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Financial Benefits of Traffic Management: Case Study of Haringey Council

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Introduction

Haringey council is a public sector organisation that is involved in financing many local projects. This paper aims at providing a literature review on the financial benefits of traffic management focusing on the case study of Haringey Council. The literature review focuses on 3 main areas including financing for public sector organisations, financing for local councils and financing in the Parking Department.

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Public Sector Financing

The government is responsible for collecting tax revenues as well as allocating these revenues to suitable projects such payment of wages to employees, road and railway construction and maintenance, education, health, and defence. The government must provide such projects because left to the private sector alone, these projects will not be provided efficiently. Governments not only raise money from taxes. Some governments find it difficult to cover all its expenditure with tax revenue. Under such circumstances, the government is obliged to borrow either internally through the issue of bonds or externally from other countries. The government is therefore accountable to its citizens on its sources and uses of funds. In order to effectively serve the public, the public sector in many countries is decentralised. Most public goods and services are delivered by local councils. Local councils are responsible for collecting local taxes are delivering local projects to the citizens. For example in the United Kingdom, the council is responsible for many delivering many goods and services to citizens within its territory.

As a result of the inefficiencies that may result if all goods and services are offered by the private sector, the public sector has emerged as a very important sector of the economy. The public sector is made up of a number of organisations known as public sector organisations. These organisations are responsible for responding to the needs of society that cannot be provided by the private sector. Public sector organisations differ from private sector organisations in a variety of ways at both the functional and organisational levels. Public sector organisations also differ from private sector organisations in terms of their specific objectives, policies, objectives, target products and services. Public sector organisations are particularly interested in achieving social objectives as opposed to private sector organisations which focus on commercial goals (Ramos et al., 2007). Private sector organisations are interested in making profit and creating value for the owners or shareholders. As a result, private sector organisations measure their performance using finance. Public sector organisations on the other hand do not focus on making profit. In addition, they do not measure performance solely on financial grounds. Like private sector bodies, public sector organisations have a number of stakeholders with a number of expectations from the organisation (Goodwin, 2000; Ramos et al., 2007). Major stakeholders of the public sector include taxpayers, trade unions, customers, government ministries, social responsibility interest groups, trade unions, trading funds and public corporations (Pollitt, 2000; Ramos et al., 2007)

A key difference between the two sectors is the mode in which in sector is financed. Unlike the private sector which relies on debt and equity sources of funding, the main source of funding for the public sector is taxation. This has led to the concept of public finance. Public finance is defined as the financing of goods and services provides by the national and local government through taxation and other means. In other words it is the means by which public sector organisations raise finance for proposed projects and other expenses. In the United States for example, Financing takes the form of debt and can be general obligation bond or revenue bond (HKS, Undated). General obligation bonds are bonds that are issued by government agencies. These are backed by the full faith and credit and taxing authority of the issuer/borrower. General obligation bonds therefore enable the taxing authority to raise necessary funds in anticipation that taxes will cover the repayment of those funds. Revenue bonds on the other hand are backed by the revenue to be generated from the project that is being funded through the bonds (HKS, Undated). These bonds are issued for the financing of special projects including transportation and airport projects.

A variety of entities and organisations are involved in the bond issuing process and thus in the financing of public sector entities. These include issuers, investment banks, rating agencies, financial advisors to municipal bond issuers, bond insurers, public fund investment managers and advisors, and investors. In the United State, issuers include Federal, State, local and other agencies and entities including special purpose entities. Investment banks are responsible for helping public sector organisations to raise money. This group include large investment firms such as JP Morgan, Goldman Sachs, Citi Group, Morgan Stanley, Morgan Keegan, and Siebert Brandford Shank and Co (HKS, Undated). Credit rating agencies are responsible for providing ratings to the bonds issued by public sector entities. Popular rating agencies in the United States include Standard & Poor’s, Moody’s and Fitch. The objective of financial advisors to municipal bond issuers is to provide local authorities with advice on how to raise capital, manage their entities effectively and invest assets in an effective and efficient manner.

