Salik IPO: What does 'dynamic pricing' for road tolls mean and how could it work in Dubai?

Salik, Dubai's toll operator, plans to introduce “dynamic pricing” at its toll gates to increase revenue and reduce congestion, it said on Monday, as it revealed details about its upcoming listing on the Dubai Financial Market.

Dubai's government plans to sell a 20 per cent stake - or 1.5 billion shares - in the emirate's toll operator later this month.

Salik, which announced the possibility of launching dynamic pricing as part of its future growth plans, said the system would be based on similar models used in other cities such as Dallas and Stockholm.

The National takes a closer look at how this transport pricing system works and what it could mean for commuters in Dubai.

What does dynamic pricing mean?

Pricing in transportation is broadly divided into static (fixed prices), variable (differs depending on the time or the day) and dynamic (prices vary depending on changes in demand), said Ashley Koussa, partner at PwC's transport and logistics division.

Dynamic pricing on roads is a mechanism of adjusting the toll charges depending on the traffic conditions, the number of people in the vehicle and the model of the vehicle, according to Andre Martins, head of transport, infrastructure and services for India, Middle East and Africa at Oliver Wyman.

Users will pay higher road tolls during peak hours and lower rates at off-peak times.

“The idea is to help change behaviours and incentivise people to use the roads during less congested hours,” Mr Martins said.

Ultimately, the aim is to minimise congestion, manage traffic, reduce travel times, decrease carbon dioxide emissions and convince people to use alternative routes and modes of transport, he said.

Dynamic pricing is used to “balance the load” on the road transport system within a defined area by constantly adjusting the price of passing a toll gate, or for using a specific lane, throughout the day depending on the traffic volume, Mr Koussa said.

“Over time, users have the option to decide between cost-saving versus speed and comfort, and can therefore make decisions to travel at off-peak times, use alternative routes or use other forms of transport,” he said.

How would it work?

Dynamic pricing of road tolls is a smart system that uses real-time data on the traffic conditions and adjusts the rates accordingly. It takes into account variables such as the time of day, the number of people in a vehicle and the most-used lanes. In the future, it could also take into account the vehicle model and the level of CO2 emissions.

Dubai, which expects the population to nearly double in the next 20 years, is seeking ways to mitigate the accompanying traffic increase.

Expanding the number of toll gates and using dynamic pricing system will help alleviate congestion and encourage more use of public transport.

“People will tend to complain a bit in the beginning because it is new, but over time they will understand how it works, and the pricing will help change behaviour,” Mr Martins said.

How have other cities used it?

Major cities such as London, Stockholm and Singapore have successfully implemented the dynamic pricing system, Mr Martins said.

Singapore recorded a 24 per cent reduction in traffic and Stockholm registered a 20 per cent decrease in congestion by adopting the system, which helped daily commuters, he said.

Oliver Wyman expects Dubai to achieve similar results.

Will toll prices increase?

Commuters in the emirate can expect to pay a higher price with the introduction of the dynamic pricing system, transport analysts say.

“It would be expected that total value paid for tolls in Dubai will increase, because traffic is up and there's a need to mitigate congestion, so we expect tolls to climb higher. But people will find alternative ways to reduce their bill,” Mr Martins said, referring to car-sharing, using different lanes and opting for alternative routes.

“It's not necessarily to monetise more, but from a quality of life perspective, it's about managing traffic flows and reducing congestion,” he said.

For the mechanism to be successful, it must use smart data generated by the toll system to understand the demand and supply of traffic flow, how to structure the right pricing at a certain time of day, factor in carbon dioxide emissions and manage the public opinion perception that this is about helping the city's residents, Mr Martins said.

Toll fares are usually increased during peak hours in order to manage the traffic, so if dynamic pricing is introduced, it is “almost certain” drivers will pay more during the peak hours, added Vitali Bielski, director of the mobility practice at Frost & Sullivan.

The pricing can vary depending on the configuration of the toll system and other factors such as the complexity of the system, he said.

In some cities, like Stockholm, it would range from €2 to €3.5 ($1.98 to $3.47) per passage but the amount would be significantly higher in cities like London, he said.

The extent of behaviour change after introducing the system will depend on the type of driver.

“Businesses like food and grocery deliveries might not have any other options but to absorb the cost or to pass it on to their customer. In case of individuals, it depends on whether free alternative routes are available. In case of Dubai, if the reach of the Salik network is not changed, drivers are likely to use Salik-free alternatives,” Mr Bielski said.

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