Case Studies on Transport Policy 8 (2020) 1256–1269

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Case Studies on Transport Policy

journal homepage: www.elsevier.com/locate/cstp

An empirical model for setting and adjusting road-toll rates based on T

optimized equity and affordability strategies
Konstantinos Panou
Department of Shipping, Trade and Transport, University of Aegean, Korai 2A, Chios 82100, Greece

ARTICLE INFO ABSTRACT

Keywords: An empirical model is presented in this paper to systematically address issues related to setting tariff structures
Road tolls for road tolls in the presence of optimized equity and affordability strategies. The model is based on break-even
Tariff setting analysis to compute the minimum toll rate that could be charged per vehicle-kilometer (veh-km) in a given
Tariff adjustment policy context to cover all costs.
The model can be applied following a process comprising three steps: (a) definition of policy-focused sce-
narios—generating information on specific policies such as equity and economic affordability and allocating
them to a number of tolling objectives; (b) tariff setting—calculating the base rates from infrastructure costs
including annual maintenance costs and yearly operating costs, and allocating them into respective user-groups
and vehicle classes, namely two classes for the light vehicles and seven classes for the heavy vehicles; (c) Tariff
adjustment—laying out the toll implementation plan including recommendations on toll duration, tariff esca-
lation and tariff commercial policy.
It shows that the model is very well suited as a decision-making tool for authorities promoting tolls as it
allows for the systematic identification of tariff structures that respond in the best possible way to the policy
needs, while respecting the limitations imposed by traffic levels and possibly high maintenance & operating
costs.

1. Introduction European Bank for Reconstruction and Development as part of the

Bank’s long engagement with the road sector in the CS.
1.1. Overview The main objectives of this study were:

During the last decade a European country (hereafter called the
Considered State—CS) had a good progress on road sector reform and
infrastructure development absorbing a considerable amount of both
foreign and domestic financing. The rapid increase of the demand for
road transport made necessary the improvement of existing road in-
frastructure, as well as the construction of new roads and highways
linking major economic and touristic centers as well as international
networks.
Taking into consideration the current process of strategic planning
and infrastructure development which CS’s road transport system is
undergoing to cope with the increasing demand, and considering also
the need for resource mobilization for the operation and maintenance
of the road network, the national Transportation Agency (TA) of the CS
has engaged an advisory board to prepare a road tolling strategy where
the objectives of tolling are established and potential segments suitable
for tolling are identified.
The financing of the CS’s Road Tolling study was endorsed by the
• to assess the normative and operational aspects associated with road
tolling, in the context of the ongoing reform and the evolving road
infrastructure workplan of the country;
• to assist the TA and other stakeholders at a strategic planning level
in assessing the viability of road tolling as related to their plans for
future developments in the road sector, and
• to pave the road to applying the user-pays principle on road users,
providing recommendations for the timing and implementation of a
tolling strategy.
To deliver to these objectives an empirical model has been devel-
oped with the main role to serve as a form of “screening mechanism”
with which a large number of possible tariff structures can be sifted
with relative ease by decision-makers, to ascertain an early view on
whether a toll project meets economic affordability and social equity
objectives, while respecting the limitations imposed by traffic levels
and possibly high maintenance & operating costs.

E-mail address: panou@aegean.gr.

