WORLD BANK TECHNICAL PAPER NO. 409 w ~~~wTp4QOq Work in progress for public discussion may 11q9 Commercial Management and Financing of Roads _~~~~~~~~~~~~~~~~~W . . '5 Y. t. ~~~~~fll G;....^t i///l (;. 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No. 362 Foley, Floor, Madon, Lawali, Montagne, and Tounao, The Niger Household Energy Project: Promoting Rural Fuelwood Markets and Village Management of Natural Woodlands No. 364 Josling, Agricultural Trade Policies in the Andean Group: Issues and Options No. 365 Pratt, Le Gall, and de Haan, Investing in Pastoralism: Sustainable Natural Resource Use in Arid Africa and the Middle East No. 366 Carvalho and White, Combining the Quantitative and Qualitative Approaches to Poverty Measurement and Analysis: The Practice and the Potential No. 367 Colletta and Reinhold, Review of Early Childhood Policy and Programs in Sub-Saharan Africa (List continues on the inside back cover) WORLD BANK TECHNICAL PAPER NO. 409 Commercial Management and Financing of Roads Ian G. Heggie Piers Vikers The World Bank Washington, D.C. Copyright © 1998 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the. United States of America First printing May 1998 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the proce- dures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data in- cluded in this publication and accepts no responsibility for any consequence of their use. 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Cover photos clockwise from top left: "Road construction in Ghana," Ministry of Roads & Highways; "Labor-based road rehabilitation in Lesotho," Labor Construction Unity, Ministry of Works; "Periodic maintenance in Colombia," Ian G. Heggie; and "Microenterprise road maintenance unit in Colombia," Ian G. Heggie. ISSN: 0253-7494 Ian G. Heggie is a roads adviser and Piers Vickers is a rural transport specialist in the transport division of the World Bank's Transportation, Water, and Urban Development Department. Library of Congress Cataloging-in-Publication Data Heggie, Ian Graeme. Commercial management and financing of roads / Ian G. Heggie, Piers Vickers. p. cm. - (World Bank technical paper; ISSN 0253-7494; no. 409) Includes bibliographical references (p.). ISBN 0-8213-4237-1 1. Roads-Finance. 2. Roads-Maintenance and repair-Economic aspects. I. Vickers, Piers, 1967- . II. Title. III. Series. HE336.E3H43 1998 388.1'14-dc2l 98-19383 CIP Contents Foreword v Abstract vi Abbreviations vii Acknowledgments viii Overview 1 Part I. Background 5 1. Introduction 7 2. The State of the Road Sector 9 The Importance of Roads and Road Transport 9 The Impact of Poor Road Maintenance 11 Past Efforts at Reform 14 Regional Programs 15 Part II. The Basic Issues 17 3. A Diagnosis 19 The Institutional Framework 19 Human Resource Constraints 19 Inadequate Financing Arrangements 22 Lack of Clear Responsibilities 24 Ineffective Management Structures 27 Weak Management Systems 28 Inefficient Work Methods 29 4. Commercializing Roads: The Four Basic Building Blocks 32 Assigning Responsibility 32 Creating Ownership 32 Ensuring Secure and Stable Financing 33 Introducing Soundi Business Practices 33 iv Commercial Management and Financing of Roads Part III. An Agenda for Reform 35 5. Assigning Management Responsibility 37 Basic Principles 37 Managing the Road Network 38 Managing Road Traffic 49 Key Conclusions and Recommendations 5 1 6. Creating Ownership 53 The Concept of Ownership 53 Organizations Representing Road Users 54 Ways of Involving Road Users 55 Setting Up a Road Board 57 Key Recommendations and Conclusions 62 7. Ensuring an Adequate and Stable Flow of Funds 65 Setting Clear Market Signals 65 Pricing and Cost Recovery Policies 72 Key Recommendations and Conclusions 77 8. Managing the Revenues 80 Linking Revenues and Expenditures 80 Types of Road Funds 80 Characteristics of Existing Road Funds 83 Problems with Conventional Road Funds 86 Setting Up a Commercially Managed Road Fund 88 Key Recommendations and Conclusions 101 9. Introducing Sound Business Practices 103 Defining the Corporate Mission 103 Separating Planning and Management from Implementation of Road Works 104 Identifying Effective Ways to Contract Out 106 Staffing Requirements 108 Management Structure 111 Management Information Systems 112 Financial Accounting Systems 114 Controlling the Quality of Road Works 118 Managerial Autonomy and Accountability 122 Key Conclusions and Recommendations 123 Part IV. Annexes 127 Annex 1. Length of Road and Estimated Asset Values in Selected Countries 129 Annex 2. The Inverse Elasticity Rule 130 Annex 3. Estimating Road-User Charges: A Worked Example 132 Annex 4. Review of Selected Road Funds 139 Annex 5. Draft Road Fund Administration Bill 145 Annex 6. Standard Format for Setting Up a Road Fund Under Existing Legislation 153 References 157 Foreword The road sector is big business. If main road agen- and put on a fee-for-service basis. In other words, the cies were publicly listed companies, they would road sector should be commercialized. This involves rank among the Fortune Global 500. The Japan creating an arm's-length agency to manage at least the Highway Public Corporation manages assets roughly main road network on a commercial basis, introducing equal in value to those of General Motors, the U.K. an explicit road tariff, making sure that road users pay Highways Agency is in the same league as IBM and for extra spending on roads, depositing the proceeds AT&T, while a relatively small road agency like the from the road tariff into a road fund, appointing a rep- Roads Department in South Africa is in the same league resentative public-private board to oversee manage- as Northwest Airlines. Given the size and importance ment of the road fund, establishing a small secretariat of the road business, it is extraordinary that these agen- to manage the day-to-day affairs of the road fund, and cies are still managed tlhrough a government depart- ensuring that all works financed from the road fund are ment and financed through general budget alloca- subject to rigorous technical and financial auditing. tions-in the same way that governments manage the This study is an international edition of a report on health and education sectors. They keep their accounts managing and financing roads first published as a on a cash basis, have no balance sheet, and are sub- World Bank technical paper in the Africa Technical jected to little market discipline. And yet what is often Series. The paper has been expanded to include exam- a country's largest business is perfectly capable of ples of sound management and financing practices standing on its own feet. from all parts of the world-drawing on examples from Most government departments do not have a com- industrial, developing, and transition economies-and mercial orientation, ancl general budget financing is a to include more details on institutional management failure for commercial undertakings. Government structures and road funds. Support for this interna- budgets were not designed to finance a major business. tional edition was provided by the Swiss Agency for Roads are big business and should be managed like a Development and Cooperation and the New Zealand business. They should be brought into the marketplace Consultant Trust. Jean-Francois Rischard Vice President Finance and Private Sector Development v Abstract In developing and transition economies 60 to 80 per- financed. Indeed, we can now draw working conclu- cent of all passenger and freight transport moves by sions about the most effective ways to promote sound road, and roads provide the main form of access to policies for managing and financing road networks. most rural communities. Yet most of the 11 million The emerging central concept is commercialization: kilometers of roads in these countries are poorly man- bring roads into the marketplace, put them on a fee- aged and badly maintained. Harral and Faiz (1988) for-service basis, and manage them like a business. estimated that in the 85 countries that had received This contrasts with the usual procedure of managing World Bank assistance for roads, allocations for main- roads through a government department and financing tenance had been so low that a quarter of the main them through general budget allocations-in the same paved roads outside urban areas and a third of the main way that the health and education sectors are managed unimproved roads had to be reconstructed. Over the and financed. But roads do not need to be managed like past two decades the situation has generally worsened, a social service. Instead, they can be commercialized with allocations for maintenance often falling below 50 by introducing an explicit road tariff for users, making percent of requirements. sure the road agency does not siphon funds from other Two major initiatives were launched to better under- sectors; managing the proceeds from the road tariff stand the underlying causes of such poor road mainte- through a representative road board; and handling nance policies and to explore ways of establishing a day-to-day management through a small secretariat secure and stable flow of funds: the Africa Road subject to explicit legal regulations and to technical Maintenance Initiative and the PROVIAL program in and financial audits. A number of countries in Africa, Latin America. More modest initiatives are currently Asia, Eastern Europe, Latin America, and the Middle under way in Asia and the Middle East. These programs East are implementing such reforms designed to pro- have clarified why roads are poorly managed and under- mote commercialization. vi Abbreviations General ADT Average daily traffic AGETIP Agence dexecution des travauz d'interet public contre le sous-emploi ESCAP United Nations Economic and Social Commission for Asia and Pacific HDM III Highway Design and Maintenance Model, Version Three IMF International Monetary Fund NGO Nongovernmental organization OECD Organisation for Economic Co-operation and Development RMI Road maintenance initiative SDC Swiss Aglency for Development and Cooperation VOCs Vehicle operating costs Units of measurement $ U.S. dollars ECU European Currency Unit ESAL Equivalent standard axles ESAL-km Equivalent standard axles times distance traveled GDP Gross domestic product GNP Gross national product GVW Gross vehicle weight GVW-km Gross vehicle weight times distance traveled IRI International Roughness Index km Kilometers m/km Meters per kilometer NPV Net present value vpd Vehicles per day veh-km Vehicles times distance traveled vii Acknowledgments This policy study was prepared by Ian G. Heggie, Vialidad, Chile), Shunsuke Otsuka (Ministry of Roads Adviser, and Piers Vickers, Rural Transport Construction, Japan), David Rendall (Transit New Specialist on secondment from the U.K. Department for Zealand), Richard Robinson (consultant), Dezso Rosa International Development, under the direction of (Directorate for Road Management, Hungary), Adnan Jean-Frangois Rischard, Vice President, Finance and Safadi (Ministry of Public Works and Housing, Jordan), Private Sector Development. The study is based on Ole Sylte (consultant), Valentin Silyanov (Moscow work carried out under regional capacity-building ini- State Automobile and Roads Technical University, the tiatives in Africa, Asia, the Middle East, and Latin Russian Federation), Andras Timar (European Bank for America, which have been working to make manage- Reconstruction and Development), and Gunter ment and financing of roads sustainable in the long Zietlow (International Road Federation/Deutsche term. The earlier work in Africa was summarized in Gesellschaft fur Technische Zusammenarbeit). Heggie (1995b). This international edition of the poli- Members of the World Bank's Roads and Highways cy study represents a much expanded version of the ear- group also provided helpful support and advice, lier technical paper. Work on the international edition including Jaffar Bentchikou (AFTT2), Sven-Ake was supported by the Swiss Agency for Development Blomberg (ECSIN), Anders Bonde (ECSIN), Rodrigo and Cooperation, the New Zealand Consultant Trust Archando-Callao (TWUTD), Christopher Hoban Fund, and the World Bank. (SASIN), Jeremy Lane (ECSIN), Peter Parker (ECSIN), Substantive inputs to the study were made by William Paterson (EASTR), Navaid Qureshi (Resident Robert Butler (consultant), The Babtie Group (consul- Mission, Pakistan), Pedro Taborga (ECSIN), Antti tants), Heather Chalcraft (FedHaul, Zambia), Peter Talvitie (OEDST), and Jacques Yenny (ECSIN). The Collis (U.K. Highways Agency), Csaba Csapodi text was edited and formatted by Communications (Directorate for Road Management, Hungary), Robin Development, Inc. Dunlop (Transit New Zealand), Miranda Douglas The study was reviewed by Robin Dunlop (Transit (VicRoads, Australia), Albert du Plooy (South African New Zealand), Kenneth Gwilliam (TWUTD), Jukka Roads Department), In-Hee Nam (Bureau of Public Isotalo (Finnish National Road Administration), Henry Roads, the Republic of Korea), Martin Fletcher (Transit Kerali (University of Birmingham), Martin Snaith New Zealand), Matti Hermunen and Jukka Isotalo (University of Birmingham), and Mel Quinn (U.K. (Finnish Road Administration), Vilnis Millers (Latvian Highways Agency). The authors thank the reviewers Road Fund), Raja Nowsherwan (National Highway for their comments, which have been incorporated into Authority, Pakistan), Alfonso Olavarrieta (Direcci6n de the text. viii Overview R oad transport grew rapidly after World War II, deferred on road maintenance increases vehicle oper- when countries expanded their road networks ating costs (VOCs) by about $2 to $3. In Africa the considerably and built new roads to open up land for extra costs due to insufficient maintenance amount to development. By the end of the 1980s there were about about $1.2 billion per year, while in Latin America and 11 million kilometers (kin) of roads in developing and the Caribbean the cost is $1.7 billion per year. In India transition economies. These roads now carry 60 to 80 VOCs could be reduced by an estimated $4 billion per percent of all passenger and freight transport. They also year through better road maintenance. Moreover, provide the only form of access to most rural commu- about 75 percent of these costs in developing and tran- nities. In terms of assets, employment, and turnover, sition economies are paid for with scarce foreign these roads are truly big business. For some develop- exchange. Not surprisingly, road user organizations, ing and transition countries roads are their largest particularly those in countries like Jordan, Pakistan, assets, with replacement costs amounting to well over the Philippines, South Africa, Surinam, and Zambia, $500 billion. are willing to pay for roads provided the money is in In spite of their importance, most roads in these fact spent on roads and the work is done efficiently countries are managed and financed by bureaucratic The Africa Road Maintenance Initiative (RMI), the road departments in the same way that social services PROVIAL program in Latin America, and similar coun- are managed and financed. Traffic congestion is pan- try initiatives in Asia and the Middle East have shown demic, and there is a huge backlog of deferred mainte- that roads are poorly managed and underfinanced nance. In the 85 countries that had received World because of weak institutional frameworks. Road con- Bank road assistance during the 1980s, maintenance struction and finance are not market-driven, and there had been so low that nearly 15 percent of the capital is no clear price for roads, as road expenditures are usu- invested in main roads-roughly $43 billion-had ally financed from general tax revenues. Roads are pro- been eroded. During the past 20 years these countries cured through appropriations and compete against spent far too little on capital investment and routine other claims. Other weaknesses also prevail in the road and periodic maintenance. They have been consuming sector: poor terms and conditions of employment, lack their assets. Restoring only the roads for which it is eco- of clearly defined responsibilities, ineffective and weak nomically justified to do so and preventing further management structures, and little managerial account- deterioration will now require annual expenditures of ability. A compelling remedy is real or surrogate mar- at least $5 billion over the next 10 years. Another $5 ket discipline, in the form of competition, that moti- billion may be needed to expand and modernize con- vates road agency managers to cut waste, improve gested road networks and to improve road safety. operational performance, and allocate resources The costs of poor road management and inadequate efficiently road financing are borne primarily by road users. In The strategic mechanism for promoting competition rural areas, where roads often become impassable in is commercialization: bring roads into the marketplace, bad weather, agricultural output suffers. When a road put them on a fee-for-service basis, and manage them is allowed to deteriorate to poor condition, each dollar like a business. This is not the same as earmarking gen- 1 2 Commercial Management and Financing of Roads eral budget revenues as a means of capturing more of led to the establishment of a growing number of semi- the government's overall budget for the road sector. autonomous road agencies that manage the trunk road Earmarking has never worked, as is shown in this network on a commercial basis. report. Commercialization is different and requires Regional road networks are often extensive, and complementary reforms in four other important areas. they can thus be managed like the main road network. These four basic building blocks focus on: clarifying But this is rarely true of rural road networks-local responsibility by assigning roles difinitively; creating government entities are often small and lack both tech- ownership by involving road users in the management nical capacity and resources. The difference is essen- of roads to encourage better management, to win pub- tially a matter of scale. Countries have attempted to lic support for road funding, and to constrain spend- deal with this problem in one of four ways: ing to what is affordable; stabilizing road financing by * Shifting the legal responsibility for rural roads to a securing an adequate and stable flow of funds; and central government department or to a specialized strengthening management of roads by introducing rural roads agency. This tends to improve road condi- sound business practices and improving managerial tions initially, but at the expense of further weakening accountability. local governments, restricting local input into the plan- ning process, threatening long-term sustainability, and damaging efforts to decentralize responsibility. Assigning Responsibility * Establishing a project implementation agency to plan and implement road projects on behalf of local The aim of the first building block is to create a con- governments. This solution works, although current sistent organizational structure with clearly assigned arrangements are not subject to competitive bidding responsibilities for managing different parts of the road and are overly reliant on donor funding. network, including road traffic. This requires allocat- * Bringing several local government agencies together ing responsibility among different departments and to procure goods and services collectively These levels of government, and allocating responsibility arrangements, known as joint-services committees, between communities and road agencies of the central offer many advantages, though the agreements tend to and local government. To work, these arrangements be complex. need an accurate road inventory, a functional classifi- - Contracting out the planning and management cation of roads, designation of appropriate road agen- functions to consultants who may work for several cies, formal assignment of responsibility among agen- local government road agencies. The local government cies, and a clear definition of the relationship between agency remains responsible for the roads, but planning the road agency and the parent ministry. and management is delegated to a technically qualified Responsibilities to be assigned include operations, third party. maintenance, improvements, road network develop- How urban roads are managed depends essentially ment, traffic management, accident and claims resolu- on the size of the urban area. In large metropolitan tion, and assessment of environmental impacts. areas roads may be managed by a citywide authority The main trunk road network is usually managed that has total responsibility for all roads and highways; through a central government department, typically the city's different political jurisdictions, which have the ministry of works. Main roads are costly to build total responsibility for the roads and highways within and maintain. With growing traffic, some of these are their ownjurisdictions; a strategic authority-an elect- now operated as toll roads. Many countries make the ed authority or a regional or state body-that takes main road agency responsible primarily for high-vol- responsibility for certain strategic roads or functions ume (national) roads and expressways and are attempt- but leaves all other roads and highways under local ing to use the private sector to manage state toll roads jurisdiction; or a strategic authority made up of repre- or to build and operate them under concession agree- sentatives from each local jurisdiction. Works may be ments. Rethinking the role of the main road agency has implemented by each body using its own directly Overview 3 employed work force and/or contractors, or it may be Ensuring Ownership implemented by the strategic authority, which then becomes responsible for delivering the services to each This second building block requires the active partici- jurisdiction. pation of road users to help win public support for Large independent towns and cities may manage secure and stable road funding. But support for more their road networks along the same lines as in large road funding through a user-pay or fee-for-service metropolitan areas. Typically the urban area has total arrangement requires that steps be taken to ensure that responsibility for its own roads, receiving varying road agencies do not operate as public monopolies and inputs from local, regional, or national governments. that no more is spent on roads than the country can The urban area is usually free to deliver services how- afford. It is thus critical to involve road users in road ever it sees fit, although it may be subject to guidelines management-a precondition for getting them to pay laid down by the region or national government. The for roads willingly What is needed is a partnership tendency today is to use contractors for most of the between road users and government to strengthen road work. In small urban areas where the urban govern- management and raise appropriate finances. At the ment often lacks the scale necessary to manage its own national and regional level road users can be effective road network, responsibility for managing roads may by serving on popularly constituted and representative rest with a regional or national agency Alternatively, road management boards, as in Finland, Ghana, the urban authority may be responsible for managing Malawi, South Africa, Sweden, and Zambia. Most of nonstrategic roads or carrying out a limited range of these boards use outreach programs to keep their con- functions (for example, street cleaning, pothole stituents and the public informed about the status of repairs), while a regional or national agency is respon- the road sector and its management. sible for strategic roads or larger-scale works. Most core functions will be done under contract. Managerial responsibility at the lowest level of the Maintaining Steady Financing road network is poorly defined. Often agencies have few technical skills and scarce funding. Some countries The third building block seeks adequate and stable treat the problem by creating a special class of roads funding. Most governments cannot increase budget funded on a cost-share basis. Local inhabitants are allocations given present fiscal conditions. Improved given incentives to assume ownership of the roads and means for mobilizing revenue are essential. Several organize and manage roacl cooperatives, which are at countries are addressing this issue by separating road least partially financed by the central and local gov- financing from the government's consolidated budget. ernment. The community contribution may be in the They have introduced an explicit road tariff consisting form of cash or volunteer labor, with oversight and primarily of vehicle license fees and a fuel levy. The rev- technical advice provided by the rural road agency enues are collected independently of the government's Regulatory responsibilities (design standards, signs sales and excise taxes and are deposited directly into a and signals, parking, congestion, routing of heavy road fund. In some cases the road tariff is collected vehicles) for all types of roads are usually assigned to under legislation that defines it as a tariff rather than as the main road agency, though these may be delegated part of the government's tax revenues (that is, such road to other road agencies or competent bodies, especially funds are road public utilities). The tariff is generally set responsibilities that are likely to have a significant to cover the full cost of operating and maintaining main urban impact. Responsibility for enforcing axle-weight roads and part of the cost of operating and maintaining regulations is generally assigned to the main road urban and rural roads. Some countries finance only agency, ideally with the cooperation of the road trans- some rehabilitation and minor new works through the port industry. The main road agency may also carry out road tariff, while others finance all road spending. vehicle safety and vehicle emission inspections and The road fund should be managed by a representa- assess environmental impacts. tive public-private board. At least half the members 4 Commercial Management and Financing of Roads should come from outside government-chambers of agerial accountability. They also encourage objectivity commerce, the road transport industry, farmers orga- in setting priorities, adopting quality assurance pro- nizations, and professional institutions that have a grams, comparing in-house work to that done by con- strong vested interest in efficiency and honesty. The tractors, and evaluating appropriate technology for day-to-day affairs of the road fund are then managed road works. Finally, auditing procedures also must be by a small secretariat headed by a board-appointed improved to ensure that the public gets value for chief executive officer (CEO). Legal regulations govern money from road spending. management of the road fund, requiring regular tech- nical and financial audits. This system is, in effect, commercial management of the road fund. It current- ly prevails in countries like Latvia, Lesotho, Malawi, These four building blocks represent the core reforms. New Zealand, South Africa, and Zambia They are interdependent and, ideally, should be imple- mented in a complementary fashion. All are necessary The system for managing and financing roads cannot Promoting Commercial Management be reformed until responsibilities are clearly estab- lished. The financing problem cannot be solved with- The final building block calls for the creation of a busi- out the strong support of road users. The support of nesslike road agency. Road users involved in the man- road users cannot be secured without ensuring that agement of roads generally press for sound business resources are used efficiently And resource use cannot practices to ensure value for money. They expect a be improved without controlling monopoly power, clear, unambiguous corporate mission and a strategy to constraining road spending, and increasing manageri- separate planning and management of road works from al accountability. implementation. This may involve contracting out There is, however, scope for flexibility. The reforms implementation to the private sector, learning effective can be introduced in different ways, and the content of ways of contracting out, recruiting and paying capable each building block can differ depending on country staff, and building sound management structures and circumstances. Reforms can move sequentially or in appropriate management information systems. These parallel, and both sequencing and pace can vary. But in reforms improve market discipline, give managers the the end all four building blocks must be in place to freedom to operate commercially, and strengthen man- ensure that the reform agenda is sustainable. Part 1. Background 1. Introduction This report is an international edition of an earlier the link between poor road conditions and higher World Bank technical paper on managing and VOCs and, even when they did, were rarely organized financing roads (Heggie 1995b). The technical paper to act. The cause of the problem was a lack of public was well received, and the World Bank was asked to pro- accountability-which could not be solved by addi- duce a revised and expanded version suitable for use in tional financial resources alone. The institutional base all of the World Bank's regions: Africa, East Asia and the of the road sector had to be reformed, including orga- Pacific, South Asia, Europe and Central Asia, Middle nization, staffing, and performance. East and North Africa, and Latin America and the Harral and Faiz (1988) offered few specific solutions Caribbean. The technical paper was therefore expanded but did give some direction. It pointed out that road to include examples of sound management and financ- agencies were usually public monopolies and had too ing practices from all parts of the world-industrialized, many responsibilities, including planning, controlling, developing, and transition economies-and more and executing construction and maintenance pro- details on institutional management structures and road grams. Furthermore, they devoted too much staff time, funds. funds, and facilities to executing road works. In most The report also follows up on the World Bank's pol- countries planning, controlling, and executing should icy study, Road Deterioration in Developing Countries be separated and the execution of road works should (Harral and Faiz 1988). According to that study in the be transferred to the private sector or to a specialized 85 countries that had received World Bank assistance government construction agency so as to clarify for roads, allocations for road maintenance had been responsibilities, improve incentives, and strengthen so low that nearly 15 percent of the capital invested in accountability. Road agencies also needed better man- main roads-roughly $43 billion, or about 2 percent agement information systems to better plan their of these countries' GNP--had eroded because of poor investment and maintenance programs. Finally, the maintenance. I As a result a quarter of the main paved study argued that internal accountability had to be road network, together with a third of the main unim- improved, perhaps by mobilizing the media and non- proved network, had to be reconstructed. Re- governmental organizations (NGOs) to help politicians construction-costing $40 to $45 billion worldwide- and the public become aware of the high costs of insuf- could have been avoided by spending only $12 billion ficient maintenance. on preventive maintenance. The study also argued that Harral and Faiz (1988) was an important milestone if countries did not improve road management, the in the debate on road maintenance policies. It gave eventual costs of restoration would increase two to impetus to a number of initiatives designed to under- three times, and the vehicle operating costs (VOCs) by stand the underlying causes of poor road management. even more. It also encouraged road agencies to address these insti- There are several reasons for this calamity. Road tutional issues through a clearly articulated reform pro- authorities were not directly affected by road deterio- gram. The Road Maintenance Initiative (RMI), a major ration and came under no immediate pressure to pre- component of the Sub-Saharan Africa Transport Policy vent it. Road users, on the other hand, were slow to see Program, was one of these initiatives, as was the 7 8 CommerCial Management and Financing of Roads PROVIAL ("for roads") program in Latin America. management and staff, officials in other development These programs did a great deal to improve the under- agencies, and senior officials in developing and transi- standing of why roads were poorly managed and tion economies-all those interested in improving underfinanced. Indeed, we can now draw tentative management and financing of roads and making them conclusions about the most effective way to promote sustainable in the long term. sound road management policies and the broad out- line of the policies themselves. This report summarizes the lessons learned from these programs, combines Note them with lessons learned from industrial countries, 1. The specific figures were: Africa, $5.0 billion; East Asia and and then develops an overall agenda for reforming road the Pacific, $9.3 billion; South Asia. $8.6 billion; Europe, the management and financing. Middle East, and North Africa, $9.3 billion; and Latin America This report is written for a nontechnical audience and the Caribbean countries, $11.0 billion. These figures and is directed at country policymakers, World Bank excluded estimates for most of the former Soviet Union. 2. The State of the Road Sector This chapter argues that, in spite of the economic historically dominated by other modes of transport are and financial importance of roads in developing now witnessing remarkable expansion in demand for and transition economies, most are poorly managed road transport. In the Russian Federation, which has and badly maintained. The chapter then examines the relied largely on the railway network, the total freight economic impact of poor road maintenance policies, moved by road is expected to increase from 13 percent reviews past attempts to reform them, and outlines to between 22 and 41 percent in the coming years some of the regional initiatives put in place to try to (depending on the rate of economic growth)-and solve them. Russia is currently the second largest freight mover in the world. The hard truth is that roads are the main arteries for moving goods and people in the global The Importance of Roacls and Road Transport economy, and they are becoming increasingly domi- nant. But such growth in demand for road space is Road transport grew rapidly after World War II and is stressing road networks not designed to carry such now the dominant form of transport throughout the high volumes of traffic, especially heavy vehicles. world. The importance of main road networks is gauged by the proportion of total passenger and freight The Size of the Road Business movement made by road and by the size of the road The road business itself is massive in terms of human- business. made assets, investment, and revenues. In response to Most economies now rely heavily on road transport rapid traffic growth, countries expanded their road net- for passenger and freight movement. In Latin America works considerably, particularly during the 1 960s and and the Caribbean road transport accounts for more 1 970s. They also built new roads to open up more land than 80 percent of domestic passenger transport and for development. Expansion has been especially fast in more than 60 percent of freight movement. In Africa Asia. The road network in Korea has grown threefold these proportions are even higher. In the countries of in the past 35 years-to its present length of more than the former Soviet Union roads account for 80 percent 77,000 km. During 1984-94 the road networks in of freight and 58 percent of passenger transport. In the Indonesia, Korea, Malaysia, and Pakistan grew in United States 34 percent of inland surface freight is length by more than 5 percent per year (ESCAP 1995). now transported by road, and 98 percent of inland sur- Most other countries also witnessed road network face passenger transport is made using private cars.1 expansion. For example, Jordan had only 895 km of Respective figures for the Republic of Korea are 38 per- roads in 1950 but more than 7,000 km by 1996. Today cent and 76 percent, and for Egypt are 80 percent and there are nearly 1.5 million km of roads in Africa, 3 mil- 46 percent. lion km in Central and South America, 2.6 million km In almost all countries the proportion of passenger in Asia (excluding China and India), just under 1 mil- and freight transport carried by road is increasing, lion km in the former Soviet Union, and 500,000 km rapidly in some. Traffic in Thailand, for example, has in the Middle East. Recent estimates have put the asset grown 14 percent annually since 1986. Even countries value of the African road network at more than $150 9 10 Commercial Management and Financing of Roads billion, the network in Latin America and the responding to the predicted large growth in traffic by Caribbean at more than $200 billion, and the Indian investing in limited-access, frequently tolled express- highway network alone at $15 billion. ways. The trend is most apparent in East Asia, Latin Investment sums are colossal. The World Bank sup- America, and Eastern Europe. In partial answer to ported more than $5.5 billion of highway and rural Korea's explosive increase in traffic (it is predicted that road projects in 1994-97. The lion's share has gone to by 2001 there will be 24 million vehicles in Korea, one East Asia ($2.2 billion), Latin America and the for every member of the working population) and Caribbean ($ 1.1 billion), and Eastern Europe ($0.8 bil- growing environmental pollution, the Korea Highways lion). The Inter-American Development Bank has been Corporation is constructing a grid-shaped expressway lending approximately $550 million per year, and the network. The plan calls for building 1,800 km of new Asian Development Bank at least $750 million peryear, expressways and upgrading a further 500 km at a cost to support road programs in their respective regions. of about $30 billion. Once the grid is built, no two The industrial world is also not immune to pressures places in the country will be more than half a day'sjour- to build roads. Between 1991 and 1995, for example, ney apart. Similar plans include the Trans Java Tollway the European Investment Bank lent ECU 9.6 billion for System in Indonesia, which aims to construct a further roads and highways to countries within the European 310 km of new expressways by 2000, financed largely Union, making roads the biggest sector in terms of vol- through private investment, and an intercity motorway ume lent. (The above figures are from annual reports program in Thailand, which has been constructing of the World Bank, Inter-American Development Bank, major arterial routes since 1988, its goal being more Asian Development Bank, and European Investment than 4,000 km. Bank.) In 1991 Japan invested $29 billion in new roads, and the United States $6 billion (OECD 1994). Road Revenues and Financing The fundamental change in attitude toward the role The importance of roads is further reflected by the fact of the state and the enormous demand for resources in that spending on roads can absorb as much as 5 to 10 the road sector have forced governments to turn to the percent of a governments recurrent expenses and 10 to private sector to finance a small but significant portion 20 percent of its development budget. Of course, road of total road investment. At least 30 countries have transport can also make up one of the largest contri- adopted private sector road concessions, including six butions to fiscal revenues. For example, road-user in Latin America and the Caribbean, three in Eastern taxes and charges in the United States amounted to $78 Europe, and eight in Southeast Asia. The private sector billion in 1994 (6.2 percent of federal government rev- invested about $18.8 billion in 40 road projects in enue) and in the United Kingdom $33 billion in developing and transition economies between 1982 1995-96 (of which only $10 billion was spent on and 1994-more than two and a half times the value roads). Net fiscal flows from the road sector tend to be of private investment in ports, railways, and airports positively correlated with economic development. combined. It is important to remember, however, that Many of the poorest countries in the world contin- private finance focuses on heavily trafficked roads and ue to subsidize road transport through the general bud- thus applies only to a small part of the overall road net- get.2 Furthermore, in many countries a significant pro- work. For example, in China only 11 percent of the portion of the central governments disbursed and national trunk highway system, itself a small fraction outstanding debt is loans made for roads. The road sec- of the total network, is estimated to generate enough tor also absorbs a great deal of grant finance, mainly for toll revenue to attract 100 percent foreign private procuring construction and maintenance equipment. finance, while a further 36 percent could be funded by Even a relatively small national road agency often owns less costly domestic loans. $25 to $50 million of plant and equipment. Although experience in many industrial economies Thus in terms of assets and turnover, particularly suggests that road building can never outpace the when maintenance is fully funded, the world's roads growth in demand for road space, some countries are are truly big business-generally bigger than railways The State of the Road Sector 11 or national airlines (table 2.1). Road maintenance and just in reducing VOCs, which then translated into less construction is also significant in terms of employ- expensive public transport, but also in expanding pub- ment, although privatization and devolution have led lic services provided in rural areas. As a result educa- to sharp reductions in the number of workers tional enrollment grew substantially, and residents employed in the road sector. were able to visit health professionals more regularly Roads in Rural Areas Although it is now accepted that roads are not enough The Impact of Poor Road Maintenance to overcome the transport burden of the poor, rural roads can, together with the necessary means of trans- Roads in many parts of the world are poorly managed port, provide significant economic and social benefits and badly maintained, usually by bureaucratic gov- in rural areas. While the case for investing in new rural ernment road departments. The poor state of the road roads is controversial and complex and must bejudged network is reflected in the large backlog of deferred country by country, the case for maintaining reason- maintenance. In Africa alone it would cost nearly $43 ably trafficked rural roads is clear. A substantial body billion to fully restore all roads that are classified as in of evidence from many countries demonstrates the cat- poor condition (that is, requiring immediate rehabili- alytic role of rural roads in agricultural development. tation or reconstruction). In Latin America and the Creightney (1993b) summarized the evidence, con- Caribbean the most recent rough estimate (1992) held cluding that transport infrastructure spending often that it would cost about $2.5 billion per year for a improves productive activity in the agricultural sector. decade to remove the backlog and prevent further Roads can also confer social benefits by providing accumulation of deferred maintenance. The estimate of rural communities with access to markets, services, the accumulated backlog of maintenance in employment, and information. World Bank (1996b) Kazakhstan is $1.8 billion, while that in Russia for the found that improving roads had a significant effect not federal highway network alone is $4.5 billion per year Table 2.1 Assets, employrnent, and turnover for roads, railways, and airlines in selected countries, 1995-97 (millions of dollars) Korea, Russian South Chile Ghana Hungary Indonesia Jordan Rep. of Federation Africa Uruguay Main and provincial road agencies Total assetsa 4,144 1,665 4,238 11,148 820 4,870 41,963 21,017 1,080 Staff (number) 4,265 3,935 5,598 20,100 8,000 1,450 2,000b 330c 3,378 Turnoverd 526 189 348 1,267 74 1,498e 1,506 874 94 National railways Total assetsf 537 - 3,968 545 65 8,062 - 7,333.9 118 Staff (number) 5,000 6,081 72,429 35,671 1,223 37,068 1,694,400 64,682 2,115 Turnover 63 7 413 157 11 1,493e 5,064 1,900 28 National airlines Total assetsf 79 negligible 124.1 31 970 6,296 880 861 negligible Staff (number) 2,255 1,164 3,465 14,503 4,796 16,518 13,362 1,056 817 Turnover 173 negligible 297 1,466 392 3,342 1,051 1,166 negligible - Not available. a. Based on replacement costs of existing road network with allowance made for road condition. Calculations are available in annex 1. b. Federal road agency staff only There are 87 regional road agencies, some of which have several thousand employees. c. National road agency staff only. Provincial numbers are unreported. d. Total expenditures on the main and secondary road networks. Country variations are mainly due to variation in the length of paved roads. e. Not including $7.5 billion in new construction. f. Based on the replacement costs of total fixed assets or the replacement costs estimated from historic costs. Source: Country moad agency survey; annex 1: World Bank sector and project reports; World Bank task managers; International Air Transport Association, World Air Transport Statistics; World Bank Railways Database. 