A typical example of a financial advisor in the United States is Assured Guaranty Corp. Bond insurers are responsible for insuring the bond issues. Public fund investment advisors may be hired by municipal authorities to manage the proceeds of the bond offering until they are needed for the intended purpose. Public fund advisors may also be hired to manage the revenues collected throughout the year from projects funded by the bond issue until they are spent. Investors are the entities that purchase municipal bonds. These include retail and institutional investors such as insurance companies and pension funds. Other organisations involved in the financing of public sector organisations include lawyers who may be required to provide legal advice to issuers on the legal issues related to a transaction as well as the structuring of the bond issue (HKS, Undated).

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A number of studies have investigated how public sector organisations across different parts of the world are financed. For example, Tang et al. (2012) introduce and formulate a carbon revenue bond a financing tool that can be used as a complement to environmental credit markets to encourage investment in renewable energy. The study provides evidence that the issuing of a carbon revenue bond with a 10-year maturity can fund a significant portion of the initial outlay of a project (Tang et al., 2012).

Financing For Local Government

Local governments are responsible for providing public services at the local level. In order to effectively provide these goods and services, local governments must be able to generate revenue. According to the decentralisation theorem suggested by Oates (1972) “local governments should provide services to identifiable recipients up to the point where the value placed on the last (marginal) amount of services for which recipients are willing to pay is equal to the benefits they receive”.

The practical implication of the above theorem is that local authorities must have some authority to exercise “own-source” taxation to be able to meet the marginal costs of providing local goods and services (Yilmaz et al., 2008). Local governments are assumed to be more accountable to citizens when relying on their own tax bases and less accountable when the pleasure of spending is separated from the difficulties associated with generating revenue through taxation (Bahl and Schroeder 1983). The foregoing suggests that, if the central government is responsible for generating tax revenue on behalf of the local government and providing them with grants and subsidies to cover expenditure for the provision of local services, local governments will be less cautious when spending, since they have no knowledge on the difficulties associated with collecting taxes. Allowing them to collect taxes themselves puts them under immense pressure to make good use of the revenue collected.

The above suggests that local governments need to be financed through local taxation. Despite the above proposition, local governments across different countries are financed through both local taxes and central government grants and subsidies. For example, in Ireland for example, a significant portion of local government expenditure is financed by grants from the central government (Indecon International Economic, 2005).

The local authorities have limited discretion, insufficient revenue buoyancy and an inequitable financing system (Indecon International Economic, 2005). Furthermore, the situation appears to have worsened since 1996 given that central government’s contribution to local government expenditure has increased since 1996. A similar situation is apparent in the Republic of Ireland. Local councils generated only 58% of the revenue in 2012 from business rates and as well as from goods and services. The remaining 42% was contributed by the central government grants and subsidies. Although a significant amount of capital expenditure comes from various government departments, local authorities also generate significant capital income from the growth in construction and the reform of the development contribution System (Department of the Environment, Heritage and Local Goverment, 2012).

The situation in Denmark is different where local governments finance more than 75% of their expenditures from local taxation (Lotz, 2005). In the United Kingdom in general, local government is financed through council tax, capital receipts, user charges, borrowing, interest charges and government grants (Adam et al., 2007). Local governments can only budget to pay for expenses such as wages and other day-to-day running costs from only a couple of these financing sources. Local governments are not allowed to sell assets or borrow out rightly to cover current spending. In addition, some of the central government grants are restricted only to capital expenditure (Adam et al., 2007).

Financing in the Parking Department

Empirical evidence of suggests that the council can benefit from management and delivery of many services. However, most studies have focused on different areas. One area that has been widely studied is curb parking. Some studies have examined how local councils can manage curb parking. For example, it has been argued that allowing motorists to park freely on the curb creates a classic commons problem (Shoup, 2003). As a result local governments tend to restrict parking on curb spaces to approximately 1 or 2 hour limits. Despite these restrictions, motorists tend not to respect the limits, making it difficult for their enforcement. Occupying all curb spaces increases turnover thus making it difficult for motorists to find a parking space. This means that drivers need to continue driving in order to locate a space that is being relinquished by a departing motorist. The higher the numbers of cars competing for curb parking spaces, the longer is the time taken to locate a space. Cruising therefore creates a moving queue of cars each waiting to locate a vacancy on the curb. However, it is difficult to distinguish between cruisers and cars that are actually going elsewhere.