https://doi.org/10.1016/j.cstp.2020.08.006
Received 22 August 2019; Received in revised form 2 July 2020; Accepted 20 August 2020
Available online 01 September 2020
2213-624X/ © 2020 World Conference on Transport Research Society. Published by Elsevier Ltd. All rights reserved.
K. Panou
This article contains an analytical discussion of this model, which
systematically combines information on strategic elements, i.e. infra-
structure and specific policies, to describe aggregate influences on the
tariff setting process and to identify tariff structures that respond in the
best possible way to the toll policy and operational needs.
The analysis reflects the perspective of a Government Authority that
will regulate private intercity toll highways, and/or of a Highway
Agency that will mobilize resources for the operation and maintenance
of the road network (be it tolled or not). The article does not address the
pricing of decongestion tolling, which might be a subject of growing
interest in the developed world, but comes much lower on the agenda
of developing countries where there is still lack of basic transportation
infrastructure and public transit services. With an extensive but ob-
solete road network in need of modernization this article does not also
address any aspects related to encouraging more efficient use of existing
roads or less automobile ownership, which require a well-developed
infrastructure and capabilities for the effective development and
adoption of public transit and sustainable mobility habits.
1.2. Disclaimer
The study reported in this paper was supported by a grant from the
CS’s national Transportation Agency (TA). The author served on an
advisory board for that Agency four years ago. Although the data used
in this research are proprietary, the findings presented in this pub-
lication have been reviewed and approved by the TA in accordance
with its policy on objectivity in research.
According to the relevant disclosure agreement, the data is pub-
lished anonymously and on an aggregated basis in this research, pro-
viding readers with indications of how to use road infrastructure and
policy related data to set tariff structures and tariff adjustment proce-
dures. It should be noted, that the data release here does not include
details of the road network or maintenance & operation costs, which are
both major components of tariff setting. Neither does the disclosure
framework extend to the traffic data which particularly influence tariff
setting and adjustment procedures. It accounts only for the data needed
to discuss the suggested model at the level of a “screening mechanism”
as mentioned above.
2. Background analysis
A review of European best-practices is presented in the following
with the aim to capture experience in the design and implementation of
widely used road pricing systems. The cases below are not very similar
to the CS but are selected as representative of certain classes of pricing
schemes, based either on their level of technological innovation or their
historical importance as early pioneers.
This Section also reflects on some major trends in setting and ad-
justing tariff levels through a review of recent experiences. The aim is to
provide a framework that could help identify key principles that can
serve as drivers for the estimation of toll rates in different institutional
contexts. The result of this analysis will be the basis for the model de-
velopment in Section 3.
2.1. A brief survey of road pricing in Europe
2.1.1. Toll pricing
2.1.1.1. Toll roads in Austria. Tolling for all vehicles was introduced for
the first time in Austria on certain high-cost segments of highways in
the Austrian mountains already in the late sixties and seventies. The
aim was to support the financing of urgently needed high level roads
crossing the central area of the Alps. In 1996, the Austrian parliament
passed a law for future toll collection systems that extended tolling to
the entire network of highways and express roads.
In a first step a vignette system (based on time charges) was im-
plemented in 1997, because of its benefits for quick implementation,
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but originally intended as a short-term intermediate solution. In 2004,
an electronic toll collection system replaced the vignettes for trucks
over 3.5 tones, allowing them to make distance-based payments rather
than time-based. Toll rates per km to date are grouped in three vehicle
classes, according to the number of axles: 2-axle vehicles; 3-axle ve-
hicles and 4- or more axle vehicles. The rates can be adapted to the
inflation rate every year and are due to a 20% VAT.
The vignette system remains still as the charging scheme for light
vehicles of up to 3.5 tones. Vignettes are offered for one year, two
months and 10 days periods.
2.1.1.2. Tolls in France. In 2011, the French highway network has been
managed by sixteen private operators, two public-owned companies
(ATMB, SFTRF), and one local authority corporation (CCI du Havre). Of
the 12,000 km of highways in service at the 1st of January 2011,
8850 km were operated by concessionaires.
In French tolls the user pays according to the distance travelled, the
number of axles of the used vehicle, the weight of the vehicle and its
level of emissions (e.g. ATMB Autoroutes et Tunnel du Mont Blanc). The
toll rate depends on construction costs, operating and infrastructure
maintenance costs, and is defined in the terms of reference of new
concessions. In older concessions, other factors such as traffic volume,
construction costs, or even comparisons with other road segments are
taken into account.
The application of class coefficients makes it possible to obtain a toll
rate for each vehicle class. These class coefficients, specific for each
concessionaire, are fixed in the concession contract. They can change in
the duration of the concession within limits explicitly specified in the
concession agreement.
Concessionaires are allowed to increase toll rates every year ac-
cording to the consumer’s price index.
2.1.1.3. Toll roads in the United Kingdom. In the UK, there are about
forty tolled highways and road infrastructure. From those, there are six
publicly owned tolls authorized by statute: for the Mersey and Tyne
tunnels and the bridge crossings for the Severn, Humber, Itchen and
Cleddau—there would be ten if the Scottish government had not
abolished four bridge tolls (Skye, Erskine, Forth and Tay).
There are also eight tolls authorized by Parliament that are privately
owned or operated but which form part of the public highway system:
Aldwark Bridge, Clifton Suspension Bridge, Dunham Bridge, Rixton and
Warburton Bridge, Shrewsbury (Kingsland) Bridge, Swinford Bridge,
Whitchurch Bridge and Witney-on-Wye Bridge. Tolls are also being
charged on the M6 toll road and the Dartford Crossing. Vehicles can
either pay by cash or through a tag which opens the barrier allowing
the vehicle to cross.
Finally there is a number of private toll roads around the UK, e.g.
College Road, Dulwich, Rye Road, Hoddesdon, Braunton Toll Road,
Barnstaple, Porlock Manor Estate, Kewstone Toll Road, Weston-super-
Mare (not currently collected) and beach access roads at Kimmeridge,
Dorset and Sandwich, Kent. A number of Forestry Commission roads are
also tolled, e.g. Cropton, Dalby, Galloway, Hamsterley and Kielder.
2.1.1.4. Tolls in Spain. The first toll road infrastructure in Spain was the
Guadarrama tunnel, for which the concession was granted in 1960.
To date, almost 3000 km of toll highways are operated by 31 de-
signated undertakings. Toll rates are calculated according to a para-
metric formula taking into account, among others, the construction
costs, the level of traffic and the length of the concession period.
In the majority of cases tolls are paid at tollbooths manually or
automatically. To avoid stopping for paying the toll, many operators
offer electronic toll collection capabilities. There is a single system
currently in use, called the “Vía T”, which operates throughout the
Spanish highway system. At each “Vía T” lane an aerial communicates
with an onboard unit, resulting in charging the appropriate amount to
the holder’s account. Average speed at the “Vía T” lanes is limited to
K. Panou
30–40 km/h for safety reasons.
2.1.2. HGV pricing
Several countries have introduced or are planning to introduce
schemes for pricing heavy goods vehicles (HGV). In recent years there is
an upsurge of interest in HGV pricing schemes incorporating microwave
short-range communications, cellular radio technology, satellite posi-
tioning, and a smart card reader. Such technology is capable of iden-
tifying when a vehicle enters a charging zone, applying the appropriate
charge, and transmitting charging data to a billing center. A desirable
feature for road user charging is that travelers should need only one set
of on-board equipment for use with any local charging scheme. More
advanced technologies however such as the Automatic Number Plate
Recognition (ANPR) or Video Tolling system allows charging without
even requiring an on-board component (see Chapter VI for more de-
tails).
2.1.2.1. HGV pricing in Germany. Since January 1, 2005, all trucks
exceeding 12 tons gross weight pay for each kilometer of road travelled
on Germany's 12,000 km highway (Autobahn) network. The toll rate is
calculated on the vehicle's environmental status (engine emission
levels) and the number of axles. This distance-related highway charge
replaced the Euro-vignette system for traveling through Germany.
The system is a dual one, comprising not only a manual booking
option but also, for the first time ever, satellite-based automatic tolling.
It uses a combination of satellite navigation and mobile communication
technology to achieve a free flow system.
Trucks using the German Autobahn network are expected to be
fitted with an On Board Unit (OBU) to enable payments to be calculated
via the satellite tracking system. Currently there are about 1.8 million
trucks identified under the scheme in Germany, of which some 48%
equipped with an OBU.
To guarantee the principle of non-discrimination, payments can also
be made by manual booking at so-called toll terminals at gas stations,
service areas and retail outlets, or by telephone or via the internet. So
the dual system with automatic and manual booking alternatives en-
sures that all truck drivers can use the toll road system without dis-
crimination. It is able to handle the full tonnage booked with the
manual system if the automatic system goes down.
The scheme is raising around 3 billion EUR a year (gross amount).
The revenue from electronic fee collection is about 5 times higher than
the revenue gained previously from the vignettes. Most of the invest-
ment goes to the federal trunk roads sector. In keeping with the Federal
Government’s desire to pursue an integrated transport policy, some of it
is also being used to upgrade railway infrastructure and waterways. The
German government contracted with “Toll Collect” to operate the
charging system, which is the first of its kind in the world.
The effectiveness of the German toll system depends mainly on the
number of vehicles equipped with OBU. Key features of the automatic
system include:
• It recognizes a fixed toll road network (about 12,000 km of high-
ways) and only charge tolls there. This road network may be ex-
panded at any time by the way of data transfer via mobile com-
munication network (GSM)
• It is able to set environmental policy through taking the pollution
class into account as well as the number of axles in calculating fees
• It offers the technical prerequisites to introduce other fee classes,
such as the time and place of the trip
• It operates on a free flow system, which charges toll without causing
stops and traffic jams.
2.1.2.2. HGV pricing in Switzerland. A distance-based charge collected
electronically applies to HGVs over 3.5 tons on all Swiss roads. The fee
depends on the distance driven, the total vehicle weight (e.g., tractor
plus trailer), and the emission class.
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For all domestic HGVs an OBU is mandatory. The OBU is linked to
the vehicle tachograph for distance recording. The driver is responsible
for entering the total vehicle weight onto the OBU. All Swiss border
stations are equipped with CEN-DSRC beacons which are used by the
border recognition system to record entrance and exits, as well as for
enforcement purposes. In addition, GPS is used for monitoring purposes
(e.g., accuracy of distance recording, correctness of border recordings).
DSRC (Dedicated Short-Range Communications) is a bi-directional
communication link between the OBU and the roadside equipment. A
more thorough discussion of these technologies can be found in Chapter
VI.
2.1.3. Areawide pricing
On February 17, 2003, London introduced a 8 EUR per day con-
gestion charge for those driving in the city center (the rate has now
been increased to £11.50 per day or about 16.25 EUR). The scheme
relies on 700 video cameras which scan the rear license plates of cars
entering the area between 07:00 and 18:00, Monday to Friday. This
information is matched each night against a database of drivers who
have paid the charge either by phone, via the internet or at shops and
garages. Except for those with exemptions, anyone who fails to pay by
midnight is fined about 150 EUR.
While some areawide pricing schemes had to be aborted because of
political opposition (e.g., Austria, Hong Kong), others are working re-
latively well. Singapore has led the way in restraining traffic by price
since 1975. In the 1990s, three Norwegian cities—Oslo, Bergen and
Trondheim—set up pricing schemes (see more details below). Rome has
introduced an electronic system to control entry into its historic center.
San Diego, California, has adopted dynamic road pricing, using mi-
crowave transponders to assess congestion levels and deduct fees ac-
cordingly.
In Sweden, following a trial period, the parliament decided to in-
troduce a congestion tax in Stockholm from August 1, 2007. The con-
gestion tax is levied on Swedish-registered vehicles that enter or exit the
city center, Monday to Friday, between 06:30 and 18:30. During the
times when the congestion tax is levied, vehicles are automatically re-
gistered at control points. Each passage entering or leaving Stockholm
is charged, depending on the time of day.
2.1.3.1. Toll rings in Norway. After a long political debate, toll cordons
have been introduced in Norway as a source of funding for urban road
improvements with the main objectives of easing congestion and
improving road safety and the environment. In 1986, the Bergen toll
ring was opened in Norway (this was the second such ring in the world,
the first being in Singapore); the Oslo toll ring was opened in 1990, and
the Trondheim toll ring was opened in 1991. In Oslo, alternatives to toll
collection that were debated (and rejected) included: (a) an extra fuel
tax earmarked for local road improvements, and (b) an extra car
ownership tax earmarked for local road investments. A reason for
rejection was a general negative attitude to earmarking of taxes in
Norway. Establishing toll cordon in Oslo, with 19 toll plazas, was
facilitated by the city's topography, with the fiord to the south and large
greenbelt areas to the north and to the east. With a few exceptions such
as handicapped drivers, public transport, and ambulances, everybody
has to pay toll when passing in the direction of the center of Oslo.
Outbound traffic is not tolled. The heaviest trafficked toll plaza, serving
about 50,000 vehicles per day, has 8 paying lanes—4 for tag users with
automatic vehicle identification and no speed limitation, 3 that are coin
operated, and 1 lane for manual services only. Operation is done by two
private companies—a toll collection company, and a toll plaza
operating company—both under contract with the Norwegian Public
Roads Administration.
2.1.4. Distance-related and other pricing schemes
2.1.4.1. The Czech Republic System. The obligation of motor vehicles
and trailer combinations, with a total weight equal to or greater than 12
K. Panou
tons, to have a toll sticker affixed on the windshield was cancelled as of
January 1, 2007, and was replaced with a distance-based toll charge
based on modern microwave technology.
Vehicles that are subject to tolls must be equipped with a small
electronic device—called the “Premid Onboard Unit”—which commu-
nicates with the roadside tolling equipment. A fee for the use of a
specific road segment is charged when a toll transaction occurs; that is
when a vehicle passes through a toll gantry installed on the road. At this
point, an acoustic signal from the onboard unit alerts the driver that the
toll has been recorded. The driver can use any lane without having to
reduce the vehicle speed. The tolling process is fully automatic and
requires no intervention on the part of the driver.
Enforcement stations are equipped with technology to check whe-
ther vehicles have “Premid” units installed, whether they are installed
properly, and to check toll payments. In addition to the stationary
gantries, there are also portable devices that can be deployed for
random checks.
The toll rate depends on the number of axles and the emission class
of the vehicle. The payable amount is calculated by multiplying the
applicable rate with the length of the segment.
2.1.4.2. Road pricing in Finland. Finland is one of the few European
countries that levy no charges for road use. Road maintenance is
financed entirely from the state budget; the taxes levied on road traffic
are fiscal and have no connection with the actual cost of road
maintenance. Because of the completely different characteristics of
the Finish example, it is included here for reasons of completion.
In Finland, road users are charged annual vehicle excise duty (de-
pending on the weight of their vehicle, its year of registration, the fuel it
uses and, in the case of heavy goods vehicles, its axle weight), regis-
tration tax (based on CO2 emissions) and fuel tax (different tax on
gasoline and diesel). Since 2010 the annual vehicle tax for passenger
cars is calculated entirely based on CO2 emissions.
The annual vehicle tax on diesel-powered vehicles is higher than
gasoline-powered ones, resulting in the use of diesel fuel being more