12 Commercial Management and Financing of Roads over an unspecified period. Even in industrial $1.4 in operating costs and can save as much as $44 economies such backlogs are common and becoming depending on traffic volume. more so. For example, in 1996 a survey conducted by Though based on the roughness of road pavement, the U.K. Institution of Civil Engineers found that in the analysis does not fully reflect pothole damage. Most Great Britain there was a $5.61 billion maintenance vehicles, particularly loaded freight vehicles, are not backlog on local government roads (96 percent of the designed to deal with the sharp, repeated shocks total public network). Because countries have consis- caused by potholes. Trucking companies are well tently spent far too little on routine and periodic main- aware of the extra costs that poor roads impose on road tenance in the past 20 years, much of the large amount transport operations. According to a recent Russian of money already invested in roads has been eroded. study, trucks operating on unmaintained rural roads during harvest time suffer a staggering 30 percent Who Pays for Poor Maintenance? reduction in vehicle life, with a resulting sharp increase The economic costs of poor road maintenance are in depreciation and hence VOCs.5 An unpublished borne primarily by road users. When a road is allowed study conducted in 1992 by the Federation of Zambian to deteriorate from good to poor condition, each dol- Road Hauliers estimated that the additional costs asso- lar saved on road maintenance increases VOCs by ciated with potholes amounted to more than $14,000 between $2 and $3.3 Far from saving money, cutting per truck per year in spare parts alone-an increase in back on road maintenance increases the cost of road VOCs of 17 percent. Furthermore, this figure did not transport and raises the net cost to the economy as a include extra fuel, accidents, down-time for repair, and whole. Furthermore, when traffic levels rise, as they damage to freight inside the vehicle. It is no wonder have been in most countries, the proportion of total road transport associations around the world keep road transport costs attributable to vehicle operation pressing for better road maintenance and express a will also increase sharply, while those attributable to willingness to pay for it-provided that the money is road expenditures will decline. spent on roads and that the work is done efficiently It is estimated that the extra costs of insufficient This common-sense view, well-supported empirically, maintenance in Africa amounts to about $1.2 billion is at the heart of a functional maintenance policy per year, or 0.85 percent of regional GDP In Latin American and the Caribbean equivalent figures were What are the Long-Term Costs? estimated at $1.7 billion per year in 1992, amounting Poor road maintenance also raises the long-term costs to 1.4 percent of individual countries' GDP The of maintaining the road network. Maintaining a paved Ministry of Surface Transport in India has estimated road for 15 years costs about $60,000 per km. If the that $4 billion of the roughly $39 billion in annual road is allowed to deteriorate over the 15-year period, VOCs could be saved through proper road mainte- it will cost about $200,000 per km to rehabilitate it. In nance-more than twice total annual expenditures on other words, rehabilitating paved roads every 10 to 20 capital and maintenance works on national and state years is more than three times as expensive, in cash roads (Indian Ministry of Surface Transport 1996). terms, as maintaining them on a regular basis, and 35 About 75 percent of these additional VOCs in devel- percent more expensive in terms of net present value oping and transition economies must be paid with discounted at 12 percent per year. scarce foreign exchange. It is no surprise that road For example, a recent unpublished transport sector maintenance and rehabilitation projects produce eco- review for the Republic of Kazakhstan analyzed how nomic rates of return in excess of 35 percent.4 the absence of periodic maintenance, due to insuffi- Four maintenance strategies evaluated in 33 coun- cient funds, affected the national road network. The tries have proven to be highly cost-effective, with analysis demonstrated that if periodic maintenance or annualized benefit-cost ratios varying from 1.4 to 44.8 strengthening was deferred for four years on 7,000 km (box 2.1). In other words, on an annualized basis each of roads, the government would save $180 million per dollar spent on patching and overlays saves at least year in maintenance costs, but would then have to The State of the Road Sector 13 Box 2.1 The impact of road maintenance on vehicle operating costs This example analyzes the impact of road maintenance on The results are summarized below for roads in fair con- VOCs using data from 3:3 countries. It compares a limit- dition for average daily (two-way) traffic (ADT) volumes ed number of potential road maintenance strategies of 300, 1,000, 3,000, and 10,000 vehicles per day (vpd). against a base case consisting of routine maintenance only Thirty percent of the traffic consists of trucks with medi- (that is, off-carriageway work). The four maintenance um loading (that is, the loading corresponds to the aver- strategies evaluated are: age loading for the 33 countries included in the analysis). * Patching, plus 5 cm overlays when surface roughness To make the tables understandable to a wider audience, reaches 6.0 international roughness index (IRI) meters per expenditures on maintenance and VOC savings have been kilometer (in/km). expressed as equivalent annual discounted outlays divid- * Patching, plus 5 cm overlays when surface roughness ed by savings, rather than as total net present value. The reaches 5.0 IRI (in/km). benefit-cost ratio thus shows the equivalent annual (dis- * Patching, plus 5 cm overlays when surface roughness counted) payoff from each strategy. reaches 4.0 IRI (in/km). Road maintenance is shown to be highly cost-effective, * Patching, plus 5 cm overlays when surface roughness with equivalent annual benefit-cost ratios that vary from reaches 3.0 IRI (in/km). 1.4 when traffic volumes are 300 vpd to 44.8 when traf- The evaluation looked at these strategies over a 50-year fic volumes are 10,000 vpd. That is, each equivalent annu- period during which traffic was assumed to grow at 3 per- al dollar spent on maintenance saves at least $1.4 per year cent per year. The benefits and costs of each option were in VOCs (with 300 vpd) and as much as $44.8 per year calculated using a 12 percent discount rate. (with 10,000 vehicles per day). ADT = 300 vpd Fair condition, ADT= 1,000 vpd Strategy: 1 2 3 4 Strategy: 1 2 3 4 Increased maintenance (dollars per year)' 2.39 4.83 7.96 10.15 2.72 4.94 8.04 10.13 VOC savings (dollars per year)b 3.32 4.74 5.88 6.15 12.48 16.83 20.69 21.59 Benefit-cost ratioc 1.39 0.98 0.74 0.61 4.59 3.41 2.57 2.13 Net present value (millions of dollars) 8.69 -0.85 -19.31 -37.26 90.73 110.63 117.62 106.59 Incremental benefit-cost n.a. 0.58 0.37 0.12 n.a. 2.04 1.24 0.43 ADT = 3,000 vpd ADT = 10,000 vpd Strategy: 1 2 3 4 Strategy: 1 2 3 4 Increased maintenance (dollars per year)a 4.07 5.82 8.42 10.51 3.88 5.68 8.32 10.08 VOC savings (dollars per year)b 56.02 67.26 78.05 80.86 173.83 213.54 250.51 258.79 Benefit-cost ratioc 13.76 11.55 9.27 7.69 44.84 37.60 30.13 25.69 Net present value (millions of dollars) 483.14 571.40 647.64 654.28 1,580.7 1,933.31 2,252.68 2,313.33 Incremental benefit-cost n.a. 6.42 5.16 1.34 n.a. 22.06 14.00 4.71 n.a. Not applicable. a. Equivalent annual VOC savings attributable to increased maintenance spending. b. Equivalent annual expenditures in addition to routine maintenance. c. VOC savings divided by spending on increased maintenance. spend $1.05 billion reconstructing the roads. Thus the ed rehabilitation. Rehabilitating gravel roads every 10 net loss would be at least $330 million. years is thus twice as expensive, in cash terms, as reg- The same pattern holds for gravel roads. ular routine and periodic maintenance, and between Maintaining a gravel road for 10 years costs between 14 and 128 percent more expensive in terms of net pre- $10,000 and $20,000 per km, depending on climate sent value discounted at 12 percent per year. and traffic volume. But leaving it without maintenance In rural areas, where roads often become impassable for 10 years will cost about $40,000 per km for need- during bad weather, poor road maintenance pro- 14 Commercial Management and Financing of Roads foundly affects the economy Poor maintenance can plifying procurement procedures, and strengthening result in large, direct economic costs in terms of lost the local construction industry. The remaining initia- production. Crops and other agricultural produce tives had little lasting impact because of shortages of often spoil for want of a passable road to take perish- qualified staff, managerial indifference, and resistance able products to market. For example, in 1988 the from strong vested interests. Deputy Prime Minister of Russia suggested that in areas Reforms of user-charging policies encouraged gov- where agriculture was of secondary importance, poor ernments to adopt charges based on short-run margin- roads resulted in losses of up to 15 percent of agricul- al costs, that is, variable road maintenance costs and tural production. road congestion costs.6 The aim was to encourage best The lack of maintenance can also seriously impair use of the road network and ensure that heavy vehicles people's lives in social terms, when roads become paid for the damage they did to the road pavement. impassable and communities can no longer access These efforts were partly successful. Taxes on heavy markets and public services, particularly emergency vehicles were often increased following studies of road- health care. While such social losses have not yet been user charges, but no country was willing to accept strict measured empirically, they are likely to be considerable short-run marginal cost pricing for roads. Governments and affect a large proportion of the world's poorest did not see the point of using such a pricing system on population. uncongested roads, why road users should be subsi- dized by other sectors of the economy, and how the pro- posed arrangements made fiscal sense. With little road Past Efforts at Reform congestion, user charges would be set equal to variable road maintenance costs, which would cover only about Until the beginning of the 1990s most reform efforts half the costs of operating and maintaining the road sought to strengthen road management, improve poli- network. cies governing user charges, and increase allocations Attempts to improve road financing concentrated for road maintenance. But these reforms lacked a com- on increasing allocations for road maintenance and, in prehensive vision focused on technical rather than Africa and Latin America, earmarking funds to secure institutional solutions, and were generally implement- a stable flow. Donor countries often asked governments ed in piecemeal fashion. to set aside part of their general tax revenues (usually Some attempts were made to rationalize and decen- specified as a percentage of overall fuel tax revenues), tralize road management, but little effort was made to deposit the money into a road fund, and use the pro- deal with weaknesses in the organizational structures ceeds to finance maintenance of the core road network. of road agencies, low pay scales, shortages of qualified But apart from pointing out the economic costs of staff, lack of staff motivation, and lack of managerial deferred maintenance and suggesting that funds be accountability Instead, most reforms concentrated on reallocated from construction to maintenance, little reducing work done using in-house staff and equip- advice was offered on where the additional revenues ment, introducing maintenance management systems, might come from and how the road fund should func- and restructuring government plant and equipment tion. The International Monetary Fund (IMF) opposed pools. These initiatives were accompanied by comple- earmarking on grounds that it undermined unified mentary attempts to simplify government procure- budget management. Ministries of finance objected to ment procedures so as to facilitate the use of local con- road funds on grounds that they simply did not work tractors, strengthen the local construction industry, (see de Richecour and Heggie 1995). Thus most road introduce maintenance and equipment management funds suffered from systemic problems-deposits were systems, and strengthen axle-weight enforcement to erratic, withdrawals were frequently delayed, govern- reduce the damage overloaded vehicles inflicted on ments diverted money to finance other public pro- road pavement. The most successful reforms dealt with grams, and expenditures were loosely controlled-and work done using in-house staff and equipment, sim- failed to provide an adequate, stable flow of funds. The State of the Road Sector 15 Regional Programs bureaucratic resistance, whether from the ministry of works or the ministry of finance. Against this background two regional programs have Second, many systemic problems associated with sought to give more focus to road sector reform. The first poor road maintenance policies-weak programming and most successful is the Road Maintenance Initiative and budgeting, undue emphasis on work done using (RMI), renamed the Road Management Initiative in April in-house staff and equipment, and inefficient plant 1997. The United Nations Economic Commission for pools-were merely symptoms of an underlying insti- Africa and the World Bank launched this program in the tutional problem. The real problems were weak or late 1980s as one of the five components of the Sub- unsuitable institutional arrangements for managing Saharan African Transport Policy Program. The second and financing roads and the impact these arrangements regional program is PROVIAL-established in 1992 had on staff incentives and motivation, as well as on through an initiative of the World Bank's Economic managerial accountability. Until the institutional Development Institute QEDI) to address road mainte- framework is strengthened, it will be almost impossi- nance management in Latin America. ble to overcome the numerous technical, organization- al, and human resource problems that hamper sound Road Maintenance Initiative in Africa road maintenance policies. RMI has sought to identify the underlying causes of Third, attempts to improve road maintenance poli- poor road maintenance policies and to develop an cies cannot be limited to maintenance alone or to the agenda for reforming them within Africa. Relying pri- maintenance of main roads. Poor road maintenance marily on subregional seminars, the initial phase of the policies are a subset of the wider issues of managing RMI program raised awareness of the need for sound and financing roads. Moreover, the problems tend to road maintenance policies and identified why current be most serious at the regional and district levels, approaches were ineffective and unsustainable. The where institutional weaknesses are more acute and second phase then encouraged country initiatives in finances scarce. Kenya, Madagascar, Nigeria, Tanzania, Uganda, These insights opened the two-way dialogue Zambia, and Zimbabwe. The country programs between the RMI program and the participating coun- focused initially only on main roads and concentrated tries to a wider debate about the institutional arrange- on promoting reforms in three main areas: planning, ments for managing and financing all types of roads. programming, and financing; operational efficiency; RMI's message has been disseminated through various and institutional and human resource development. media, including regional and subregional policy sem- During the initial stages of the program the policy inars, country workshops, study tours, annual meet- dialogue quickly led to three important insights. First, ings of all country representatives and participating it had always been assumed that the ministry of finance donors, newsletters, and visits by RMI staff. The result would play a key role in developing sustainable road was a program that helped to promote a number of maintenance policies. So strong was this belief that major policy reforms in several African countries.7 some country initiatives sought to interest the ministry in road maintenance by exploring the basic financial PROVIAL in Latin America issues through public expenditure reviews. But it quick- EDI took the lead in establishing PROVIAL, though it ly became apparent that involving the private sector was collaborated with a number of bilateral and multilater- the secret to success, thle ministry of finance did not al agencies including the International Road Federation hold the key The private sector, after all, used and paid (IRF), the Permanent International Association of Road for the roads and clearly had the most to win or lose. Congresses (PIARC), the U.S. Federal Highways Their representative organizations-chambers of com- Administration, and the German Gesellschaft fur merce, road freight and passenger transport associa- Technische Zusammenarbeit (GTZ). The objectives of tions, and agricultural organizations-were strong and the PROVIAL program were similar to that of the RMI: influential. Their support could often overcome creating awareness of the need for proper road mainte- 16 Commercial Management and Financing of Roads nance, encouraging adequate and timely funding for Development Cooperation. This meeting aimed to road maintenance, promoting the concept of account- share international experience with ESCAP member ability in government, and encouraging the transfer of states and to consider whether reforms from other results from research and development to improve regions might be applicable to Asia and the Pacific, managerial and construction techniques. and, if so, how they might be adapted to the Asian envi- PROVIAL has relied heavily on seminars to dissemi- ronment. By 1997 a number of country workshops had nate its message and to enable a dialogue among Latin been held in Bangladesh, Pakistan, and the Philippines American and Caribbean countries and between Latin and several more were planned for India, Laos, and American and Caribbean countries and the donor com- Nepal. munity. Between 1992 and 1995 PROVIAL organized 17 seminars, seven of which were regional and the rest held for specific countries. The last such seminar, held Notes in Puerto Rico, concluded that PROVIAL had effective- 1. Figures for the former Soviet Union refer to 1993, while ly enabled engineers and technicians from the region to those for the United States refer to 1995. See International Road share professional know-how. But it had made insuffi- Federation (1997). cient progress in improving road maintenance manage- 2. This relationship was demonstrated in an analysis of gov- ment. Public debate had to be expanded to involve per- ernment tax revenues that subdivided into general revenue tinent public institutions and road users in the reform taxes and specific charges for usage of roads in eight countries. See Heggie (1991b). and decisionmaking process. Country representatives 3. A paved road in good condition, carrying about 500 vehi- suggested that PROVIAL address other issues, such as cles per day, requires resealing or light overlays, costing about consensus building, decentralization of road network $23,600 per km, every seven years to keep it in good condition. management, identification of appropriate financial The net present value of this amount, discounted at 12 percent instruments, options for public-private partnerships, over 25 years is $17,688 per km. Without maintenance, the road safety and environmental concerns, and ways to road will deteriorate from good to poor condition. This will increase VOCs by about $5,000 per km, which has a net pre- harmonize sent value, when discounted over 25 years, of $39,200 per km (Thriscutt and Mason 1991, p. 29-30). The benefit-cost ratio Other Seminars of a fully funded road maintenance program is thus between 2 A number of regional seminars have taken place apart and 3. from specific programs such as RMI and PROVIAL. In 4. A recent analysis of the World Banks Operations Evaluation May 1995 the World Bank, the European Union pro- Department database, covering 341 road projects evaluated gram for Technical Assistance to the Commonwealth of between 1961 and 1988, found that the average economic inter- Independent States (TACIS), and GTZ held a highway nal rate of return for pure road maintenance projects was 38.6 percent. The analysis was carried out for World Bank (1994) . policy seminar in Moscow for countries of the former 5. Personal communication from Professor Leo Rothenburg, Soviet Union. This seminar provided a forum to University of Waterloo. exchange experiences, enable the international donors 6. Under this practice the price is made equal to short-run mar- to develop a clear understanding of existing country ginal costs (that is, the costs of producing the last unit sold, plus policies, lay the groundwork for policy reform, and a mark-up to clear the market). The rationale was that subject instruct participants on how to prepare loans for inter- to certain assumptions about production costs and other mat- nationa donors In Setember 996 a jint UN ters, such a pricing rule would maximize economic welfare. See, national donors. In September 1996 a joint UN for'eape hrhl 17)adWles(98 frexample, Churchill (1 972) and Walters (1 968). Economic and Social Commission for Asia and the 7. The RMI was one of the first two winners of the President's Pacific (ESCAP)-World Bank seminar was held in Award for Excellence within the World Bank. That award rec- Bangkok, sponsored in part by GTZ and the Swiss ognizes outstanding achievement in the field of operations. Part II. The Basic Issues 3. A Diagnosis W hy have most governments been pursuing inef- underlying needs (that is, to the cost-effectiveness of Vvfective and unsustainable road maintenance road expenditures at the margin) or to users' willing- policies? There is no simple answer. But despite signif- ness to pay. There is no hard budget constraint (that is. icant country and regional variations, there are some no direct link between revenues and expenditures), no common themes. The main problems are institutional, price to ration demand (do users want more or less of affecting incentives. As part of WorldDevelopmentReport particular road services?), and expenditures are not 1994 (World Bank 1994) a survey of 44 countries that subjected to the rigorous tests of the marketplace (how had received World Bank loans was conducted to high- much road spending can the economy afford?). light their most common infrastructure problems. Because road users do not pay for roads directly, they Financial and wage-labor problems were the leaders, are not forced to choose whether and how to make a followed by unclear goals and lack of management journey, or to hold the road agency accountable for the autonomy and accountability. This chapter spells out way it spends its budget. Further, there is a free-rider problems that make road agencies inefficient: human effect in that the absence of a firm link between rev- resource constraints, inadequate financing arrange- enues and expenditures encourages individual road ments, lack of clearly de:fined responsibilities, ineffi- users to demand more road spending because it does cient management structures, and weak management not affect individual payments for road use. Finally, systems. without a hard budget constraint and pressure from road users, the road agency does not have to manage resources efficiently The government rarely provides The Institutional Framework clear objectives (road agencies are often required to employ too much labor and to build roads that are Part of the blame for poor road maintenance policies uneconomic), managers face few incentives to cut costs comes from the institutional framework within which (major cost reductions may simply lead to reduced roads are managed. They are not managed as part of budget allocations in the next period), there are few the market economy with its formidable pricing sanctions, staff cannot easily be disciplined, and man- dynamic. There is no clear price for roads, road expen- agers are rarely penalized for poor performance. There ditures are most often financed from general tax rev- is thus a need to instill an efficiency ethic, a standard enues, and the road agency is not subjected to any rig- for productive use of all resources. orous market disciplinie. These bias managerial incentives. Roads are managed like a social service with multiple goals. Road users pay taxes and user charges, Human Resource Constraints but the proceeds are almost always treated as general tax revenues. Instead of being financed through user Human resource constraints is the most important issue charges, roads are thus financed through budget allo- facing many road agencies. They suffer from an acute cations determined as part of the annual budgetary shortage of technically qualified staff and at the same process. These allocations bear little relationship to time employ far too many unskilled workers.' Morale 19 20 Commercial Management and Financing of Roads is generally low, primarily because of low salaries that Engineers working in the private sector generally compare poorly with those in the private sector. earn more than twice as much as their public sector Furthermore, the incentives working on individual counterparts (tables 3.1, 3.2). At one time agency staff managers and technical staff often discourage initiative, enjoyed perks that made up for lower salaries. But diminish personal accountability, and further depress inflation has eroded these fringe benefits, and private morale. Rewards are not given for exceptional perfor- sector employers now tend to offer better bonuses, mance, and sanctions are not imposed on poor per- housing allowances, and car allowances. Real salaries formers. Furthermore, staff are often inadequately have also declined sharply Salaries in some road agen- trained to carry out their new professional responsibil- cies are so low that "daylighting"-working another ities as road agencies change from being service full-time job during regular working hours-has providers to clients. One cannot manage a road agency become part of the status quo; employees' primary alle- with a demoralized, poorly trained, and part-time staff giance is with other employers.2 Some road depart- that has little incentive to work effectively or efficiently. ments even implicitly acknowledge the disparity in Overstaffing is still a problem for some road agen- salaries by officially condoning daylighting as a sup- cies, particularly in parts of the Middle East and North plement to public salaries. This has occurred in the Africa, South Asia, and Latin America and the Dominican Republic. Caribbean. Having a large number of staff doing work Road departments paying qualified technical staff a in-house means that, in the face of ever-diminishing fraction of the going market wage end up with high funds, the payroll takes up a growing share of total vacancy rates, employ expatriate road managers paid expenditures, leaving less available for actual works. through donor-financed technical assistance programs, For example, in Uruguay more than 40 percent of the or use part-time staff forced to supplement their national road agency's budget was spent on the pay- incomes by moonlighting, daylighting, manipulating roll in 1995. In the Dominican Republic during 1994 allowances, and pilfering.3 This problem cannot be about 3,000 staff were employed to maintain a net- solved through training, bonded studentships, and work of 5,000 km-and salaries absorbed more than improved allowances. There is no point to training staff two-thirds of the total maintenance budget. In who spend only a fraction of their time on the job. Argentina some provincial road agencies had several Likewise, bonded graduates have no interest in mak- hundred workers per 1,000 km of road even though ing a career in the road department and leave as soon estimated requirements were between 50 and 80 as their bonding period ends. Improved allowances are workers. The staff of Jordan's Ministry of Public Works equally ineffective since they are discretionary, subject and Housing assigned to roads numbered about 8,000 to change, and are not bankable, that is, cannot be used in 1997, and this on a road network of only 7,000 km. as security for mortgages and other loans. Compare this figure with the 688 staff employed to Staff in many road departments are still not held per- deal with road construction and maintenance on the sonally responsible or accountable for their work. Ghana Highway Authority's network of 14,100 km Typically, workers do not have anyjob specifications to (table 3.1). guide them, or if some do exist they do not relate well At the same time poorly conceived or implemented to the reality of the post. Staff do not know what is retrenchment can also be counterproductive. The most expected of them, which decisions they should make, skilled engineers and managers can be lost, and the and which decisions should be passed up or down the remaining employees demoralized. In Kazakhstan the hierarchy. This uncertainty not only paralyzes deci- rapid pace of reform and arbitrary rationalization has sionmaking but stifles initiative and detracts from job cut the adequate pool of capable staff to barely a dozen satisfaction. Moreover, managers do not know which in the Department of Roads, which is responsible for skills are needed at particular levels and so are unable managing 17,000 km of main roads and supporting the to judge whether or not workers possess them. Hence, regional management of another 70,000 km of sec- it is impossible to assess performance fairly, allowing ondary roads. greater leeway for political or personally driven per- A Diagnosis 21 Table 3.1 The number of technical staff and salary scales in selected countries, 1996-97 Country Road length Number of Kilometer per Annual salary range (km) staff staff member (1996-97dollars) Argentina 8,328 Engineers 247 34 20,000-24.000 Technicians 800 10 14,000-20,000 Chile 46,979 Engineers 731 64 8.436-27,000 Technicians 306 154 4,380- 9,012 Ghana 15,232 Engineers 125 122 1,500-2,000 Technicians 383 40 1,000-1,500 Hungary 30,000 Engineers 561 54 6,315-10,500 Technicians 226 133 5,260-8,420 Jordan 7,041 Engineers 60 117 5,400-8,000 Technicians 90 78 1,800-6,000 Kazakhstan 87,300 Engineers 365a 240 2,800-4,500 Technicians 80a 1,090 1,800-3,000 Korea, Rep. ofb 12,052 Engineers 35 344 17,000-20,000 Technicians 3 4,017 12,000-16,000 Pakistan 6,580 Engineers 294 22 2,040-5,760 Technicians 1,251a 5 840-2,040 South Africa 6,133 Engineers 63c 97 32,000-46,400 Technicians llld 112 15,600-28,000 a. Figure also Includes some nontechnical administrative staff. b. Figures for Bureau of Public Roads only Most staff work at the provincial level for which figures are not available. c. Includes 8 vacant positions. d. Includes 21 vacant positions. Source: Country national road agencies and World Bank task managers. formance appraisal, if indeed such appraisal is made at A final human resource constraint is an imbalance in all. In some road departrnents promotions are still professional skills. Staff in road agencies tend to be engi- made on the basis of administrative criteria rather than neers who may be strong in the technical aspects of merit, and senior staff are often political appointees, building and maintaining roads, but weak in the analyt- with consequently limited technical capacity and ical and managerial skills needed to look after a network autonomy. Political appointees are also likely to come in the long term. Standardized maintenance strategies, and go frequently during times of political change, common in many regions, especially in the countries of causing discontinuity and disrupting management of the former Soviet Union, have deskilled engineers by the network and staff. removing professional judgment from decisionmaking. Table 3.2 Incomes of public and private sector engineers in selected countries, 1997 (dollars per month) Argentina Chile Ghana Hungary Jordan Korea, Rep. of Pakistan South Africa Public salary 1,800 750 160 625 500 1,650 200 2,500 Private salary 5,000 1,750 825 1,250 750 2,800 485 2,500 Private/public 2.8 2.3 5.1 2.0 1.5 1.7 2.4 1.0 Note: Figures are of salaries and allowances for graduate engineers with three to four years practical experience. Source: Country national road agencies and World Bank task managers. 