in history – period.  If you stacked all 359,000 pages, they would tower as high as five double decker buses. 

To put this all in perspective – more money has been spent on the Lower Thames Crossing’s planning application alone than it cost Norway to not only build the world’s longest road tunnel (the Laerdal tunnel), but also the world’s deepest subsea road tunnel.

Look, it is unfair to compare tunnelling in Norway with tunnelling in the South East of England. Norwegian tunnelling benefits from hard igneous rock and a sparse population. But, this isn’t comparing Norwegian tunnelling with British tunnelling. It is comparing Norwegian tunnelling with getting planning permission to dig a tunnel in Britain.

Some argue that projects like the Lower Thames Crossing ought to be scrapped on climate grounds, yet their arguments don’t add up. It may be true that new and better roads will lead more people to drive at the margin, but the impacts of new road projects on the climate are marginal and the wrong thing to focus on.

To put it in perspective, Britain Remade’s analysis found that accelerating the EV roll-out by just a year would have 20 times the impact on emissions as all roadbuilding between 2015 and 2020. Put simply, most emissions now and in the future will come from cars and trucks driving on roads built decades ago and no plausible amount of road building will change that. In the absence of proper carbon pricing, planning should take into account environmental impact but blocking the Lower Thames Crossing will only bring marginal emissions reductions for a large economic cost. It is smarter, economically and politically, to focus on the numerous other lower-cost ways to cut transport emissions.

The final decision on whether to grant planning permission for the Lower Thames Crossing was recently delayed. But, even if the Lower Thames Crossing obtains planning permission, there’s a bigger problem: how to pay for it?

Whatever you think of Rachel Reeves’s discovery of a £22bn fiscal black hole, the fiscal picture is tough right now. Governments of all stripes will always struggle to cut ongoing spending programmes with visible beneficiaries, so capital projects are usually the first on the chopping block. Already, Labour have scrapped the A27 Bypass and the A303 Stonehenge tunnel.

With every capital project under review, the Lower Thames Crossing’s fate looks uncertain. Cost estimates on the project have risen substantially from just over £4bn to between £6.2-8.3bn. If approved it would be the single largest infrastructure project on the books outside of HS2. The temptation to cut it – even in the face of a clear need for an additional road link between Kent and Essex – is likely to be overwhelming. 

Yet, there may be hope yet. The Financial Times reports that there are conversations within HM Treasury to shift the major project off the government’s balance sheet using private finance. A recently published report, led by industrialist Juergen Maier, commissioned by Labour before the election, makes similar noises and calls for European-style private funding of transport infrastructure.

This is likely to be controversial. New Labour’s use of the Private Finance Initiative is now largely seen as a costly error. Newspapers are full of horror stories of schools being forced to pay thousands of pounds to mow their lawns or hospitals costing millions more than they should have. The legacy of bad PFI contracts is such that the last Government ended the use of PFI and its successor scheme PF2.

But, there’s a risk of throwing the baby out with the bathwater. The key problem with the use of PFI to fund hospitals and schools was that they are not revenue generating assets. The only way to make PFI work for hospitals and the like was through management contracts where private companies would be paid for maintenance or running catering services.

This had two key problems. First, it required extremely complex negotiations between the private and public sector. In general, the public sector is overwhelmingly outgunned in such situations. The type of person who is particularly good at these negotiations tends to have been doing it for a long time and demands more cash than the public sector is typically willing to part with. Second, it requires contracts to be extremely tightly written to get round the problem of one party cheating the other. Renegotiation is possible, but costly. The result is extreme inflexibility, which is not conducive to productivity.

But, roads are not hospitals. In fact, many of Britain’s roads were originally financed privately through turnpike trusts. The M6 Toll Road was financed privately via PFI and while it has had its problems (the investors struggled to make a return), it’s a good piece of infrastructure. On the continent private financing of road building is common. France has more than 5,500 miles of privately built and maintained motorway funded by tolls from users.

Unlike complex maintenance contracts covering a range of services, tolls are simple. There will of course be debates over the correct level and how it should be set, but there’s limited scope for gaming and plenty of good examples out there to copy.

The issue with tolls is that not all types of road are appropriate. If tolls are easily avoided, then roads will struggle to recoup their build costs. Additionally, much of the road investment needed these days isn’t about building entirely new motorways, but targeting specific bottlenecks such as junctions in need of upgrades. In theory, a system of road pricing or shadow tolls (e.g. a payment to providers based on use that road users do not actually pay) could work, but would be complex to implement in the next few years. North Virginia-style Express Lanes, where motorists can pay to access a special purpose-built fast lane, may work in some cases.

But, if there’s one type of road that is absolutely perfect for tolling, it’s a river crossing. Simply put, if you want to cross the river then you have no choice but to pay. 