economical only if the vehicle’s annual mileage exceeds 27,000 km.
Road traffic taxation in Finland favors frequent road users and heavy
goods traffic, and in that perspective can be seen as in conflict with the
“polluter pays” principle.
The aim of road traffic taxation is to collect funds for the Treasury.
The significance of these taxes to the country’s economy is substantial:
their combined total accounts for some 10% of the State's annual rev-
enues.
There are currently judicial restrictions preventing charges from
being levied for road use. Finland’s constitution states that public ser-
vices must be financed from tax revenues. The Act on Criteria for
Charges Payable to the State provides that charges levied for public
services must be based on the per unit cost of providing those services.
The Public Roads Act of 2006 also bans the levying of charges on public
roads.
2.2. Guiding principles
The profitability of a toll road project, especially in inflationary
environments, will depend much on the toll level, or increases
achievable by the operators.1 Accumulated world experience suggests a
number of general guidelines for setting and adjusting toll rates. Sub-
issues relate to: (a) general guidelines for toll setting; and (b) toll ad-
justment procedures.
2.2.1. General guidelines for toll setting
General principles suggested by the World Bank (World Bank, 1999)
1 2
Toll profitability in deflationary environments is more a function of the
operator’s ability to shape demand through demand orchestration.
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indicate that (i) tolling is appropriate only when traffic levels exceed
4000–5000 vehicles per day; (ii) toll rate levels should not result in
excessive traffic diversion—with an upper limit of acceptability con-
sidered to be in the range of 10–15%; and (iii) under certain conditions,
toll rates can be set higher where there is no feasible alternative.
Particularly at a country with middle to low average income, it is
important to base project revenues on affordable toll rates. Although in
some cases these rates might exceed short-term marginal costs they
could be set at levels considered adequate to avoid excessive traffic
diversion. Moreover, the toll levels established for the various projects
should be set at levels consistent with existing tolls in neighbouring
networks. A general rule of thumb is that tolls can be varied from 9 to
36 percent of user cost savings, with the lowest values corresponding to
buses and the highest to trucks.
Similar approaches taken worldwide demonstrate the need for af-
fordable toll rates (BTRP, 2015). For instance, tolls in Brazil have been
kept at relatively low levels by international standards, at about 0.04
USD per veh-km, which has helped promote public acceptance of the
tolling programme. Another instructive example is that of Chile
(Ortega, 2003), which has endeavored to keep tolls at levels that users
are willing to pay for improved services (i.e., about 0.025–0.030 USD
per veh-km, linked to the consumer price index). By contrast, Mexico a
country with comparable GDP per capita as Brazil and Chile has set tolls
relatively higher, in the range of 0.12–0.50 USD (Carruthers, 2014).
2.2.1.1. Uniform toll rate issue. An important issue for tolling is whether
tariffs should be set by individual route or set uniformly across the
network. If a toll revenue pooling system is used for the entire road
network system (e.g. France, Italy, Japan), tolls can be set at equal rates
per km for all of the routes within the network, regardless of the
construction costs or traffic levels on the individual segment (Gómez-
Ibáñez and Meyer, 2013; Takeda, 2016; Nishida, 2015). The use of
uniform toll rates allows cross-subsidizing less profitable routes with
revenues from more profitable ones. Financial viability is thus to be
achieved for the entire network, without this meaning that individual
routes or segments with positive contribution margins cannot be viable
on their own. Although cross-subsidization may not necessarily require
toll rates to be uniform, different levels of rates across routes or
segments in a relatively small network would create confusion among
users. The author advocates that charging equal levels of rates would
also be more politically acceptable.
2.2.1.2. Differential toll rate by vehicle categories. Toll rate setting also
involves an issue of specifying the number of vehicle categories to be
charged different toll rates and the rate differences across categories.
That issue is been thoroughly discussed in Section 4.2.2, suggesting for
the CS case the use of nine vehicle categories in order to enhance the
sense of fairness among users and to be more politically acceptable.
This number of categories can be raised or decreased in special cases
should technical reasons so require.
2.2.1.3. Fixed or distance-based toll rate. Another issue on toll rate
setting relates to the choice of distance-based or fixed toll rates.
Although a distance-based toll rate system is generally more
reasonable for toll operators, as it better reflects the cost of service, it
involves two major problems: requirements for large capacity at exits
and possible leakage in toll collection. Since payments in a distance-
based system should be made at exits, land and staff requirements could
be large,2 which has been a primary reason for the use of fixed toll rates
for highways in Greece, Japan and elsewhere (ASECAP, 2018; Nishida,
2015). Fixed rates on the other hand are not fair to users as they usually
correspond to a greater, if not to the maximum distance that can be
Shortcomings of distance-based toll rates can be mitigated by the in-
troduction of an Electronic Toll Collection (ETC) system.
K. Panou
actually travelled.
A well-balanced approach would be to use a “quasi distance-based”
toll rate system where tariff levels on each individual segment are
calculated relevant to each segment’s length. In such system, a toll
station can be installed in the middle of each segment (on the highway
mainline) without need for large capacity at exits. Users entering the
highway well before the toll station and exiting long after (before
running onto the next station) will assume the greater benefits. Users
entering the highway shortly before a toll station and exiting im-
mediately after will bear the greatest losses. Local traffic between two
successive toll stations can be decided whether it should be left free or
should be tolled, depending on the congestion levels of the highway and
on the existing free alternatives that affect the neighboruing commu-
nities. The extent to which a “quasi distance-based” system might work
in favor of the toll operator or the user depends (among others) on the
location where tolls are installed. If they are installed on segments
connecting popular travel pairs the benefit is for the provider. Failing to
intercept such pairs would result in the advantage passing on to the
user.
2.2.2. Toll adjustment procedures
One issue central in a toll pricing strategy, is whether toll rate ad-
justments should be left to a Governmental authority’s discretion or
based on a formula, usually linked to price index changes. In any case,
there is a need to follow specified toll adjustment procedures once they
have been set; uncertainty creates problems for toll road operators. To
address the issue of toll rate adjustment an overview of best practices
would be helpful.
Toll rate adjustments are at the discretion of the Ministry of Finance
in France, which tends to approve larger increases for less profitable toll
operators. The French approach aims to constrain unnecessarily high
returns to private investors, but at the risk of sacrificing efficiency by
undermining incentives to make exceptional efforts to control costs or
improve productivity (Gómez-Ibáñez and Meyer, 2013). In Italy an
automatic toll adjustment mechanism is in force, linked to inflation,
which has been agreed upon between ANAS (the National Road
Agency) and the toll road concessionaires. This mechanism allows for
periodic re-evaluation of the portion of toll rates that is more likely to
be affected by inflation, i.e. operation and maintenance costs. Owing to
that, toll rates in Italy have been raised nearly every year since the early
1970s (Takeda, 2016). Spain’s approach is also based on a formula
linked to price inflation. It has an advantage over the previous one in
that it encourages new investment, while assuming less risk of unduly
returns to private investors; that is because “excess” profits are moved
to a Special Reserve (Gómez-Ibáñez and Meyer, 2013). In a completely
different approach, Japan has commissioned an advisory board to re-
view periodically the appropriateness of toll rates taking into account
the users’ opinion. Should adjustments are deemed necessary an inter-
Ministerial body, responsible for consumer price issues, has to make
approval for changes to take effect (Nishida, 2015).
The experience of the Hong Kong Special Administrative Region
(SAR) presents another toll adjustment mechanism, perhaps the most
interesting “best practice,” at least from a private operator point of view
(Tam, 2009). According to that, if traffic and therefore revenue falls
below a forecast volume, it will allow the operator to transfer the pre-
agreed (toll) increase date forward. Conversely, if the amount of rev-
enue received by the operator is above the forecasted—resulting in a
rate of return exceeding a specified range—a toll increase will be de-
ferred.
Another interesting example of a toll adjustment mechanism can be
found in the Philippines (Planta, 1998). Here a parametric formula
calculates tariff adjustments based on a long list of economic and cur-
rency related variables, such as prevailing local and foreign interest
rates, the consumer’s and construction materials’ price index and so on.
The automatic fare adjustment, along with the fact that the results are
guaranteed by the Government, alleviate one of the most common risks
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facing toll road investors—that of an unpredictable revenue stream.
Although this approach is quite attractive from a private investor’s
point of view, it does have other implications, such as the fixed esca-
lation of toll rates and the implication this might have on future road
users who effectively subsidize the early ones. In addition, should in-
vestors come across a windfall there are no profit sharing provisions,
making them the only beneficiaries.
As suggested by the experience of the Hong Kong SAR and the
Philippines approach, uncertainty over toll adjustment procedures may
discourage the private operators and investors. Such adjustment pro-
cedures are best agreed unambiguously within contracts. This paper
endorses that principle, but also offers specific recommendations re-
garding the toll rate adaptation procedure—the following points come
from lessons learned from the various experiences outlined above. More
specifically, if the actual traffic level is more than the forecast level at a
specified time, the Governmental agency responsible for tolls could
request either the deferral of a toll rate increase or a lowering of that
level. Likewise, if the actual traffic is less than forecasted, the operator
could request to bring forward the timing of toll rate increases.
As part of the tolling mechanism—particularly in the developing
countries—a toll stability fund could also be established to which in-
come above the maximum allowed is channeled, in order to offset the
need for future toll increases. That would give the potential toll op-
erator the certainty that tolls can be adjusted as the need arises, while
providing for a low and stable toll regime. It also offers confidence to
the operator—if also an equity investor—that will reap a minimum
return on his investment. A toll stability fund would also give financiers
(banks and other lending organizations) the assurance that the project
will be able to service its debt requirements over the contract period.
However, there still may be a problem if the operator’s revenues fall
short due to slower than expected traffic growth. In that case, a toll
increase would just suppress demand without necessarily generating
more net revenue.
2.3. Traffic, tariff and revenue relationships
As mentioned above adjusting the toll level might have profound
effects on traffic volumes and revenue toll generated, and thus on the
ability of a Government to attain any of these goals. The purpose of this
Section is to illustrate some aspects of the traffic–revenue relationship,
and how the available data can be used to make preliminary tariff
setting recommendations.
The Governmental authorities promoting tolls must have obtained
precise data on the potential traffic and revenue that could be expected
from the implementation of the tolling programme. An “investment
grade traffic and revenue study” with emphasis on commercial policy
(in order to avoid unnecessary public reaction) should be duly com-
missioned, for the toll projects shortlisted for immediate launch. One of
the key characteristics of an investment grade traffic revenue study is
that it divides users into groups based upon their perception of value of
time, and their likely origin and destination. This allows more precise
estimates of the number of users and amount of revenue that they might
generate on various segments of a toll road over time and, how this may
be affected by variations in the toll level. That data is of critical im-
portance in evaluating the ability of a toll road to repay public or pri-
vate borrowings used to construct the toll road itself, or to provide
revenue to finance other projects or activities. It is also of fundamental
importance in deciding how to develop toll rate charges and subsidiary
regulations.
Prior to the availability of data from an investment grade traffic and
revenue study, there are some less precise but easier to found indicators
of financial viability of a toll road. One of the most important factors
affecting the success of tolls is affordability of the expected users, which
could be expressed in terms of the economic concept of unwillingness-
to-pay. A related concept is that of Value of Time (VoT), which com-
bines the ideas of affordability, willingness-to-pay and other factors into
K. Panou
a measure of the value that any specific user group will perceive from
the time savings provided by a faster travel option such as a tolled
highway.
When user VoT exceeds the proposed toll levels, then the user may
find the toll road to be a potentially attractive option. If the general VoT
is below the implicit tolls, then the toll road may be unaffordable to the
user considered. In extreme cases, the average income of the user might
be so low that the ability to pay is called into question. In other words,
the toll can be set so high that the user simply cannot afford to pay it
under any circumstances.
2.4. Tariff setting risk
Tolls—particularly private operated options—require a high degree
of certainty that a given toll rate will be applied for a sustained period
of time. Private investors expect to be repaid, either from toll revenues
or direct Government subsidies or both. In a country where guaranteed
long term financial support to a toll project appears to be rather pro-
blematic, application of tolls seems to be the only method available that
could ensure repayment of private investment.
Nevertheless, tolls are almost never popular with the public, poli-
tical pressures to reduce or eliminate tolls are frequent, and as can be
seen from late experience (cf. the M50 case in Ireland) might result in
outcomes that can be extremely costly to the Government.
The author advocates that parallel to the investment grade traffic
revenue study a Government willing to successfully promote tolling
must work on a toll regulation strategy that is:
• well founded in national law;
• sufficient to ensure that the Government has overall control of the
setting and collection of road tolls;
• flexible enough to facilitate the specific needs of highway operation
or maintenance contracts as they arise, and
• providing sufficient insulation from the rest of the political process.
3. Presentation of the model
At a very basic Level, the key questions toll facilitators should ad-
dress are why, where, what, how, when and by whom should tolling be
applied. The first two issues are more focused on identification or
screening of toll opportunities and are thoroughly discussed in Panou
(2019); the next three issues (what, how and when) relate to tariff
setting and implementation challenges and are addressed here; the last
issue relates to toll operating entity and is not addressed in this paper.
The aim of this Section is to produce a model related to preliminary
assessment of the tariff structure that should be applied by tolls. The
focus of the work has thus been to develop a tool, which seeks to
combine information on infrastructure characteristics, traffic, user be-
havior and explicit policy objectives to compute the minimum toll rate
that could be charged per vehicle-kilometer (veh-km) on a given vo-
lume of traffic to cover all costs.
The suggested mode builds on break-even analysis to deliver tariff
structures as acceptable as possible in the context of commercial and
social considerations. It can be applied within a process comprising
three steps:
• Definition of policy-focused scenarios, generating information on
specific policies such as equity and economic affordability and al-
locating them to a number of tolling objectives;
• Tariff setting, where the model is applied for each considered sce-
nario to calculate base rates for low 2-axle vehicles (cars). Based on
these rates differential tariffs by vehicle category are established and
checks are carried out to verify household affordability to tariffs and
traffic to tariff sensitivity;
• Tariff adjustment, laying out the toll implementation plan with clear
recommendations on toll duration, tariff escalation and commercial
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policy.
3.1. Definition of policy-focused scenarios
To set the overall framework in which toll rates can be designated
our model employs scenario analysis to gauge the possible future policy
