Show me the money: A business case for ‘Smart Roads’

Valerann
Valerann
Sep 9, 2020 · 7 min read

Roads have long been woven into the fabric of society as a public utility, used to move the economy and facilitate daily life. While this long tradition of connecting places with people will withstand the passage of time, roads are facing the biggest shift since the invention of asphalt. Mobility is getting smarter and introducing changes that threaten the old funding models of our road networks. Our roads are getting smart, and the business of roads must get smarter too.

Today, road construction, management, and maintenance are funded predominantly through taxes and charges. The main taxation that traditionally is allocated to roads (albeit not necessarily directly) comes from three sources: (i) Tax on new vehicles purchases (ii) Tax paid for new vehicles tied to the carbon emissions of the vehicle (iii) Tax paid on fuel purchased. Likewise, charges are also split into three types: (i) direct tolls for using a specific road (ii) heavy good vehicle road levies (iii) congestion pricing for entering highly congested areas.

Meanwhile, the world is moving into a CASE (connected, autonomous, shared, electric) mobility ecosystem where the vehicles traveling on roads are making the first dynamic shift since horse and buggy. This shift presents many risks to the current funding sources for roads:

  • Gas taxes and emissions tax are likely to diminish with the rise in electric vehicles and increase efficiency of combustion engines
  • Car sales tax will reduce if autonomous and shared mobility brings the expected reduction in car ownership (post-Covid)
  • Willingness to pay for tolls is projected to decrease as we start to use our time more productively in shared and autonomous vehicles

Depending on how the money is funneled to the road, these changes will form larger or smaller risks to specific roads. Roads, such as toll roads, that are financed directly from the sources above (rather than the money going into a larger pot, which is funneled back to roads), will potentially suffer the most. Fitch Ratings actually published a report emphasizing the risks CASE poses to toll roads, which could lead to a reduction in toll road credit ratings and credit terms in the future.

Roads have long been woven into the fabric of society as a public utility, used to move the economy and facilitate daily life. While this long tradition of connecting places with people will withstand the passage of time, roads are facing the biggest shift since the invention of asphalt. Mobility is getting smarter and introducing changes that threaten the old funding models of our road networks. Our roads are getting smart, and the business of roads must get smarter too.

Today, road construction, management, and maintenance are funded predominantly through taxes and charges. The main taxation that traditionally is allocated to roads (albeit not necessarily directly) comes from three sources: (i) Tax on new vehicles purchases (ii) Tax paid for new vehicles tied to the carbon emissions of the vehicle (iii) Tax paid on fuel purchased. Likewise, charges are also split into three types: (i) direct tolls for using a specific road (ii) heavy good vehicle road levies (iii) congestion pricing for entering highly congested areas.

Meanwhile, the world is moving into a CASE (connected, autonomous, shared, electric) mobility ecosystem where the vehicles traveling on roads are making the first dynamic shift since horse and buggy. This shift presents many risks to the current funding sources for roads:

  • Gas taxes and emissions tax are likely to diminish with the rise in electric vehicles and increase efficiency of combustion engines
  • Car sales tax will reduce if autonomous and shared mobility brings the expected reduction in car ownership (post-Covid)
  • Willingness to pay for tolls is projected to decrease as we start to use our time more productively in shared and autonomous vehicles

Depending on how the money is funneled to the road, these changes will form larger or smaller risks to specific roads. Roads, such as toll roads, that are financed directly from the sources above (rather than the money going into a larger pot, which is funneled back to roads), will potentially suffer the most. Fitch Ratings actually published a report emphasizing the risks CASE poses to toll roads, which could lead to a reduction in toll road credit ratings and credit terms in the future.

New Funding Stream to Replace Old Funding Streams

While history would tell us to simply shift what we tax and who, we believe there are alternative sources of financing that roads can access. Road operators, especially high traffic motorways, are at a crossroads in the services they provide and re-envisioning the future of roads. Many road operators are changing course from passive operators, to active participants in the future of mobility. Increasingly prevalent ‘Smart Roads’ are able to collect and analyze data from their roads in real-time, forming a live ‘digital twin’ of their asset including the precise movements of every single vehicle on the road. This data, and the insights it provides, creates a more proactive, predictive, and productive roadway. Today, this data is used to better manage traffic, but its potential is far greater. By creating data from the roadways, road operators can supply unique information to road users, provide value-adding services to the wider transport ecosystem, and ultimately, form the necessary enabler for a connected and autonomous world.