22 Commercial Management and Financing of Roads In much of the world the role of government is chang- What's more, the flow of funds is erratic. Budget allo- ing in all sectors, including roads. Yet this move is often cations are often cut at short notice in response to diffi- not accompanied by training for professional staff to cult fiscal conditions, funds are rarely released on time, cover such key areas as planning and economic analy- and actual expenditures are often well below agreed allo- sis, environmental assessment, contract management cations. As a result road agencies are unable to plan and supervision, and prioritization of works. Likewise, works effectively contractors are not paid on time and engineering skills are not being updated to include mod- go out of business, short-term "patch and mend" work ern construction and maintenance techniques. replaces appropriate road conservation, rural roads reg- ularly become impassable during the rainy season, and the large backlog of road rehabilitation continues to Inadequate Financing Arrangements grow. Between one-quarter and one-third of the main and secondary road networks included in table 3.3 are All countries suffer from a shortage of funds for roads, in poor condition and must either be rehabilitated or a shortage of funds for both investment and mainte- downgraded to roads that receive minimal maintenance. nance. Low investment results in high congestion, often intensified by the frequency of lane closures Too Few and Poorly Allocated Funds because of the need to repair deteriorating pavement Road maintenance is underfunded mainly because and structures. We see this problem especially in rapid- road users do not pay enough for their use of the road ly growing cities, such as Bangkok, Buenos Aires, network (see table 3.3). They pay the usual import Manila, and Mumbai. Lack of funds for maintenance duties and excise and sales taxes-but so does every- results in the decay of road networks (see World Bank one else. Since private cars are a luxury good for low- 1998). The initial impact of this funding crisis has been and middle-income economies, a higher level of gen- to increase road transport costs, in terms of travel time; eral taxation, at least on private car ownership and use, VOCs; road conservation; pollution; and road acci- would be justified on equity grounds. Yet road-user dents. The long-term impact has been to reduce com- charges-in the form of vehicle license fees, a specific mercial and agricultural competitiveness in interna- surcharge added to the price of fuel (the fuel levy), and tional and regional markets and consequently slow international transit fees-rarely cover more than 50 overall economic growth. percent of expenditures on road maintenance and, in Without an adequate and stable flow of funds, road some countries, barely 25 percent (see box 3.1). maintenance policies will not be sustainable. Most road expenditures are still financed from gen- Maintenance expenditures in virtually all countries are eral tax revenues (listed in table 3.3 as "government well below the levels needed to keep road networks in grants") and donor-financed loans and grants. stable condition for the long term. In many countries Moreover, the underpricing of road use has led to the these expenditures are less than half the amount dramatic shift to road transport worldwide, primarily required and, in some, less than a third (table 3.3). And at the expense of railways. Demand has not been man- this problem is not confined to only transition or devel- aged through appropriate pricing. But it need not be. oping economies. Many of the wealthiest nations in the Roads can be commercialized, put on a fee-for-service world are also failing to properly finance road mainte- basis so that demand can be better managed, and treat- nance. For example, in Canada spending on public ed like any other public enterprise. roads in 1993 relative to road traffic volumes was only An added complication is that funds for road main- half that of 1965. In the United Kingdom a 1996 tenance are allocated as part of the annual budgetary Institution of Civil Engineers survey of local authority process. But in the absence of proper network assess- networks found that maintenance of local roads (96 ments financial proposals for maintenance are based percent of the total road network) was being under- on historical spending patterns rather than real need. funded by $1,440 million per year, and construction Each ministry must compete for funds during the and improvement by a further $2,260 million. annual budget negotiations. A Diagnosis 23 Table 3.3 Main and secondary road expenditures, financing, and actual and required maintenance in selected countries (millions of dollars) Argentina Chile Ghana Hungary Jordan Kazakhstan Korea. Rep. of Pakistan South Africa 1995 1995 1996 1995 1994a 1996 1997 1995 1995 Road expenditures' 333 526 191 348 74 101 5,768 395 874 Amount financed by Road usersc 0 105 50 205 0 20 5,593 1 0 Government grants 293 421 20 97 58 81 d 175 320 874 Donors 40 0 121 46 16 0 0 75 0 Maintenance expenditures Requirede 68 760 135 240 31 176 970 40 742 Actual 61 308 73 127 9 101 655 27 507 Maintenance shortfall 7 452 62 113 22 75 314 13 235 Actual/required (percent) 89 41 54 53 29 57 67 68 68 a. Jordan figures are from the Budget Law of 1996. b. These figures represent actual spending, which is generally below requirements, due to shortfalls in regular road maintenance. c. Includes license fees, international transit fees, and fuel levies where directly channeled to finance roads. d. All from a turnover tax (not a road user charge) dedicated to the road fund. e. Maintenance requirements from country road agency estimates. Most include some element of rehabilitation. Source: Survey of country road agencies, World Bank sector and project reports, and World Bank task managers. In theory, funds are allocated to finance those roads)-scarce resources are misallocated. Lack of expenditures with the highest economic return, which market discipline has encouraged governments to would ensure that road maintenance would not be minimize their own road maintenance expenditures, underfunded. But in fact allocations for maintenance disregarding the impact that this has on total road are well below the optimal requirements (defined as a transport costs. Further, maintenance is normally maintenance strategy that produces an economic inter- financed under the recurrent budget, and recurrent nal rate of return of more than 12 percent), even revenues are nearly always in short supply. Since in the though the economic return at the margin is frequent- past donors have been willing to finance rehabilitation ly more than 100 percent. under the development budget (often on a grant basis), The budget allocation process is flawed and politi- governments have had every incentive to capitalize cized, and large spending ministries, particularly those road maintenance and charge it against the develop- proposing to spend high sums on maintenance, near- ment budget. Rehabilitation, rather than recurrent ly always lose out in budget debates. Lack of funds for maintenance, became the "optimal" solution. maintenance does not lead to immediate, catastrophic Donors have since recognized this mistake and most failure and there is thus little political pressure or will no longer finance rehabilitation programs until incentive to support maintenance. Likewise, mainte- governments have introduced sustainable road main- nance can always be postponed in the hope that better tenance policies. But a further and perhaps more fiscal times are around the corner. But they rarely are, important reason for favoring new construction is that and road maintenance continues to be cut or deferred. such contracts tend to be larger (hence offering greater Given this inherent structural problem, it is no wonder opportunities for gratification payments) and are polit- that some industrial economies have turned to ear- ically more visible and glamorous. marking to secure a stable flow of funds for their road Other countries have no choice but to invest heavi- expenditure programs (box 3.2). ly in new construction as there are many potential con- struction projects with a high economic internal rate of Too Much New Investment return and demand for road space outstrips supply to Road maintenance is also underfunded because some such an extent that economic growth is severely countries still spend too much on new investment impeded. In many economies in East Asia and, to a (mainly upgrading existirng roads and building feeder lesser extent, Latin America, the costs of inadequate 24 Commercial Management and Financing of Roads Box 3.1 Separating road-user charges from general tax revenues The taxes and charges paid by road users are generally * Second, when there is no prior information, it is worth identifiable as: specific charges for use of the road network examining the tax code to see how the taxes levied on road (for example, tolls, fuel levies paid into a road fund, and users compare with the taxes levied on other goods and ser- vehicle license fees); 'green' taxes imposed on road users vices. For example, trucks are usually classified as plant and to try and internalize the external costs of road use; gen- equipment. If the tax schedule levies the same rate on trucks eral revenue taxes (for example, value added taxes, cor- as on all other plant and equipment, then, prima facie, there porate income taxes, and trade protection taxes); or taxes is no road-user charge added to the tax rate. On the other used to collect road-user charges and raise general rev- hand, if the rate is clearly higher than that on other plant enues (generally only excise taxes, but may also include and equipment, the difference may represent a road-user some import duties and sales taxes). Since it is fairly easy charge (the difference would represent the maximum to identify the taxes and charges that fall into the first three amount that could be considered a road user charge since categories, this box concentrates on ways of dealing with the additional element may reflect other fiscal objectives). road-user charges and general taxes. * Third, when it is not possible to identify the tax rate When road user charges are combined with other gener- applicable to road users, the analysis must rely on the aver- al taxes, they add to the existing indirect taxes (for example, age tax rate for all similar goods. For example, the rates taxes on goods and services and import duties). Indirect applicable to individual items of plant and equipment may taxes generally differentiate among consumer luxuries, other vary widely, and in such cases there may be no alternative consumer goods, intermediate goods (including raw mate- but to use the average rate as representative. The average is rials), and capital goods. Within each category items are usu- calculated by dividing the tax revenue collected from a par- ally treated in a fairly consistent way, although there are ticular tax (such as general sales taxes, excise taxes, and exceptions since tax rates also reflect other fiscal objectives import duties on plant and equipment) by the base value (such as promoting domestic vehicle assembly, energy con- of these items. The difference between the taxes levied on servation, and protection of local industry). The following road users and the average tax rate on the group as a whole four-step procedure is suggested as a means to separate road may then be treated as the road user charge (again, this user charges from general revenue taxes. amount represents the maximum that can be considered a * First, prior information will often be available to show road user charge). This procedure is not particularly satis- how the overall tax rate has been built up and how much factory and should be avoided if possible. of the overall rate comprises the road-user charge. For A recent unpublished study applied the above method example, in China the purchase tax on new vehicles to eight countries (Argentina, Bangladesh, Bolivia, China, includes an added vehicle purchase fee, which is credited Indonesia, Mexico, Tanzania, and Turkey) and showed to a special fund to support road construction. that import duties, sales taxes, and excise taxes rarely Unfortunately, information on the structure of the tax rate include an additional element representing a road-user is not systematically recorded and may not be readily charge. Indirect taxes are nearly always general revenue available. But when it is available, it may enable the road taxes and neither charge directly for use of the road net- user charges to be separated from general revenue taxes. work or raise revenues specifically for roads. road infrastructure are large, as are the corresponding Turkey, and the United Kingdom, all with traffic investment needs. A 1992 study by the Korea growth rates higher than 3 percent per year-are Transport Institute estimated that the costs of conges- spending more than 50 percent of their total road bud- tion on intercity and urban routes was $6 billion per gets on new construction (OECD 1994). year, or about 2.5 percent of GNP. Hence, not only is investment in the transport sector projected to be a high percentage of GDP (5.2 percent in 1993-97), but Lack of Clear Responsibilities roads make up the majority of total investment (56 per- cent). In China the projected need for new roads is also A lack of clearly defined responsibilities adds to the large: $504 billion over 1996-2010. Likewise, the above problems. It is often not established which OECD countries with the highest growth rates in car agency is responsible for managing different parts of and truck traffic-including Germany, Japan, Portugal, the road network, controlling overloading, managing A Diagnosis 25 Box 3.2 Earmarking and user pay in Japan, New Zealand, and the United States Several countries responded to the rapid expansion in diesel, and gasohol (currently $0.14, $0.20 and $0.08 demand for road transport in the post-war period by per gallon, respectively); a graduated tax on tires weigh- establishing road funds. T'he concept of "user pay" stood ing 40 pounds or more; a 12 percent retail tax on select- behind the establishment of such funds-the road user ed new trucks and trailers; and a heavy-vehicle use tax pays certain road-related taxes and the government on all trucks with a gross vehicle weight more than credits the proceeds directly to a special highway 55,000 pounds. Total revenue raised through these taxes account. was $21 billion in 1995, most coming from the tax on gasoline. Tax rates are adjusted as part of the regular bud- JAPAN ROAD IMPROVEMENT SPECIAL ACCOUNT. This special getary process. funding system was introduced in 1954 to meet the needs Revenues from the highway portion of the Trust Fund of the post-war road improvement program. It was "based are used to reimburse states, on a cost-share basis, for on the concept that road users who enjoy the benefits of expenditures on approved projects. These include peri- improved roads should bear the burden for their improve- odic maintenance, road improvement, new construction, ment." It includes an elaborate system for earmarking road safety, road studies, and other highway-related national and local taxes, both supplemented by general expenditures, except for routine maintenance. Since 1982 revenues, to finance the maintenance, improvement, and a portion of the Fund has also been used to finance mass construction of roads. transit projects, and, since 1991, its mandate has been At the national level earmarked tax revenues consist of extended to supporting other land transport modes. 25 percent of gasoline tax revenues ($0.39 per liter), half of tax revenues on liquid petroleum gas ($0.14 per kg), NEW ZEALAND NATIONAL ROADS FUND (NRF). The original and 75 percent of revenues from the motor vehicle ton- road fund was established in 1953, although the latest ver- nage tax ($51 per 500 kg per year). At the local level ear- sion, the National Roads Fund, was created in 1996. The marked tax revenues cons ist of: tax revenues collected by fund derives revenues from a fuel excise added to the price the national government and then passed on to the local of gasoline (currently $0.065 per liter); weight-distance government (the other half of the liquid petroleum gas charges on diesel vehicles purchased as distance licenses tax, a local gasoline tax of $0.04 per liter, and 25 percent and approximately proportional to gross wheel-load (and of the motor vehicle tonnage tax) and tax revenues col- hence more closely related to damage imposed on the road lected by the local governmnent itself (a local diesel fuel tax pavement); and motor vehicle registration and license of $0.26 per liter and the rnotor vehicle purchase tax cur- fees. The charges raised $589 million in total-$ 195, rently set at 5 percent of the purchase price). Revenues $286 and $108 million, respectively-in 1996-97. About from all these sources amounted to roughly $30 billion in $30 million per year, that is, 5 percent of revenues, is 1995. spent on collecting the various user charges under con- The tax rates are set during the preparation of the tract. Five-Year Road Improvement Programs. The Ministry of The government still sets the level of charges on the Construction prepares t:he Programs in consultation recommendation of the Treasury, Ministry of Transport, with local governments and then submits them to the and the agency responsible for controlling the funding of Ministry of Finance for approval. After discussing the roads, Transfund New Zealand, and hence determines the proposals, new tax rates are agreed on and written into inflow of resources. But it no longer determines the out- a new proper tax law, which remains in force for the next flow. Once the costs of policing the road network and the five years. Land Transport Safety Authority have been met ($93 and $15 million per year, respectively, in 1996-97), Transfund U.S. FEDERAL HIGHWAY TRU:ST FUND. The Trust Fund was can use the balance of the revenues without further inter- introduced in 1956 to finance construction of the inter- ference. state highway network. The Fund is based on the user- Transfund finances the entire cost of the national road pay concept, which is well established in the United agency, Transit, as well as regional planning activities and States. All but six states now dedicate their state-level local authority networks on a cost-sharing basis. Bids from user-fee revenues to special highway or transportation all road agencies are subjected to a benefit-cost analysis accounts. before prioritization, with a cutoff at a ratio of 4 or less. The Trust Fund revenues derive from a variety of high- All bids for maintenance works have to be based on a stan- way user taxes, including motor fuel taxes on gasoline, dardized maintenance management system. 26 Commercial Management and Financing of Roads urban traffic, improving road safety, or reducing the roads in many countries have never been formally adverse environmental impacts associated with road assigned to a legally constituted highway authority. traffic. The poor definition and enforcement of respon- Some have been built using central government funds sibilities at the individual staff level also relates here. or multilateral and bilateral donor grants channeled Responsibility for roads is often diffused among sev- through central government departments dealing with eral central government ministries and local govern- agriculture, fisheries, and tourism. In several countries ment agencies, leading to duplication, confusion, and a in Africa and Asia no arrangements were made for trans- lack of coherent management policies. For example, in ferring managerial responsibility for these roads to an Jordan six organizations-three ministries, one munic- established road agency National and local road agen- ipal government (the Municipality of Greater Amman), cies did not know which roads they were supposed to and two parastatals. are responsible for various parts of maintain, and many rural roads went unclaimed and the road network The situation is further complicated unmaintained. For example, in Russia about 450.000 in that the Ministry of Public Works and Housing is km of enterprise roads are undesignated, and a further responsible not only for all primary and secondary 700,000 km of access roads have no legal owners. roads, but also for some village and agricultural roads. While there is often local pressure to transfer the enter- In Indonesia the principle responsibilities for the road prise roads to regional authorities, these authorities are network are divided between two ministries (Public understandably reluctant to take on the burden of addi- Works and Communications), while another four agen- tional maintenance funding, since most of the roads do cies and ministries are also involved in road transport. not meet public road design standards. This multiplicity of participating agencies is not limit- Most road agencies are also unclear about their ed to the developing world. In the United Kingdom the responsibilities for a number of other important road administration of roads involves the Department of traffic activities. Among these is axle weight enforce- Transport, Environment and the Regions; the Highways ment. Regulations are commonly promulgated by the Agency; regional government offices; and local author- transport ministry, and administration and enforce- ities. In many countries traffic regulation and enforce- ment are handled by a number of agencies, including ment are handled by a separate transport ministry and road departments, traffic commissioners, the police, the police, further complicating matters. and private contractors. Reviews of axle weight In addition, different road agencies rarely have dis- enforcement have identified several key weaknesses: tinct responsibilities. For example, it is often uncertain poorly assigned responsibilities, weak enforcement whether the main road agency or the urban munici- agencies, and resistance by truck owners and opera- pality are responsible for trunk roads in urban areas. A tors. The road agency frequently has no incentive to relatively common scenario is that of an urban enforce regulations or to prosecute offenders, as any through-route constructed or upgraded by the nation- fines (which are anyway too low to act as a deterrent) al road agency often through a loan or grant, but with typically accrue to the consolidated account, while the responsibility for maintenance left uncertain. costs of enforcement are charged against the road Responsibilities between national and regional road agency's budget.4 departments are also often not clear cut. Frequently Main road agencies are sometimes unclear as to decisionmaking is too centralized-decisions that whether they should actively intervene to manage should be made by staff in regional offices who know urban traffic by enforcing parking and other traffic reg- what is happening in the field are instead made in the ulations. Often this job is left to municipal govern- main roads department in the capital. Moreover, road ments. This ambiguity is largely a result of confusion classification systems are often out of date. New roads over the allocation of responsibilities between central may not have been listed, and changes in the functional and local governments on urban through-routes and is class of existing roads may not have been accompanied closely linked to the construction of new relief roads by the appropriate reassignment of responsibilities. and bypasses or the improvement of main roads that This problem is even more acute in rural areas. Rural cross urban centers. Assessing the environmental A Diagnosis 27 impact of new road schemes is also an area of increas- The management structures of most road agencies ing concern, as is assigning responsibility for identify- date back to the time when the ministry of public ing and mitigating the adverse impacts associated with works spent about as much time on roads as it did on roads and road traffic. Finally there are ambiguities maintaining public buildings and procuring govern- surrounding less important issues, such as liability ment vehicles. Times have changed. Today road claims for accidents caused by defective design and departments typically account for more than 70 per- maintenance policies, as well as compensation from cent of the ministry's total expenditures and manage third parties for damage done to road infrastructure by more assets than either the railways or the national air- road accidents and utility companies.5 line. Nevertheless, the head of the road department is Many of these road and traffic-related problems are usually appointed to a level corresponding to that of aggravated by a shortage of technical staff and under- the chief civil engineer in the railways or chief mechan- developed legal and administrative systems. But the ical engineer in an airline. Furthermore, the organiza- core problem is lack of clearly defined responsibili- tion of a typical central government road agency ties-most often caused by the absence of a coherent exhibits three structural weaknesses: it is missing a legal framework and cogent mission statements for the layer of management, it is usually overly centralized, various road agencies. and the director of roads rarely reports directly to the permanent secretary. A more focused ministry would overcome some of Ineffective Management Structures the above problems since reporting lines would be more direct. Furthermore, a more narrowly focused The problems discussed above are worsened by the transport ministry would benefit from better inter- diverse management structures under which most roads modal coordination, although the ministry would still are administered. The central government usually man- remain lopsided, the management structure weak, and ages the main road network in one of four ways: the director of roads still a line manager. The special- * As part of a combined ministry of works, transport, purpose ministry, such as that in Ghana before 1997, and communications, such as in Hungary, the provides the simplest model, although the same objec- Netherlands, Sri Lanka, and Tanzania. tive could be achieved by restructuring a larger, het- - As part of a more narrowly focused ministry of erogeneous ministry. works or transport, such as in Chile, Indonesia, Jordan, Urban and rural roads may be handled directly the Philippines, and Zambia (figure 3. 1). through a central road agency (such as in Sierra Leone), * Under a sharply focused ministry of roads and high- through a separate department forming part of a cen- ways, such as in pre-1997 Ghana. tral road ministry (such as the Local Government * As an arm's-length road agency reporting to any type Engineering Department in Bangladesh), or, more of parent ministry, such as in Argentina, Ghana, Latvia, commonly, by local authorities. Local authorities and the United Kingdom. sometimes work through a local government ministry, The model illustrated in figure 3.1 is cumbersome which in turn usually delegates most day-to-day oper- and, in practice, largely ineffective as a framework for ations back to the local authorities. promoting a more commercial approach to road man- At the level of local government, management struc- agement. Regional engineers often report directly to tures tend to be even more confused. There is often no the permanent secretary instead of through the direc- road department (new roads are typically the respon- tor of roads, numerous support services are shared sibility of the development committee and road main- (and suffer from conflicting priorities), and the struc- tenance the responsibility of the finance committee) ture is lopsided. While the road sector has grown making it difficult to identify who is responsible for rapidly relative to other sectors, this increased impor- what. Usually, staff are demoralized, underpaid, inex- tance has not been reflected in changed priorities or the perienced, poorly skilled, and unmotivated. Local gov- changed relative status of departments. ernment entities are typically small and lack both the 28 Commercial Management and Financing of Roads Figure 3.1 Typical management structure of a ministry of works and transport | Parent l Regional offices Headquarter services -Roads -Accounts *Water -Personnel and training -Buildings -Programming and Evaluation -Planning and research One or two deputy permanent secretaries Roads CIvil avIation Meteorological B Mechanical | Roads } ] Civil aviation s t Meteorvjlogics | | Buiidings | | and electrical Water Administration I ~ ~ ~~~evcsservice technical capacity and the resources to manage their systems often use line-item budgeting with very broad road networks effectively, These problems are matters cost headings that involve a great deal of aggregation. of scale: local governments are too small to justify hir- Items like "administration," "rent," and "electrical and ing people with the skills needed to plan and manage mechanical" frequently cover several functions, and road networks acceptably there is no simple way to identify the expenditures attributable specifically to roads. Most road depart- ments cannot tell how much they spend on routine and Weak Management Systems periodic maintenance, since some periodic mainte- nance costs are charged to the recurrent budget and Effective management requires timely collection and some to the capital budget. They cannot discern the analysis of both physical and financial information. Yet breakdown of costs among overhead, labor, and equip- many road departments do not possess even the most ment, or the unit costs of shoulder repairs, regraveling, rudimentary management information systems. and cleaning drains. Such poor accounting systems Moreover, confusion and poor management structures make it difficult, if not impossible, for managers to offer managers little incentive to introduce and devel- establish consistent spending priorities. op such systems. Numerous attempts have been made to introduce Financial accounting systems often provide little management information systems, but with little success information to support enlightened management deci- (box 3.3). Many fail as soon as the consultants who have sions. Typically there is no revenue account (hence no installed them leave (box 3.4). The most recent World cash flow statement), accounts are kept on a cash basis, Bank review of road management systems showed that and investments are written off as a cash expense as basic roads inventory data were valid or complete in only soon as they are incurred (that is, road agencies do not 10-25 percent of countries in Africa, Latin America and keep a balance sheet or depreciate assets). Accounting the Caribbean, and Asia, and 50 percent in the Middle A Diagnosis 29 Box 3.3 Problems implementing road management systems Robinson and May (1997) reviewed donor-financed pro- * Lack of commitment, often because the road manage- jects in which consultants were employed to develop road ment system had been imposed by donors as a loan management systems. The aim was to identify why these condition. projects encountered problems during implementation * Expectation of high-tech solutions when simple com- and what might be done to avoid such problems in future. mon-sense solutions were more appropriate. The following external, institutional, and technical factors * Greater than expected resistance to change. were identified as important in contributing to poor Design problems: performance: * Inappropriate and unrealistic terms of reference. - Consultants lacking sufficient qualified staff. External * Systems too complicated to be sustained by local staff Economic and financial problems: and domestic resources. * Weak local economies and foreign exchange shortages Staffing and training problems: preventing the purchase of required inputs. * Shortage of experienced local staff. * Local funds sufficient to cover only staff salaries, leav- * Operational requirements preventing local staff from ing little to finance actual maintenance. being released for training. Cultural problems: * Overambitious training programs with poorly pre- * Problems introducing modern management practices, pared instructors. including incentives, into cultures that were ruled by * Insufficient follow-up training and updating. elders, suffered from ethnic problems, or where nepotism and favoritism prevailed. Technical * Traditional behavior in which excuses had to be made Hardware and software problems: to avoid blaming individuals. * Deficient computer facilities and unsuitable hardware. * Inadequate data. Institutional * Focus on procuring new equipment, rather than the Client attitudes: systems needed for maintenance and repair. Source: Robinson and May (1997). East and North Africa (the latter region included economic evaluation model-to program regular Hungary, Portugal, Turkey and the former Yugoslavia). maintenance. The use of bridge management systems Data on pavement condition, surface roughness, and was even less common. pavement strength were virtually nonexistent in 30-50 Many countries do not have functioning mainte- percent of the countries surveyed in Africa and Asia.6 nance management systems to determine network- Timely and accurate traffic counts, essential for informed wide maintenance priorities. Fewer, still, supplement road planning, are often incomplete, with road agencies such physical planning tools with performance bud- conducting surveys on unrepresentative, irregular, or geting systems. A country cannot manage a large road nonexistent lengths of the road network. network efficiently without a usable management Although donor-financed lending programs over information system to help managers set priorities the past two decades have typically included mainte- and monitor performance against predetermined tar- nance management systems, only 10 percent of the gets. Yet this is precisely what many road agencies in countries surveyed in Africa, and 30-50 percent else- developing and transition economies are still trying where, had a functioning routine maintenance man- to do. agement system. Moreover, performance was variable. Likewise, economic evaluations of road maintenance interventions were still uncommon. Although the vast Inefficient Work Methods majority of World Bank projects use the World Bank's Highway Design and Maintenance Model, only 15 per- Few road agencies manage their resources well enough cent of the countries reviewed used it-or a similar to achieve reasonable value for money. Instead, they 30 Commercial Management and Financing of Roads Box 3.4 The failure of a maintenance management system A 1995 consultant's report had this to say about a failed equipment to update the inventory and inspect the maintenance management system in a Middle Eastern roads; country: 'The Road Maintenance Management System * maintenance engineers in the districts do not under- (RMMS) was introduced in 1986 when a complete inven- stand the condition categories due to lack of training; tory and inspection of the network in each district was * the labor force in each district is too large, most are prepared. It was intended for this to be updated each year. unwilling/incapable of producing reasonable quality The RMMS was to be used to determine the allocation of work, but it is impolitic to discontinue their employment; funds for maintenance between districts, although it was * there is great difficulty in obtaining sufficiently skilled not suitable for determining rehabilitation and recon- and responsible supervisory staff; and struction priorities. However, the Directorate of Road * the financial allocation is only sufficient to pay the Maintenance in the Ministry of Public Works has not used wage bill. the system since 1992, and the RMMS is now in complete Although there is nothing fundamentally wrong with the disarray and disrepute for no clear reason. The following system, it seems to have failed through inadequate manage- reasons have been offered by various officials involved in ment, lack of training, ill-designed personnel policies and the program, all of which are valid to a greater or lesser underfunding. It seems probable that the system has been degree: seriously undermined due to political and other pressures * some districts do not make returns; on district engineers to employ more daily laborers than are * district officials do not have the staff, vehicles and needed and without regard to their capacity for work." Soure: Unpublished consultant study by Halcrow, Fox, and Associates. deliver poor quality services-the result of meager agency must also have enough qualified staff to process annual budgets-characterized by undue reliance on contracts, supervise work, and deal with arbitration work done using in-house staff and equipment, ineffi- issues-tasks for which staff in many countries, like cient operation of government plant pools, and lack of those of the former Soviet Union, often lack experience. interest in labor-based work methods.7 These practices Inefficient government plant pools are another are typical of agencies that face no market discipline and symptom of weak market discipline. Most road agen- have poorly motivated and unaccountable managers. cies own millions of dollars worth of heavy plant and A considerable portion of maintenance, particularly equipment, much of it procured under loans from routine maintenance, is still carried out using in-house international donors or furnished on a grant basis by staff and equipment, even though its quality is variable bilateral donors. Even a relatively small road agency and costs usually higher.8 Although cost comparisons may own plant and equipment worth $50 million or are often tenuous, in-house work exposed to private more. Utilization rates for this equipment often drop sector competition nearly always dramatically increas- to 20-30 percent, compared with 80-90 percent in the es efficiency, with costs falling by as much as 30 percent. private sector. The economic losses associated with Contract maintenance can also improve quality. A these low utilization rates can amount to more than recent review of experience with contract maintenance $23 million per year.9 in six Latin American countries concluded that such The superficial reasons for such low utilization rates practices had helped to solve, or at least alleviate, ineffi- include poor management and accounting systems, cient resource use (World Bank 1996c). Still, contract lack of standardization, shortages of fuel and spare maintenance is not a panacea. Road agencies are natu- parts (or shortage of foreign exchange to purchase rally reluctant to give up the power that comes from them), shortages of trained equipment operators and managing large in-house labor units. And, further, con- mechanics (mainly due to poor terms and conditions tracting out will work effectively only when procure- of employment), and overstaffing of unskilled laborers. ment procedures are straightforward, that is, if there is a The real reasons are related to lack of a stable work load healthy and competitive local construction industry and (that is, inadequate road maintenance allocations and a stable flow of funds to pay the contractors. The road an erratic flow of funds), lack of transparent manage- A Diagnosis 31 ment systems (that is, costing systems that clearly spell Notes out the price of low utilization levels), lack of manage- 1. Over the past few decades many governments systematical- rial accountability, and political interference. No one ly expanded the civil service, often by a factor of two or three, knows, or cares, that allowing equipment to be idle to deliver on election promises to reduce unemployment. Road involves serious waste. agencies were a key target for employment programs, and some The lack of interest in labor-based work methods is now have two to three times the required number of laborers on their books. also symptomatic of weak market discipline. Not only 2. A further complication is that agency staff may work for pri- are labor-based method[s often much cheaper (in vate sector engineering firms that could compete for contracts Tanzania and Ghana labor-based contracts cost about tendered by the road department. 30 percent less than traclitional contract prices), they 3. "We want them to come to work. We want them to work five are often more reliable because government plant pools days a week. We want them to work 40 hours a week. We don't want them to have to do something else in order to survive and are in such disarray Labor-based work methods never- we want them to keep their hand in their own pocket." theless raise other difficulties.10 Government procure- Comments by E. K. Jaycox, Vice President, Africa Region, at ment procedures often discourage the letting of small a conference on "Capacity Building: The Missing Link in African contracts, particularly to one-person contractors who Development," Reston, Virginia, May 20, 1993. cannot be expected to follow standard bidding proce- 4. Inadequate fines not only encourage overloading and fail to dures. Donor policies, with their emphasis on interna- cover the extra costs of the road damage, but they also present tional competitive bidding and preference for financinig greater scope for gratification payments, thereby eroding good foeigna changtitie expenditures, add toeferee ti binas g governance. Gratification payments can add up to substantial foreign exchange expenditures, add to this bias. sums. A recent article in The Economist (April 12, 1997) report- Evidence from a recent survey in Ghana points to two ed the $1.25 billion annual turnover in illegal payments made principle problems there (Stock 1996). First, large con- by truckers to officials in order to enter Delhi. tractors have less incentive than small firms to employ 5. Civil liability claims become more of a problem as the state labor-intensive work melthods, since they do not want of the road network deteriorates. The 1996 Local Transport theirc.Second, frequent delays Survey conducted by the Institution of Civil Engineers in the hir costym nts toe setanr heindle. by contractors withrel United Kingdom found that more than 70 percent of local in payments are better handled by contractors with rel- authorities had experienced a rise in highway liability claims atively small wage bills, since payments for other inputs over the previous five years. can more easily be deferred. Delays in paying wages lead 6. See World Bank (199Ia). Most Bank-supported highway quickly to strikes. Hence, the expectation of delays in projects now include elements to redress this problem. payment for works dissuades prospective contractors Although a more up-to-date review might show a general from using labor-based methods. And there are other improvement, the lack of an adequate road inventory and con- dition survey still hampers the efforts of many developing coun- reasons. Labor-based work methods offer less scope for tries to manage their networks more effectively gratification payments, and management is under no 7. Labor-based work methods involve substituting labor for direct pressure to find the cheapest and most cost-effec- equipment in low-wage countries. See Stock and de Veen tive way of getting the work done. (1996). Road agencies are unlikely to operate efficiently 8. Higher unit costs are, of course, hidden by the budgeting until they are subjected to some form of market disci- framework that makes unit cost accounting difficult, if not pline. Competition is t]ae primary factor motivating impossible. 9. This calculation is based on a plant pool worth $50 million, managers to cut waste, improve operational perfor- with an average utilization rate of 25 percent instead of 85 per- mance, and allocate resources efficiently (Shirley cent. The equipment is depreciated over eight years, using 1989). But unintended and unwanted consequences straight line depreciation, a 12 percent interest rate, and maxi- could arise. If the lower unit costs achieved through mum utilization of 1,250 hours per year. 10. Accurate cost comparisons are difficult to make since they improved work methods lead to a lower budgetary are dependent on the costing system used, market conditions, allocation the following year (or at least the anticipa- and the government's reputation as a reliable payer. Contractors tion of a lower allocation), then managers have little often add a surcharge to contract prices to cover expected late incentive to introduce more efficient operations. payments. 