and economic context that affect tariff setting and adjustment.
(Draeger, 2010; Wiek et al., 2006; Bradfield et al., 2005; Ringland,
1998). Thus, different scenarios are used which in an “IF…THEN…”
proposition, provide the “IF” part.
To define the scenarios it is important to have prior identify the
specific policies that, in a given institutional context, contribute mostly
to the achievement of toll objectives. In this research, we consider
equity and economic affordability as the key policy variables that create
an environment for successful tolling, facilitating the identification of
projects likely to be launched without major delay as they are expected
to face barriers to implementation of low or no significance.
The allocation of specific policies such as equity and affordability to
tolling objectives allows then for the systematic identification of tariffs
that respond in the best possible way to the policy needs, while re-
specting the limitations imposed by traffic levels and possibly high
maintenance & operating costs. Equity and affordability implications
here are understood as follows:
1. Equity refers to any change in the distribution of costs and benefits,
relative to the existing distribution, resulting from the introduction
of tolls. The importance of comparing equity implications of a toll
project with alternative approaches to achieving the same objectives
is noteworthy. Alternatives may, of course, range all the way from
enhancing other travel modes, to a combination of approaches, or
doing nothing.
It is also useful to understand the different perspectives of equity.
The so-called “horizontal equity” perspective is concerned with
fairness among individuals and society groups with similar re-
sources and needs. Thus, in the case of a toll project, concerns of
horizontal equity leads to examination of costs and benefits by
geographic area, or by users and non-users. A geographic view
would seek to compare benefits and payment burdens by individuals
from different geographic locations in the region. A user versus a
non-user view would aim to estimate what benefits are received and
payments made by users of the tolled facility versus those with si-
milar travel needs and desires who opt for alternative ways to
paying the toll. Since tolling typically makes the users who benefit
pay for most of (or more of) the costs of improvements, it is in-
herently likely to be more equitable from the horizontal perspective
than most other approaches to capacity expansion.
The perspective on equity often referred to as “vertical equity” is the
viewpoint concerned with differential effects on groups defined by
socioeconomic factors such as income and gender, or other measures
of inherently advantaged or disadvantaged status. The associated
benefit and cost assessments often turn out to be complex since one
must start with current travel behavior and burdens by these dif-
ferent segments of population and then estimate differential impacts
of pricing on these same segments.
The literature is abundant with discussions about the vertical equity
of road tolls (Manville, 2017; Schweitzer, 2009; Schweitzer and
Taylor, 2008; Shaheen et al., 2019). Critics argue that tolls are re-
gressive (they burden poorer motorists) but advocates point out that
such tolls are less regressive than other roadway funding sources. In
our scenario building approach the vertical equity implications
make three points. First, the net effect of tolls depends on how toll
revenues will be spent. If revenues are redistributed, i.e. used for the
maintenance and expansion of non-tolled roads, tolls need not result
largely in gains for higher-income groups and losses for lower-in-
come groups. Second, the net benefits are likely to be greater for
higher-income groups under any but the most progressive
K. Panou
redistribution schemes. Third, even with a revenue redistribution
scheme it is impossible to ensure that all travelers within a parti-
cular income class are compensated. Thus, a revenue redistribution
scheme cannot completely ensure equity. Realistically, of course,
very little is completely equitable.
2. Affordability refers to people’s ability to purchase important goods
and services. In transportation, affordability refers to people’s fi-
nancial ability to access important goods and activities such as
medical care, basic shopping, education, work, and socializing
(Litman, 2009).
Considering transportation affordability in tolling is fundamental, as
it causes significant problems in communities that rely primarily on
low- to medium-income workers and lower-income households. On
those communities unaffordable tariffs imposes disproportionate
financial burdens and constrains people’s mobility and opportu-
nities.
To operationalize the specified scenarios the following factors have
to be considered:
• Network coverage—i.e. the total length (in km) of the road network
considered;
• Tolled projects—the length (in Km) of tolled roads in the considered
network;
• Base rate—corresponding to a minimum rate that could be imposed
in a typical low 2-axle vehicle class category per kilometer;
• Maintenance cost covered—by applying the base rate in the con-
sidered network.
The issue of scenario operationalization is more thoroughly dis-
cussed in Section 4.1 with an application example.
3.2. Tariff setting
Starting point is the calculation of veh-km travelled on each can-
didate toll road of the reference network of each considered scenario.
The maintenance requirements of those networks are then assessed
assuming all activities needed to achieve and maintain a certain level of
service for road users, including:
• Routine maintenance: Works carried out on a regular basis in order to
maintain the base condition and functionality of the network—ex-
amples are verge vegetation cutting, drainage cleaning, and basic
maintenance of traffic devices.
• Periodic maintenance: Works undertaken to maintain acceptable level
of pavement condition, riding quality, road comfort and safety
through periodic interventions—examples are resealing and overlay
pavement works, which are carried out in response to measured
deterioration in road condition.
The operating costs of tolls are calculated thereafter. In the absence
of previous experience from tolls in the area of interest, the calculation
of operating costs can be based on the cost per transaction of an
Electronic Toll Collection (ETC) system—instead of the manual cost—as
this does not differ greatly from country to country, and therefore can
provide grounds for safer and more comparable calculations.
Summing the operating and maintenance costs of each considered
road segment, and dividing the resulting costs with the corresponding
number of veh-km, the total maintenance and operating costs per veh-
km is obtained. This value corresponds to a minimum rate that could be
charged per veh-km, without causing losses to the toll operator, but also
without contributing to the amortization of fixed costs—contribution
margin is zero.
At this point the mathematical problem which arises, regarding the
calculation of the minimum toll rate that could be charged per veh-km,
is the following:
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Case Studies on Transport Policy 8 (2020) 1256–1269
Let n be the number of road segments for each reference scenario; Pi
the minimum rate that could be charged per veh-km in road segment i
(i = 1,2,3,…,n); and Ti the number of veh-km travelled on each seg-
ment. Find the minimum value of Pi that maximizes the sum
R = i Pi Ti , where R is the total toll revenue.
Since both the Pi and Ti are strictly increasing functions, the opti-
mization problem stated above cannot be solved unless one of the two
functions, or their output R is bounded from above.
Setting R C , where C is the total maintenance and operation cost
of the reference network, the minimum required value Pi can be ob-
tained as follows:
1. The (Pi, Ti) pairs are firstly sorted from the smallest Pi to the largest.
Then for i = 1 we compute R = P1*T1.
2. For i = 2 we compute again: R = P2*(T1 + T2). We repeat this step
for i = 3 and until the boundary condition of equation R C is
met—N.B. for each increment of i the cumulative Ti is used instead
of the individual value.
3. The value P f corresponding to the last road segment adding to the
demand needed to achieve R = C, is the minimum toll rate—-
hereafter called the Base Rate (BR)—that could be charged per veh-
km to cover all costs.
It might happen that the road segments i which satisfy the condition
R = C are not those with the highest traffic—are certainly those with
the most veh-km. To identify the road segments with the necessary
surplus of demand to be tolled it takes:
• Resorting of pairs P , T , according to the road segments’ annual
i i
average daily traffic (AADT), from the smallest to the largest;
• obtained in theofprevious
Recalculation the total revenue R = P
step.
T , using the base rate P
f
i i
f
The break-even point here defines (i) the road segments likely to be
tolled at that rate, and (ii) is dependent on the costs sought to cover.
3.3. Tariff adjustment
Tariff adjustment is necessary for cost-recovery road tolls to ensure
that future toll revenues will be sufficient to retire debt, pay for the
costs of operation, maintenance and future capital improvements, and
provide a reasonable return to investors. Raising debt and equity for
these projects, whether for construction or for payment of any upfront
fee, requires a reasonable adjustment procedure to assure that revenues
from tolls will be sufficient for these purposes.
Under public ownership, toll rate increases have rarely reflected
inflation, and some have not even provided for the increasing cost of
maintaining the toll roads. This is primarily due to the fact that there
are generally weak incentives for public operators to price roads at a
socially optimal level.
For congested facilities, setting maximum fixed toll rates will likely
be in conflict with a desire to minimize congestion through variable
pricing. For those projects, limiting returns on equity or providing for
revenue sharing can be used in lieu of rate caps to protect against
monopoly profits.
While private operators are usually allowed to increase toll rates in
accordance with major economic indices, they are not required to do so,
and have strong incentives not to increase the toll rates if it would
decrease use of the facility and reduce revenues.
Our approach uses experience from recent agreements for operation
of existing or newly constructed toll roads to develop guidelines on how
often and how much toll rates could be increased. The process used to
adjust toll r involves setting the principles that mandate toll duration &
tariff escalation, and developing the toll commercial policy. This pro-
cess is described in the application example in Section 4.3 below.
K. Panou
4. Application of the model in the CS
4.1. Definition of policy-focused scenarios
To identify equitable and affordable toll rates in the CS, two explicit
policy scenarios have been specified:
• a diffusion scenario, and
• a retrenchment scenario.
The diffusion scenario assumes welfare maximization by applying the
smallest possible toll rate to a bulk of demand needed to generate
sufficient revenue for the operation and maintenance needs of the en-
tire network (breakeven condition).
The retrenchment scenario assumes revenue maximization by ap-
plying the maximum rate users can bear (also called the “‘affordability
threshold”) to a bulk of demand needed to generate sufficient revenue
for the operation and maintenance of a selected network of primary (P)
and main secondary (SP) roads.
To operationalize the specified scenarios the following factors have
been considered:
• Network coverage—From the road inventory data provided by the
TA, the total length of the considered road network under the dif-
fusion scenario was set at 4250 km, while for the retrenchment
scenario the total length was set at 1380 km.
• Results of WTP surveys—The results of the available CS’ surveys
showed value of time for car users of 2.6 EUR and for trucks of
13.4 EUR. Car occupancy rate has been found at 3.27. The figure
was deemed too high (the corridor is serving long distance tourist
traffic which usually means entire families traveling together) for
national average and has been reduced to 1.63 based on data pub-
lished by Schiffer (2012). That value is in the range of the European
(1.6) and US (1.5) averages, reflecting also trends (higher con-
solidation) due to the recent economic crisis (International
Transport Forum, 2012).
• Tolling levels in neighbouring countries—Average toll rates in neigh-
bouring country A range between 0.02 and 0.03 EUR per km for cars
and pickups. Medium trucks are charged 2–3 times more. The toll
level is lower for neighbouring country B and C, ranging for do-
mestic vehicles between 0.01 and 0.04 EUR per km and up to 20
cents per km for large trucks. Foreign car owners in country B are
paying between 0.07 and 0.075 EUR per km depending on the
specific toll road. In country C a car is charged 2.5 EUR for a 40 km
trip (rate of 6 cents per km) offering a saving of 45 km or over 1 h of
travel time over the alternative route. Likewise, the toll level in
neighbouring country D ranges from 0.03 to 0.05 EUR per vehicle
kilometer.
• Level of toll in comparison to fuel costs and driver incomes—Fuel costs
in the CS are typically 1.1 EUR per liter, and this equates to between
8 and 10 cents per km travelled for a car. Fuel rates for buses and
trucks are higher. Total vehicle costs can rise up to 40 cents per km
considering fuel and non-fuel costs.
• Time savings per veh-km—Using the average speed on the primary
and secondary CS network, time saving benefits were estimated in
the region of 0.035 EUR/veh-km (Basic Rate—BR for the diffusion
scenario). This value roughly represents the maximum toll rate that
could be imposed in a typical low 2-axle vehicle class category per
kilometer. It corresponds to about 20–40% of total user cost savings
as it does not account for fuel and non-fuel vehicle- or safety-related
cost savings. This maximum toll rate is also called the affordability
threshold and it is calculated as follows:
• From the road inventory data (provided by the TA), an average
speed of 78 km/h is calculated for highways and 45 km/h for the
alternative network;
• Based on the speed difference, average time saved per passenger-
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Case Studies on Transport Policy 8 (2020) 1256–1269
kilometer (pax-km) is calculated at about 0.50 min;
• The passenger time savings are converted into EUR saved per pax-
km using a VoT of 2.6 EUR/h; the result is 0.021 EUR;
• Multiplying the 0.021 EUR saved per pax-km with the average
occupancy rate of 1.63, a 0.035 EUR saved per veh-km is ob-
tained.
• Total maintenance costs—Routine maintenance (vegetation cutting,
drainage cleaning, basic maintenance of traffic devices, etc.) and
periodic maintenance (resealing and overlay pavement works) are
considered, as mentioned, in the cost estimation. Costs take account
of road geometry, type of terrain, weather conditions and geo-
technical/hydraulic risks.
• Cost of tolling plaza operation including revenue collection—In the ab-
sence of previous experience from tolls in the CS, average EU and US
values were used as a proxy for assessing transaction costs of the
ETC (found between 0.04 and 0.10 EUR) and manual collection (in
the range of 0.33–0.43 EUR). Construction costs of a toll plaza were
provided by the TA; it is about 150.000 EUR per lane. Whilst con-
structing and operating more than one tolling plazas will generate
more revenue, there would be significant extra costs.
• Wider effects—Suppressed demand from applying tolls has been
determined assuming (in the interest of prudence) elasticity be-
tween cost and demand changes of −1. This value is representative
of a 10% decrease in demand following a 10% increase of the
generalized costs (including the toll) currently incurred by passen-
gers. The issue of suppressed demand is more thoroughly discussed
in Section 4.2.4.
With the preceding points in mind, Figs. 1 and 2 illustrate the dif-
fusion and retrenchment scenario used in the CS case, with their dif-
ferent variants defined along the axes of equity and affordability.
It can be noted in the two scenarios that the tolling scope (network
coverage) changes with the equity perspective (100 km for vertical
equity, 300 km for horizontal equity, 200 km for in between),3 whereas
the Basic toll Rates (BR) change with affordability level from
0.005 EUR/veh-km to 0.035 EUR/veh-km4 (low affordability stipulates
low toll rates and vice-versa). Moreover, the contribution margin5 (up
over 100% in maintenance cost covered) appears positive throughout
variants r1 to r5 of the retrenchment scenario, namely 197%, 138%,
35%, 81% and 46%; and in variant d7 of the diffusion scenario (16%).
Another interesting observation in the above illustrations is that the
closer one gets to the lower left corner of Fig. 1, the closer is to the
“social” end of the tolling policy spectrum. The more one approaches
the top right corner of Fig. 2, the closer gets to more “liberal” tolling
policies where the philosophy is “pay what you get and get what you
pay”. Variant d1 (of the diffusion scenario) represents the most “social”
policy of all, whereas variant r3 (of the retrenchment scenario) the most
“liberal” one.
4.2. Tariff setting
4.2.1. Base rate
By applying the model outlined in Section 3.2, the minimum toll
rate that could be charged per veh-km to cover all costs is calculated.
This is a 0.005 EUR/veh-km rate that could be imposed in a typical low
2-axle vehicle class category per kilometer (Basic Rate—BR for the re-
trenchment scenario) without causing losses to the toll operator, but
3
The 100, 200 and 300km toll coverage was the result of an open con-
sultation process between the TA and other political, financial and social sta-
keholders.
4
For details on the calculation of those values see Section 4.2.1.
5
Definition: the portion of toll revenue that is not consumed by maintenance
and operating costs and so contributes to the amortization of the im-
plementation cost.
K. Panou Case Studies on Transport Policy 8 (2020) 1256–1269

