One of the most controversial topics recently discussed in the political scene in Germany is the proposal by the German Ministry of Transportation to introduce a toll fee for passenger cars in the country.
In Germany until now, passenger cars pay no toll on roads and motorways. With about 60 million registered passenger cars and over 12.000 km of motorway infrastructure (‘Autobahn’), there is probably no other country worldwide that lets passenger cars take advantage of so many kilometres of roads for free and without any kind of toll.
This is about to change once the Ministry receives blessing for its proposal from the political landscape in Germany. Obviously, many aspects have been fiercely discussed already, ranging from legal issues regarding compliance with EU regulatory laws, to concerns on data privacy through to the question of the overall economics of the new system.
For us at Investaura Management Consultants, the last aspect is the most relevant as in the end imposing a motorway toll is about generating (more) money to improve the quality of the road network. Therefore, we have analysed the calculations done by the Ministry and checked if the numbers really make sense.
The Ministry is keeping its assumptions and calculations very close to the chest; however some key indicators have been disclosed already and we can therefore perform a reality check:
The ministry expects €3.7 billion annual income whereby
- €3 billion would be generated by German cars
- and €700 million by foreign cars.
The annual toll e-vignette would be mandatory for all German cars; therefore the income calculation is the simple multiplication of all German cars by the average price of a one-year vignette. The expected income seems plausible, assuming an annual average charge of about €60 per car.
The calculation of revenues from foreign cars is more complex. It depends on the following estimations: how many cars enter Germany how many times per annum, and how many will opt for the weekly, monthly and yearly vignettes with their different prices. No statistical data is currently available for Germany on that matter and it is difficult to predict a potential change in user behaviour once foreign car owners have to pay for using German roads. However, comparing calculations performed by various industry bodies and lobbyists, the estimated €700 million resides rather on the higher end of the various model outcomes.
Costs of the system
On the cost side the Ministry has announced very specific estimations:
- Costs for controls and enforcement are expected to be €51 million (one time set-up Capex) and €54 million as annual expenses (Opex), mostly for staff.
- Costs for operations (likely to be outsourced to a private company) would be €276 million (one time set-up) and €134 million annually.
- Additionally, some minor costs for setting up the system at the responsible government agency for supervisory tasks would be €10 million (one time) and €6.5 million recurring annually.
In total, this results in one-time set-up costs of $337m and €195m recurring costs.
First of all, those numbers are good news for the industry, as they clearly signal a very interesting business opportunity. Investaura Consultants has successfully support the industry on similar opportunities in the past. For further inquiries, please feel free to contact us!
Now, let us continue and check the ROI for the German state:
- To avoid political suicide politicians promised their electors to ‘reimburse’ the new toll charges by reducing their car taxes by approximately the same amount. It means that Germany will only receive about €700 million of incremental revenues per annum.
- Comparing the incremental income of €700 million with the total one time expenses of €337 million (split over two years) plus the annual expenses of €195 million, the project pays for itself from the beginning without need to raise debt. This is good news.
- With a cumulated positive cash flow of €1685 million after 4 years and initial investment of €337 million the ROI stands at a solid 5 times the initial investment after 4 years and 11 times after 8 years which shows a high-performing investment.
However, the state is by definition not operating as a business facing market competition. For monopolistic and mandatory ‘services’, a high ROI is not unusual at all. We have to look at other KPIs to measure how positive the business case really is.
The percentage of operational expenses (€195m) over annual (incremental) revenues (€700m) is a good indicator of the efficiency of the operations, in this case calculated at 28%. Concretely, it means that the state spends 28% of the revenues for collection, control, enforcement, overhead, administration, maintenance etc.
By industry standards, this is astonishingly high. Toll operations like Toll Collect in Germany (trucks), Asfinag in Austria and others typically remain in a range of 10-15% or revenues. Simple (i.e. non-intelligent) tolling systems like the passenger car e-vignette should be significantly cheaper in operations. If we add back the €3 billion of revenue from German cars the operational KPI drops to about 5% of gross revenues, which would make the toll system on passenger cars one of the most efficient toll systems in operation.
In conclusion, we can confirm that the introduction of Toll on German Autobahns is a positive business case, mostly for the ETC industry, who would benefit from capturing a billion euro size deal.
But from the perspective of the German state, the new tax is not particularly efficient to say the least, as 28% of the incremental revenues would be spent on administration costs. Furthermore, the annual Free Cash Flow of about €0.5 billion is not substantial enough to close the current budget gap – currently estimated at €7 billion – to keep up with the increasing costs of repairing and maintaining one of the densest and most heavily used motorway network in the world.
About the Author: Guido Peters is a Partner at Investaura Management Consultants. He has been working in the European Tolling industry since 2005 and can be contacted at firstname.lastname@example.org