4. Commercializing Roads: The Four Basic Building Blocks W hat can be done to improve road financing and scope for flexibility. The reforms can be introduced in W road maintenance policies? More generally, different ways, that is, the content of each building what can be done to strengthen the management and block can differ, depending on country circumstances. financing of roads overall? The key concept behind the They can move sequentially or in parallel, and both the reform agenda is commercialization: bring roads into sequencing and the pace of reform can vary. But in the the market place, put them on a fee-for-service basis, end all four building blocks should be in place to and manage them as a business.1 But since roads are a ensure that the reform agenda is sustainable and does public monopoly and their ownership is likely to not drift back to the status quo ante. remain in government hands for some time, commer- cialization requires complementary reforms in four other important areas, referred to as the four basic Assigning Responsibility building blocks. They focus on: * Establishing responsibility for managing roads by The first building block concentrates on creating a clearly assigning roles. coherent organizational structure for managing differ- - Creating ownership of roads by involving users of ent parts of the road network. This requires clearly roads in their management to encourage better man- assigning responsibility among different government agement and to win public support for more road departments, different levels of government, and indi- funding, while constraining road spending to what is vidual road agencies. The arrangement must be based affordable. on an accurate road inventory, functional classification * Stabilizing road finance by securing an adequate, of roads, designation of appropriate road agencies, for- continual flow of funds. mal assignment of responsibility to each road agency, * Strengthening management of roads by introducing and clarification of the relationship between the road sound business practices and enforcing managerial agency and the owner or parent ministry accountability. Responsibilities to be assigned include those for oper- The four basic building blocks are the core of ating, maintaining, improving, and developing the reform. They are interdependent and should be imple- road network; for traffic management; for handling mented together. If not, reform will be only partly suc- general accidents and incidents; for road accidents cessful. The management and financing of roads can- caused by the road agency's own negligence; and for not be reformed without establishing who is adverse environmental impacts associated with roads responsible for what. The financing problem cannot be and road traffic. solved without the strong support of road users. The support of road users cannot be won without taking steps to ensure that resources are used efficiently And Creating Ownership resource use cannot be improved without controlling monopoly power, constraining road spending, and The second building block is concerned with the con- enforcing managerial accountability. Still, there is cept of ownership-building constituencies with a 32 Commercializing Roads: The Four Basic Building Blocks 33 strong vested interest in sound road management. Furthermore, traditional earmarking is not a viable Major policy reforms in the road sector cannot succeed solution. It adversely affects management of the gov- without the active support of a large and vocal con- ernment's overall budget and is rarely sustainable. stituency willing to argue for better road management An added concern is that existing financing mecha- and additional, affordable road financing. nisms do little to strengthen market discipline either The obvious constituents are the stakeholders: road by managing demand or by improving the efficiency of users themselves, together with the business commu- the road agency. Solving the financing problem calls for nity, farmers, and other people dependent on a well- a radically new approach. Hence, the concept of com- functioning road network. Given that current financial mercialization. With strong stakeholder support roads allocations for roads are erratic and well below the lev- can be put on a fee-for-service basis to generate the els needed to keep the road network in stable condi- added revenues needed to support operation, mainte- tion over the long term, strong stakeholder support for nance, and improvement and to separate road financ- more road funding must be built up if reform is to suc- ing from the vagaries of the government's budget. ceed. The usual mechanism for winning their support is by involving them in road management. Stakeholders agree to work in partnership with the Introducing Sound Business Practices government to strengthen road management and financing in return for a seat at the table where deci- The fourth building block focuses on creating a com- sions are made about how roads are to be managed and mercially oriented road agency. Road users involved in how funds are to be spent. the management of roads generally press for the intro- duction of sound business practices to ensure that their constituents get value-for-money from road spending. Ensuring Secure and Stable Financing Road users expect clear management objectives, an effective management structure, competitive terms and The third building block: concentrates on establishing conditions of employment, consolidated budgets, com- an adequate and stable flow of funds. Without both, mercial costing systems, and effective management none of the above reforms will be sustainable. Yet prac- information systems. Introducing sound business prac- tically all governments in developing and transition tices changes managerial incentives. It brings pressure economies are seriously short of fiscal revenues. to dispose of in-house plant and equipment (or to use Budget allocations for road maintenance rarely exceed it more efficiently), to arrange for more work to be done 50 percent of requirements, and agreed allocations are under contract, to control vehicle overloading, and to often cut with little notice in response to short-term fis- improve road safety. These issues have become systemic cal crises. Funds for road improvement are likewise in sources of inefficiency in the road sector because cur- extremely short supply, particularly in rapidly growing rent management procedures in most countries provide economies and those in need of extensive road mod- little incentive to do anything about them. ernization. Given these fiscal conditions, governments cannot meet financing needs by allocating additional revenues Note from the consolidated fund. Additional funds must 1. In the early 1950s when the Japanese, U.S., and New Zealand come from heightened revenue mobilization. But if road funds were set up, this financing arangement was referred road-user charges are raised, there is no guarantee that to as the "user pay" principle. It consisted of two elements: the user paid and proceeds were credited to a special account, or the additional revenues will be allocated to roads, nor road fund, that was managed separately from the government's that they will generate a stable flow of funds. budget. Part Ill. An Agenda for Reform 5. Assigning Management Responsibility M anagers of road networks cannot be held M accountable for the condition of roads unless Box 5.1 Establishing the legal status of roads responsibilities for managing different parts of the road in anglophone countries network and road traffic are assigned clearly Managing In anglophone countries roads fall into two main legal road traffic involves controlling vehicle weights and categories-they are either designated or undesignated dimensions, providing road signs and signals, regulat- (the terminology varies among countries, and other inveicleafet,regulatg vehicle emissions, terms like proclaimed/unproclaimed, declared/unde- i v, r clared, and adopted/unadopted are also used to describe managing on-street parking>, and controlling road con- the legal status of a road). When a road is designated, the gestion. This chapter discusses how managerial act of designation is published in the government gazette responsibilities are assigned, how they affect overall in a notice that cites the act under which the road was management of the road network, and how they affect designated, the roads location, the responsible highway responsibility for managing road traffic. authority, and the functions to be delegated to that authority. In the case of trunk roads the act cited is usu- ally the Roads and Road Traffic Act (or the equivalent). Urban roads may be designated under the Urban Basic Principles Transport Act (or the equivalent), while other roads may be designated under a variety of other acts, including the The formal way of assigning responsibility for manag- Local Government Act, the National Parks Act, the Game ing a road-which also establishes ownership of the Parks Act, or the Private Streetworks Act. road-is by designating the road (box 5.1). The notice Once a road has been designated, the responsible highway authority is expected to physically mark out the that does so cites the act under which the road is to be road reservec(to deynechelan-hodinuo theh road reserve (to define the land-holding of the highway designated, the location of the road, the responsible authority) and to take responsibility for the various func- road agency, and the functions to be assigned to that tions delegated to it. Roads that are undesignated simply agency. In this way responsibility for certain roads may belong to the adjoining landowners who are solely be assigned to a central government agency, a local gov- responsible for maintaining them. Under certain cir- cumstances, however, the government may channel ernment agency, a community group, or a private enti- funds,thouhaesinte ghway ay toamee ty (as with private sector toll roads). Responsibilities are funds through a designated highway authority to meet part of the costs of maintenance. When a private road iS normally assigned on the basis of a road's functional built to a certain specified standard or is improved to that classification. As the functional class changes, it should standard, the highway authority will usually designate it be reassigned from one road agency to another-usu- and assign it to a legally constituted highway authority ally from a lower- to a higher-level road agency, Note: This box describes the system of establishing legal owner- although downward reclassification also takes place. ship in aniglophone countries, though procedures in countries with Spanish. French, and other legal systems are similar. One of the perennial problems in developing and Source: Prepared by Jeremy Lane and Ian Heggie for this study. transition economies is that the road classification sys- tem is often out of date. New roads may not have been ment to the appropriate road agency Updating the road designated, and changes in the functional class of exist- classification system requires an accurate road invento- ing roads may not have been accompanied by reassign- ry and identification of the road agency legally respon- 37 38 Commercial Management and Financing of Roads sible for managing each road. If any roads have not been traffic may delegate some of these responsibilities to designated, they will have to be assigned to a legally other levels of government (for example, responsibili- constituted road agency or, in the case of community ty for road signs and signals may be delegated to local roads, to an appropriate community group (like a vil- governments) or to the private sector (for example, lage council). The inventory may also identify the need responsibility for axle-weight enforcement and vehicle to reclassify selected roads, based on changes in their inspection may be contracted out to the private sector). functional class, and to reassign management of some roads from one road agency to another. The road inventory will normally be used to divide Managing the Road Network the network into three or four functional hierarchies. The roads can then be grouped into consistent classes For the purpose of assigning managerial responsibility, for setting common management objectives, construc- the road network is divided into several administrative tion and maintenance standards, and intervention lev- classes. Responsibility for managing the roads within els. Countries with relatively low volumes of traffic each class is then assigned to a public or private sector often group their roads into three functional hierar- agency, which becomes the custodian or temporary chies: arterial roads, collector roads, and access roads "owner" of these roads. The way in which these respon- (TRRL Overseas Unit 1988), while countries with high sibilities are assigned generally depends on the size of volumes of traffic usually group roads into four main the country, the extent of motorization, and the admin- functional hierarchies with several subdivisions: istrative structure of the central and local government. expressways, strategic routes, distributor roads The simplest management structures tend to be (including main and secondary distributors), and local associated with centralized government systems in roads (including local roads and local access roads) countries that are relatively small. They have a single- (Local Authority Associations 1989). tier structure in which one or more central government The process of assigning managerial responsibility road agencies take responsibility for managing most or attempts to reconcile three conflicting objectives. First, all of the road network (as in Bangladesh, Jamaica, and to the extent possible, it attempts to keep the various Ghana). On the other hand, when the political and functional hierarchies together. Second, it attempts to administrative system clearly distinguishes between assign managerial responsibility in a way that is con- the central and local government, countries tend to sistent with the country's administrative structure. adopt a two-tier management structure (as in Latvia, Since most countries are attempting to decentralize the United Kingdom, and Zambia). Under this system administrative responsibility to reduce the fiscal bur- local governments also become involved in manage- den on the central government and strengthen local ment. This model suits countries with extensive road accountability, this means assigning managerial networks that cannot easily be managed by centralized responsibility for collector roads and local access roads road agencies. to provincial and district-level governments. Third, it Finally, countries with a federal administrative sys- attempts to assign responsibility to agencies that have tem tend to adopt a three-tier management structure in the financial and technical capacity to manage the which central, provincial (state), and local governments roads effectively. all play a role in managing the road network. The three- Similar principles apply when assigning responsi- tier structure is, however, not universal in federal coun- bility for managing road traffic. Issues that are primar- tries. In some, such as Australia, Canada, and the ily local in nature (like managing urban road conges- United States, the federal government delegates the tion) are normally assigned to local governments, management of most roads to provincial or state gov- while those dealing with use of the network as a whole ernments, and the management structure ends up look- (such as regulating vehicle weights and dimensions) ing like that in two-tier countries (see box 5.2). are normally handled by the central government. The The remainder of this section divides the road net- agency with prime responsibility for managing road work into four administrative classes: Assigning Management Responsibility 39 Box 5.2 Jurisdictional control of roads in the United States Jurisdiction Rural mileage Percent Urban mileage Percent Total mileage Percent State 692,414 22.3 107,058 13.3 799,472 20.5 Local 2,229,668 71.9 694,728 86.5 2,924,396 74.9 Federal 179,561 5.8 1,292 0.2 180,853 4.6 Total 3,101,643 100.0 803,078 100.0 3,904,721 100.0 Most (74.9 percent) roads in the United States fall under the roads on other federal lands and Native American reserva- jurisdiction of local governments (town, city, county). Only tions. The rest of the roadways (representing 20.5 percent of 4.6 percent are under the jurisdiction of the federal govern- total national mileage and including the entire interstate sys- ment. These include roads in national forests and parks and tem) are controlled and maintained by state governments. * National roads, that is, major trunk roads, including volumes of traffic have also meant that the main road expressways and toll roads. agencies are increasingly involved in constructing and * Regional and rural roacls. operating high-grade expressways and public toll * Urban roads, which nmay also include some toll roads and overseeing toll roads built and operated by roads. the private sector (table 5.1). * Community roads, tracks, and trails. Although the functions of the main road agencies have evolved, these changes have not always been The Trunk Road Network accompanied by institutional reforms to ensure that Trunk roads, which typically account for between 10 the agencies have a clear idea of their diverse and and 20 percent of the overall public road network, have growing responsibilities and are restructured so that traditionally been managed through a central govern- they can discharge these responsibilities effectively. To ment department that forms part of the ministry of address this issue, many countries have decided to works or, in some countries, the ministry of construc- make the main road agency responsible primarily for tion. These roads tend to be the most heavily used and managing high-volume (national) roads and express- the most costly to build and maintain. Although the ways. In parallel, a growing number of countries are primary task of this department is to manage the trunk asking which roads can be realistically managed by the road network, it is often expected to assist local gov- private sector and whether the remaining public sec- ernment road agencies and, if needed, temporarily take tor roads can be managed in a more commercial over management of local government roads. Growing manner. Table 5.1 The importance of expressways and toll roads in overall road management (kilometers) Mai.n road agency Toll roads Total Expresswaysa Other roads Publicly managed Privately managed Privately ownedb public roads Argentina 600 28,600 0 9,800 0 216,000 France 8,581 29,050 5,562 0 743 966,000 Hungary 378 29,300 0 0 57 158,600 Indonesia 0 17.700 280 0 150 260,000 Italy 894 44,206 0 5,550 0 314,360 Japan 5,860 57,500 8,723 0 0 1,144,360 Korea, Rep. of 0 12,052 1,840 0 40 77,000 Malaysia 575 15,400 0 0 1,010 94,000 Mexico 0 42.928 2,507 3,176 0 303.262 South Africa 615 4,693 0 672 153 525,000 Spain 4,939 22,536 0 0 2,023 343,200 a. Expressways without tolls. b. Includes joint ventures between the public and private sectors. 40 Commercial Management and Financing of Roads This rethinking has led to the establishment of a autonomous road toll agency as in Japan and Korea; or growing number of autonomous or semi-autonomous are owned and operated by the private sector under road agencies that manage the trunk road network or toll various types of concession agreements (box 5.3). roads along commercial lines (table 5.2). The agencies Between 5 and 20 percent of the trunk roads man- managing the trunk road network tend to be managed aged by the main road agency can be operated as toll by a public-private board, which includes representa- roads, depending on traffic densities and toll rates (see tives of road users and the business community; have a table 5.1). The revenues from these tolls generally chief executive and line managers; operate under a per- cover the entire cost of operation and maintenance. formance contract with the parent ministry; and employ Usually, less than half of the toll roads cover their cap- workers under terms and conditions similar to those ital costs. Those that do not cover all costs are often used in the private sector. The annual performance con- financed using the loan supportable by revenue tract is a key element of the arrangement. It is usually approach (box 5.4). The general rule is that a tolled based on a multiyear business plan and spells out the full-standard motorway link will cover all of its costs road agency's obligations, strategies for achieving them, only when: traffic volumes are at least 10,000 to performance targets, and procedures for monitoring and 15,000 vpd and growing, average toll rates for private evaluation. Such arrangements . assign managerial vehicles are $0.03 to $0.06 per km, and the concession responsibility in a clear and transparent manner. period is between 20 and 30 years (International Road Responsibility for managing toll roads is less well- Federation 1996). As a result, there are relatively few defined. Some toll roads are managed directly by the privately owned toll roads. Indeed, it is difficult to let main road agency, as in Ghana where they are managed concessions to construct, operate, and transfer more by the Ghana Highway Authority; managed by the pri- than about 5 percent of the roads managed by the main vate sector under a management contract with the road agency-and this amount usually accounts for main road agency (in Argentina and Malaysia the pri- less than 1 percent of the overall public road network. vate sector rehabilitates, operates, and maintains some Costs of rehabilitating existing roads can still be eco- roads, while in South Africa, they mainly build, oper- nomic with lower traffic volumes of around 5,000 to ate, and maintain roads); managed through an 6,000 vpd. That is why design, build, finance, and Table 5.2 Countries with autonomous or semi-autonomous main road and toll road agencies, 1998 Established Being established Under consideration For toll roads only3 Australiab Lesotho Kenya China Colombia Malawi Lebanon France Finland Mozambique Peru Indonesia Georgia Namibia Philippines Italy Ghana Nigeria Romania Japan India Zambia Tanzania Korea, Rep. of Ireland Uganda Malaysia Latvia Zimbabwe Spain New Zealand Thailand Sierra Leone South Africac Spaind Sweden United Kingdome Yemen Note: Pakistan, Russia, and Sri Lanka (not listed) have road authorities in name only. a. Both public and private toll road agencies. b. Some states have established semi-autonomous highway authorities. c. To be established as of end-March 1998. d. Some regions only (for example, Andalucia). e. Highways Agency in England. Assigning Management Responsibility 41 Box 5.3 How different countries manage toll roads KOREA (DESIGN, BUILD, FINANCE, AND OPERATE): Korea legislation under which these roads are tolled stipulates, Highway Corporation is a public corporation charged among other things, that the Ministry of Transport deter- with constructing, reconstructing, and maintaining mines toll tariffs based on recommendations submitted by national expressways, all of which are operated as toll the South African Roads Board. roads. By the end of 1996 Korea had 20 expressways with The toll tariffs are raised regularly to account for infla- a total length of 1,840 km. There is a bold plan to add a tion. The toll system operates on an open basis (that is, further 1,800 km and to expand 500 km of existing roads motorists can use sections of road between toll plazas with- by 2004. Then, expressways will account for about 25 out paying the toll). Regular users are given substantial dis- percent of the national road network and nearly 5 percent counts through concessions to local residents and frequent- of the overall public road network. user cards. In addition to the above roads, there is one Average traffic volume on expressways is more than private sector toll road carrying a government guarantee 44,000 vehicles per day Revenues are pooled, and there and another under consideration without any guarantees. is a unified toll fee of $0.031 per km for cars, $0.035 per km for buses, and $0.065 per km for trucks. Tolls were ARGENTINA (PRIVATE DESIGN, BUILD, FINANCE, AND OPERATE): originally introduced to generate sufficient revenues to The Direcci6n Nacional de Vialidad is responsible for cover the costs of operating and maintaining the express- 38,000 km of roads. Many of these needed to be rehabil- way network. But shortage of public revenues has meant itated, and the Direcci6n Nacional de Vialidad decided to that Korea Highway Corporation is increasingly required invite bids from the private sector to rehabilitate, operate, to contribute part of the costs of new expressway schemes. and maintain up to 10,000 km of this network and to The government provides the balance of the capital in the recover the costs through tolls. The roads were divided form of equity. into 20 corridors varying in length from 300 to 1,000 km. Korea Highway Corporation operates on a break-even Improvement needs were identified for each corridor, and basis, and tolls are adjusted from time to time to ensure a schedule was established for the work to be carried out that revenues cover costs, including redemption of loans by the concessionaire. and payment of interest on government loans and corpo- Some work had to be done before any tolls could be rate loans and bonds. Efforts are currently underway to collected, while other work had to be completed within persuade the private sector to build and operate selected 36 months. After a bidding process, in which concessions toll roads under concession agreements. The first such were awarded to bidders offering the highest lump-sum project is being implemted, and it is expected that sever- payment for the concession, 14 concessions were award- al more will be agreed during the next few years. ed to 13 consortia covering 9,800 km. The government remained owner of the roads and set the basic tariff SOUTH AFRICA (PRIVATE F[NANCE AND OPERATE): South (indexed on the basis of the cost of living and the exchange Africa currently has 10 continuous toll roads totaling 709 rate). The concessions were for 12 years, and the roads km in length. Average daily traffic taken over all toll plazas had to be maintained to specified standards. The initial was 8,892 vpd during 1995-96, with variations from a tariff was set at an average rate of $0.015 per km. low of 2,292 vpd to a high of 26,143. These limited-access The concessions operated for only about six months- freeways are either new or have been significantly rebuilt, the tariff rose rapidly, a public outcry arose, and the con- Almost all work, including construction, maintenance, cessions were suspended. After further negotiation, the and operation of toll plazas is carried out by the private concessions were reinstated based on an average toll rate sector under open-tender contracts. The roads are over- of $0.01 per km, the lump-sum payments were abolished, seen by the Department of Transport, which acts as the and the government agreed to pay an annual subsidy of administrative arm of the South African Roads Board. The $57 million to the concessionaires. operate contracts involving partial finance by the pri- gous to the one managing the main trunk road network. vate sector are becoming siD popular. But the same is rarely true of the rural road network since rural municipalities and rural districts are often small and Regional and Rural Roads lack the capacity and resources to manage the local road Regional road networks are often large, and it is therefore network effectively. The difference is essentially a matter feasible to manage them thirough a road agency analo- of scale. The local road networks are too small to justify 42 Commercial Management and Financing of Roads Persuading (or requiring) local governments to Box 5.4 Financing toll roads in South Africa: the hand over responsibility for implementing their road loan supportable by revenue approach programs to a specialized project implementation In South Africa none of the initial toll road schemes agency implemented by the Department of Transport on behalf * Persuading local governments to join together to of the South African Roads Board were wholly self- form larger operating units for the purpose of manag- financing. The concept applied in designing the initial ing their road networks, that is, to form joint-services schemes was called the loan supportable by revenue approach. The loan supportable by revenue is deter- committees. mined by calculating the present value of the project * Persuadinglocalgovernmentstocontractouttheplan- over 30 years, using a projected real interest rate, ning and management functions to consultants. expected traffic growth, and forecast expenditures. This figure determines the size of the loan that can be repaid Central government management. The first model, from toll revenues over 30 years at a borrowing rate which is used in both Bangladesh and Chana, solves above the rate of inflation. The balance of the capital is prvie in th for ofaln-em.onfo h the problem of scale and also provides access to cen- provided In the form of a long-term loan from the National Road Fund. These loans (together with any tral government budgetary resources, at least for capi- interest determined by the Board) are repayable only tal works (box 5.5). The Department of Feeder Roads when all private sector loan obligations have been met. in Ghana has often been held up as a model of best Experience to date indicates that traffic growth has practice for managing feeder roads through a central exceeded initial expectations, and real interest rates government department. It was established in 1981 have been higher than forecast after an initial period of being less than forecast. The loan supportable by rev- when it became clear that the Ghana Highway enue calculations are revised on a regular basis to Authority could not manage the rural road network. ensure that all private sector financial obligations will The Department of Feeder Roads overseas a network be met. Although the toll roads incurred deficits during of 21,830 km, is highly decentralized, and does most their early years, a combination of inflation-linked tolls work under contract-often using labor-based meth- and traffic growth is expected to enable the toll roads to ods. But now it will have to transfer many of its respon- break even within 20 years and fully repay private sec- sibilities back to the rural district councils as part of the tor loans within 30 years. Private sector financing involves both capital and government's overall decentralization program. It is money market loans using a variety of instruments. The still unclear how this will be done and whether the total borrowings as of March 31, 1997 amounted to Department will remain a contractor managing the $645 million in the capital market at nominal values local networks on behalf of the districts or will be with redemption dates up to and including 2015, and restructured into a small central government depart- $99 million in the money markets. Overall financing ment that monitors local road works, provides advice, costs in 1996-97 were 13.5 percent. No interest was paid on National Road Fund loans, amounting to more and ensures quality control. than $390 million. A central gGvernment department can successfully Source: Prepared by Albert du Plooy for this study. manage rural roads, but such an agreement generally ._______________________________________________ represents only an interim solution to the problems of weak local government capacity. Centralization, par- recruiting the skilled personnel needed to plan and man- ticularly in large countries, bypasses the local govern- age a road to a technically acceptable standard. This prob- ment road agencies, further weakening them. lem raises serious questions about how to assign legal Meanwhile, remote central government agencies rarely responsibility for managing such networks. consult local communities about priorities to the Countries have typically attempted to deal with the extent that they should and are less concerned about above problem by: long-term sustainability. But these problems can be * Reclaiming legal responsibility for rural roads and avoided in smaller countries, given proper legislation transferring it either to a central government ministry requiring formal consultations and local endorsement or to a special-purpose rural roads agency of road plans. Assigning Management Responsibility 43 Project implementation agency. The second model is lines payment procedures, and pays high salaries, there- used extensively in francophone Africa. Such an imple- fore attracting well-motivated, high-quality staff. Its menting agency is generally referred to as AGETIP "corruption-free" procedures have also allowed them to (Agence d'execution des travaux d'interet public contre le complete most projects on schedule with a cost-over- sous-emploi), and they have been set up primarily to exe- run ofjust more than 1 percent of the portfolio (in con- cute donor-financed infrastructure projects. The agency trast, cost overruns in public procurement in the same generally has a board comrposed of well-known figures countries average 15 percent). The AGETIP routinely (none of whom are government representatives), a gen- obtains unit prices 5 to 40 percent lower than those eral manager appointed by the board, other line man- obtained by the government through official bidding. agers (administrative, financial, and technical managers), The disadvantages are that the contract between the and staff who are paid market-based salaries. The agency AGETIP and the government is not itself subject to is set up as a private, nonprofit association and pays no competitive bidding, the AGETIP is almost entirely taxes. It works on behalf of local authorities who delegate dependent on continued donor funding, and it proba- certain functions. The local government usually reserves bly hampers development of the local consulting the right to select projects. The project implementing industry by creaming off staff and monopolizing all agency then recruits consultants to carry out detailed contract management work under its tax-free operat- engineering, invites bids and awards contracts for both ing environment. The AGETIP can nevertheless play an supervision and implementation of works, manages the important role, particularly as an interim solution in contracts, and pays the contractors directly from a spe- economies where the local consulting industry is rela- cial account opened in its own name. The agency is sub- tively undeveloped. Also, in the longer term it could ject to bimonthly managemnent and financial audits, and evolve into a contractual arrangement awarded on the an annual technical audiL. The overhead cost of the basis of competitive bidding. AGETIP in Senegal (excluding the fees paid to consul- tants for designing and supiervising works) is about 5 per- Joint services committees. The third model, in which cent on a turnover of $55 imillion (330 projects). several local government agencies cooperate to procure The advantages of an AGETIP are that it avoids cum- goods and services on behalf of all their members, is fair- bersome government procurement regulations, stream- ly common in industrial countries, as well as in Jordan Box 5.5 The Local Government Engineering Department in Bangladesh The Local Government Engineering Department started * Professionalism-the Department is well-known for its in the 1970s as a small cell in the Local Government highly qualified professionals and its emphasis on contin- Division. Today, the Department is a dynamic agency with ual skill upgrading. about 700 engineering staff who are led by an energetic * Monitoring system-a computerized management director. It is the second largest of the departments imple- information system has been in place for more than a menting the country's Annual Development Program. It is decade. responsible for construction and maintenance of rural * Informal decisionmaking-the Department has infrastructure, including about 95,000 km of rural roads, bypassed the time-consuming practice of processing deci- most of which are earth. Almost all works are contracted sions through many layers of the bureaucracy out to the private sector, with smaller tasks going to work- * Leadership-strong, consistent leadership has provid- er groups. The Department is praised by both service ed continuity and motivated the staff. users and donors as one of the most efficient and effective * Teamwork-the staff have clearly defined work objec- government organizations in Bangladesh. The institution- tives and a keen sense of achievement. al aspects contributing to its successful operation include: * Sense of mission-the Department has vigorously * Decentralization-90 percent of the staff are located at pursued its mission of 'serving the people at the grass- the thana (subdistrict) level. roots." Source: World Bank (1996a). 44 Commercial Management and Financing of Roads and South Africa. The arrangements are normally remains responsible for managing the road network- referred to as joint-services committees. Joint-services and often does so through a small in-house client committees are used mainly to acquire scale. By pooling unit-while the actual planning and management are their resources, individual agencies are better able to delegated on a competitive basis to a technically qual- plan and manage their affairs and let larger and more ified third party. In industrial countries this model is cost-effective contracts for procuring goods and services, being adapted as part of the process of redefining the The group of local government agencies generally role of government and to increase efficiency In devel- assigns the tasks of organizing procurement and super- oping and transition economies its main attraction is vising implementation to one of their members, to a that it enables small road agencies to gain access to higher level of government, or to a local consultant (see people with high-quality technical planning and man- the fourth option below). The collaborative arrange- agement skills without taking the decisionmaking ment is sometimes made on an informal basis, power away from the local government. This model is although there usually must be a written agreement being used in some small municipalities in the United among the participating parties when the joint services States, at the county council and district levels in the committees becomes involved in activities like road United Kingdom (box 5.6), for some rural district maintenance, particularly when cost-sharing with the councils in Tanzania, and for all district councils in central government or a road fund is involved. These Zambia (box 5.7). legal agreements tend to be quite complex, especially when the local government agencies are controlled by Urban Roads different political parties. However, they do build local Urban roads can be grouped into three broad classes: capacity and identify who is responsible for what. roads in large metropolitan areas (generally compris- ing several large and medium-size cities), roads in large Private consultants. The fourth model, which cities, and roads in small towns. Each class faces involves contracting out planning and management unique problems, and they thus tend to be managed functions to consultants, is growing in popularity. differently. Some of these differences are logical and Under this arrangement the local government agency easily understood, while others have been arrived at Box 5.6 Contracting out planning and management of local government roads in the United Kingdom Prior to 1980 local governments in the United Kingdom 65 percent of all construction-related services be subject typically employed their own workers to advise, manage, to the market test, that is, compulsory competitive ten- design, and deliver projects and services to their cus- dering. tomers. This system changed in 1980 when new legisla- Under this arrangement the local authority's in-house tion compelled councils to let large construction contracts organization is split into two parts. One part remains in- under competitive tenders and required in-house direct house as a 'client unit," while the other becomes a 'con- labor to operate as quasi-companies and produce a small tractor," consisting either of previous in-house staff who profit at the end of each year. The regulations were sub- have to bid competitively for the work or of an outside bid- sequently tightened to require that all new works under- der who wins the contract. By early 1996 this process was taken by direct labor be subject to competitive tendering. well under way, and many councils had decided to con- Some councils later decided to seek competitive ten- tract out most construction-related services rather than ders for provision of local authority services (such as allow in-house staff to bid for the work (the process of con- garbage collection). The central government followed up tracting out was referred to as externalization). Berkshire on this by introducing competitive tendering for all such County Council externalized highways and planning, services. By the early 1990s the concept of competitive Westminster City Council externalized planning and tendering was well-established, and the government transportation projects, the London Borough of Ealing decided that competitive tendering should also apply to externalized all technical services, and other local author- professional services (including planning and engineering ities externalized selected functions like engineering, services). The law required that by April 1, 1996 at least design and materials, highways, and traffic management. Assigning Management Responsibility 45 Box 5.7 Contracting out planning and management of rural district roads in Zambia Zambia has 15,980 km of rural roads managed by 48 rural * Help councils to control and reduce costs of road district councils. When the National Roads Board took works and maintenance through consulting services. over management of the road fund, they invited the dis- * Advise councils on undertaking preventive mainte- tricts to submit proposals for maintenance programs. The nance activities to promote the quality and life span of programs submitted left much to be desired. They typi- road infrastructure. cally consisted of a list of road names coupled with a finan- The Association of Consulting Engineers also agreed to cial figure. There was no assessment of road conditions, introduce performance indicators for their members, no details of the proposed maintenance works, no indica- including quality of the program drawn up, time frame for tion of how the work was to be done, no specifications, implementation, unit costs of road works undertaken, and no contract documents. quality of work done, volume of work done, public rela- The National Roads 'Board therefore approached the tions and involvement of the local community, and pre- Association of Consulting Engineers of Zambia and asked ventive maintenance activities. By 1997 the performance if their members would help to prepare acceptable mainte- indicators had already resulted in the termination of at nance programs on behalf of the districts. The Association least one contract with a consultant. agreed to this on the basis of a terms of reference that Bids were invited from members of the Association required the consultants to work with the councils and: of Consulting Engineers to act on behalf of all the dis- * Agree on a road maintenance program and order of pri- tricts in each province. The National Roads Board and ority. the concerned districts selected firms, and one firm was * Agree on procedures to be followed in calling for tenders. appointed per province under a local government ser- * Assist in tendering and evaluation. vice contract. Within each province a single consulting * Negotiate with winning tenderers. firm now works with the districts, prepares their main- * Agree on the selection of contractors. tenance programs, prepares bid documents, helps them * Negotiate and agree on the terms of contract. select contractors, and supervises implementation. The * Ensure that implementation adheres to a set time National Roads Board fully reimburses work done frame. under contract. When a district does work using in- * Assist and monitor progress of road works to ensure house staff and equipment (mainly pothole patching), total quality management. the National Roads Board pays for materials only after * Certify payments at each stage of road