Fig. 1. . The diffusion scenario.

also without contributing to the amortization of fixed costs—recall that in time.

the 0.035 EUR/veh-km (Basic Rate—BR for the diffusion scenario) re-
presents the maximum toll rate that could be imposed in the same
vehicle class category per kilometer. Both the 0.005 EUR/veh-km and
0.035 EUR/veh-km rate set the envelope of tariff variation in the CS
case.
With the preceding points in mind, Table 1 calculates the total
revenue generated from applying the base rates for the different sce-
narios, as well as the annual average daily traffic, the total operation
and maintenance costs, and the number of veh-km of roads with the
highest levels of traffic. Note that these roads are organized in pools of
100 km, 200 km and 300 km, which reflect our recommendation to the
CS Government of different waves of investment at different moments
4.2.2. Tariff structure by vehicle categories
Tariff setting involves also an issue of specifying the number of
vehicle categories to be charged different toll rates and the rate dif-
ferences across categories. Current practice for inter-city highways
(France, Italy, Japan, and Spain) suggests five vehicle categories most
commonly used; although ways of classifying them vary somewhat
across countries. A larger number of categories tends to enhance the
sense of fairness and thus is more politically acceptable. For that reason,
the number of vehicle categories to be charged different toll rates was
raised in the CS from five to nine. With this change, complaints by users
about vehicle categorization are expected to decrease. But there might

