Funding for local delivery of infrastructure and services - the user pays option
- StratPlanTeam
- Feb 16
- 4 min read
Updated: Mar 11
We need new thinking about funding for local infrastructure and service delivery
The way infrastructure and services are funded and paid for is a critical issue for local and central governments. With increasing demand for services such as roads, water supply, and electricity, determining a fair and sustainable funding approach has become a key concern. Recent research on public perceptions of fairness in infrastructure funding has revealed strong support for usage-based pricing models for some services while highlighting concerns over cost distribution in others.
This article discusses various funding mechanisms, and evaluates the potential impact on policy development.
Public perception of fairness in infrastructure funding
Public opinion on infrastructure funding varies based on service type, demographic factors, and regional considerations. Findings suggest that while usage-based pricing is widely accepted for services like electricity and water, there is greater resistance to applying similar models to road funding. Nearly three-quarters of respondents believe it is fair to pay for water (72%) and electricity (74%) based on usage, whereas only 34% support the idea for roads.
User pays, or beneficiary pays, is a pricing approach based on the idea that the most efficient allocation (and consumption) of resources occurs when consumers pay the full cost of the goods that they consume. In public finance, it stands in opposition to another principle of 'ability-to-pay,' which states that those who have the means should share more of the burden of public services. The ability-to-pay principle is one of the reasons for the general acceptance of the progressive income tax system.
The principle of user pays supports the idea of horizontal equity, which states that those in similar wealth and income positions should be treated equally by the tax system. The basic idea is that those who do not use a service should not be obligated to pay for it. As long as the beneficiary aligns exactly with the user, the user-pays principle works. Those who do not go to a movie are not obligated to pay for someone else to attend.
In public goods, beneficiaries and users sometimes do not align. The divergence of user and beneficiary occurs when production and consumption have external effects. Drivers who purchase gasoline may believe that they pay for the full cost (user-pays) of using gasoline except for the greenhouse gases produced. They impose costs on the environment and are known to contribute to climate change. The 'beneficiaries' must bear costs not paid in the purchase of gasoline. In that case, the user-pays principle results in the driver not paying the full or social cost of using fossil fuels, which creates a strong argument for regulation and other forms of public intervention. Increasing taxes on gasoline is one possible response that preserves the user-pays principle by increasing the costs to users.
A key concern raised in discussions on infrastructure funding is the fairness of pricing based on the cost of service delivery. Over half of average respondents did not think it was fair to charge households based on supply costs, particularly in remote areas where costs are higher. This highlights the ongoing challenge of balancing affordability with the need to fund infrastructure sustainably.
Alternative funding mechanisms for infrastructure
Governments and policymakers are exploring a range of funding mechanisms to address the growing financial demands of infrastructure maintenance and expansion. Some of the key approaches include:
Volumetric charging - water as an example
A strong majority of respondents support charging households for water based on usage.
Implementing a volumetric pricing model could help ensure fairer distribution of costs while promoting water conservation.
A hybrid model with a low fixed charge for basic needs and variable rates for higher consumption may be a viable solution.
Peak time/time of use charging - the example of congestion charging for roads
Many local citizens are likely to support congestion charging
International trends show time-of-use charging faces initial resistance but gains acceptance after implementation.
Congestion charging could be an effective tool for managing traffic and funding road infrastructure improvements.
Revenue sharing and local taxation
Local governments rely heavily on property rates to fund infrastructure, which is increasingly seen as unsustainable.
Proposals include revenue-sharing arrangements between central and local governments to diversify funding sources.
New tools, such as tourist levies, bed taxes, and congestion charges, could provide additional revenue streams for councils.
Addressing costs in remote areas
Maintaining infrastructure in rural and remote areas presents unique challenges due to higher supply costs and lower population densities.
Policymakers must consider equitable ways to distribute these costs, particularly in the context of extreme weather events and climate change adaptation.
Potential solutions include government subsidies or tiered pricing structures to ensure continued access to essential services.
Policy implications and future directions
These findings provide valuable insights for policymakers as they consider future infrastructure funding models. Key considerations include:
Balancing fairness and sustainability: Ensuring that funding models are both equitable and capable of supporting long-term infrastructure investment.
Encouraging behavioural change: Usage-based pricing can incentivise more responsible consumption of services such as water and electricity.
Managing public perception: Any shift in funding mechanisms must be accompanied by clear communication and engagement to build public trust and acceptance.
Supporting local government autonomy: Providing councils with additional funding tools and flexibility to address infrastructure needs at the community level.
Conclusion
Infrastructure funding is a complex and evolving challenge that requires careful consideration of public perceptions, economic sustainability, and equitable cost distribution. While there is strong support for usage-based pricing in some areas, resistance remains in others, particularly regarding road funding and the costs associated with remote service delivery. Policymakers must navigate these concerns while exploring innovative funding mechanisms to ensure the continued provision of essential infrastructure services. A combination of revenue-sharing, targeted taxation, and fair pricing structures can help create a more sustainable and equitable approach to infrastructure funding in the future.
References
Comments