works if the certification that the work has been done according to quality of work is satisfactory, specification. through a process of incremental change. The engi- In a second model the constituent parts of the met- neering criteria used iin interurban transport may ropolitan area have full authority for their own network become less important than other criteria, such as of roads and highways. These parts are normally large pedestrian needs, traffic congestion, pollution, and the enough to achieve the necessary economies of scale expectations and rights of city dwellers. These consid- and, in addition, can deliver services closer to the pop- erations can modify decisions that would otherwise be ulation. Unfortunately, conflicts can arise when deci- made on purely engineering grounds. sions are made on cross-boundary or strategic routes. Such decisions can have far-reaching consequences in Roads in large metropolitan areas. The simplest model neighboring areas-which have no formal say in the for large metropolitan areas is an area-wide authority decisionmaking process. with full responsibility for roads and highways. This Recognition of this problem has led to the adoption model has the advantage of economies of scale and of a third model in which a strategic authority takes mechanisms to direct funds to the areas of most need. responsibility for certain strategic roads or functions. But not all parts of the metropolitan area are likely to This authority can be a metropolitan-wide body, such have or perceive that they have the same problems. as an elected authority, or a regional or state body Divisive arguments between different parts of the met- empowered to fulfill this role. In a technical sense this ropolitan area may arise, along with accusations that system has much to recommend it. Unfortunately, con- decisions are being made at the wrong level. flicts between local bodies and the strategic body then 46 Commercial Management and Financing of Roads arise because the strategic body has a bias to manage, operate, and finance the road in the interests of strate- Box 5.8 The agency system fin the United Kingdom gic traffic. The local authority may naturally wish to In the United Kingdom an agency system operates in restrict traffic on such roads or to allow more frontage which the highway authority, normally the county coun- development to the detriment of the free flow of traffic. cil, devolves the delivery of certain functions to a lower In a fourth model the strategic authority comprises tier of local government-in this case a district. The representatives from each of the local authorities, cre- exact arrangements vary among and within counties. In ating a mechanism for dealing with differences. Still, general, such arrangements work best in urban areas, and the bigger is the urban area, the bigger is the num- local agendas have historically predominated in such ber of functions that can be devolved. How agencies joint bodies and the only way to progress is through a should operate was the subject of a government report, process of deal-making. and the following guidance was given on functions that The models mentioned above delineate ultimate might be suitable for an agency. Maintenance, grass cut- responsibility for highway functions. The actual delivery ting, sweeping, gully emptying, relaying footway, white lining, fencing, and cleaning signs, bollards, and traffic of services can also involve different mechanisms. The signals may be carried out by an agency whose district most straightforward is the one in which the road agency is highly or sparsely populated. Patching, potholing, is responsible for delivering the entire service, either curbing, resurfacing, and reconstructing should only be through its directly employed work force or through one undertaken by the agency if the district has a population or more contractors. This method allows little ambigui- of more than 100,000. Similarly, street lighting is appro- ty concerning responsibility and is easily understood by priate only for a district of more than 180,000. Winter maintenance is not dependent on district size, provided practitioners an h ulc.the routes fall largely within the district. Lastly, drainage, mechanism is one in which one authority, normally the bridges, earthworks, and electronic maintenance of traf- strategic authority, delivers the service using another fic signals should be carried out by the county. authority as its agent (box 5.8). The rationale behind this method is that the local authority will be able to offer economies of scale by incorporating the services area, but the urban area must conform at least in part required for the relatively short lengths of strategic roads to policy guidelines set down by the region or state. into whatever arrangements it has for delivering services This set up leaves the urban area free to provide value on the much longer length of its own roads. for money by planning the delivery of services howev- While this method does have an advantage in obtain- er they see fit (box 5.9). ing competitive prices, it suffers in other respects. In particular, the local authority tends to act as though the Roads in small towns. In small urban areas the respon- strategic roads were its own, which can create conflicts sibility for managing roads can rest with a nonurban between the local authority and strategic authority. authority, such as the region or state, the rationale There is also confusion over who has responsibility for being that the urban area is too small to carry out or what, especially in the eyes of the public, who invari- procure the necessary expertise. Alternatively, many ably find this arrangement difficult to understand. countries operate a system in which the urban author- ity has responsibility for all roads, or all nonstrategic Roads in large cities. The options outlined above for roads, that pass through their area. In another system metropolitan areas may also apply to large free-stand- certain functions are the responsibility of the urban ing towns and cities. But, in reality, the arrangement is area and some the responsibility of the region. For normally one in which the urban area has total respon- example, routine maintenance activities like sweeping sibility for its roads or is in some way linked to the local and pothole repairs may be the responsibility of the region or state, which plays a strategic role. This link- urban area, while larger-scale works are the responsi- age can take several forms (as outlined for metropoli- bility of the regional body tan areas). Further, sometimes under agency arrange- Service delivery in small urban areas takes many ments the responsibility for roads falls to the urban forms. It is typical to find that only certain core func- Assigning Management Responisibility 47 aims and objectives. Taking this process one step further, Box 5.9 Funding relatioinships in urban areas authorities could enter into quasi-legal arrangements, In several African countries the funding relationship often by letting contracts for the delivery of a specified between the city and the central government is through a service to one another or to an outside body This bidding process. In general, over an annual cycle the city arrangement is different from the joint bodies formed by determines which roads need repair and presents this bid parts of metropolitan areas. In that case the joint body to the central government. The central government con- siders bids from all over the country and decides which was responsible for policy while in this instance it is resources should be allocated to which cities. This prac- responsible for implementation. It should also be noted tice varies according to the level of detail. In some cases that toll roads-with either real tolls or shadow tolls- individual, relatively small schemes are individually can be superimposed on any of the above arrangements approved and funded. In other cases only large schemes by a strategic, regional, state, or local authority. are individually approved and funded, while smaller Finally, all urban areas normally have some undes- schemes and general works are jointly allocated funds. Such generic ystems are comon in Europ .Ths ignated or private roads that are normally the respon- Such generic systems eare common in Europe. These mechanisms can be just as complex as the managerial sibility of the adjoining landowners. In many cases relationships. It is not uncommon to find that funding is such roads form the majority in urban areas even made available from all levels of government and from the though they have a tenuous legal status. Often the private sector in one form or another. The availability of adjoining landowners have rights, privileges, and the- such funds, the ease with which they can be obtained, and oretical responsibilities that are honored more in their the conditions attached can distort spending decisions. In breech than in their observance. The urban authority addition, the public has difficulty understanding such sys- tems and hence bringing pressure to bear to change pol- has certain step-in rights, but does not often exercise icy decisions and introduce efficiencies. these rights-deliberately, because of a shortage of These funding mechanisms can also distort manage- funds, or because of the sheer complexity of the legal rial responsibilities. It is easy to blame inadequate and bureaucratic process involved. Unfortunately, an resources from a different level of government as the impasse can arise and last for many years. cause of poor maintenance. But when funding and responsibility come from the same body, there is a clear imperative to maximize efficiency in all aspects of ser- The Lowest Level of the Road Network vice delivery There is no one else to blame. Managerial responsibility is not well-defined at the Source: Prepared by the Babtie Group for this study lowest level of the road network. Some roads may be nominally placed under the jurisdiction of village councils (or the equivalent), while others may be treat- tions are provided in-house because of the size of the ed as private roads and left in the hands of adjoining operations, or core functions are provided under long- landowners or state enterprises (as with agricultural term contracts (as in the case of many small Finnish roads in Russia before the restructuring of collective communities that contract out all road works). Other farms). At this low level there are few technical skills less-frequent operations may be carried out through and an acute shortage of funds for maintenance, individual contracts, framework agreements, or call-off upgrading, and new works. contracts.' This system allows access to organizations Some countries attempted to address this issue by with the necessary expertise without having to main- creating a special class of roads-by amending the tain in-house resources all year. basic road legislation or by passing a Private Some small urban areas form consortia with other Streetworks or Road Cooperative Act-to which pub- adjacent bodies to provicie services on a lead-authority lic funds can be channeled on a cost-share basis. The basis-one town may deliver a particular service to a key to these arrangements is setting up an institution- group of like-minded towns. Other towns may take on al arrangement that offers appropriate incentives and similar roles for other services. This system can work clearly defines who is responsible for what. This so- effectively if authorities are like-minded, but is difficult called "private road" option is particularly appealing as to orchestrate if authorities have markedly disparate devolution of government becomes global. 48 Commercial Management and Financing of Roads The private road arrangements in Canada, Finland, while in Lesotho they form a village development Norway, Sweden, and the United States have common committee. elements. Their main objective is to persuade local There is obvious need for technical advice at the local people-individuals, villages, or groups of villages- level, especially in developing and transition economies. to accept responsibility for managing their own roads. Local villagers need to be trained in planning, carrying out Persuasion usually requires that there be an incentive road works, and dealing with unexpected problems dur- system, access to advice and technical assistance on ing implementation. Such instruction is usually provided road management, and technical and financial over- through a local planning agency and through the agency sight to ensure accountability of public funds. responsible for managing the main or rural roads. Finally, Incentives normally take the form of cost-sharing there is the question of oversight, the need to ensure that arrangements. Higher-level government pays part of road works are carried out to agreed standards. There is the construction and maintenance costs, and the also a need to ensure that government funds are proper- adoptive owners of the road pay the balance. But, to ly accounted for. Technical supervision should ideally be participate in the cost-sharing agreement, the indi- provided by the agency responsible for rural roads, vidual or group must formally apply tojoin the agree- though there is generally no need for financial oversight ment and abide by its rules. In Finland they do so by when the local contribution takes the form of volunteer forming a road cooperative (it is compulsory for prop- labor. When cash is involved, there must be an oversight erty owners to join an established cooperative if they arrangement like that in Finland. The Finnish system is maintain a road that provides the only access to their well-developed and might be used as a model for devel- property). In Ontario they form a local road board, oping and transition economies (box 5.10). Box 5.10 Managing private cooperative roads in Finland Finland has 78,000 km of public roads, 24,000 km of city The government supports maintenance of cooperative streets, and about 280,000 km of private roads that are roads provided that a formal cooperative has been estab- maintained by adjoining landowners or people living lished, the road length to a permanent residence is at least alongside the road. Private roads with more than one 1 km, and there are at least three estates with permanent owner can be managed as road cooperatives. By 1997. residents alongside the road. Each municipality has its 104,000 km of all private roads had been legally consti- own rules for supporting cooperative roads under their tuted under the Private Roads Act as cooperative roads. jurisdiction. In 1997, 87,000 km of the 104, 000 km These roads carry an average of 45 vehicles per day, and legally designated as cooperative roads received public 99 percent have gravel and earth surfaces. support from the government, a municipality, or both. The Private Roads Act requires that the cooperative stip- The support was given to 17,400 cooperatives with ulate right-of-way, ownership, and the formula for distrib- 392,000 members. In 1990 the government provided uting maintenance costs among both road users and the about $30 million to support cooperative roads, munici- adjoining property owners. The cooperative is responsible palities provided $40 million, and the remaining $50 mil- for arranging maintenance and may either pay its own lion came from members of the cooperatives. members to do the work or use a contractor. Each cooper- Government support is channeled through the Finnish ative must hold an annual meeting and must elect a chair- Road Administration (FinnRA) and is allocated to each qual- person, a secretary, a trustee, and other office-holders to if ying road on the basis of traffic volume and number of per- manage their maintenance operations. The trustees charge manent households served. The amount of government about $200 annually to manage an average-size coopera- support is adjusted for climate and average income. tive. The cooperative sets its own maintenance fees, accepts Additional support may be granted to cover exceptional new members, and is responsible for having the previous items. A FinnRA supervisor inspects the qualifying roads years accounts audited. Membership is compulsory for once every two to three years and transfers road mainte- property owners who use the road. Maintenance costs are nance know-how through an annual meeting with the road shared among members, depending on the size of their cooperative. FinnRA' administrative costs of managing property and the amount of traffic they generate. cooperative roads is about $60 per road cooperative per year. Source: Isotalo (1995). Assigning Management Responsibility 49 Transferring managerial responsibility to local com- egate some of these responsibilities (road signing in munities through road cooperative arrangements urban areas, for example) to lower-level road agencies. ensures that most roads receive regular maintenance; At the other extreme it is clear that control of park- may reduce the number of roads for which local gov- ing, particularly on-street parking, and handling of ernments are responsible, making it easier for them to urban road congestion should be assigned to the agen- manage the other roads under their jurisdiction; cies responsible for managing the urban road net- ensures that priorities reflect local expectations; and works. These two areas are closely linked, tied to the can be used to stimulate local employment and to issue of urban road safety (particularly pedestrian- improve the efficiency of local road works. For exam- vehicle conflicts), and are essentially local in nature. ple, road cooperatives in Sweden have managed to They are therefore generally dealt with most effective- reduce their maintenance costs to about half that spent ly by local governments in conjunction with local law by the Swedish National Road Administration on sim- enforcement officials. Traffic regulations, particularly ilar public roads. This savings is partly due to lower those dealing with routing heavy vehicles in cities, are (more appropriate) maintenance standards, but also also largely a local matter. They either form part of local comes from lower overheads and use of otherwise idle traffic management or, in the case of heavy vehicles, are farm equipment. Some of the road cooperatives have intimately related to vehicle impacts and construction become so good at carrying out maintenance that the of local relief roads and urban bypass schemes. Swedish National Road Administration uses them to Although the broad framework for these regulations maintain some of the low-volume roads on the public should be set by the central government, their detailed road network. application must be delegated to the agencies respon- The above arrangements offer a number of advan- sible for managing urban road networks. tages. First, they assign managerial responsibility to a More problematic are the questions of vehicle clearly identifiable entity Second, when the arrange- weights and dimensions, vehicle safety, vehicle emis- ments are backed by legislation, they also assign legal sions, and the environmental impacts associated with responsibility for managing the roads. Third, they roads and road traffic. Overweight vehicles damage the introduce mechanisms for providing technical advice road pavement and increase road maintenance costs. and oversight to ensure that government funds are What are considered permissible vehicle dimensions properly accounted for. Finally, they ensure that all affect road design standards and hence construction parts of the road network, not only those owned by the and maintenance costs. All road agencies have a vest- government, are regularly maintained. ed interest in seeing that these regulations are well- designed and consistently enforced. Axle-weight regu- lations are the most important, although they are Managing Road Traffic difficult to enforce. Weight standards are generally pro- mulgated by the central government transport min- The concern here is with responsibility for those istry, while the regulations are administered by a wide aspects of vehicle traffic that affect management and array of other agencies: weighbridges are operated by financing of roads. Assigning these responsibilities is the main road agency, penalties are issued by traffic fairly obvious since they are widely recognized as an commissioners. and law enforcement is handled by the intimate part of overall road management. Road signs police. and signals fall into this category (they are usually spec- Reviews of past enforcement efforts have pointed to ified under international agreements), as do road three areas of weakness: lack of clearly assigned design standards. These are central government responsibilities, weak enforcement agencies, and resis- responsibilities and will usually be delegated to the tance by the road transport industry. But the underly- agency responsible for imanaging the main road net- ing problem is lack of appropriate incentives (Heggie work or the organization managing the road fund. The 1991 a). The road transport industry sees no direct con- agency with prime responsibility may nevertheless del- nection between the damage done to the road pave- 50 Commercial Management and Financing of Roads ment and the road-user taxes and charges they pay to And since this involves vehicle inspection, to also the government, while the road agency is reluctant to assign them the role of administering vehicle emission spend its own time and money on administering the regulations. However, it is only worthwhile to make weighbridges when all the revenue from penalties these assignments if the agencies have the skills and accrues to the treasury resources to carry out the inspections properly and can Part of the solution lies in clearly assigning respon- compel compliance. sibilities among the various agencies administering Finally, there is the important question of assigning axle-weight regulations. In addition, assignment responsibility for dealing with the environmental should be supported by other actions ensuring that impacts associated with roads and road traffic. New road users understand the relationship between over- road schemes may inadvertently damage ecologically loading and pavement damage, the road transport sensitive areas, destroy property, displace people, or dis- industry agrees to work with the road agency to fairly rupt established settlement patterns in both urban and enforce axle-weight regulations, and the main road rural areas. The road agency should, at least in princi- agency has an incentive to enforce axle-weight regula- ple, be assigned the responsibility of ensuring that tions. Several road agencies have persuaded the road potentially beneficial environmental impacts associated transport industry to work with them in an effort to with new road schemes are realized, that adverse envi- control overloading (see box 6.1). ronmental impacts are minimized, and that any remain- Getting incentives right is more difficult. There are ing impacts are considered acceptable by the public. encouraging signs from countries with commercially The usual way of doing this is ensuring that major road managed road funds: private sector board members are schemes are subjected to some form of environmental beginning to see the direct link between the damage impact assessment involving public consultation. Such caused by overloaded vehicles and the road tariff that procedures are now routinely used throughout Europe their members must pay. As a result they are becoming and North America, and in countries like Brazil, Chile, increasingly involved in controlling overloading. For China, and South Africa. Still, the consultation process example, the road funds in Yemen and Zambia are now must be strengthened and extended to other develop- taking over management of weighbridges, and the rev- ing and transition economies. enue from fines is going into the road fund. The road agency normally bears less responsibility Regulations governing vehicle safety and vehicle for the environmental impacts associated with road emissions are usually administered in conjunction traffic. It generally has little control over vehicle per- with the issuing of vehicle licenses. In some countries formance, which is mainly affected by the tax structure (Finland and the United Kingdom) this is done by the (which influences the size of vehicles, their age, the central government, while in others (South Africa and type of fuel used), vehicle emission regulations and nearly all federal countries) it is handled by local gov- inspection procedures (which affects their state of ernments. Administration is generally the responsibil- repair), and the quality of imported and locally refined ity of the transport ministry (licensing branch) or the fuel. These responsibilities are normally assigned to the local tax office. Since between 35 and 50 percent of the ministries of environment, energy, and finance. Still, vehicles in a typical developing country are unlicensed, the road agency can play a secondary role in helping to uninsured, and uninspected, vehicle safety and emis- mitigate the adverse environmental effects associated sions regulations, where they exist, are not particular- with road traffic. They can install noise barriers, use ly effective (Heggie 1992). Road agencies nevertheless porous asphalt, plant trees, and landscape the road have a clear interest in vehicle safety since it affects the right-of-way A road agency should thus be responsi- use of the road network and has an important impact ble for carrying out environmental assessments on on road safety-for which most road agencies have major road schemes, using them as the basis for under- some responsibility. It may therefore be worthwhile to taking public consultations, and possibly implement- assign responsibility for regulating vehicle safety to the ing remedial measures to mitigate the adverse envi- agencies charged with managing the road network. ronmental impacts associated with road traffic. Assigning Management Responsibility 51 Key Conclusions and Recommendations functions to consultants appear to offer viable long- term solutions to the problems of weak technical The above discussion leads to the following sugges- capacity. The AGETIP model is an alternative that tions for clarifying and assigning responsibily for man- could evolve into a suitable long-term solution. aging different parts of the road network: * In large metropolitan areas roads may be managed by * The formal way of assigning responsibility for manag- a metropolitan-wide authority with full responsibility ing a road is by designating the road. Responsibilities are for all roads and highways; by the different political normally assigned on the basis of the road's functional jurisdictions making up the metropolitan area; by a classification. Managerial responsibility may be assigned strategic authority-an elected authority or a regional or to a central government agency, a local government state body-that takes responsibility for certain strategic agency, a community group, or a private entity. roads or functions, but leaves all other roads and high- * Since the road classification system in developing ways under local jurisdictions; or by a strategic author- and transition economies is often out of date, the gov- ity made up of representatives from each of the local ernment may need to revise the road inventory. The jurisdictions. Works may be implemented by each body inventory can then be used to reclassify the road net- using its own directly employed work force and/or con- work and identify which road agency has been tractors, or by the strategic authority on an agency basis. assigned legal responsibility for managing each of its * In large free-standing towns and cities the road net- parts. Roads that have not been designated must be work may also be managed along the same lines as in assigned to a legally constituted road agency or to an large metropolitan areas. But, typically, the urban area appropriate community giroup. Some roads must also has total responsibility for its own roads, receiving be reclassified, and managerial responsibility reas- varying strategic inputs from the local, regional, or signed from one road agency to another. national governments. The urban area is usually free to * Responsibility for managing the main trunk road deliver services however it sees fit, although they may network will normally be assigned to a central govern- be subject to guidelines laid down by the regional or ment road department, except in federal countries, national government. The tendency is to use contrac- where the provinces or states may be the designated tors for most of the work. highway authorities. * In small urban areas, where the urban government - The main trunk road network is increasingly being often lacks the scale necessary to manage its own road managed by autonomous or semi-autonomous road network, responsibility for managing roads may rest agencies that operate along commercial lines. Likewise, with a regional or national agency. Alternatively, the roads carrying large volumes of traffic are increasingly urban authority may be responsible for managing non- being managed as toll roaids, either by the main road strategic roads or for handling a limited range of func- agency, autonomous public toll road agencies, or the tions (street cleaning, pothole repairs), while a region- private sector under various forms of concession agree- al or national agency may be responsible for strategic ments. These developments should be encouraged roads or larger-scale works. Because of the small scale, since they promote managlerial responsibility. many core functions will likely be contracted out, * Large regional road networks tend to be managed in though some may be provided in-house. the same way as the main trunk road network. Smaller * At the lowest levels of the road network, where networks, which lack the scale needed to support a roads are often undesignated, it is best to offer incen- technically competent local road agency, tend to be tives to local residents-individuals, villages, or groups managed through a centrail government department, a of villages-to accept responsibility for managing their project implementation agency (AGETIP), or a joint- own roads. This includes having them adopt the roads services committee, or by contracting out the planning (by forming a local road cooperative or the equivalent), and management of roads to consultants. receive grants from the government or the road fund to * In the case of rural roads joint-services committees meet part of the costs of maintenance and improve- and contracting out the planning and management ment, gain access to technical advice, and be subject to 52 Commercial Management and Financing of Roads some form of oversight to ensure that any government * All road agencies should be made responsible for funds are properly accounted for and that technical examining the potential environmental impacts of new standards are met. road schemes and should be required to ensure that * The main road agency should be assigned all regu- adverse effects have been minimized and that remain- latory responsibilities affecting the entire road network ing impacts are acceptable to the public. Road agencies (such as design standards, signs, and signals), even should also be required to consider remedial measures though it may delegate some of these to other road to mitigate the adverse environmental impacts of road agencies or competent bodies. traffic, including provision of noise barriers. * Urban road agencies should be assigned responsi- bilities (control of parking and congestion and routing of heavy vehicles) that significantly affect urban areas. Note * The main road agency should be responsible for 1. Call-off contracts are those in which a contractor bids for a enforcing axle-weight regulations, ideally in conjunction notional quantity of specified services at times and locations to with the road transport industry. The main road agency be determined by the client at a later date (for example, 100 km could also carry out vehicle safety and emission inspec- of resealing in district A, or 100 hours of snow removal in dis- tions, provided they have the skills and resources to do trict B at 6 hours notice). The actual services are then 'called them properly. off' in smaller packages by the client as the need arises. 6. Creating Ownership O wnership is one of the most important building Road users may be willing to pay for roads, but only blocks in the reform agenda. How can central if their money is actually spent on roads and the work and local governments make road users believe that is executed efficiently. This important concept, that of roads are their own? How can they persuade users to self-interest, is part of the symbiotic relationship take an active interest in road management? This underlying market discipline. Road-user involvement chapter tackles four related topics. First, what is meant acts as a surrogate for market discipline, encouraging by ownership? Second, which grass roots organiza- the road agency to use resources efficiently and to pre- tions represent road users and other interested parties, vent it from abusing its monopoly power. The benefits and do these provide a sound basis for involving road of ownership transcend financing and market disci- users in discussions on road management? Third, pline, however. Once road users are convinced that the which institutional structures might be used to government is trying to serve their needs, they will involve road users in management? Finally, how does generally support a whole range of initiatives designed one establish a road board, assuming that it is an to improve the road sector. Ownership can become the appropriate way of involving road users in manage- basis for a genuine partnership between road users and ment of roads? the government to improve road safety, restrict fuel smuggling (or at least find an alternative the fuel levy for financing roads), and control overloading. The Concept of Ownership There are numerous examples of road agencies and road users working together to solve common problems. Ownership is a means to empower, to encourage the Together they consult about changing regulations, par- public to take an active role in the management of ticularly those relating to vehicle weights and dimen- roads. For example, enthusiastic user support is a pre- sions, and often collaborate on initiatives designed to condition for solving the problem of road financing, improve road safety and enforce axle-weight standards whether by raising taxes and reforming the budget (box 6.1). In some countries-Zambia being a note- process or by introducing an explicit road tariff. worthy example-the trucking association has repeat- Finance ministries are always reluctant to raise taxes edly put forward proposals to improve administration of and user charges-the public invariably complains. In international transit fees and has requested that the fact, the ministry of finance will likely mobilize more transport ministry allow the private sector to enforce revenue to finance road maintenance only if road users axle-weight regulations. This system often operates in openly express willingness to provide the extra rev- countries with extensive international transit traffic. enues. Since road users have good reasons to see more When foreign vehicles overload and avoid paying tran- money spent on road maintenance (see chapter 2), the sit fees, it undermines the international competitiveness issue boils down to finding ways to make known their of local hauliers. Not surprisingly, the trucking associa- support for a sustainable road financing plan. This tions in transit countries like Malawi, Jordan, and mechanism for solving the financing problem also Zambia have all expressed willingness to help the road addresses other daunting management issues. agency enforce axle-weight regulations. 53 54 Commercial Management and Financing of Roads Box 6.1 The trucking association in Finland helps to control vehicle overloading When the Finnish National Road Administration (FinnRA) limits on rural roads during the spring thaw. To better first installed weighing-in-motion equipment, instead of define the 'controlled' period. FinnRA used more than using it to prosecute and fine overloaded vehicles, FinnRA 100 freeze-depth measuring devices on the rural road decided to use it as a means of gathering information on network. It also prepared photographs to show what a the extent of overloading and publicizing the names of per- legally loaded timber truck should look like and printed sistent offenders. At that time, FinnRA was having trouble a small booklet that it distributed to its field staff and with overloaded timber trucks using both rural roads and transporters for information. Because of the above dis- main trunk highways. Part of the problem was related to cussions, the raising of the legal weight limits, and aban- confusion about how the weights of timber, gravel, and donment of the volumetric measurement of loads, the peat were measured. During the 1960s and 1970s the wood industry changed the timing of its timber purchas- loads were measured by volume, and the legal volumetric es (to avoid the spring thaw period), and altered its inven- measure did not always coincide with the legal weight tory practices to suit. The trucking association also measure. FinnRA therefore approached the trucking asso- encouraged its members to police themselves and estab- ciation, which represented the timber transporters, and lished a good working relationship with FinnRAs local attempted to agree on a solution to the problem. The truck- regions who met periodically as needed. ing association explained that the wood and paper indus- The problem of overloading has not been eliminated, try was very competitive and that transport costs were a but it has been substantially reduced. The weighing-in- major factor affecting their input costs. In return, FinnRA motion tools are still being used to gather and publicize explained how overloading affected the road pavement, information on overloading. The availability of this infor- particularly during the spring thaw. mation, together with the visible damage done by the Both parties agreed on an acceptable modus operan- remaining overloaded vehicles has, with the assistance of di. The Ministry of Transport and Communications the trucking association, created a form of public over- agreed to permit certain overloads when the road beds sight that discourages overloading more effectively than were frozen in return for strictly enforced vehicle weight could pure enforcement alone. Source: Prepared by Antti Talvitie for this study Organizations Representing Road Users zations, engineering societies, pedestrian and cycling lobbies, consumer groups, and women's organizations. The objective is to identify an appropriate institu- * National transport sector organizations: transport tional mechanism for building a public-private part- institutions, transport training institutes, transport nership between the politicians who represent the consultative councils, and transport workers unions. public (and the civil servants who assist them) and * National road sector organizations: roads associa- the road users. Politicians, both national and local, tions (or federations or societies), motoring organiza- help to set road sector priorities, while the road users tions, trucking associations, and national organizations strengthen governance and provide access to private representing bus owners and operators. sector commercial know-how. Road users also * Local transport organizations: taxi associations and emphasize technical considerations over narrow local organizations representing bus owners and political interests and help to depoliticize the setting operators. of priorities. * Local community organizations: village associa- Road users can be easily involved through con- tions, parent-teacher associations, and other local com- stituencies, which link the representative individual munity groups. with large, assertive groups that have compelling inter- The groups most relevant for establishing owner- ests in well-managed roads. Most countries possess a ship in the road sector are chambers of commerce, number of such organizations that are influential at dif- farmer organizations, engineering institutions, road ferent levels of government. These include: associations, trucking associations, national organiza- * National, economy-wide organizations: chambers tions representing bus owners, other motoring groups, of commerce, farmer organizations, consultant organi- and labor unions. Local community organizations and Assigning Management Responsibility 55 taxi associations are also relevant at the local govern- tively involve them in discussions on road manage- ment level. ment, or cannot work with them to confront other road Nearly all countries have some form of business sector issues. Establishing and strengthening such association or chamber of commerce. They are gener- organizations should be an important part of any agen- ally well-organized, take a keen interest in the state of da for improving the management and financing of the road network, and have a great deal of influence. roads (table 6.1). Their involvement in discussions about the future of the road sector is essential. In addition, most countries have farmer organizations that are well-organized and Ways of Involving Road Users influential, particularly when they represent large com- mercial farmers, a constituency that is dependent on Road users can be involved in an advisory or executive well-managed roads. Most countries also have reason- capacity, in overall management, in management of ably well-organized engineering institutions that act as parts of the road network (particularly at the local gov- opinion leaders and add a professional dimension to ernment level), or in specific aspects of road manage- discussions about road management. Representatives ment. Most countries invite outsiders to join steering from the engineering profession are regularly consult- committees that guide consultants working on the road ed about road sector issues in most countries. Finally, sector, or to sit on specialized advisory boards that most countries have reasonably effective national orga- review departmental research programs, training pro- nizations representing the trucking industry They are grams, road design standards, and other technical mat- regularly involved in discussions about axle-weight ters. For example, in England there is a Road Users controls and other road-related matters. Committee that facilitates dialogue between the Industrial countries also have motoring associa- Highways Agency and representatives of both motor- tions, often with large memberships. These associa- ized and nonmotorized road users. tions are influential, given their size, and are regularly Several countries have national road safety councils consulted by the government on road sector issues. that include representatives from a wide variety of private Organizations representing car users and public trans- sector organizations (table 6.2). The councils attempt to port operators are less common in developing and coordinate the activities of different organizations transition economies. Many of these countries have no involved in road safety and may also advise the transport formal mechanism for carrying on a dialogue with ministry on a wide range of matters related to road safe- these potentially influential road users, cannot effec- ty. Most councils lack statutory powers, are underfund- Table 6.1 Organizations representing road users in selected countries Country Road association? Trucking organizations Bus owners and operators Motoring associations Engineering professions Argentina Yes Yes Yes Yes Yes Chile Yes Yes Yes Yes Yes Finland Yes Yes Yes Yes Yes Germany Yes Yes Yes Yes Yes Ghana No Yes Yes No Yes Hungary Yes Yes No Yes Yes Japan Yes Yes Yes Yes Yes Jordan Yes Yes No Yes Yes Korea, Rep. of No Yes Yes Yes Yes New Zealand Yes Yes Yes Yes Yes Pakistan No Yes Yes No Yes Russia No Yes No Yes No South Africa Yes Yes Yes Yes Yes United Kingdom Yes Yes Yes Yes Yes United States Yes Yes Yes Yes Yes a. Road associations, federations, societies, and road engineering associations mainly represent consultants, contractors, and plant and materials suppliers. 