Kallas: Europe must reduce subsidies to transport

Siim Kallas. Arvamusfestival, 2014. [Sven Tupits/Wikimedia]

EU governments pour too much public money into obsolete enterprises and thereby keep low-quality transport services going when they should not be allowed to do so, said Siim Kallas in an interview reflecting on his legacy as Commission Vice-President in the Barroso II team.

Siim Kallas is former Vice-President of the European Commission, who was in charge of Transport policy. He is currently a professor of international economics at the University of Tartu.

He spoke to EURACTIV’s Editor-in-Chief Daniela Vincenti.

You were the Transport Commissioner in the Barroso II team. What do you think are the global challenges in the transport sector?

With global issues, there is an obvious need for EU countries to coordinate policies and attitudes – and adopt a united front.

The greatest challenge for transport policy is probably dealing with safety arrangements and preventing terrorist attacks. Various aspects are involved, such as the constant upgrading of EU rules governing transport safety and making sure that they are effectively implemented and enforced. But public opinion of passengers or business is very sensitive to any matter that relates to safety and security. This creates its own frustrations.

That said, air traffic is very safe in general. The European Union aims to make sure that this remains the case by compiling and regularly updating lists of air carriers that are not allowed to enter European airspace. Safety standards and practices at specific airlines are scrupulously assessed by the relevant European authorities. The key element is the quality and fairness of inspections in the country whose airline is being assessed.

What was the most significant clash over EU transport policy during the 2010-2014 term of the European Commission?

It was the confrontation about the European emission trading scheme, or ETS.

Europe’s system of trading CO2 emissions was amended in 2008 to include aviation. It was a time when everyone supported measures to reduce CO2 emissions, and the economic burden was considered to be affordable.

But things were not easy at all. The United States opposed our emission trading scheme for aviation on principle and it left the European Commission in a very isolated position. The only chance to calm the situation and prevent the conflict from escalating was to entrust the International Civil Aviation Organization (ICAO), a United Nations institution, deal with the situation.

Has the transport policy in the European Union been especially liberal?

I have noticed that in many articles and comment pieces that I am portrayed as a hard-line political liberal who pushed for a very liberal agenda in European transport policy.

I am very happy that my liberal convictions have been noticed. But I feel that I must make some corrections about my policy priorities. What I pushed for was a reasonable cross-border and pan-European transport policy, without any burden of ideology.

Firstly, Europe needs to reduce the subsidies given to transport services. EU governments have many – too many – ways to pour public money into obsolete enterprises and thereby keep low-quality services going when they should not be allowed to do so thanks to the public purse.

Secondly, we could have much more private enterprises in transport. State-owned and municipally-owned ports and airports could be privatised, for example.

Lastly, we need a more flexible labour market. We have sectors where there is no possibility of increasing numbers of jobs. The rigid system of different privileges that is historically linked to the rights of employees makes it extremely difficult to adapt to market demands with any flexibility. The result is low profits leading to economic losses.

Are all costs related to transport adequately reflected in the prices charged? Or is it the taxpayers who subsidize prices? Why?

Some prices in transport are heavily regulated. At the same time, the European Union has set very high standards for transport products regarding their quality, safety and environment. One therefore needs to ask what the economic consequences are of regulating standards and prices.

The bottom line is that, whatever the outgoing, a business has to be profitable in order to stay viable. If there is no profit or economic viability, not only is there the threat of bankruptcy, but there are also no jobs.

Then there is also the cost of transport infrastructure, which needs to be maintained and upgraded on a regular basis to remain in full working order and, crucially, to be safe for everybody to use at all times.

But who should pay for its use? And how it should be done?

Maintenance budgets and infrastructure quality across the EU have eroded. Today’s public budgets are unable to keep transport infrastructure maintained.

The sensitive issue of road charging is a good example to illustrate some of the problems. At the moment, countries use a large variety of models to finance investment in road infrastructure and its maintenance.

The first source of financing is public: money that comes from taxpayers via the national budget. Budget debates are always difficult, particularly at a time of economic downturn when investments are usually subject to cost-cutting. Volatility in budget financing, however, creates uncertainty for investments in infrastructure and its maintenance. If limits are placed on acceptable costs for proper and necessary maintenance, it means that the quality of roads will deteriorate.

In some countries, the revenues deriving from fuel excise tax are partly earmarked for road investment and maintenance. An advantage of this system is that it provides a fairly stable revenue. However, technological advances in combustion engines along with increasing use of alternative fuels and energy in road vehicles look likely to change this. We could end up in a situation where there is rising demand and use of road transport – but the funding allocated to road investment and maintenance just stagnates.

To address the issues of financing the transport infrastructure more and more countries introduce various models of the user pay principle. These can be the direct tolling systems or different time based vignette systems.

How could we encourage more private investments in the transport sector?

When I began my term as Commissioner in 2010, I asked the same question to the world’s largest investment banks for their views. I received good advice from leading banks including Goldman Sachs, HSBC and Macquarie. To summarise, they told me that there is no shortage of private money, that it is abundantly available for investment projects provided that the conditions are suitable.

But private investors expect regulators not to be politically motivated or micromanaging the activities of private enterprises. They must be fair, transparent and work with consistency and predictability over long periods.

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