A number of studies have been conducted to determine the actual number of cars that are cruising. The first study was conducted by Simpson (1927 cited in Shoup, 2003) by measuring traffic by counting the number of cars as they repeatedly passed observation points at two locations in Detroit’s CBD from 14:00 to 18:00. The results suggest that 19 percent of cars passing through point one and 34 percent of cars passing through point two were in search of a vacancy on the curb. Cruising is considered a negative form of vehicle travel because it increases the amount of time travelled by the vehicle known as vehicle mile travel (VMT) without taking into account other travel time. VMT is referred to as searching for parking once motorists reach their destinations. Cars simply circle a particular block without going anywhere. Cruising is also capable of reducing travel to congested areas if potential visitors imagine that nobody is going there anymore because it is overcrowded (Shoup, 2003). Cruising therefore creates an impression of crowding which can in turn deter visitors who would otherwise be willing to pay a premium if they could park without cruising and as such limits patronage of the business that cheap curb parking is supposed to help. The foregoing suggests that low priced parking on the curb creates a classic commons problem. Empirical evidence suggests that approximately 8% and 7% of cars in congested traffic were cruising in search of curb parking and that the average cruising time ranged between 3 and 14 minutes. In order to eliminate cruising and thus reduce congestion, curb parking needs to be charged at market-clearing prices. This can result in approximately 5% and 8% of the total land rent in a city. Moreover, in some neighbourhoods, market clearing prices on the curb can provide more revenue to the local authority that the property tax that is being charged on the land (Shoup, 2003).

Charging for curb parking is not meant to be a source of local government revenue (Shoup, 2003; Arnott and Rowse,1999). Charging for curb parking is meant to reduce the length of time that a particular car can use the curb. This is because if a single car uses the curb for a very long time it will result in a build-up of traffic. Charing for curb parking is therefore, barely a means of reducing cruising and thus traffic congestion during busy periods. The objective is to limit the occupancy rate to 85%. Therefore, once the occupancy rate is below 85%, curb parking should be free (Shoup, 2003). Once demand increases above this rate, curb parking is no longer a public good because it takes time to find a vacant space and the marginal cost of adding another user increases. Since curb parking is fixed in supply, an increase in demand must result to an increase in price to ensure that the occupancy rate is limited at 85% (Ellickson, 1973). Goodwin (2001) employs prices to manage the demand of transportation by making a distinction between two policies. The first policy is to get the prices right when travel is undercharged and the second policy is to decide how much traffic is required and then make use of prices to achieve it. The second policy is achieved by setting the occupancy rate for curb parking (Goodwin, 2001). The right price is not chosen by the administration. Rather, the right price is determined by the right occupancy rate. Charging for curb parking also makes it possible for local councils to abandon time limits as a way of reducing congestion in the city. In another study, Shoup (2003) argues that argues based on the 19th-century reformer Henry George by arguing that land rent represents the most appropriate means of generating revenue for the government. Despite the importance of traffic management, there is apparently no literature investigating its potential financial benefits to the society. A study commissioned by the OECD (2007) provides some insights on how traffic management through the management of congestion can improve the functioning of urban cities. Congestion imposes a burden on urban travellers. By using effective land planning and appropriate levels of public transport services traffic congestion can be reduced. Reducing traffic congestion provides road users with reliable door-to-door trips. Less congestion facilitates the movement of people, goods and services from one place to another. This reduces the cost of delays thus resulting in overall financial benefits for the overall economy. Low congestion also benefits the council financially in that results in cost savings for the council (OECD, 2007). Litman (2012) in another study investigates how the improvement of parking management can benefit society. While the study does not provide a discussion of the direct financial benefits of parking management, the study provides insights which show that enormous financial benefits can be derived from effective parking management. The study argues that developing a comprehensive parking management program that incorporates an appropriate combination of cost-effective strategies can usually reduce the amount of parking required at a destination by 20-40% thus providing economic and social benefits (Litman, 2012). The economic benefits can come from reduced congestion which ensures that people, goods and services can move freely from one place to another. In addition, this strategy increases the revenue that local authorities can collect from parking charges. Osborn (2003) focuses on the benefits of Parking Management. The study provides evidence that parking management can result in a wide range of benefits including meeting the economic needs of the community; meeting the financial needs of the developmemt community, supporting the transportation infrastructure and providing opportunities for better streetscape design (Osborn, 2003). Again, the study by Osborn (2003) suggests some potential benefits of traffic management. However, the study fails to provide an in-depth analysis of the financial benefits.