Tolling existing roads is typically controversial, but tolling new infrastructure isn’t. Recent cases, such as the Mersey Gateway bridge and the Silvertown Tunnel also show that tolling existing alternatives (the Silver Jubilee Bridge and Blackwall Tunnel) does not generate a significant backlash when used to fund new crossings.

A key merit of tolling road infrastructure is that it ensures the people who benefit from infrastructure directly are the ones who pay for it. It is fundamentally fairer and avoids the situation where hard-pressed taxpayers in Bootle are funding a road used by relatively wealthier Southerners.

Tolling the Lower Thames Crossing is a no-brainer and the existing planning application for it has provision for tolls. However, tolls on the Lower Thames Crossing alone may be insufficient if they avoid paying by sticking with the Dartford Crossing. At £2.50, the Dart Change, which fully funded the Dartford Crossing, is a very low toll by international standards and has risen by less than inflation. To fund the Lower Thames Crossing’s up to £9bn price tag, a higher Dart Charge will likely be necessary.

One approach, cited in the Financial Times article on the Government’s LTC discussions, is the Regulated Asset Base (RAB) model used to fund Thames Tideway super sewer. Under this model, tolls would be set in a way to ensure investors received a regulated return on their investment. While this model reduces the incentive to keep construction costs low, the reduction in risk means that private investors typically demand a smaller return on their investment than under other models. It is hard to gauge exactly how high the tolls will need to be, it is likely the charge for drivers will be far above the £2.50 cost for cars. Locals will almost certainly be exempted from the charges.

Why go private? As Adam Smith once observed, bakers don’t bake bread out of the kindness of their hearts, they do it to make a profit. The same is true of infrastructure investors. Given the risks involved, private investors will demand a larger return than they would on normal government debt. To be clear, this is separate from the question of tolls or general taxation. It is possible to fund new infrastructure through government borrowing and recouping the cost via tolls.

All things being equal, financing the Lower Thames Crossing privately will make the already extremely expensive tunnel cost even more. So why do it?

Here are a couple reasons.

Even if the government fronting the cash would be theoretically cheaper, moving the project off the books would avoid the risk of cancellation or delay. As mentioned before, infrastructure projects are often the first victims when savings are needed to meet a fiscal rule. The risk of sudden cancellation or a Treasury cost-saving exercise (read: delay) increases building costs by making it much harder to build up a pipeline of projects. Construction firms respond by spreading risk to their supply chain and relying more heavily on subcontractors. The UK’s largest construction firm Balfour Beatty is small by international standards. In the last quarter, it reported revenues of just under £2bn. By contrast, Vinci, France’s largest construction company, had revenues of €17.2bn.

Another advantage of user-funded privately financed infrastructure is relative insulation from political pressures. In an ideal world, infrastructure projects would be chosen on their merits, but in reality, politics plays a role. Some projects survive longer than they should because they are pivotal in a marginal seat, others are seen as low priorities because “no one who votes for us lives there”. It shouldn’t be the case, but it is. Funding infrastructure through private finance ensures that good projects, which for whatever reason aren’t the government of the day’s priorities, can still get funded. I suspect one reason France built around 5 times more motorway lanes than us over the last decade is that the government isn’t on the hook for each project.

As it stands, the Lower Thames Crossing is in competition with hundreds of other cycle, rail, and road projects. If the Government decides to front the cash, then within fiscal rules it becomes significantly harder to fund vital active travel projects, investment in rail electrification, or new trams. Private finance and user-charging can end this zero-sum state of affairs. It would mean a new river crossing for the Thames no longer means fewer train lines and cycle lanes.

This model isn’t right for all infrastructure investment. In the case of public transport projects such as a new tram in Leeds or the long overdue extension of the Bakerloo Line, charging users is unlikely to be sufficient. Some of the largest beneficiaries for these projects will be nearby homeowners with property values higher near tram and tube stops. Tax-increment financing, where private companies offer funding in return for a share of the uplift in property tax receipts (such as Stamp Duty revenue), will be needed too. In some cases, this still will be insufficient and public funding is justified, particularly in the case of projects like new tram lines which have the potential to significantly cut carbon emissions and air pollution.

Development itself can help fund projects. This worked for London’s Northern Line Extension and the historic expansion of the Metropolitan line. Reforms to the NSIP regime to bundle major housing developments (e.g. more than 500 homes) with new rail infrastructure could create a new metroland.

The Dartford Crossing is no longer fit for purpose. It is unacceptable that the main road between two of the country’s largest ports is constantly congested. In fact in recent days, a traffic incident led to 50 minute delays for the 5 mile crossing. A new crossing is overdue, yet funding one through the public purse will be tough with HM Treasury already making significant (and controversial) cuts to day-to-day spending such as cutting the Winter Fuel Allowance for most pensioners. Private funding can save the Lower Thames Crossing.