56 Commercial Management and Financing of Roads Table 6.2 Institutions involving road users in management of roads National road board National road safety Local road boardsl Country or council Advisory committees council commission or similar cooperatives Argentina No No Yes' Yes Chile No Yesb Yes Yes Finland Yes Noc Yes Yes Germany No Yes No No Ghana Yes No Yes No Hungary No No Yes No Japan Yes Yes Yes No Jordan No No No No Korea, Rep. of No No Yes No New Zealand Yes Yes Yes No Pakistan Yes Yes No No Russia No Yes Yes No South Africa Yes Yes Yes Yes United Kingdom Yes Yes No No United States No Yes Yes Yes a. In the process of being established. b. Advises on pavement management systems. c. Road plans are also circulated to many interest groups for comment. ed, and do not have an effective secretariat, though some Zambia. Some of these are executive boards that man- do function well, serving as a useful body for involving age the main road network, such as the boards of the private sector in discussions on road safety. FinnRA, Ghana Highway Authority, Transit New Urban and rural district councils are not particular- Zealand Authority, and the South African Roads Board; ly good at involving road users in the management of others manage the road fund, such as the Ghana Road roads. The usual mechanism for doing so is through Fund Board, the board of the Malawi National Roads working committees that operate at the local govern- Authority, the board of Transfund New Zealand, the ment level. All urban and rural district councils have Yemen Road Fund Board, and the Zambia National committees that handle finance, planning and devel- Roads Board. Still others merely advise the appropriate opment, housing, and the other functions delegated minister on road management and financing, such as from higher government levels. Some also have road the Japan Road Council, the advisory board of the and road transport committees that deal with roads, Latvian road fund, and the U.K. Highway Agency street cleaning, street lights, drainage, public transport, Advisory Board. The South African Roads Board- and traffic management. These committees generally originally established in 1935-is one of the oldest consist of elected members and occasionally include boards, followed by the Japan Road Council (1952), some nonelected people (such as the police). They and the original New Zealand Roads Board (1953), rarely include nonelected people representing road which then became the Transit New Zealand Authority users or the local community. But representatives of (1989) and is now Transfund New Zealand (1996). such organizations are sometimes invited to participate The South African Roads Board has an interesting in the business of the committees. history. First established in 1935, it started off with six At the national and regional level road users gener- members, four representing the provinces and two ally participate in the management of roads through appointed by the Minister of Interior. Although the road management boards. These are becoming increas- Board was meant to function autonomously with the ingly common-there are now active road boards in provincial representatives acting "in the national inter- several countries, including Australia (the states of est," it quickly lapsed into gridlock because the New South Wales, Queensland, and Victoria), Finland, provinces expected their representatives only to pro- Ghana, India, Japan, Latvia, New Zealand, South mote their own local interests. In 1948 the Board was Africa, Sweden, the United Kingdom, Yemen, and therefore replaced by another composed exclusively of Creating Ownership 57 civil servants. This worked better, although it led to a decree (or the equivalent), or under new legislation. large and controversial frieeway program and to the The Zambia National Roads Board and the U.K. accumulation of a large surplus in the road fund- Highways Agency Advisory Board were both set up which led to the suspension of the fuel levy in 1988. under existing legislation. The road legislation in many Following the suspension of the fuel levy, the board former British colonies gives the responsible minister was expanded to include representatives of local gov- power to establish a road board by publishing a notice ernment, the engineering profession, road users, and in the gazette. Legislation differs widely and provides industry and commerce. This board functioned well, for establishment of advisory boards, as in Tanzania, initiating a successful toll road program. In fact, the and for executive boards, as in Zambia. The U.K. public-private board worked so well that in 1995 mem- Highways Agency Advisory Board was set up under the bership was further widened to include more private 1994 Government Framework Document. The sector representatives and a representative from acade- Advisory Committee to the National Highways mia. In the end the board consisted of three members Authority of India is slightly different in that the representing central government, three representing Chairman of the Authority simply decided to set up a local government, five representing the private sector, board to advise him on all matters pertaining to man- and one representing academia. In March 1998 the aging the national highway network.' board will be replaced by an autonomous board with The boards set up under decrees can be either advi- ten members, nine representing the private sector and sory or executive. The board in Finland (established by one representing the Department of Finance. parliamentary decree) is an executive board that man- The major lessons learned from the experience of ages FinnRA; the Yemen Road Fund Board (established the South African Roads Board are: by presidential decree) is an executive board that man- * It is better to have one person representing all local ages the road fund; the Jordan Road Fund Board (estab- governments than to have each local government rep- lished by cabinet decree) advises the responsible min- resented on the board. ister on the management and financing of road - A board made up wholly of civil servants does not maintenance. necessarily serve the interests of road users. Other boards have been set up under special-purpose - A broad-based public-private board acts more com- legislation. Most of these have executive powers and mercially and better serves the long-term interests of manage part of the road network, the road fund, or both. the government and road users. The Japan Road Council is unusual in that it was specif- ically set up under legislation to advise the Minister of Construction on overall road policy. The newly estab- Setting up a Road Board lished Malawi National Roads Administration is even more unusual. The Administration separates itself into Several issues arise in establishing a road board: legal two subcommittees-one manages the road fund in an procedures for setting up the board; membership and executive capacity, while the other advises the responsi- procedures for nominating board members and ble minister on the planning of road works and ways to appointing the chairperson; the role of committees, if strengthen road management. The expectation is that the any; the size and composition of the secretariat; and the advisory committee will eventually evolve into the exec- functions of the board anci its detailed terms of refer- utive board of a semi-autonomous highway authority. ence, including the relationship between the board and Although new legislation offers the best long-term the parent ministry and how the board will be held solution, it has some short-term disadvantages. First, it accountable. requires parliamentary approval, and that takes time. Second, it requires formalizing a number of operating Legal Basis for a Road Board procedures without the benefit of hindsight. This There are three ways to establish a road board: under shortcoming has created major problems in countries existing legislation, under a ministerial or presidential like Mozambique and Yemen, where the original word- 58 Commercial Management and Financing of Roads ing of the legislation made it difficult to add private sec- aged roads. Some typically represent the central gov- tor representatives to the board, except as unpaid, non- ernment departments directly concerned with roads- voting advisors. It is often better to establish the board usually the ministries of finance, works, transport, and under existing legislation or under a simple ministeri- agriculture. Others comprise nongovernmental mem- al or presidential decree (or the equivalent), and to bers representing road users-usually the business then work with provisional operating procedures community, the road transport industry, farming inter- before legalizing the arrangement. ests, and the engineering, accounting, or legal profes- sions. Members may also represent local governments. The Structure of the Board The nongovernmnent members represent the people There are at least three structural factors that affect the who use the road network and also pay for it, while the workings of the board: its overall composition, local government members represent agencies that whether it is made up of professionals or representa- depend heavily on roads for delivering public services tives of key constituencies, and the way in which mem- to their constituents. They thus have a strong vested bers are nominated. interest in ensuring that the road network is managed efficiently and effectively. Who should sit on the road board? Some of the early road boards, including the 1948 South African Roads Should the board be made up of professionals or people Board, the initial U.K. board, and the Administrative representing key constituencies? The boards in Japan and Council in Mozambique, were made up exclusively of New Zealand (Transit New Zealand) are unusual in that civil servants. The board of the Swedish National Road their boards are made up primarily of prominent per- Administration even included three politicians and sons selected for their skills and professional standing. three elected staff representatives.2 It is difficult for The nongovernment members in the United Kingdom such boards to build up public support, to deal with are selected on the same basis. Although these boards their relationship with the responsible minister, and to function well, most other countries, particularly those make difficult decisions that might appear critical of with problematic governance, have chosen a more ministers and civil servants. The boards' proceedings explicit link between nongovernment board members are often confidential (the U.K. board is covered by the and their constituencies. Each member represents a Official Secrets Act), and they tend to spend too much specific constituency, like the chamber of commerce, time dealing with day-to-day administrative matters national farmers association, road haulage association, rather than important long-term policy issues. institute of engineers, or association of municipalities. The boards that do include a wide range of road sec- The Sierra Leone Road Authority is one example of a tor interests-as in Finland, Japan, Latvia, South balanced tripartite board structure. One-third of its Africa, and Zambia-tend to be more effective. The members represent government departments, one- same is true of the boards in New Zealand. The board third represent road users (the chamber of commerce, of Transfund is made up of sector representatives, the road transport industry, and the engineering pro- while the board of Transit New Zealand is made up of fession), and the final third represent regional interests prominent people selected for their skills and profes- (local government). sional standing. These boards are innovative, act deci- Flexibility in the size of the board allows the com- sively, make great efforts to consult the public, do not position to evolve in line with changing road needs and hesitate to be critical when needed, and generally oper- provides a useful vehicle for resolving conflicts over ate in a commercial manner. A representative road membership. For example, the inaugural meeting of board, which includes representatives of road users, is the Zambia National Roads Board was delayed for sev- therefore preferable to one made up wholly of civil ser- eral months because of a disagreement over which of vants or one with a majority of civil servants. the two main road transport organizations should rep- A broad-based, representative board must comprise resent the road transport industry This conflict could people with strong vested interests in having well-man- have been avoided had it been possible to appoint Creating Ownership 59 board members to undesignated positions on the Several countries have attempted to address this "advice of the minister" or on the "recommendation of concern by specifying that no ministry may be repre- the board." The boards in Ghana, Jordan, Malawi, and sented on a board by anyone below the level of direc- New Zealand (Transfund) all provide for appointment tor. In the case of nongovernment members the orga- of ad hoc members representing the public interest nizations represented on the board are either permitted based on the recommendation of the board, permanent to nominate their own representatives, or the respon- secretary, or road transport interests (box 6.2). sible minister invites them to nominate candidates and It is difficult to say how and how well these road then appoints one of the nominees to the board. New boards function, since many are unduly secretive and Zealand, some Australian states,3 and South Africa unwilling to open their meetings to the public or to consult the organizations about their nominees, while share their agendas and minutes with outsiders. But Ghana, Jordan, Latvia, Malawi, Zambia, and several based on what is known publicly about them, we can other countries let the organizations nominate their draw some tentative conclusions. Boards that consist own members. The United Kingdom is unusual in this solely, or primarily, of civil servants-particularly respect. Civil servants prepare a list of nominations when the permanent secretary or minister is chairper- which are then discussed with the CEO of the son-tend to avoid controversial issues, are reluctant Highways Agency. The permanent secretary then to criticize the road agency, and spend little time dis- selects the members and informs the minister of his cussing overall strategic issues. Representative boards, choice. Once nominated, board members are general- on the other hand, particularly those with independent ly appointed by the minister, president, or cabinet. In chairpersons, function better. Even if the responsible many cases the names of members are published in the minister serves as chair, the private sector members government gazette. encourage more open and constructive debate. There is also the important question of how to Further, strong chairpersons avoid calling for votes on choose the chairperson. There are four broad options. controversial issues-they try to manage by consensus. The chairperson can be ex officio; nominated and The same applies to disagreements between the board appointed by the minister, perhaps after consulting the and the minister. Most chairpersons work hard to board; appointed by the minister from among the avoid such confrontations and regularly consult both existing members of the board; or elected from among the minister and their constituents about the business the board members. Finland and South Africa both of the board. Therefore, major conflicts between a rep- have ex officio chairpersons. The chairperson is the resentative board and the minister are rare. director general of roads or transport. Such an arrange- ment often creates a conflict of interest. The head of the How should board members be nominated? Members board will often find that he/she is criticizing the must be able to speak on behalf of their constituents agency that he/she directs. Furthermore, when the and report back to them. Government departments director general is chairperson, outsiders tend to view must be represented by the permanent secretary or by the board as a lobby group arguing on behalf of the a senior official with regular access to the permanent road agency rather than as an impartial body con- secretary. Otherwise, the member will not really repre- cerned only with the national interest. It is worth not- sent the ministry. Likewise, NGOs cannot be repre- ing that South Africa has amended its legislation to sented simply by an acquaintance of the minister who appoint an independent chairperson to head their new happens to run a trucking company Such people may Roads Agency have no mandate from the road transport industry Usually, the responsible minister nominates the They have no constituency and no way of communi- chairperson, as in Japan and Ghana (Ghana Highway cating with or mobilizing the support of road users. Authority). This method works well provided the min- Genuine ownership occurs only when the people ister chooses a competent person and ensures that the selected to represent each constituency truly represent nominee is able to work well with the other members and can consult with their members. of the board. Another option designed to avoid con- 60 Commercial Management and Financing of Roads Box 6.2 Membership of road boards in Japan, New Zealand, Finland, the United Kingdom, and South Africa JAPAN ROAD COUNCIL: The Council was established in mittees. One of the directors of FinnRA handles its busi- 1952 and consists of a chairperson and 12 members. ness, and a secretary takes minutes and arranges meetings. Members are nominated by the director general of roads The secretarial functions absorb about one person-year and appointed by the minister of construction. The per year. chairperson has traditionally been president of the Japan Road Association (always a former undersecretary U.K. HIGHWAY AGENCY ADVISORY BOARD: Established in from the Ministry of Construction), but is currently for- 1994, the U.K. Board consists of a chairperson and four mer president and chairperson of Nissan Corporation. or more members. Members are appointed by the per- Board members include representatives of the motor manent secretary, after consultation with the Agency's industry, business community, trade unions, academia, chief executive officer, based on nominations prepared and local government. Much of the Council's substan- by staff of the Department of Transport. The minister is tive work is carried out by three subcommittees: one informed of the appointments. The permanent secre- deals with road policy, one with toll roads, and the other tary is ex officio chairperson, and the Board does not with environmental issues. The Council has no perma- meet in his/her absence. The other members include nent secretariat. the chief executive, one or more of the Agency's exec- utive Board members, one or more departmental rep- TRANSIT NEW ZEALAND AUTHORITY: The original resentatives, and one or more nondepartmental mem- National Roads Board was established in 1954 with the bers. There are currently two nondepartmental minister of works as chairperson. The current board members who are appointed in their personal capacity. was established in 1989 and consists of a chairperson, The Board has no subcommittees and no permanent deputy chairperson, and six members. Members are secretariat. One of the department's staff acts as secre- appointed by the governor-general on the joint rec- tary to the Board and is assisted by other departmental ommendation of the ministers of transport and finance staff. The secretarial functions absorb about five per- and based on consultations with various industry asso- son-weeks per year. ciations. The chairperson is appointed by the gover- nor-general from among the members of the Board. SOUTH AFRICAN ROADS BOARD: The original Board was The current chairperson is a former local authority established in 1935. The Board operating until 1998 was engineer. The deputy chairperson is past president of established in 1988 and consisted of 12 members-6 the Institution of Professional Engineers, and the other public and 6 private-appointed by the minister of six members have backgrounds in town planning, transport, posts, and telecommunications, following industry, local government, road transport, farming, consultation with the constituencies represented on the and accounting. The Board sets up ad hoc subcom- Board. The director general, transport, was ex officio mittees to deal with specific tasks. The subcommittees chairperson. Two members represented the central gov- always include the chairperson and usually two other ernment, two represented provincial governments, and board members. The Corporate Services Manager of one represented metropolitan and local authorities. The Transit New Zealand acts as secretary to the board, and six private sector members represented car users, the bus the secretarial functions absorb about one person-year industry, the road freight industry, business (commerce, per year. industry, mining, and agriculture), the engineering pro- fession, and academia. The Board had three committees: BOARD OF FINNISH NATIONAL ROAD ADMINISTRATION finance, tenders, and urban transport and planning. The (FINNRA): This Board was established in 1990 and con- urban transport and planning committee managed the sists of a chairperson and seven members. Members are Urban Transport Fund, reviewed .the transport plans nominated by the director general of FinnRA and appoint- prepared by the core cities, and made recommendations ed by the cabinet on the recommendation of the Minister on these plans to the Board. The Board was terminated of Transport and Communications. The director general in 1998 and its powers devolved to the provinces. Until is ex officio chairperson, and the other seven members 1995 there was also a toll road committee, which advised currently represent the Ministries of Transport and the Board on all matters pertaining to toll roads. The Environment, the municipalities, the Confederation of chief director, roads, acts as secretary to the board. The Industries, the road transport industry, the labor union, secretarial functions absorb about two to three person- and the union of employees. The Board has no subcom- years per year. Creating Ownership 61 flicts between the chairperson and the board requires time required clearly depends on the scope of the that the minister appoint the chairperson only follow- board's activities and whether it is new or well-estab- ing consultation with the board. This mode has been lished. An effective board needs some kind of secretar- adopted recently in Japan. A third option leaves the ial capacity, and the board will be more effective if the choice of chairperson to the minister, but limits poten- secretariat is independent of the agency it is overseeing. tial candidates to serving members of the board. This method is used in New Zealand (Transfund and Transit Functions and Detailed Terms of Reference New Zealand) and in Ma]awi. The option in which the The terms of reference for the board are usually spelled board elects its own chairperson is rare. Both Jordan out in the legislation or in the legal regulations pro- and Zambia use this option. It works well in Zambia, mulgating the legislation. The terms must cover the and several other African countries have shown inter- relationship between the board and the parent min- est in the procedure. istry, whether the board is executive or advisory, its sources of finance, and its day-to-day responsibilities. Subcommittees and the Secretariat Functions vary widely from country to country (boxes Several road boards have standing committees to carry 6.3 and 6.4). Legislated duties are usually supple- out much of the substantive business. Some boards mented by additional duties and procedures, which invite technical specialists to sit on these committees. may be specified by the responsible minister (New In Japan standing committees carry out most of the Zealand) or decided by the chairperson (Finland). To work of the Road Council. In Malawi and South Africa prevent unwarranted interference in the board's busi- the road fund is managecl by a committee of the board. ness, the legislation may also define the circumstances The committees in Japan deal with toll roads, environ- under which the minister can override board decisions mental matters, road policy, and road financing. Those and specify the way in which the minister must issue in South Africa manage the road fund and the urban directions to them. Such directions generally have to transport fund (the functions of the urban transport be specified in writing and may also be limited to mat- committee were devolved to the provinces in 1998), ters already covered in the legislation. while those in Malawi manage the road fund and advise The legal regulations are detailed, fairly standard, the responsible minister on road management. and usually cover the appointment of board members, Similarly, in Zambia a technical committee-made up their tenure, payment of fees and expenses, secretarial primarily of technical specialists-reviews the road arrangements, frequency of meetings, keeping of min- maintenance proposals put forward by the district utes, accounting arrangements, submission of reports councils, examines the draft contract documents, and their content, and auditing arrangements. In the reviews the bids and bid prices, and then advises the case of a road fund board the regulations (or primary main board on whether the proposals should be legislation) may also include special penalties relating financed "as is" or amended. to misappropriation of funds. Reporting arrangements Most boards have some form of secretariat. The are particularly important since they act as a vehicle for Japan Road Council is unusual in that it has no inde- holding the board accountable for its work. They keep pendent secretariat, which is considered to be a major the parent ministry informed, enable board members disadvantage. The duties of the secretariat include to report back to their constituents, and also help keep organizing the meetings of the board, taking minutes, the public informed. handling correspondence, keeping a record of The board is usually required to submit an annual accounts, and preparing position papers at the request budget, an annual statement of accounts (audited by the of the board. The amount of time spent on these activ- auditor general or independent auditors appointed by ities varies from a few weeks per year (the United the auditor general), and an annual report that includes Kingdom) to a full-timie job for one or more people information on board policies and activities during the (Finland, South Africa, Transit New Zealand, year. The boards of the National Roads Authority in Transfund New Zealand, and Zambia). The amount of Malawi and Transfund New Zealand are also required 62 Commercial Management and Financing of Roads Box 6.3 Duties laid down for road boards in Japan and New Zealand JAPAN ROAD COUNCIL: The role and duties of the Council amended in 1979, 1989, and 1996. The present Board are laid down in article 77 of the Road Law, 1952. The law established under the Transit New Zealand Act, 1989, was provides for a Road Council to be established by the empowered to: Ministry of Construction at the request of the minister. * Prepare an annual national land transport program and The Council's role is to: review and revise the program from time to time. * Investigate present road conditions and propose future * Manage implementation of the following elements of improvements. the program: local roading, safety (construction and * Deliberate on management of the road fund and toll- maintenance), passenger transport, state highways, and road financing, and advise the minister on changes nec- administration. essary to reorient road financing. 0 Make payments from the [road fund] account and, in v Examine important topics like road safety, traffic con- special cases, present proposals to the minister for fund- gestion, and environmental damage, and propose a long- ing outside the approved national land transport program. term strategy on road policy to be adopted by the gov- * Control the state highway system, including planning, ernment just before the start of the five-year road design, supervision, construction, and maintenance. improvement programs. * Advise local authorities in relation to their functions, * Deliberate on the contents of the five-year road duties, and powers and audit the performance of every improvement programs prepared by Ministry of local authority as compared with its statement of intent Construction and, after the Council is satisfied with the contained in the relevant land transport program. program, convey that consent to the minister. * Provide the minister with such information and advice as the minister may require and carry out such other land TRANSIT NEW ZEALAND AUTHORITY: The National Roads transport functions and duties as the minister may Board was established in 1954 and the legislation was prescribe. to prepare a consolidated national land transport pro- depoliticize the setting of priorities, since road users gram that incorporates the programs of the regional tend to emphasize technical considerations over nar- transport authorities. The road fund boards likewise row political interests. have to publish quarterly financial reports, together * The challenge is to identify an appropriate institu- with the audited annual accounts of the road fund. tional mechanism that can effectively involve politi- cians and road users in objective, depoliticized discus- sions about road management. This typically cannot be Key Recommendations and Conclusions done by simply involving them as individuals. Effective involvement generally requires constituencies that link The key issues that have emerged from the above dis- the representative individual to large, assertive groups cussion are as follows: with compelling interests in well-managed roads. * The central theme of this chapter is ownership- o The organizations that are most relevant for estab- which is seen as a means to empower road users and lishing ownership in the road sector are chambers of encourage them to take an active interest in the man- commerce, farmer organizations, engineering institu- agement of roads. Among other things, their involve- tions, road associations, trucking associations, nation- ment creates a form of surrogate market discipline that al organizations representing bus owners, other motor- can encourage the road agency to use resources effi- ing groups, and labor unions. Local community ciently and prevent it from abusing its monopoly power. organizations and taxi associations are also relevant at * The overall objective is to build a public-private the local government level. partnership between the politicians who represent the * Although road users can be usefully involved by way public as a whole (and the civil servants who assist of more or less informal committees and consultative them) and the road users who have a strong vested councils, at the national and regional level road users interest in well-managed roads. This pairing helps to are increasingly participating in discussions on road Creating Ownership 63 Box 6.4 Duties laid down for road boards in Finland, the United Kingdom, and South Africa BOARD OF FINNISH NATIONAL ROAD ADMINISTRATION: This SOUTH AFRICAN ROADS BOARD: The original National Road Board was established under the Finnish National Road Board was established in 1935. The current South African Administration Decree, 1990. It was set up to involve the Roads Board was set up in 1988, and the legislation was public in discussions on road sector development, strength- amended in 1995. The main purpose of the Board is to en concern for the environment, improve the effectiveness promote and encourage the development of transport and efficiency of FinnRA, and make road planning more and, where necessary, to coordinate various phases of transparent. The decree ernpowers the Board to: transport in order to achieve the maximum benefit and * Make decisions on FinnRAs goals and operations, tak- economy of transport services to the public. The main ing into account the goals set by the Ministry of Transport. objectives of the Board are to: * Decide on administrative arrangements. * Design, build, and maintain a national network of free- * Decide on the budget proposal, the activity and finan- ways and other roads, including toll roads. cial plans, and long-term development programs. * Compile a priority list of roads to be built or improved. * Monitor implementation of the organization's goals * Design and build various special roads that are in the and approve the financial accounts. national interest. * Decide on important research and development tasks. * Set geometric standards for the construction of nation- * Issue the organization's rules and regulations, except al and special roads. where these functions have been delegated to the director * Preserve the environment. general or other functionary. * Expend available funds in the most cost-effective man- * Deal with any other matters of importance to the orga- ner in providing a primary road network. nization as decided by the chairperson. * Initiate research, whether in South Africa or elsewhere, in connection with the design, planning, or construction U.K. HIGHWAYS AGENCY ADVISORY BOARD: This was estab- of roads. lished as a nonstatutory board in 1994 through publica- * Grant bursaries or subsidies to enable people to study tion of a Government Framework Document. The Board's or research any subject connected with roads. general role is to support the permanent secretary in * Advise the minister, at his/her request, on questions advising the secretary of state on the strategic direction of relating to roads that may be raised by the government of the Highways Agency In particular, the board advises on any other country or territory. the Agency's: * Provide rest and service areas, in conjunction with pri- * Corporate and business plans. vate enterprise, at strategic points on national roads in * Performance against the targets set in its corporate and order to promote road safety. business plans. The Department of Transport is charged with carrying out the The board also supports the Agency's chief executive to executive and administrative work necessary to enable the achieve his/her aims and objectives. board to carry out the duties and functions assigned to it. management through road management boards. These key government ministries, it should also include peo- are now widespread in industrial, developing, and ple representing road users, the business community, transition economies. farmers, the professions, and local governments. The * One of the first issues that arises when setting up a membership will vary depending on the functions of road board is whether it should have executive powers the board. or simply operate in an advisory capacity. If it is an * Board members should ideally represent constituen- executive board, it will usually require new legislation. cies that have strong vested interests in well-managed Otherwise, it can often be established under existing roads, not simply individuals without clearly defined legislation using simpler parliamentary procedures or constituencies. The represented constituencies should using a ministerial or presidential decree (or the equiv- nominate their own members. Civil servants represent- alent). In the long term an advisory board will be on ing government ministries should not be below the firmer ground if it is supported by legislation. level of director. Board members should be formally * To be effective, the board must have representative appointed by the responsible minister, president, or membership. In addition to civil servants representing cabinet. 64 Commercial Management and Financing of Roads * It is advisable to have one or two ad hoc members * The board's rules and procedures must be clearly nominated by the board or the minister to represent spelled out in legal regulations. The regulations should the public interest. This provision will allow for some include procedures for appointing board members, flexibility in membership. their tenure, frequency of board meetings, auditing * The chairperson should be independent and should arrangements, and the content and timing of annual ideally be chosen from among existing board members reports. (elected by the board or chosen and appointed by the minister), or appointed by the minister following con- sultation with the board. Notes * The board should be able to establish standing com- 1. India has a 20-member advisory committee that advises the mittees that can invite technical specialists to partici- Chairman of the National Highway Authority The members pate in their meetings. This ability gives the board represent the road transport industry, business (including vehi- cle manufacturers), research and academia, transport training, access to a wide range of technical knowledge. The anlolgvemnt and local government. board should also have an independent secretariat to 2. The board consists of three politicians (one is the chairper- organize meetings and assist with its business. son), the director general, a civil servant, a contractor, an NGO, * The board should have clear terms of reference that a representative from academia, and three elected staff repre- can be supplemented and updated by the responsible sentatives. minister. Among other things, the terms of reference 3. The Roads Corporation Advisory Board in Victoria has for- malized the appointing procedure by inviting the various con- should spell out the relationship between the board stituencies to submit a panel of three names for the minister's and the parent ministry. consideration. 