‘Smart Roads’ have many value-adds for road operators: improving safety for drivers and staff, enabling the full potential of our connected mobility vision, and even the responsibility road operators have to provide the best network of road possible. However, here we’re going to look at the future of ‘Smart Roads’ as a business model for a new funding stream potential and the gap it will fill in the aging way we currently fund roads.

We believe there are two ways ‘Smart Roads’ can expand the revenue model for road operators:

  1. Tap the larger mobility ecosystem to leverage, sell, and monetize ‘Smart Road’ data. Creating unique streams of data that are relevant to many stakeholders. For example, ‘Smart Road’ data can (i) support OEMs’ demand for V2X data in order to operate in level 3 and 4 of autonomy, (ii) improve the efficiency of logistics companies by providing lane-level traffic flow and risks, (iii) help insurance companies improve risk management and liability assessment.
  2. Utilize ‘Smart Road’ data to automate, integrate, and change the way we deal with congestion, accidents, and traffic flow to ultimately cut costs in operation and maintenance of roads across ecosystem players. Having real-time, integrated data allows road operators to respond to conditions faster, cheaper, and safer. For example, ‘Smart Road’ data can (i) improve funding KPIs like response time to incidents and congestion, (ii) reduce wasted funds on weather management like over-salting, and (iii) save lives and expenses from unidentified black ice and other hazards. By using ‘Smart Road’ data, road operators can streamline response to help most importantly save lives but also decrease costs in responding to conditions on roadways.

The data created on smart roads is valuable to an array of stakeholders, and ultimately buyers. Because of this demand for such potential data, innovation has poured into the market to provide a marketplace for mobility data, an exchange for the ecosystem players to integrate data and gain actionable insights. However, many of these technologies miss the point where they aggregate data that already exists. Road operators have the power to create unique value through unique data that is worth more to the market because it is more dependable in timing, accuracy, and granularity.

Rise of the Innovative Road Operator

Whether we take the lens of increasing revenues or decreasing costs, ‘Smart Roads’ enable a new business model to exist for road operators, with new revenue streams from not just taxpayers and drivers but rather other stakeholders that have not been involved before. ‘Smart Roads’ have the potential to change the way the world funds roads while also reaping the benefits of real-time data and insights.

In order to create this future vision, road operators need to start their journey to ‘Smart Roads’. To prepare data to be monetized and capable of cost savings, data from road operators will need to be unique, rather than replicate the data that can be collected from vehicles directly. This means it will need to be (i) comprehensive, covering the full road and sensing all vehicles (ii) have high frequency so it remains relevant and be available at (iii) low latency so it can be used in real time when needed. To reach this goal, different operators will have different gaps to fill; however, the below action plan is a prescription of the best first steps to take:

Action Plan:

  1. Identify your current blindspots: This is important to analyze in both a traditional and nontraditional check. First is understanding the blindspots in your road network you do not have access to data on the current account of activity on the road. Another definition of this is analyzing where your latency and other barriers prevent access to real-time data.
  2. Understand your users: What data will benefit users the most? From the lens of monetizing your data, users will require access to data not already available. Road operators need to understand what users want and how to provide it. In order to create synergies and cost savings, road operators should look at the stakeholders in their ecosystem to understand what data they use and how it can be improved.
  3. Identify areas of risk in road networks: Road operators should look at their road network and find the critical paths where incidents and congestion are most prone and also look at areas where CAVs will be the most difficult to implement. By concentrating on these high risk areas, pilots and new methods to innovate can be prioritized and help solve these problems faster.

At Valerann, we are working to empower road operators with the data needed to operate in a future-ready mindset. Valerann is a ‘Smart Road’ enabler, partner, and believer in the future role of ‘Smart Roads’ in the mobility ecosystem of the future. We believe this data can reshape the way we fund roads. Please connect us to find out more.