Fig. 2. . The retrenchment scenario.

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K. Panou Case Studies on Transport Policy 8 (2020) 1256–1269

Table 1
. Toll revenues, traffic, veh-km and total costs of roads with the highest levels of traffic.
Road name Road segment AADT Length (km) Veh-km travelled Total cost Toll revenue Toll revenue
(EUR/km) (BR—retrenchment) (BR diffusion)

100 km—First wave of investment

Road 1 (autostrada) Segment 1-i 31.268 11,50 359.582 17,84 1.798 3.596
Road 1 (autostrada) Segment 1-ii 29.631 7,30 216.306 18,61 1.082 2.163
Road 1 (autostrada) Segment 1-iii 29.631 4,90 145.192 19,63 726 1.452
Road 1 (autostrada) Segment 1-iv 29.631 4,50 133.340 19,90 667 1.333
Road 2 (B) Segment 2-i 24.157 10,50 253.649 16,52 1.268 2.536
Road 2 (B) Segment 2-ii 24.157 7,30 176.346 8,91 882 1.763
Road 2 (B) Segment 2-iii 24.157 7,00 169.099 16,52 845 1.691
Road 2 (B) Segment 2-iv 19.069 9,70 184.969 19,42 925 1.850
Road 2 (B) Segment 2-v 19.547 7,85 153.444 17,20 767 1.534
Road 2 (B) Segment 2-vi 19.547 4,60 89.916 11,15 450 899
Road 2 (B) Segment 2-vii 10.588 12,10 128.115 17,20 641 1.281
Road 2 (B) Segment 2-viii 10.588 9,20 97.410 10,52 487 974
Road 3 (B) Segment 3-i 19.547 8,10 158.331 6,31 792 1.583

200 km—Second wave of investment

Road 3 (B) Segment 3-ii 10.588 39,00 412.932 10,52 2.065 4.129
Road 4 (A1) Segment 4-i 10.423 11,60 120.907 10,63 605 1.209
Road 4 (A1) Segment 4-ii 14.604 8,20 119.753 18,35 599 1.198
Road 4 (A1) Segment 4-iii 9.685 9,70 93.945 13,54 470 939
Road 4 (A1) Segment 4-iv 8.335 16,40 136.694 11,68 683 1.367

300 km—Third wave of investment

Road 4 (A1) Segment 4-v 4.044 35,60 143.966 11,66 720 1.440
Road 5 (A2) Segment 5-i 1.200 24,20 290.400 17,56 1.452 2.904
Road 6 (A3) Segment 6-i 6.500 12,90 83.850 6,30 419 839
Road 7 (C) Segment 7-i 4.507 20,50 92.394 12,60 462 924
Road 7 (C) Segment 7-ii 4.107 21,10 86.658 15,17 433 867
Totals 303,75 3.847.198 327,74 19.238 38.470

A: Highway, B: Main Interurban, C: Interurban Secondary.