7. Ensuring an Adequate and Stable Flow of Funds This chapter examines pricing and cost recovery * Simple to administer, that is, not vulnerable to wide- policies for roads, developing a model that spread evasion, avoidance, and leakage. attempts to promote economic efficiency and to gen- In addition, the instruments should be able to dis- erate sufficient revenues to operate and maintain the tinguish between paying for the right to use the road road network on a sustainable long-term basis.I To do network, actual travel on the roads, the occupying of so, the model must influence the demand for travel- road space (either by parking or causing congestion), whether and how to make the journey-as well as the and the benefits of road access. supply of road services. The impact on supply is par- ticularly important. The road agency should be dis- Selecting Appropriate Charging Instruments couraged from simply passing on to road users the The main instruments used to charge road users costs of its own inefficiencies in the form of higher user include vehicle license fees, levies or taxes on transport charges.2 Instead, financing mechanisms should fuels, international transit fees, and tolls. Very few encourage the road agency to use resources efficiently, countries use supplementary heavy-vehicle fees, limit the scope of the road network to what is afford- although many express interest in doing so. Parking able, and construct new roads only when resources are charges are common in urban areas, whereas weight- available for maintenance. In other words, pricing and distance fees and the various methods of charging for cost recovery policies should bring roads into the mar- urban road congestion are rarely used. Although some ketplace by setting a clear price and subjecting the road countries deposit certain sales and excise taxes into agency to a hard budget constraint, by linking revenues their road funds, these are nearly always general rev- and expenditures, to promote surrogate market enue taxes and should not constitute part of road-user discipline. charges. In other words sales and excise taxes on trans- This chapter addresses two key questions: Which port-related services are generally set at the same rate instruments can be used to charge road users? Which as they are for all other comparable goods and services principles should guide the pricing and cost recovery (see box 3.1). Likewise, some countries wrongly treat policies that are applied to roads? drivers licenses, vehicle inspection fees, and registra- tion fees like road-user charges. These are nearly always service fees levied in connection with the pro- Setting Clear Market S:ignals vision of specific services.3 The instruments best suited to developing and tran- To influence demand and provide a basis for linking sition economies are vehicle license fees, supplemen- revenues and expenditures, charging instruments tary heavy vehicle license fees, fuel levies, and interna- should be: tional transit fees (table 7.1). Parking charges, as they * Easily recognizable. are presently collected, are less suitable because they * Related to road use. are difficult to administer. They suffer from high levels * Easy to separate from indirect taxes and other ser- of avoidance and leakage.4 However, if they are col- vice charges or fees. lected under contract, parking charges could play an 65 66 Commercial Management and Financing of Roads Table 7.1 Administrative characteristics of different road-user charging instruments Administrative characteristics Separable Collection Avoidance Ease of Related to from general Easily cost or collecting Charging instrument Potential role road use taxes recognizable (percent) evasion by contract Suitability' Tolls user fee yes yes excellent 10-20 moderate simple moderate Vehicle license fee vehicle access fee no yes good 10-12 high moderate high Heavy vehicle license fee vehicle access fee not directly yes good unknown unknown simple high Fuel levy user fee partly can be good negligible low simple high Weight-distance feeb user fee yes yes excellent 5 moderate moderate low International transit fee foreign user fee should be yes good 10 high simple high Parking charges' control access partly yes good over 50 high simple moderate Cordon charged congestion charge partly yes moderate 10-15 unknown simple moderate Area license congestion charge partly yes moderate 10-15 unknown simple moderate Electronic road user or less than pricing congestion charge can be yes good 10 unknown simple low a. Suitability as general charging instruments. b. A simpler fonm of weight-distance fee is the vehicle-km fee. It employs the same basic principles, but relates fees more simply to vehicle type and distance. c. These are difficult to administer and currently generate little revenue. d. These are only suitable when the road network lends itself to cordon pricing. Source: Based on case studies in Argentina, Bolivia, Ghana, India, Tanzania, Zambia and Yugoslavia. See Heggie (1992). important role in helping to generate revenues and to levies, international transit fees, and tolls can be used manage urban traffic. to charge for use of the road network. Fuel consump- The other technically sound charging instruments, tion is not exactly related to variable road maintenance tolls and weight-distance fees, are less suitable as gen- costs, but is related closely enough for practical charg- eral charging instruments. Few roads carry sufficient ing purposes (see figure 7.1). In terms of revenues traffic to make widespread tolling economic, and raised, fuel levies are by far the most important user weight-distance fees are difficult to administer in charges currently used (see figure 7.2). developing and transition economies (see box 7.1). The advantage of weight-distance fees is that they Administrative Considerations encourage the use of vehicles with axle configurations It is important to ensure that the above fees, fuel levies, that do less damage to the road pavement. They also and bridge, ferry, and road tolls are administered effi- make it easier to charge for roads when there is ram- ciently. This means minimizing evasion, avoidance, and pant fuel smuggling and, particularly if introduced leakage; avoiding inadvertent subsidies; ensuring that regionally, make it easier to charge international truck the fuel levy does not unintentionally tax non-transport traffic. Weight-distance fees should therefore be con- users of diesel; and minimizing fuel price distortions. sidered as soon as a country has developed the capac- In developing countries license fees suffer from ity to administer them. widespread evasion, international transit fees suffer Most countries use vehicle license fees (usually from serious leakage (aggravated by the fact that they based on gross vehicle weights or engine capacity), a are often paid in foreign exchange), and tolls can be few use license fees based on axle weights or vehicle costly to administer and-particularly in the case of weight, a surprising number use fuel levies, and some ferry and bridge tolls-suffer from high levels of eva- also use international transit fees (table 7.2). Several sion and leakage (table 7.1). In some countries half of countries also use tolls on bridges, ferries, and select- the vehicles go unlicensed and uninsured, revenues ed high-volume roads. These charges may be used as a from international transit fees are less than half their two-part road tariff. The license fees can be used to potential, and the costs of administering ferry and charge for access to the road network, while the fuel bridge tolls is higher than the revenues collected. Ensuring an Adequate and Stable Flow of Funds 67 Box 7.1 Weight-distance fees for diesel vehicles New Zealand and Iceland use weight-distance fees to and Sweden revenues were not paid into a special account. charge diesel vehicles for road usage. Norway and Sweden In addition to the weight-distance fees, Iceland and New used weight-distance fees until the early 1990s, but have Zealand also levy a special charge on gasoline. The revenues now abolished them. Narnibia is planning to introduce from this charge are also paid into the special account. them in the near future, and a weight-distance fee, the Euro Weight-distance fees can be difficult to administer. Vignette, is under consideration in the European Union for There is considerable scope for evasion-mainly by charging foreign vehicles t-aveling through member coun- understating vehicle weight-unless the sale of licenses tries (for example, Russian trucks entering Finland). The can be checked for consistency and linked to an active basic principle is that all diesel vehicles must buy a license enforcement program. In New Zealand it is estimated that (in New Zealand they are issued in multiples of 1,000 km) collection and enforcement absorb 3.2 and 2.0 percent graduated according to axle configuration and gross vehi- respectively of gross revenues, evasion accounts for about cle weight. The charges are administered through sealed 12 percent of net revenues (9.4 percent from heavy vehi- hub odometers or other certified distance meters. The cles and 2.8 percent from light vehicles), and legal avoid- charge is lower for vehicles with multiple axles and increas- ance for 7 percent of net revenues. The system works sat- es with gross vehicle weight (see figures below). isfactorily when it is effectively administered-with fees The weight-distance fee is administered separately from collected under contract-and vigorously enforced. But the general tax system, anci all revenues collected from the the collection technology is now somewhat dated and sale of weight-distance licenses are paid into a special countries should perhaps wait until electronic systems are account set aside to suppoit spending on roads. In Norway available before introducing weight-distance fees. l'railers Rigid vehicles Charge rates (NZ/1 000 km) Charge rates (NZ/I000 km) 800 2 spaced axles, 800 700 both single tyred/ 4-axle rigid 600 600 (any configuration) 500 500 2 spaced axles, 3-axle rigid 400 both twin tyred 400 (S+T+T) / / ~~~~~~~~~~~~bus and 2-axle / / 300 300 rigid (S+l) 200 200 car 100 lgroupof3 100 close axles 0 ~~~~~~~~~all twin tyred 30 1~~~~~~~ ~ 11 22 1 10 20 30 Maximum gross vehicle weight (tons) Maximum gross vehicle weight (tons) Governments are attempting to improve revenue countries already have such fees, and others are con- administration to lessen these problems. sidering them. The second option is to collect more There are two main options. The first is to simplify fees under contract with the private sector. Countries the fee structure, which in turn will simplify adminis- as diverse as New Zealand, Yemen, and Mozambique tration and reduce the costs of collection and compli- have done so with good results (box 7.2). ance. One way of doing this is by mobilizing most Administrative arrangements may also lead to inad- license fee revenues through a supplementary heavy- vertent subsidies. Vehicles owned by the government vehicle license fee. There are fewer heavy vehicles (per- rarely pay license fees, and government and diplomat- haps 20 percent of the total vehicle fleet), and they are ic vehicles often pay no fuel levies. These vehicles nev- mostly owned by registered businesses. Thus a heavy- ertheless impose measurable costs on the road net- vehicle license fee would be easier to administer. Some work, and typically other users have to pay these costs. 68 Commercial Management and Financing of Roads Table 7.2 Charging instruments currently used in selected countries Supplementary International Country License fees heavy-vehicle fee Fuel levy transit fee Other charges Argentina Yes No Yesa No Fuel tax and tolls Chile Yes No No No Tolls Finland Yes No No Yes Fuel tax Germany Yes No No No Fuel tax Ghana No No Yes No Tolls and vehicle inspection fees. The fuel levy applies to all fuels Honduras Yes No Yes No Tolls Hungary No Yesb Yes Yes None Japan No Yes Yes No Vehicle purchase tax at local level. Jordan Yes No No Yes Gasoline tax earmarked to municipalities Korea, Rep. of Yes No Yes No Excise taxes on automobiles; tolls Latvia Yes No Yes No None New Zealand Yes No Yes No Weight-distance charges Pakistan Yes Yes Yes No Tolls; vehicle registration and vehicle sales tax Russia Yesc No Yes No Vehicle sales tax: enterprise taxes in selected cities South Africa Yes No Yesd Yes Fuel tax United Kingdom Yes No No No Fuel tax United States Yes Yes Yes No Graduated tax on tires; retail tax on selected trucks and trailers Zambia Yes No Yes Yes None a. A portion of fuel taxes allocated to provinces is earmarked on a cost-share basis. b. Weight-related vehicle tax based on gross vehicle weight. c. For vehicles registered in Moscow and St. Petersburg. d. Reinstated as of March 1998. To avoid the distortions that such exemptions create, sidy is also given when the pump price of fuel (exclud- all road users should pay license fees and fuel levies, or ing the fuel levy) is lower than its border price (box the government should reimburse the road agency for 7.3). When that occurs, the fuel levy does not gener- loss of revenue caused by exemptions. An implicit sub- ate additional net revenues. It simply reduces the Figure 7.1 Relationship between variable road Figure 7.2 Fuel levies for financing roads, selected maintenance costs and charge imposed through a fuel countries levy US cents per liter Variable road 50 3.0 maintenance cost el levy 2.5 4 2.0 30 diesel T 1.5 1.0 gasoline 0.5 10 0 Car Utility Light Medium Heavy Articulated Bus Diesel Truck Truck Truck Truck ~ 4 Note: Charge imposed through a fuel levy is based on a levy C C' ' 0 of $0.08 per liter (fuel consumption times fuel levy). . 9 Source: Annex 3. table A3.4. Source: Individual road funds. Ensuring an Adequate and Stable Flow of Funds 69 Box 7.2 Collecting road-user charges under contract in New Zealand, Yemen, and Mozambique NEW ZEALAND: All road-user charges are collected under orandum of understanding between the Yemen Petroleum agency agreements. The fuel excise is collected by the New Company and the road maintenance fund. The Yemen Zealand Customs, which charges a fee equivalent to 0.2 Petroleum Company collects the levy and deposits the percent of revenues. The sale of weight-distance charges revenues into the road fund on a monthly basis. Monthly is managed by a unit within the Land Transport Safety reconciliation statements are sent to the road fund board Authority at a cost of about 3.2 percent of revenues-just showing deliveries of fuel, the levy payable, and deposits more than half is spent on collection and the balance on into the road fund. The Yemen Petroleum Company enforcement. The certificates are sold through the New charges a small fee for this service. Zealand Post, BP petrol stations, Vehicle Testing New Zealand, New Zealand Automobile Association, and AMI MOZAMBIQUE: International transit fees are collected under Insurance. Operators can also buy licenses through a contract between the road fund and a freight company, remote terminals. The collection of motor vehicle regis- The National Agency for Navigation and Freight. Transit tration fees is managed by the Land Transport Safety fees are collected through the sale of bank-note-quality Authority on a similar basis at a cost of about 18 percent certificates, which are distributed by the contractor to of revenues. road hauliers and then collected and endorsed at official international border crossings. The road agency supplies YEMEN: The road maintenance levy, which is added to the the certificates to the contractor, which deposits the rev- price of fuel, is collected by the Yemen Petroleum enue collected into the road fund bank account, less a 3 Company. There is no formal contract, but instead a mem- percent agency fee, within an agreed period of time. implicit subsidy channeled to the road sector. To avoid improved refining practices, while the final 10 percent subsidization, the government should ensure that would come from improved distribution and storage pump prices are always higher than border prices. arrangements (Schloss 1993). Many OECD countries already take advantage of the The World Bank's general advice with regard to taxes low price elasticity of demand for fuel to impose high- on goods and services is that they should be consoli- er taxes on fuel than on general consumption goods. dated into a limited set of instruments with the fol- These higher prices are justi.fied from an economic effi- lowing characteristics (World Bank 1991 b): ciency point of view, since they generally move the * Revenue should be generated primarily from a overall taxation system closer to the optimum (box broadly based tax on consumption that does not tax 7.4). Fuel prices in most developing and transition interindustry transactions or exports and does not dif- economies are generally lower than those in OECD ferentiate by source of production (domestic or for- countries. The former could therefore mobilize more eign). domestic revenue and reduce the welfare costs of tax- * The best instrument to achieve this objective is a ation by raising fuel taxes and lowering other general value-added tax (VAT) at a single rate of between 10 consumption taxes. and 20 percent, with crediting provisions and zero rat- On the other hand, in some developing and transi- ing for exports. tion economies fuel prices are already too high because * Equity would be encouraged by introducing luxury tax levels are higher than the optimum or because of and excise taxes with only three or four different rates inefficient petroleum procurement and distribution on income-elastic items (such as vehicles, petroleum policies. A recent survey has estimated that Sub- products, and luxuries) that are not distinguished by Saharan Africa could save about $1.4 billion a year at source of production (domestic or foreign) and by 1989-90 prices by rationalizing the supply of petrole- exempting items from the VAT that are a significant um products. About half the potential savings would component of expenditures by the poor. come from improved procurement arrangements, * Efficiency would be encouraged by additional excis- which would cut costs and reduce gratification pay- es and taxes on items with demonstrable negative ments. Another 40 percent would come from externalities (such as "green" taxes on transport fuels). 70 Commercial Management and Financing of Roads Box 7.3 The border price of transport fuels Border prices indicate the cheapest way to procure trans- Ocean freight and port charges are then added to the port fuels. There are three main cases to be considered, f.o.b. price to produce the c.i.f. price. Alternatively, the countries that import refined fuel products, import crude calculation can begin directly with the c.i.f. price, which petroleum and refine it in a domestic refinery (or pay a fee is readily available for most countries from the World to have it refined in another country), or produce crude Bank's quarterly report on prices of crude petroleum and petroleum and refine it in a domestic refinery petroleum products. Finally, allowance is made for inland The method of calculating border prices is the same in transport costs from the port to point of sale, the distrib- all three cases. For countries that import refined fuel, the ution margin, and the sales margin. The sum of these starting point is the f.o.b. price at the originating port, costs represents the economic cost, or border price of while for the other two types of countries, it is the f.o.b. fuel. price at the most efficient, available originating port (usu- The table below shows how border prices were cal- ally Bahrain, Curaqao, Rotterdam, or Singapore). The rea- culated for Brazil. The final estimates for the border son for choosing the most efficient, available originating prices of gasoline, diesel fuel, and kerosene were $0.23, port is to ensure that the costs of an inefficient local refin- $0.22, and $0.20 per liter, respectively, compared to ery, that is, inflated production costs, are not passed on to actual retail prices of $0.45, $0.24, and $0.17. Diesel users as part of the border price, but are clearly recognized fuel only bears a small positive tax, while kerosene is as an implicit subsidy to the refinery or local producer. being subsidized. Border prices of transport fuels in Brazil, March 1989 (U.S. cents per liter) Gasoline Diesel fuel Kerosene Price, f.o.b. 13.95 11.97 12.86 Freight charges 1.56 1.84 1.50 Insurance costs 0.47 0.58 0.54 Price, c.i.f. 15.98 14.39 14.90 Average transport costs 2.26 3.30 1.82 Distribution margin 1.87 1.30 1.28 Sales margin 3.28 3.09 2.31 Economic cost (border price) 23.39 22.08 20.31 Sourre:World Bank (1984). Tax reform will generally be more effective when schemes, or compensating non-road users for having accompanied by improvements in tax administration. to pay the fuel levy. One of the most difficult administrative issues is Exemptions are difficult to administer, even if there ensuring that nontransport users of fuel-primarily are only a limited number of users, as in the power sec- diesel fuel-do not have to pay the fuel levy. A third or tor. Ghana used to exempt the fishing industry, but with- more of diesel fuel is used outside the transport sector drew the exemption because of the high level of tax eva- for power generation and to operate heavy equipment sion. Finland, the United Kingdom, and the United in the construction, agriculture, and mining sectors. It States color untaxed diesel and test nonexempt diesel is also used for heating. Few countries have managed vehicles to ensure they are using regular (taxed) diesel.5 to solve this problem satisfactorily. Some have applied Still, enforcement is difficult. New Zealand operates a different tax rates to automotive diesel, industrial rebate scheme that covers the off-road use of gasoline. diesel, and diesel for power generation. But it is diffi- The scheme is administered under contract by the Land cult to control avoidance and evasion when several dif- Transport Safety Authority that, in turn, uses New ferent tax rates apply to the same end product. Other Zealand Post Ltd. as its agents. Applications for refunds countries have attempted to address the issue by offer- must be accompanied by invoices covering the pur- ing exemptions, coloring untaxed diesel and testing chases on which refunds are being claimed. The Land road vehicles for unauthorized use, operating rebate Transport Safety Authority Audit Unit undertakes ran- Ensuring an Adequate and Stable Flow of Funds 71 Box 7.4 Strengthening revenue mobilization by improving taxation of transport fuels Fuel prices in many developing and transition economies where tax rates are measured in percent) (Creightney (such as Benin, China, Egypt, Nigeria, Romania, 1993a). This rate was three to five times higher than gen- Venezuela, and Yemen) are currently well below those in eral consumption taxes in these countries. The available most industrialized countries. Several countries have neg- evidence on the price elasticity of demand for gasoline ligible tax rates (that is, the pump price is at or close to suggests that these differentials are justified from an eco- the border price), others simply apply standard con- nomic efficiency point of view (that is, the higher rates sumption tax rates to fuel, and in others fuel prices are move the taxation system closer to the optimum). below the international border price (that is, the effective Since gross consumption tax rates are about 15 to 20 tax rates are negative and fuel is being subsidized). percent, gross petroleum tax rates should be between 60 These countries have made little systematic effort to and 75 percent to be economically efficient, generating net improve domestic revenue mobilization by levying high- tax rates of 150 to 300 percent. In other words, if the base er taxes on fuel than on other commodities. This contrasts price of gasoline were 25 cents per liter, the fuel tax would with the practice in industrialized countries, where fuel be between 37.5 and 75 cents per liter, giving pump prices taxes are generally much higher than general consump- of between 62.5 and 100 cents per liter. This rate is far tion taxes. A recent survey of selected OECD countries higher than existing gasoline taxes in most developing and showed that gross tax rates on leaded gasoline during transition economies. Most of these countries could there- 1990 and 1991 were between 60 and 70 percent (75 per- fore improve domestic revenue mobilization and reduce cent in France), leading to net tax rates of 150 to 230 per- the welfare costs of taxation by raising fuel taxes and low- cent (the gross tax rate = net tax rate/[1 + net tax rate], ering other general consumption taxes. dom audits to discourage fraud. In 1996 refunds which may encourage substitution between different amounted to about 3 percent of total revenues. Namibia transport fuels. The biggest problem arises with is proposing to operate a similar rebate scheme. kerosene. Some governments keep kerosene prices low Instead of offering exemptions or rebates, which are to minimize the impact on low-income households difficult to administer, Latvia and Mozambique com- that use it for cooking and lighting. They also keep pensate selected non-transport users of diesel for hav- kerosene prices low to encourage substitution of ing to pay the diesel levy. In Latvia the Ministry of kerosene for fuelwood to reduce deforestation. Finance estimates how much diesel the railways con- Kerosene can be mixed with either gasoline or diesel sumed (currently, 18 percent of total sales) and then fuel and, when mixed with a little engine oil, can even transfers that part of the diesel levy to the railways. be used as a complete substitute for diesel fuel. A high Likewise, farmers are entitled to receive annual com- price differential between diesel and kerosene will thus pensation equivalent to 120 liters of diesel fuel for every encourage substitution, and the fuel levy will not real- hectare of land under cultivation (120 liters being the ize its full potential. The only ways to discourage sub- estimated amount of diesel used to cultivate one hectare stitution are to color kerosene and inspect vehicles for of land). The local municipality assesses the applicable mixing or to issue coupons to poor households to pur- land area. A similar compensation scheme applies to the chase kerosene at concessionary rates. Neither solution fishing industry. Mozambique uses an even simpler is entirely satisfactory. The best option is to avoid wide method to compensate farmers. Twenty percent of the price differentials between kerosene and diesel fuel. diesel levy is paid into a special fund, which provides financial support for agriculture. There are thus a num- Fuel Smuggling ber of ways to ensure that the fuel levy is paid only by Financing roads through fuel levies breaks down when road users or that they are compensated for having to there is rampant fuel smuggling-a major problem in pay it. The key issue is to clecide which method is like- North America, North Africa and the Middle East, parts ly to work best in each cotntry context. of Asia, and Africa, where low fuel prices in some coun- The final administrative concern relates to relative tries have led to massive fuel smuggling. Canadians fuel price distortions. Fuiel levies raise fuel prices, buy cheap fuel in the United States, Algeria smuggles 72 Commercial Management and Financing of Roads fuel into Tunisia, Yemen smuggles fuel into Saudi Finland, Norway, and Sweden all add various environ- Arabia, some provinces in China smuggle fuel into mental taxes to the price of gasoline and diesel to dis- other provinces, and Nigeria smuggles fuel into most courage lead in petrol, encourage sulfur-free diesel West African countries. Indeed, in 1992 it was esti- fuel, and reduce C02 emissions.) The pricing and cost- mated that between one-quarter and one-half of the recovery policies discussed in this chapter have four fuel consumed in Cameroon and Benin was smuggled objectives: to provide the correct market signals to road from Nigeria. Smuggling makes it virtually impossible users, to ensure that road agencies use resources effi- for governments to mobilize any revenues by taxing ciently, to constrain the size and quality of the road net- imported fuels. work to what is affordable, and to generate sufficient There is no easy way around this problem. Wide dis- revenues to operate and maintain the core road net- parities in prices lead to large potential profits and work on a sustainable long-term basis. These policies hence to widespread bribery and corruption. Attempts must therefore balance several conflicting objectives. to prevent smuggling cannot rely on enforcement alone. Three alternatives currently being tried include: Basic Principles removing subsidies and exchange rate distortions, To maximize net economic benefits, road-user charges making the currency nonconvertible so that the sale of should be set equal to the costs of the resources con- smuggled fuel is more difficult, and introducing net- sumed when the road network is used. These costs are work-wide road tolls in lieu of the fuel levy Algeria has generally referred to as short-run marginal costs. Two removed the bulk of its fuel subsidies, which has costs must be considered: the cost of damage done to reduced large-scale smuggling to a trickle. In Yemen the road surface by the passage of vehicles (that is, the the realignment of the official exchange rate, combined variable costs of operating and maintaining the road with an increase in fuel prices, has also reduced fuel network) and the additional costs that each road user smuggling. Convertibility has been suspended in imposes on other road users and on the rest of society- Cameroon and Benin, and Cameroon has introduced primarily the costs of road congestion. Congestion is the road tolls over the entire main road network. However, classic negative externality in the road sector and is the the tolls were not intended primarily to discourage one normally taken into account when estimating the smuggling, and it is estimated that 75 percent of poten- optimal user charge.6 tial toll revenue is lost through evasion and leakage. The basic principle behind efficiency pricing is that Unless toll systems are carefully designed and admin- additional road capacity should be financed through istered in collaboration with the road transport indus- congestion charges. Capacity should be expanded try, they will face public hostility and are unlikely to when the annual costs of road congestion are equal to generate much revenue. the annualized costs of expanding capacity. But since less than half the costs of operating and maintaining the road network vary with traffic (see table 7.3)-and Pricing and Cost Recovery Policies roads in developing and transition economies do not generally experience widespread and persistent road This section focuses on ways of recovering the costs of congestion outside large urban areas-if prices are set maintaining, improving, and rehabilitating the road equal to short-run marginal costs, large financial network and on ways of using congestion charges to deficits will ensue. Furthermore, since most govern- ration scarce road space. It does not deal with the costs ments in developing and transition economies are of other externalities-like noise, ground water pollu- acutely short of fiscal revenues, it is rarely possible for tion from de-icing chemicals, and greenhouse gasses- them to finance these deficits through general taxation. since the government should handle such externalities The funds are simply not available. directly through regulations and corrective taxes. How should these deficits be financed? The obvious (These should take the form of an additional environ- targets are road users and, in the case of local access mental levy added to the price of transport fuels. roads, those who benefit from road access. Furthermore, Ensuring an Adequate and Stable Flow of Funds 73 given the relatively high welfare costs of mobilizing gen- and maintaining the road network, and increased road eral tax revenues and the k)w price elasticity of demand spending should automatically raise the road tariff, even for road use, there is a prima facie case for assuming that though it will usually also reduce VOCs. Imposition of the welfare costs of raising most of the required revenues a hard budget constraint thus requires full cost recov- from road users are lower than the costs of mobilizing ery from road users and, in the case of local access roads, them through general taxation. There are also distribu- both road users and the beneficiaries of road access. tional arguments in favor of raising most of these rev- This leads to three basic pricing and cost-recovery enues from road users. Road users are among the wealth- policies: iest members of society. Although the poor depend * Never set the road tariff-ideally, the variable ele- heavily on public transport for job searching and gain- ment of the road tariff-lower than the variable cost of ing access to public services, it is better to assist them by operating and maintaining the road network. subsidizing selected transport services or by providing * Ensure that the road tariff and the taxes and charges other forms of income support. used to support local access roads collectively cover all Attempting to achieve full cost recovery is consistent road costs. with the desire to link revenues and expenditures to * When there is significant road congestion, the road subject the road agency to a hard budget constraint. If tariff should also include congestion costs. (This rule some costs are financed through subsidies or other will generally apply only to a handful of seriously con- transfer payments, market discipline is weakened. gested cities.) Pressure to keep costs under control-and only under- take expenditures for which users are willing to pay- Practical Considerations requires a clear market signal that forces road users to There are three main practical problems. First, the vari- recognize the full costs of providing road services. The able costs of maintaining different types of roads differ road tariff should therefore reflect the costs of operating significantly-from about 0.026 to 0.177 cents per Table 7.3 Costs of road maintenance on different types of roads with typical loading conditions (U.S. cents per vehicle per km) Main roads Local access roads Major arterial, Minor arterial, Low volume, High volume, Low volume, paved paved paved unpaved unpaved Traffic (ADT) 10,000 3,000 300 300 50 Deflection (mm) 0.5 1.0 1.5 - - Medium loading, high motorization (10 percent trucks) Variable costs 0.026 0.110 - Fixed costs 0.198 0.548 Total 0.224 0.658 - - Medium loading, average motorization (50 percent trucks) Variable costs - 0.177 1.449 - Fixed costs - 0.635 2.850 - Total - 0.812 4.299 - Primary gravel, average motorization Variable costs - - - 1.035 1.321 Fixed costs - - - 1.058 6.351 Total - - - 2.093 7.673 - Atypical loading conditions that have not been calculated. Note: Based on 49 data sets from 33 developing and transition economies, with medium vehicle operating costs, medium road agency costs, and temper- ate environmental conditions. Medium loading means that the average design loading in the 33 countries included in the sample. U.S. cents per vehicle per km is the average cost for all vehicles. Source: Calculated in annex 3. 74 Commercial Management and Financing of Roads vehicle-km on the main road network, to 1.499 cents is no scope for using the inverse elasticity rule (that is, per vehicle-km on high-volume local access roads, and Ramsey pricing), although it would be applicable for from 1.035 cents to 1.321 cents per vehicle-km on the weight-distance fees. (See annex 2 for a description of rural road network (table 7.3). Total costs likewise vary the inverse elasticity rule. Annex 3 provides an example from a low of 0.224 cents per vehicle-km on the main illustrating how to estimate the above two-part tariff.) network to a high of 7.637 cents per vehicle-km on the rural road network. Charges based strictly on costs Financing Maintenance would thus involve wide differentials between differ- The above model suggests that the costs of operating ent types of roads and different central and local gov- and maintaining the interurban road network should ernment toad agencies. This is simply not practical, be financed through the road tariff, that in urban and although it is possible to maintain some differential rural areas at least the variable costs of operating and between urban and rural areas and among different maintaining the road network should be financed regions. A practical set of user charges will thus involve through the road tariff, and that the balance of the a great deal of averaging.7 required expenditures in urban and rural areas should Further, the variable costs of maintaining the road be financed from local revenues. These local revenues network also differ significantly with vehicle type (see may come from parking charges, particularly in large figure 7.1). Cars impose relatively small costs on the urban areas (these are usually a minor source of rev- road network, while articulated trucks impose costs enues); local property taxes (a major source of revenues twelve times larger. In principle, an articulated truck since road access increases the tax assessment value of should therefore pay 12 times more than a car. But if the property); market and/or product taxes (effective- the main charging instrument is a fuel levy it will only ly a local sales tax); and other miscellaneous taxes. In pay three-and-a-half times as much (an articulated rural areas and informal urban settlements the local truck uses about three-and-a-half times as much fuel community sometimes contributes materials and/or as a diesel car). The available charging instruments volunteer labor in lieu of such taxes. therefore introduce further averaging that can be One of the key features of the above financing avoided only by switching to weight-distance fees, arrangement is that it focuses attention on the afford- which can be more accurately calibrated to reflect ability of a fully funded road maintenance program and underlying road-use costs. hence on the need to define a core road network that The final practical problem relates to the way license users are willing and able to fully finance. Most coun- fees and the fuel levy are set to ensure that to the extent tries are now having to face this issue. Road net- feasible, the variable element of the road tariff paid by works-particularly in Africa, Asia, and Latin each class of vehicle (the fuel levy) covers the variable America-expanded too rapidly during the 1 960s and costs that vehicle imposes on the road network, and the 1 970s, and governments can no longer afford to main- road tariff and the taxes and charges used to support tain them in full. Instead, governments are being forced local access roads collectively cover all road costs. The to define an affordable core network. Noncore roads fuel levy, by itself, will generally undercharge articulat- either receive minimal maintenance or are handed over ed trucks and overcharge other vehicles, particularly to lower levels of government. A typical core road strat- buses. The license fee must therefore be used to com- egy involves fully maintaining all major roads in good pensate. In other words, the license fee cannot be used or fair condition and carrying out only emergency and strictly as an access fee set to cover only fixed costs. The spot maintenance on roads in poor condition. available pricing instruments are too blunt for that. Instead, the combined license fee and fuel levy have to Financing New Investment be set to ensure that each vehicle class covers the vari- New investments include making road improvements able costs it imposes on the road network. This then (such as paving a gravel road), extending the road net- results, not in a strict two-part tariff, but in a quasi-two- work (such as constructing an agricultural penetration part tariff. Clearly, with these charging instruments there track), and expanding road capacity (such as widening Ensuring an Adequate and Stable Flow of Funds 75 a road). There are sound economic reasons for wanti- Africa). It is really a question of governance. In countries ng to finance improvement and extension by taxing where new investments are frequently made for politi- those who benefit. There are also sound economic rea- cal reasons and where the roads board (if any) is unable sons for wanting to finance increased road capacity on to stand up to these political pressures, new investments congested roads through congestion charges (see the should probably be financed through the development section above). budget. Where there are strong, representative road In the case of interurban roads the bluntness of the boards that are able to withstand political pressure, it available charging instruments makes it difficult to may be better to finance new investments through the confine charges to beneficiaries, except on roads car- road tariff. This will ensure that all new investments are rying high volumes of traffic and that lend themselves subjected to the test of the marketplace. A strong repre- to tolling (urban road congestion is dealt with below). sentative board should also be able to ensure that new The choice of financing instruments for the overall investment does not displace maintenance. interurban network thus boils down to either financ- Slightly different considerations apply for local gov- ing all new investments from general taxes channeled ernment roads. The overriding objective concerning through the government's development budget or new investment is to ensure that local governments financing new investments by charging all road users. undertake only priority projects, not those for which People have strong views on which option to use. funds are provided as a grant channeled through the Many believe the road tariff should finance only oper- government's development budget. This issue argues in ation and maintenance of the road network and that all favor of a matching-grant system. Local governments new investment should be financed through the gov- should have to demonstrate the priority of their invest- ernments development budget. Their concern is that ment programs by paying part of the costs from local that new construction might otherwise take prece- revenues. These revenues can come from land-value dence over maintenance cr that the road agency might increment taxes (that is, betterment taxes and frontage overinvest. There is somie evidence to support this levies), charges to adjoining landowners, urban con- view-many countries ccntinued to build new roads gestion charges (where applicable), or other forms of during the 1980s at the expense of maintenance. property tax. The balance of the expenditures are then An additional concern is that major new invest- financed by the road tariff or through the government's ments in the interurban road network generally have development budget. The amount financed by the local substantial effects on land-use patterns, the location of government should clearly be based on ability to pay. industry, and adjoining property values. Since this issue raises strategic and political concerns, such Financing Road Rehabilitation investment decisions should be made and financed by Most countries have large backlogs of deferred main- the government. On the