Traffic management is important for Haringey Council because it reduces traffic congestion, improves safety, and reduces environmental pollution. In order to effectively manage traffic, the Council consults with local residents to gain an understanding of their views prior to introduction new traffic rules (Haringey Councl, 2012) The Council also endeavours to publish formal notices regarding traffic measures in the press. Local residents are normally given a three week period to provide objections regarding the introduction of new measures (Haringey Councl, 2012). Once formal objections have been received, they are reviewed and schemes may be redesigned with further notices being published prior to implementation of a legally enforceable Traffic Order.

Despite the importance of traffic management to Haringey Council, it can be observed that no study has been conducted to determine what the financial benefits of traffic management can be to Councils in General and to Haringey Council in particular. While some studies have attempted to study traffic management by local authorities, most of the studies have focused only on one aspect of traffic management – charging for curb parking and most of the studies have focused on cities in the United States with very limited attention given to cities in the United Kingdom. This study therefore aims at contributing to the literature in that it focuses on Haringey Council, which is based in the United Kingdom and considers a wider range of traffic management tools as discussed above.

In particular the paper extends the literature by evaluating the parking financial strategy and objectives of Haringey council parking services. These issues have not been considered in previous studies despite their significance for traffic management strategic financial planning. In addition, the study focuses on understanding the financial outcomes achieved by parking services in Haringey council in relation to the income generated and investments made in parking projects. The paper also evaluates how financial analysis can promote the success of parking services. Finally, the study aims at making recommendations that will help Haringey council in particular and local authorities in general to improve their traffic management.

Conclusions

The objective of this paper was to provide a literature review on the financial benefits of traffic management using the case study of Haringey Council. The literature review focused on the financing of public sector organisations, financing of local authorities and traffic management at Haringey Council. With regards to financing public sector organisations, the literature review that public sector organisations are financed mainly through taxes and borrowing. Local authorities on their part are financed through local taxation, borrowing and central government grants and subsidies. With respect to traffic management at Haringey Council, the literature revealed that the Council has made significant investments in managing traffic so as to improve road safety and reduce traffic congestion.

References

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Indecon International Economic (2005) Indecon Review of Local Government Financing Report Commissioned by the Minister for the Environment, Heritage and Local Government, available online at: http://www.environ.ie/en/LocalGovernment/LocalGovernmentAdministration/LocalGovernmentFinance/PublicationsDocuments/FileDownLoad,1944,en.pdf [accessed: 10th December 2012].

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Tang, A., Chiara, N., Taylor, J. E. (2012) Financing renewable energy infrastructure: Formulation, pricing and impact of a carbon revenue bond, Energy Policy 45, 691–703

Yilmaz, S., Beris, Y., Serrano-Berthe, R. (2008) Local Government Discretion and Accountability: A Diagnostic Framework for Local Governance, Social Development Papers, Local Governance & Accountability Series Paper No. 113 / July.

Osborn, L. (2003) Parking Management Programs as Effective TDM Land Use Strategies ACT International Conference – Parking Management Strategies-September 2003

Litman, T. (2012) Parking Management Strategies, Evaluation and Planning, [online] Victoria Transport Policy Institute: Available at: http://www.vtpi.org/park_man.pdf [accessed: 11th January 2013].

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Arnott, R., Rowse, J., 1999.

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