be cases during the application of the tariffs where a smaller number of
vehicle categories would be desirable, primarily for technical reasons.
For example, toll plazas with long queues in order to minimize time and
queue length for toll collection might consider using less vehicle cate-
gories.
There is no simple equation or a universal theory to determine rate
differences across vehicle types. For inter-city highways for example, a
fairly substantial variation is observed in the extent of rate differences.
It is also often argued that commercial vehicles including trucks and
buses are favored in terms of the toll levels; as compared to the capital
and maintenance costs incurred by those vehicles. For a country like the
CS it is strongly recommended that a lower rate for buses should be
applied as part of the welfare maximization (diffusion) scenario to
support public transport operators and to encourage bus use.
To facilitate the allocation of infrastructure costs into the considered
vehicle classes, class coefficients have been used to obtain the dis-
tribution of toll rates shown in Table 2. It can be seen that motorcycles/
tricycles pay 0.5 times (50%) the basic rate, vehicles with 4 axles pay
1.5 times (150%), vehicles with 4 axles (including buses) pay 2–3 times
(200–300%), vehicles with 5–6 axles pay 3 times (300%) the basic rate,
and so on.
It is important to note that the suggested tariff structure constitutes
preliminary recommendation on how the CS should accomplish a fair
and reciprocating road pricing scheme. That structure can change in the
duration of the application of tolls within the lines of any potential
private sector contract or under a certain threshold. Of course, toll rates
can also be adapted yearly according to the consumer price index.
4.2.3. Assessment of toll affordability
Table 3 shows per capita GDP and average household income for
countries in the CS region with indication that Country F has by far the
highest figures.
Table 4 demonstrates the proportion of income spent on essentials
and luxuries, and the likely impact of increased transport costs on the
CS’s household expenditures. Note that the expenditure level indicates a
small portion for household savings at the rate of 3% (estimate).
It can be seen in Table 4 that about 94 EUR is spent monthly on
luxuries covering restaurants, hotels, recreation, culture, tobacco and
alcohol, which can be considered “elastic” expenditures that could be
avoided. That amount can be thought of, roughly, as the maximum
amount of extra toll charges that could be afforded by households in the
CS per month (in 2014 prices).
With the preceding points regarding luxury spending in mind, the
possible impact of tolls on the household budget is illustrated in the
following representative example. Assume that a household6 car spends
on average 10 days per month on toll roads and travels 30 km per day.
If the toll rate is 0.01 EUR per km (basic rate for some variants of the
diffusion scenario—see Section 4.1 above), the monthly toll budget
would correspond to an additional 3.0 EUR per month, i.e. an 11%
increase in the household transport budget, or a 3% shift from luxury
spending to offset the increased transport costs. Likewise, if the toll rate
is 0.02 EUR per km (intermediate rate—see Section 4.1), the monthly
toll budget would correspond to an additional 6.0 EUR per month,
leading to a 22% increase in the household transport budget and a 6%
shift between luxury and transport spending. Finally, if the toll rate is
0.035 EUR per km (affordability threshold—also in Section 4.1), the
monthly toll budget would correspond to an additional 10.5 EUR per
month or a 39% increase in the household transport budget, requiring
an 11% reallocation of luxury budget.
Those values advocate that the additional burden created on
household budget by toll rates less than 0.035 EUR per km is quite
affordable. Rates of 0.01–0.025 EUR per km can be considered accep-
table by the average CS’s household. Of course, special (higher) rates of
0.05, 0.06 EUR per km or more might be applied in cases of selective
tolling or where a free alternative route does not exist, but suppressed
demand from applying these rates should be thoroughly investigated.
6
Average household size in the CS was 3.9 in 2011.

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K. Panou Case Studies on Transport Policy 8 (2020) 1256–1269

Table 2
. Tariff structure and vehicle classes likely to be tolled.

Table 3 sensitivity to changes in toll rates is indicated by the changes in the

. Per capita GDP and average net (after taxes) wage. traffic levels on the new highway.
Country Per capita Monthly average income Average monthly net Following the mandate of current best-practices to account for toll
GDP (PPP)a per household in EUR wage EUR (2014)** elasticity, suppressed demand has been determined in the CS assuming
EUR (2014 (2014)** elasticity between cost and demand changes of −1 (see Section 4.1).
est.)* This value implies that a 10% increase of the generalized costs currently
CS 10,248 515 420
incurred by users will cause a 10% decrease in demand.
Country A 14,033 660 478 For the calculation of the generalized cost the following equation is
Country B 7386 450 360 used:
Country C 9048 680 415
Country D 12,187 590 353 Section length Segment length · Vehicle Costs
Country E 11,540 554 363 Generalized cos t = ·VoT +
Country F 23,819 1200 1004
Average speed Average occupancy rate

* Source: The World Fact Book, CIA, 2015. where “Segment length” is given in km, “Average speed” in km/h, the
** Source: National sources. “Value of Time (VoT)” is in hours and the “Vehicle costs” are in EUR/km.
a
Purchasing Power Parity. Following the calculations of the generalized costs, three alternative
rates have been tested for possible suppression effects on demand:
Table 4
. Average monthly household expenditure in the CS.
• A base rate, i.e. 0.01 and 0.005 EUR per km for the diffusion and
7

Main household expenditure categories by Total monthly household the retrenchment scenario respectively;
COICOP* expenditure** • intermediate rate of 0.02 EUR per km, and
An

EUR %
• A maximum rate of 0.035 EUR per km.
Food and non-alcoholic beverages 195 39% The maximum toll rate (affordability threshold) is calculated as
Alcoholic beverages, tobacco and narcotics 16 3% shown in Section 4.1.
Clothing and footwear 20 4% When imposing a base rate of 0.01 EUR per km traffic, under the
Housing, water, electricity, gas and other fuels 65 13% diffusion scenario, responds with an average decrease of 3.16%. The
Furnishing, households equipment and routine 30 6%
maintenance of the house
traffic declines by between 2.98% and 3.44% depending on the seg-
Health 24 5% ments. When testing the traffic for the retrenchment scenario (base rate
Transport 27 5% at 0.005 EUR per km), the average decrease in traffic is 1.39% corre-
Communications 9 2% sponding to a decline of 1.31% to 1.51%, also depending on the seg-
Recreation and culture 64 13%
ments.
Education 15 3%
Restaurants and hotels 14 3% When imposing an intermediate toll rate of 0.02 EUR per km, the
Miscellaneous goods and services 20 4% model yields an average decrease of 6.85% in traffic, which varies
Total monthly household expenditure 500 between 6.47% and 7.46% depending on the segments.
Finally, when testing the traffic for the maximum toll rate
* Classification of Individual Consumption According to Purpose.
(0.035 EUR per km) the average decrease in traffic is 11.9%, corre-
** Projected data based on the 2007 CS’s National Census.
sponding to a decline of between 11.25% and 12.97% depending on the
segments.
4.2.4. Traffic sensitivity to tariffs and impact on total toll revenue
Applying tolling will reduce the traffic on a highway, as some users
will prefer the existing road rather than paying for using the new
highway. Those users will only obtain limited time savings and safety
savings, as they will stay on the existing road, imposing an economic 7
These values are calculated by applying the break-even model of Section
loss and, hence, reducing potential benefits for the new highway. The
4.2.1.

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K. Panou
4.3. Tariff adjustment
4.3.1. Duration of tolls
It is known that the objectives of applying tolls include among
others:
• Covering construction costs for new roads;
• Covering improvement/rehabilitation/capacity expansion cost for
existing road network;
• Covering maintenance and operation of existing road network.
Deciding the time frame for tolls is a complex issue that depends
primarily on the following parameters:
• Tolling objective;
• Expected revenue;
• Private sector involvement.
Should tolls are aimed at covering construction costs, the tolling
period can be long depending on the project’s financial structure, the
anticipated traffic and the implementation cost. Should traffic levels are
high, toll duration may be shorter. But when the public sector bears the
cost, it is very common that the tolling period expends indefinitely;
with the notable exception of Japan which has made 61 roads toll free
after recovering construction costs.
When the primary toll objective is to cover improvement/re-
habilitation/capacity expansion costs then the tolling period depends
on the length of network, expected revenue and is usually long. In the
case of public tolls, this period is usually extended after the cost has
been recovered because Governments would rarely admit their goals
have been achieved.
When the private sector is involved, project economics change as
new costs and benefits arise with a private sector contract. A typical
format of private sector involvement is a Build-Operate-Transfer (BOT)
concession which grant the concessionaire the right to construct
maintain and toll a road over a certain period of time after which the
road is transferred to Government.
Factors to be taken into account for the duration of a BOT project
include:
• Pre-construction issues (e.g., environmental issues, possible oppo-
sition from special interest groups, legal issues and problems in se-
curing project financing);
• Uncertainty in traffic and demand issues;
• Investment/business risks (revenues, costs, interest rate, inflation);
• Taxation and regulatory risks;
• Construction risks such as cost over runs, delays and specifications
not met, etc.
• Risks in operations;
• Competition from existing high quality toll-free routes;
• Risk in maintenance and rehabilitation cycles.
The determination of the duration of a toll contract is based inter
alia on:
• Toll objective, i.e. covering construction or maintenance costs or
both;
• Financial instruments available—in some markets there is no pos-
sibility of long term financing from the private sector;
• Political imperatives/security concerns.
Typical BOT concessions last from 20 to 30 years, whereas main-
tenance contracts or concessions are usually shorter, ranging from
-5 years. The reason for this spread in duration is the difference in fi-
nancial requirements.
The duration of a toll contract—be it a concession agreement or
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Case Studies on Transport Policy 8 (2020) 1256–1269
not—may be set by the Government in advance of the actual tender or
be part of the decision criteria for selecting the preferred bidder.
Caution, however, should be exercised on the importance assigned to
toll duration as a selection criterion; if it is the only one, it may have
unexpected effects, like in Mexico, where toll rates soared causing many
toll road operators to fail and appeal for Government bailout (Gómez-
Ibáñez, 2007).
4.3.2. Tariff escalation policy
Tariff escalation is generally defined as the policy or rules by which
toll fees change in the long run. Depending on whether or not there is
private participation, price escalation may be provided:
• As a rule in the feasibility study when tolls are intended to cover
construction costs, or when the private sector is involved;
• As a budgetary need of the Governmental authority in charge of
tolls, when there is no private sector involvement.
When a Governmental authority is the sole body responsible for
setting the toll tariffs, escalation is in line with the forecasted annual
budgetary needs. It is usually based on Consumer Price Index (CPI) or
inflation, either as a whole or as a percentage e.g. 95% of CPI. Tariff
escalation may also be based on the GDP annual change ratio, though
this is not usual. Tariff escalation time may be set annually or more
infrequently.
As tariff escalation is primarily a Governmental decision, it is likely
to be affected by other non-financial factors, political or social, such as
public opposition and local contingencies. For example in Texas, the
toll rates on the Dallas North Tollway have not been increased since
1982 (STF, 2018). This is not an unusual situation where toll roads are
managed by the public sector.
In cases, however, where the private sector is involved in the op-
eration of tolls, the tariff escalation formula is normally negotiated and
agreed prior to contract signing. Of course, over the contract period
much is likely to change, including the costs of major inputs, specific
service requirements as well as the wider legal, social and economic
environment in which the contractor operates. Thus, toll contracts
should be flexible as to allow prices to be adjusted over time, without
prior knowledge of what these adjustments should be or what will
trigger them.
Regarding concession agreements, the majority includes a toll es-
calation formula that is related to the consumer price in-
dex—sometimes also to foreign exchange devaluation—allowing for
toll increases every year or every once in a few years. In Spain, for
example, the toll rate review system for the highways granted by the
Government takes into consideration the Consumer Price Index cor-
rected by a coefficient that shows the difference between the estimated
AADT (Average Annual Daily Traffic) and the real ADT, while in
Portugal tariffs are adjusted up to 90% of the annual CPI. It should be
mentioned that small annual increases can be easier for users to in-
corporate in their spending patterns than larger, but less frequent rises.
Economic forecasts and financial analysis should however consider, as a
sensitivity test, the failure to increase tolls for several years and a
failure to agree/pay specified compensation.
It is also noteworthy that in toll operation agreements there is often
a clause providing for Governmental approval of any increases and
compensation arrangements, should that approval is withheld.
Government approval, however, is not always given and operators do
not always receive the specified compensation immediately. This is an
area of considerable political interest, and increases might meet violent
opposition from the public, particularly if the economy is weak. To use
again the example of Spain, the central Government and some regional
Governments have reduced the toll rates or have frozen the annual
review of the rates. In all cases, they were obliged to compensate the
concession holding company (Gómez-Ibáñez and Meyer, 2013).
K. Panou
4.3.3. Commercial policy
4.3.3.1. Basic actions. For CS tolls to succeed in their goals the
forecasted revenue should be achieved. This in turn means that users
must use the infrastructure despite any possible suppression effects
from the application of tolls. To “sell” tolls to the road users a
commercial policy has to be planned and implemented from the toll
operator with a twofold aim:
• Offer the right product in the right price;
• Increase the number of users, thus generating more income.
This paper has recognized the basic elements of a CS’s toll com-
mercial policy, which include:
1. User segmentation: User segmentation is necessary to establish a
differential pricing scheme based on user characteristics. Basic user
segmentation classifies users by:
•
Vehicle type (category) based on the number of axles which re-
presents the road space used by the vehicle and the damage that
the vehicle causes on the road pavement;
•
Frequency of use, where users are classified as frequent/regular or
occasional users depending on the number of trips in a certain
time period (usually monthly).
2. Basic products definition/pricing: Basic products should cover the
needs for both the frequent and the occasional user and should be
applied to both manual and electronic methods of payment. For
example, a special prepaid smart card issued by the toll operator is
an option that could be used to pay tolls manually. It is important
that all products offered do not make subscription obligatory; there
should be at least one product per vehicle category for occasional
users and at least one per vehicle category of frequent users.
Additional products (subscription products/packages) may also be
defined targeted to different classes of frequent users as the system is
established and the number of users increases or the user segmen-
tation becomes more detailed. Pricing of these products usually
depends on the number of trips per month and/or time of day.
3. Advertising/product introduction actions: An integrated marketing
program should be in place before the launching of any new product
or to increase the penetration of an existing one. Newspaper ads,
leaflets in toll stations, radio spots, banners in popular internet sites
are some indicative actions of a marketing campaign.
Should ETC is implemented in the CS, a commercial policy might
also be targeted to ETC-generated opportunities such as:
• On-Board Unit (OBU) cost charging, replacement. OBU should be
given free of charge for subscribers, while for non-subscribers a
refundable deposit may be asked. Replacement of faulty OBUs
should be free of charge;
• OBU distribution channels organization/monitoring;
• User credit policy. Depending on the payment method (prepaid, user
account tied to a standing bank order or user account charged by
credit card) users may or may not be granted a credit period;
• User access to personal account information. Users should be offered
different ways to access details of their account (balance, charges)
and other information related to their use of the road. Account
statements may be sent by post on a nominal fee or free, depending
on the account; or user may have access to his account via internet
secure connections.
4.3.3.2. User acquisition and retention policy. For the CS’s tolling
programme to succeed, some basic conditions should be met:
• The services offered must be competitive in terms of the quality-
price ratio;
• The demand must be sufficiently high to support the specific
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Case Studies on Transport Policy 8 (2020) 1256–1269
business targets;
• The toll services have to achieve a certain degree of market pene-
tration;
• User base must be continuously growing in order to generate in-
creased revenue over time in order to cover operating and devel-
opment costs.
Assuming that the pricing and market size issues are thoroughly
investigated before a toll project is launched, and that the majority of
revenue risks are hedged contractually, it remains for the toll operator
to develop a sufficient user base which should be able to expand over
time.
Accumulated experience shows that conditions in road tolling may
change over time and competition (in the form of alternative routes or
modes of transport) may come even from the State itself for various
reasons. What is important to maintain is the user base which should
remain stable or potentially expanding as a guarantee of a constant
revenue stream. It is important for users to feel that they are charged for
something that is of value to them rather than to feel that they are
paying another tax in the most inconvenient way (having to stop to do
so).
To establish this sense of worthwhileness, a campaign should be run
in the CS before introducing the tolls. That campaign should stress the
advantages of using the tolled roads (safety, traveling speed, quality,
etc.) from many different perspectives. For example, the use of ETC is a
feature central to that campaign. Advantages of ETC that could be ad-
vertised include ease of use, no need for cash, less time spent in toll
plazas, dedicated lanes and possible reductions for the subscription
program offered. The ETC has significant advantages for the operator
(lower operating cost, less cash handling, higher throughput in toll
plazas, advance payment capability for pre-paid subscription), so every
effort to establish a considerable base of ETC users would generate
significant economic benefits for the toll project. ETC campaigns should
be run regularly especially when a new subscription program is about
to be introduced. Local campaigns may also be run to attract local
commuters and leaflets about ETC use should be given to every user
that pays cash in the toll plazas for a long period. While ETC to occa-
sional users is an option, the main effort remains to frequent users who
should be encouraged to enter a subscription program or package.
Similarly, subscription programs/packages need to be established
for every vehicle class. The author recommends that these packages are
tied with a loyalty scheme offering reductions. The amount of reduction
will be based on the number of trips or other appropriate criteria (e.g.
fleet owners, local residents). Reduction rates may be fixed or vary
depending on the number of trips. The offered subscription programs
should be heavily advertised stressing on advantages over manual or
simple ETC use (smaller fee per trip, dedicated lanes, invoicing for
professional/tax reasons, account statement etc.) and making clear
distinctions between offered subscription programs in order to help the
user choose the appropriate one.
At a subsequent stage, marketing actions should be taken with a
twofold aim:
• Attraction of new users;
• Increasing the frequency of use of the existing ones.
These actions should include (not an exhaustive list):
• Additional reductions for regular/frequent users based on number of
trips;
• Introduction of a monthly or daily “unlimited” subscription package
(as in mobile telephony with a maximum limit of trips);
• Introduction of “return” ticket;
• Different pricing for week-ends and/or time of day;
• Lotteries for subscribers.
K. Panou
All the above actions should be carefully evaluated for their per-
formance against the targets set above to decide the most effective ones.
5. Conclusions
An empirical model has been developed in this paper based on
break-even analysis to compute the minimum toll rate that could be
charged per vehicle-kilometer (veh-km) on a given volume of traffic to
cover all costs.
The contextualization of the model calls for particular attention to
the definition of the costs to be covered, and the users’ VoT which
combines the ideas of affordability and willingness-to-pay. Significant
determinants are the objectives and expectations from tolls, which are
summarized in a number of equity and affordability scenarios.
The main advantage of the suggested model is that it points out the
relationship between operation and maintenance cost, traffic volumes,
tariffs and toll revenues. It can be extended to show how changes in
maintenance-operation cost relationships, tariffs and total revenues will
affect profit levels and break-even points.
The model has been applied in the CS case using two policy sce-
narios; (a) diffusion—aimed at welfare maximization in wider areas
(horizontal equity); fair to people with medium–low to low afford-
ability and, (b) retrenchment—aimed at revenue maximization from
selective tolling (vertical equity); fair to people with high affordability,
who because they pay more are entitled to get more.
The application of the model has shown that it can systematically
combine policy- and project-specific information to indicate tariff
structures that, during the application of the toll, are likely to face low
or of no significance public opposition.
CRediT authorship contribution statement
Konstantinos Panou: Conceptualization, Data curation, Formal
analysis, Investigation, Methodology, Validation, Writing - original
draft, Writing - review & editing.
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