other. hand, there are also tenance. Further, governments are short of fiscal rev- arguments in favor of financing new investment by enues and are generally unable to finance much road charging road users. Only by forcing road users to pay rehabilitation from their own resources. So, where will the full costs of using the road network-including the the funds come from? First we must recognize that costs of investment-will the size of the network be most developing and transition economies cannot constrained to what is affordable and will essential afford to rehabilitate all roads that are in poor condi- investments be carried out regardless of the state of the tion. The best they can hope for is to rehabilitate a core government's budget. network that the country can afford to maintain on a There is no simple answer. Some countries finance sustainable long-term basis. The remaining roads will most new investments through the development budget either have to receive minimal maintenance or be (including Guatemala, Malawi, Yemen, and Zambia), handed over to lower levels of government and local while others finance some investment through user communities. But even rehabilitating core roads will charges (including Georgia, Hungary, Japan, Korea, cost several billion dollars each year for the foreseeable Latvia, New Zealand, Romania, Russia, and South future. There are three possible means of financing: 76 Commercial Management and Financing of Roads reallocating existing spending from new construction ance strategies. Parking charges offer a natural transi- to rehabilitation, seeking donor-financed loans and tion from the use of physical measures to improve road grants, and relying on the road tariff. capacity to the use of congestion charges to ration The first option offers little hope. Few developing scarce road space. and transition economies have oversized construction Once the value of parking charges has been programs. Most new construction is being undertaken exhausted, serious consideration should be given to in rapidly growing economies that are suffering from introducing an explicit road pricing scheme, serious road congestion (China, India, Korea), or in although the only serious attempts made so far to transition economies with outdated road networks in develop road pricing instruments are in Hong Kong, urgent need of modernization (Russia). So, there is lim- Norway, Singapore, and Sweden (see box 7.5). Much ited scope for reallocating domestic resources from of the public resistance to these road pricing schemes construction to rehabilitation. The second option, centers on how the revenues are used. Norway and donor financing, is already being used, with donors Sweden have largely overcome this resistance by ded- currently financing at least one-half of the required icating the revenues to improving urban transport rehabilitation programs. services. This money is, however, not free. True, some comes in the form of grants and some comes in the form of The Likely Structure of User Charges concessionary loans, but governments still have to ser- A sustainable road maintenance program generally vice these loans. In the short term most governments requires vehicle license fees, which vary from about are doing so from general tax revenues. In other $150 per year for a car, to $500 to $600 per year for a words, other sectors are being taxed to finance road bus or medium truck, to about $2,000 per year for an rehabilitation programs. This practice is not sustain- articulated truck. These license fees must be combined able under present fiscal conditions and in the long with a fuel levy of about $0.05 to $0.10 per liter to term. And donor financing will not be available indef- ensure that the costs of operating and maintaining the initely Thus there is only one realistic long-term road network can be fully funded. License fees in most option: financing road rehabilitation programs countries, particularly those applicable to heavy vehi- through the road tariff. cles, are generally lower and should be raised and/or There are three qualifications. First, funds for reha- supplemented by a heavy vehicle license fee to gener- bilitation must be clearly designated as a surcharge in ate the required revenues. the road tariff, and the surcharge should eventually be The same is not true of fuel levies (see figure 7.2). A phased out. Second, the costs can be spread and made number of countries either have, or are well on their more affordable by continuing to use international and way to having, fuel levies of $0.10 per liter, while some domestic borrowing. And third, the required funds have fuel levies well in excess of this rate (Japan and should be increased gradually to enable local consul- Korea). Furthermore, a fuel levy of $0.10 per liter does tants and contractors to build up their capacity. The not necessarily make fuel unduly expensive. Most decision to borrow should nevertheless be based on a developing and transition economies have diesel prices careful assessment of alternative financing options and of about $0.55 per liter or less and gasoline prices of their costs. about $0.70 per liter or less (figure 7.3). A $0.10 fuel levy would thus still leave fuel prices in most develop- Managing Urban Road Congestion ing and transition economies at levels lower than those Congestion charges can be used to manage urban traf- in Europe and Japan. They would also be lower than fic and generate additional revenues for investment. the prices based on the EUs recommended minimum The simplest way to start charging for congestion is excise duty rates on motor fuel (1998: gasoline $0.473 through parking charges, supplemented by improved per liter, diesel $0.344 per liter; 2000: gasoline $0.500 traffic management to prevent the parking charges per liter, diesel $0.381 per liter; 2002: gasoline $0.555 from spilling over into illegal parking and other avoid- per liter, diesel $0.436 per liter). Only in a few coun- Ensuring an Adequate and Stable Flow of Funds 77 Box 7.5 Methods of charging for urban road congestion There are four main ways of using pricing to reduce urban ic tags. The charging rates differentiate between peak and road congestion: charging for parking, imposing a higher off-peak hours. Revenues are used to finance improved license fee or fuel levy on urban road users, charging a fee transport infrastructure, including the transit system and for entering the urban road network, or charging for the pedestrian and bicycle facilities. The ENP scheme has use of individual streets or designated parts of the urban been tested in Hong Kong, and the Smartcard system is road network. This box describes the last two methods. set to be introduced in Singapore in 1998. Electronic Entry fee systems charge vehicles each time they cross charging schemes do away with the need for toll plazas a cordon. Fees can be collected manually or electronical- and reduce delays. ly. The schemes either use tollgates to charge vehicles On the basis of benefit-cost calculations the labor- entering the restricted zone, as in Bergen, Oslo, and intensive technology of supplementary licensing outranks Trondheim in Norway, or use area licenses, as in the capital-intensive technology of electronic pricing Singapore. With area licenses, there is no need for toll- through AVI and is especially suitable for those develop- gates. Vehicles simply display a supplementary prepaid ing and transition economies that have a large pool of license when entering and operating within the restricted unemployed workers and a limited number of urban zone. General road pricing, in which vehicles are charged access routes. Cordon pricing through standard manual either on individual routes or when using parts of the road tollgates and unattended reserved lanes (as in Bergen) may network, is feasible only with electronic charging schemes prove to be a worthwhile, labor-intensive technology for such as: automatic vehicle identification (AVI), electronic developing and transition economies. Electronic pricing number plate (ENP), and Smartcard. The vehicles through AVI is a viable alternative for newly industrializ- equipped with an AVI tag, an ENP, or a Smartcard are ing economies whose standard of living is rising, but identified when they pass an electronic reader. The read- where rapid urbanization and growth of motorization er charges either the vehicle's account (precredited or not) pose major problems. Smartcard technology is not wide- or the prepaid Smartcard itself. Oslo and Trondheim in ly available on a commercial basis and is not yet recom- Norway use both manual and electronic tolling systems. mended for developing and transition economies-even Users can thus choose either to subscribe to AVI and be though Singapore is currently testing an Electronic Road identified or use the manual toll lanes and remain anony- Pricing system with smartcards and will change to this mous. In Trondheim 95 percent of users use the electron- system in 1998 if the trials prove successful. Source: Hau (1992). tries might the introduction of a high fuel levy need to license fees can be used to charge for access to the road be accompanied by revision of the underlying fuel tax network, while fuel levies, international transit fees, structure to ensure that the final price of fuel was not and tolls can be used to charge for use of the road net- unreasonably high. work. Fuel consumption is not exactly related to vari- able road maintenance costs, but it is related closely enough for practical charging purposes. Key Recommendations and Conclusions * To improve the effectiveness of road-user charging instruments and to enhance revenue mobilization. it is The key elements of the strategy required to generate a desirable to simplify the fee structure (simplify admin- secure and stable flow of funds for roads include the istration and reduce the costs of collection and com- following: pliance) and to collect more fees under contract with * Choose pricing instruments that send a clear market the private sector. signal to road users. The signals should be easily recog- * To ensure there are no inadvertent subsidies, all nizable, related to road use, easy to separate from indi- vehicles should be required to pay the two-part tariff, rect taxes and service fees, and simple to administer. and the government should reimburse the road agency * A review of the various charging instruments avail- for mandated exemptions (such as for diplomatic vehi- able suggests that road users should be charged for use cles). The pump price of fuel should also be set above of the road network by way of a two-part tariff. Vehicle the applicable border price of fuel. 78 Commercial Management and Financing of Roads Figure 7.3 Fuel prices in selected countries, early 1997 US cents per liter 120 Gasoline 100 80 60 40 20 0 Note: Recommended 1988 EU levels based on border prices of $0.24 per liter for gasoline and $0.23 per liter for diesel. - Countries should consider taking advantage of the * Since it is virtually impossible to finance roads low price elasticity of demand for fuel by imposing high- through fuel levies when fuel smuggling is widespread, er taxes on fuel than on general consumption goods. steps should be taken to discourage smuggling. There Doing so would move the overall taxation system clos- is no easy answer. Of the options available, removing er to the optimum, particularly in countries where fuel subsidies and exchange rate distortions are among the prices are well below those in OECD countries. Such most effective. Using road tolls as an alternative way of countries could improve domestic revenue mobilization raising road revenues is the least effective. and reduce the welfare costs of taxation by raising fuel * The two-part tariff should be set to: provide the cor- taxes and lowering general consumption taxes. rect market signal to users, ensure road agencies use * Since a third or more of diesel is used outside the resources efficiently, constrain the size and quality of transport sector, it will probably be necessary to ensure the road network to what is affordable, and generate that non-transport users do not have to pay the fuel levy. sufficient revenues to operate and maintain the core Applying varying tax rates to different end users, offer- network on a sustainable long-term basis. ing exemptions, coloring untaxed diesel, and operating * To maximize net economic benefits, road-user rebate schemes are all difficult to administer. charges should be set equal to the costs of the resources Compensating road users for having to pay the fuel levy, consumed when using the road network. These costs as applied in Latvia and Mozambique, is one of the eas- consist of the variable costs of operating and main- iest methods to administer. The key issue is to decide taining the road network and the costs of road conges- which method is likely to work best in each country tion (the costs of other externalities should generally * To discourage the mixing of kerosene (which is not be handled through regulations and corrective taxes, subject to the fuel levy) with gasoline and diesel, wide which should take the form of an additional "green" price differentials between kerosene and diesel should environmental levy added to the price of transport be avoided if possible. fuels). But since less than half the costs of operating and Ensuring an Adequate and Stable Flow of Funds 79 maintaining the road network vary with traffic, prices * The above pricing and cost recovery policies are set equal to these costs would generate large financial likely to result in vehicle license fees that vary from deficits. There are strong arguments in favor of financ- about $150 per year for a car to $500-$600 per year ing these deficits from charges to road users and those for a bus or medium truck, to about $2,000 per year who benefit from road access. for an articulated truck. These fees must be combined v There are three basic principles for setting up a two- with a fuel levy of about $0.05 to $0.10 per liter to part tariff: never set the road tariff-ideally, the variable ensure that the costs of operating and maintaining the element of the road tariff-lower than the variable road network are fully funded through the road tariff. costs of operating and maintaining the road network; ensure that the road tariff and the taxes and charges used to support local access roads collectively cover all Notes road costs; and if road congestion is significant, the 1. In developing and transition economnies, where virtually all road tariff should also include congestion costs governments are critically short of fiscal revenues, improved (although this will generally apply only to a handful of cost recovery is generally more important than improved seriously congested cities). demand management. 2. This emphasis counteracts the standard presumption of eco- *The road tariff will require a great deal of averaging nomic theory that public sector production is efficient and that among different road types and different vehicle types. costs, including marginal costs, are minimized (see Kranton The fuel levy will generally undercharge articulated 1990). Although the inverse elasticity rule remains valid when trucks and overcharge other vehicles, particularly costs are not minimized, welfare is no longer maximized by set- buses. The license fee mtist therefore be used to com- ting the ratio of price over marginal cost proportional to the sum pensate for this and cannot be strictly used as an access of the inverses of the supply and demand elasticities. Reducing fee set to cover only fixed costs. The available pricing marginal costs to increase welfare also becomes important. instume.What results, then, 3. Service fees cover the costs of establishing title to property (to facilitate law enforcement), checking vehicles for mechani- is not a strict two-part tariff, but a quasi two-part tariff. cal soundness, and monitoring payment of license fees. As such, * The revenues from the above road tariff are normal- they are not user charges and should be set only to cover ly used to finance the entire cost of operating and main- servicing costs. taining the trunk road network and, on a cost-share 4. Experience with parking charges is not encouraging. For basis, part of the cost of local government roads. The example, in 1991 the Nairobi City Council earned $17,500 costs of new investment are either financed through the from car parks and parking meters, but it cost $82,000 to oper- ate and maintain these facilities. governments development budget or, in countries with 5. In the United States some vehicles, like school buses, are good governance, through the road tariff. Investment in exempted from paying the fuel levy. Also, off-road use by indus- local government roads again tends to be financed on a try and agriculture is exempted. cost-share basis to provide the correct incentives to 6. External disbenefits also include the road damage external- local governments. A great deal of road rehabilitation is ity. Each vehicle damages the road pavement, which increases currently financed through donor loans and grants. In the VOCs of all subsequent vehicles that use the road. But if the the longer term it will have to be financed through the road network has a fairly uniform age distribution, and if main- tenance policies are condition-responsive, road damage exter- r nalities are zero when traffic growth is zero and all road dam- to spread the burden over several years. age is caused by vehicles. Road damage externalities are # Parking charges are the simplest way to charge for negligible in all other reasonable cases (see Newbery and oth- congestion. Once the value of parking charges has been ers 1988). exhausted, serious consideration should be given to 7. This is true in many sectors. In the case of electricity the introducing an explicit road pricing scheme, bearing in costs of generating the base load are estimated by pooling the mind that much of the public resistance to such costs of individual power stations and calculating the average pse rt ot ri variable and fixed costs for the entire group. The variable costs ing schemes is related to what is done with the rev- of a hydropower station (which are virtually zero) are thus enues. Revenues should ideally be dedicated to pooled with those of coal, oil, and gas-fired stations, and with improving urban transport services. stations of different ages. 8. Managing the Revenues W e start with the assumption that the revenues roads then becomes dependent on users' willingness to ~V allocated for roads will be separated from the pay, which helps to impose a hard, but fair, budget con- government's consolidated budget and managed on a straint on the agencies supplying road services. stand-alone basis. This requires establishing a road Road users are generally willing to pay for roads only fund-and some kind of road fund administration-to when the money is actually spent on roads and the actively manage the revenues. This chapter focuses on work is done efficiently'1 To that end, it is important to the desirability of linking road-user revenues with road recognize that the money paid into the road fund expenditures, the different types of road funds, the char- should not include any earmarked tax revenues. Road acteristics of existing road funds, the typical problems fund revenues should consist only of charges for use of affecting conventional (first-generation) road funds, and the road network: vehicle license fees, supplementary how to set up a commercially managed road fund. heavy vehicle license fees, international transit fees, bridge and ferry tolls, fines for overloading (or at least the part of the fine that represents damage to the road Linking Revenues and Expenditures pavement), and fuel levies. These charges would make up the road tariff-showing that roads are being treat- Nearly all road funds established during the 1 970s and ed like any other public enterprise-and should not be 1980s were set up during periods of fiscal stress and confused with the general taxes that road users also were designed to deal with failed budgetary systems. have to pay and that should continue to be paid into These were called the "first-generation" road funds. the government's consolidated fund. This is one of the They relied primarily on earmarked revenues-which main reasons why putting roads on a fee-for-service often included general taxes as well as road-user basis-by introducing a road tariff and depositing the charges-and were set up to protect the road sector proceeds into a special account-is not the same as from the vagaries of the government's budgetary conventional earmarking. process. The ultimate objective was to ensure that road maintenance could be adequately funded. The road funds that were restructured or set up dur- Types of Road Funds ing the 1 990s had a different rationale. They were intro- duced primarily as part of a long-term strategy designed Road funds come in all shapes and sizes (tables 8.1 and to commercialize the road sector. The idea was to bring 8.2). Their objective is nearly always to provide regu- roads into the marketplace, put them on a fee-for-service lar finance to support spending on roads (often con- basis, and manage them like a business (box 8.1). Road fined to maintenance), keep the revenues separate users would then pay for using roads, and the revenues from the government's consolidated account, and collected would be slated to finance road development account for use of these funds. Some road funds and maintenance. Indeed, pricing and cost-recovery finance only national or main roads (South Africa); policies will influence demand and strengthen market some finance only state, provincial, and regional roads discipline only when this link is made. Spending on (Argentina, the state road and transportation funds in 80 Managing the Revenues 81 Box 8.1 Conventional earmarking versus commercialization Earmarking is the practice of setting aside revenues raised a proportion of any sales or excise taxes), extract no rev- from certain taxes to cover specified public expenditures. enues from other sectors, adjust charges regularly to meet Many economists argue that earmarking imposes undesir- anticipated expenditure requirements, keep the revenues able rigidity on government spending decisions and should apart from the consolidated fund, and use the revenues be discouraged. For example, it is inefficient to set aside, say, only to finance the road services paid for by the road users. 20 percent of overall fuel tax revenues to finance national This institutional distinction has important implications roads, since not all fuel consumption is related to road use. for efficiency. The charges create a constituency for the The required expenditures will generally be larger or small- agency supplying the service (that is, they create a specif- er than this amount, only part of the revenues will come ic, albeit surrogate, market), make the agency more from taxes related to road use, and it may be desirable to use accountable to its users, and, by clearly linking revenues some or all of the fuel tax revenues for other purposes. and expenditures, help to impose a hard budget constraint But others argue that earmarking taxes under certain on the road agency. Specifically, the proposed financing circumstances can improve allocative efficiency in that arrangements differ in that the road tariff is: they act as surrogate prices when the taxes chosen are * Set to achieve specific objectives, including demand levied only on those who benefit from the expenditures. management and cost recovery for particular services. For example, in both the United States and Japan part of * Not set in relation to the government's overall fiscal tar- the gasoline tax and other motor vehicle tax proceeds are gets (although usually collected under the government's earmarked for the road fund, the income from which is tax-making powers). used to meet the costs of ciperating, maintaining, improv- * Added to pre-existing standard sales and excise taxes ing, and extending designated parts of the road network. or, when fuel is highly taxed, partly replace and partly add Many argue that such earmarking is a helpful device for to pre-existing taxes. approximating benefit taxation and will promote more * Used to impose a hard budget constraint on the agency efficient expenditure decisions. supplying road services. Nevertheless, this paper does not propose the above The road tariff is generally set by a public-private man- type of earmarking. Instead, it favors commercializing the agement board that recommends the charges to the min- road sector by managing it along lines that mirror the istry of finance, the charges are set to ensure that each management of comparable enterprises in the private sec- vehicle cover the costs it imposes on the road network, tor. In this context the road-user charging system should and all vehicles collectively cover the entire costs of oper- derive its revenues only from road-user charges (not from ating and maintaining the road network. the United States, the Russian regional road funds, and finances roads, since 1996 it has also started to finance the regional municipal road funds in Latvia); and some local authority "alternatives to roading." have been set up as urban road funds to finance only Both Korea and South Africa have unusual road urban roads (box 8.2). Most, however, finance expern- funds. The Korean road fund, unlike others, is not ditures on the whole road network. really a separate account, but a mechanism for chan- Some road funds also finance nonroad expenditures. neling earmarked revenues to finance the regular road The Korean traffic facility special account (the expand- budget. The funds are not managed separately from ed 1994 version of the 1989 road sector special account) the consolidated fund, and there are no special finan- includes a special account for urban rail, express rail, air- cial procedures or separate auditing arrangements. ports, and harbors, while the U.S. Federal Highway The South African road fund, on the other hand, was Trust Fund finances community road safety programs, financed through a fuel levy until 1988, when the levy high-speed rail lines, and bike trails and makes transfers was suspended. Since then it has operated as a mech- into a mass transit fund. The Latvian state road fund anism to manage finance for the national highway finances passenger bus subsidies, while the New network, which now comes in the form of an annual Zealand road fund finances passenger transport, the grant from the consolidated fund. A road fund can Land Transport Safety Authority, and police enforcment thus operate simply as a means to increase trans- of road safety, before the balance is transferred to parency and strengthen financial discipline. It does Transfund. Furthermore, although Transfund primarily not have to be tied to dedicated financing. The fuel 82 Commercial Management and Financing of Roads Table 8.1 Legal and administrative arrangements applicable to selected road funds Country Legal basis Oversight Type of entity Own staff What does it finance Main source of revenues Ghana Decree 1985, Public - Separate Yes All Fuel levy, transit legislation 1996 private board agency expenditures fees, vehicle fees Guatemala Legislation 1993 Public - Separate Yes Maintenance of Fuel taxes, vehicle private board agency national roads only fees, tolls, miscellaneous Hungary Cabinet decree 1989, Road agency Division of Yes All expenditures on state Fuel levy, weight- state law 1992 road agency roads plus transfers related vehicle tax, to municipalities donor finance Japana Special account Road council Division in Yes All expenditures on Gasoline tax, liquid law 1954 Road Bureau national roads plus petroleum gas tax, transfers to local vehicle tonnage tax, governments general budget Korea, Rep. ofb Special account law Ministry of n.a. No All expenditures on Fuel tax, excise tax, 1989, amended 1994 Construction national roads, tolls, general budget and some expenditures Transportation on expressways and provincial roads Latviaa Cabinet decree 1994 Public-private Division of Yes All expenditures on state Fuel tax, vehicle fees, advisory board road agency roads plus transfer general budget to municipalities New Zealand Legislation 1953, Primarily Separate Yes All expenditures Weight-distance amended 1996 private board agency charges, fuel levy, vehicle fees Malawi Legislation 1997 Public - Separate Yes All expenditures, Fuel levy, vehicle private board agency maintenance priority licenses, transit fees, overload fines Romania Legislation 1996 Ministry of Division in Yes All expenditures Fuel levy, vehicle Transport Ministry of plus transfers to sales tax Transport counties and villages Russiaa Legislation 1992 Federal Division in Yes All road Fuel and lubricant tax, Highway Highway expenditures plus vehicle sales tax Department Department transfers to regions South Africa Legislation 1935, Public - Staff in Yes All expenditures on General budget since plus amendments private board director's office national roads 1986 United Statesa Legislation 1956 Committees of Accounting Yes Primarily capital Fuel tax, vehicle sales Congress mechanism works on federal- tax, heavy-vehicle tax managed by aided highways Treasury Yemen Presidential decree Civil service Separate Yes Maintenance only Gasoline levy, overload 1995, ratified by boardc agency fines, general budget Parliament n.a. Not applicable. Note: In addition to the road funds shown in this table, there are national road funds and earmarking devices in Belgium, Luxembourg, the Netherlands, Switzerland, Benin, Central African Republic, Chad, Kenya, Madagascar, Mozambique, Rwanda, Senegal, Sierra Leone, Tanzania, Zambia, Zimbabwe, Argentina, Guyana, Honduras, Azerbaijan, Czech Republic, Georgia, Kazakhstan, Lithuania, Mongolia, Slovak Republic, Turkmenistan, Ukraine, and Uzbekistan. New road funds have recently been set up in Jordan and Namibia, and Armenia is currently establishing one. The Swedish government is also considering whether the Swedish National Road Administration should in the future be financed solely through vehicle license fees and a fuel levy of about $0.08 per liter. a. National or federal road fund. b. Road fund is not a separate account but a mechanism for financing the regular road budget. c. Includes nonvoting members from the Chamber of Commerce and Ministry of Transport. Managing the Revenues 83 Table 8.2 Financial arrangements applicable to selected road funds Annual revenues? Adjusting Deposit Financial pro- Country Fuel levy (million dollars) charges mechanism cedures, regulations Auditing Ghana $0.05 per liter 60 (1997) By board Direct deposit Yes Auditor General or independent audit Guatemala $0.023 per liter 32 (1997) By annual Through Yes Auditor General budget consolidated fund Hungary $0.095 per liter 233 (1997) By annual Through yesb Auditor General budget consolidated fund Japanc 25 percent of 30,000 (1995) By tax law Road fund is a Yes Independent audit gas tax every 5 years line of credit Korea, Rep. 67 percent of 5,000 (1996) By tax law n.a. n.a. Auditor General ofd gas and diesel tax Latviac 50 percent of gas 64 (1996) By annual Vehicle fee, direct; Yes Auditor General and diesel tax budget fuel levy through consolidated fund New Zealand $0.065 per liter 580 (1996-97) By annual budget Direct deposit Yes Auditor General Malawi $0.065 gas: 16.0 (1998 est.) By board Direct deposit Yes Independent audit $0.074 diesel Romania 25 percent ex 250 (1997 est.) No mechanism Direct deposit Yes Independent audit refinery price Russiac 25 percent ex 640 (1993) By annual Through Yes Ministry of Finance refinery price budget consolidated fund South Africa Nonee 150 (1995) n.a. n.a. Yes Auditor General United Statesc $0.032 gas; 21,000 (1995) By annual Road fund is line Yes Auditor General $0.048 diesel budget of credit Yemen $0.004 per liter 7.0 (1997 est.) By annual budget Direct deposit Yes, in draft Auditor General n.a. Not applicable. Note: In addition to the road funds shown in this table, there are national road funds and earmarking devices in Belgium, Luxembourg, the Netherlands, Switzerland, Benin, Central African Republic, Chad, Kenya, Madagascar, Mozambique, Rwanda, Senegal, Sierra Leone, Tanzania, Zambia, Zimbabwe, Argentina, Guyana, Honduras, Azerbaijan, Czech Republic, Georgia, Kazakhstan, Lithuania, Mongolia, Slovak Republic, Turkmenistan, Ukraine, and Uzbekistan. New road funds have recently been set up in Jordan and Namibia, and Armenia is currently establishing one. The Swedish government is also considering whether the Swedish National Road Administration should in future be financed solely through vehicle license fees and a fuel levy of about $0.08 per liter. a. Excluding general budget allocations. b. Standard government rules and regulations. c. National or federal road fund. d. Road fund is not a separate account but a mechanism for financing the regular road budget. e. Expected to be $0.044 when fuel levy is reintroduced. levy for the South African road fund was re-instated Legal Basis in early 1998. Most road funds are set up under basic legislation or under ministerial and presidential decrees. Decrees are fairly common in West Africa and have also been used Characteristics of Existing Road Funds in Mozambique and Yemen. Only a few road funds have been set up under the finance act, usually in for- The administrative and financial characteristics of mer anglophone countries (such as Lesotho, Tanzania, existing road funds can be examined by looking at 1 1 and Zambia). In several countries inflexible legislation separate areas. The detailed management of the road has caused difficulties. For example, if the legislation funds in Japan, New Zealand, and the United States are sets cost-sharing arrangements and the level of the fuel summarized in annex 4. levy, these specifications cannot be changed without 84 Commercial Management and Financing of Roads Box 8.2 Urban road funds HONDURAS: In 1996 the city of San Pedro Sula set up a road while the fuel levy is distributed on the basis of weighted fund under a municipal decree. The road fund is managed road lengths (weighted to reflect surface condition and by a board that consists of a chairperson (the mayor), a traffic volume). These revenues are supplemented by allo- vice chairperson, a secretary, and nine voting members cations from the municipal budget and miscellaneous rev- from the private sector. The voting members represent the enues. Funds can be used for maintenance, rehabilitation, business community, the engineering profession, orga- improvement, and related expenses. The annual budget nized labor, the road transport industry, and the press. and annual report must be published in the local press. They are appointed by the mayor, who chooses from three names nominated by each organization represented on SOUTH AFRICA: Urban roads in the declared Metropolitan the board. The board hires its own staff. The revenues for Transport Areas are financed through local government the fund come from local improvement taxes, vehicle reg- rates and grants made from an Urban Transport Fund istration fees, traffic fines, parking charges, and other mis- administered by a subcommittee of the South African Roads cellaneous revenues that are channeled through the Board. The original intention was to partially support the municipal budget. Revenues come to about $2 million per Fund with revenues collected by applying road congestion year. Maintenance is the first charge on the road fund, but charges in urban areas. But these charges were never intro- the fund can also finance other road expenditures. There duced. Instead, the Urban Transport Fund received money is an independent annual audit. from the road fund (in 1986-87, $30 million was trans- ferred), and it is currently financed entirely through a cen- LATVIA: In 1994 the Cabinet issued a resolution to enable tral government grant amounting to about $15 million per the city municipalities of Riga, Daugavpils, Liepaja, year. Money from the Fund is used to finance urban trans- Jelgava, Ventspils, and Jurmala to set up road funds to port plans and infrastructure improvements that assist pub- finance municipal streets. Each fund is managed under an lic transport. The Funds main responsibilities are being advisory board appointed by the municipality. The head of devolved to the nine provinces. In the future, the national the Ministry of Transport's regional road service is a mem- Urban Transport Fund will shrink since each province will ber of the board. The revenues for the road funds include establish its own fund that it will support with its own rev- transfers from the national road fund-30 percent of the enues. The national Urban Transport Fund will be used to annual vehicle license fee and 27 percent of the fuel levy. assist in the development of national transport policy, stan- Income from the vehicle licenses is distributed among the dards, and guidelines, and will finance and administer urban municipalities on the basis of vehicle registrations, national demonstration projects. amending the basic legislation (this is a problem in community, road transport industry, farmers, and the Romania, for example). Likewise, if certain key con- professions; and one member appointed as chairper- stituencies are omitted from the board, it is very diffi- son or an independent chairperson appointed by the cult to add them at a later stage-a problem in responsible minister (sometimes after consultation Mozambique and Yemen. The Yemen road fund has with the board). The representative boards attach attempted to solve this problem by inviting two non- much importance to accountability. They will often voting members to join the board to represent the erect signs to inform the public that "these road works Chamber of Commerce and Ministry of Transport. are being financed by your money through the roads board" (such as in Yemen and Zambia) or publish their Oversight Arrangements accounts in the press (as in Kenya, Latvia, and Zambia). Many road funds are overseen by a public-private Board members are normally appointed for three to board made up of representatives from key govern- four years and may be eligible for re-appointment. ment ministries and the main road user groups. The rest are overseen primarily by government depart- Type of Entity ments or ministries. The growing number of represen- Most road funds are becoming separate agencies, par- tative boards generally have members nominated by ticularly when funds are channeled to several different the organizations they represent; nongovernmental road agencies and are headed by a secretary or chief members, including representatives of the business executive appointed by the board. But a number are Managing the Revenues 85 still managed by a division in the main road agency, there is a danger that new works will drive out main- creating an obvious conflict of interest. Management tenance. For this reason legislation may state that the by a group in the treasury or maintaining the road fund road fund is being set up to 'provide funds for financ- as simply a bank account (as in Ghana before 1997) is ing the maintenance, rehabilitation, and improvement now rare. of all classified roads," but may then specify that main- tenance is the first priority and that "a limited amount Staffing of road upgrading, rehabilitation, and minor works" There are nearly always sorne staff assigned to manage can be financed, "but only after all road maintenance the road fund. They are normally appointed by the chief requirements have been met." Malawi has gone one executive. Transfund employs 35 staff to manage an step further, placing a cap of 10 percent on the amount annual turnover of about $580 million, the Latvian road of road fund revenue that can be spent on new works. fund employs three staff to manage an annual turnover The Korean road fund restricts the items that can be of about $64 million, the Russian federal road fund financed through the road fund. For example, grants employs 38 staff to manage an annual turnover of about made to the provinces do not cover the costs of land $640 million, and the South African Roads Board acquisition. This is a sound idea, since the costs of land employs the equivalent of (0 to 12 full-time staff to man- acquisition can be manipulated and the road agency age a turnover of about $150 million. The danger is that closest to the road works is in the best position to the road fund may recruit too many staff (at one stage ensure that land costs are not artificially inflated. the road fund in Central African Republic employed more than 50 workers) and that the staff may not have Source of Revenues relevant financial qualifications. Thus some road funds Most road funds derive their revenues from taxes and have regulations requiring that administrative costs charges on fuel, vehicle license fees, international tran- remain under 5 percent of revenues collected through sit fees, and fines for overloading. A number of coun- the road tariff (for example, the regulations in Zambia tries have also introduced procedures to ensure that the limit the costs of the secretariat to no more than 5 per- fuel levy applies only to transport fuels (apan, New cent of revenues). To ensure they can recruit staff with Zealand, the United States) or that non-road users- the necessary financial qualifications, some road funds generally users of diesel-are compensated for having (as in Ghana) employ workers as consultants, while oth- to pay the fuel levy (Latvia, Mozambique). Some road ers (as in Lesotho) have co:ntracted out financial man- funds also derive part of their revenues from non-road- agement of the road fund to a firm of accountants. related taxes (such as enterprise taxes in Georgia, spe- cial excise taxes in Korea, and vehicle sales taxes in Qualifying Expenditures Russia and the United States) or from the general bud- Some road funds finance only maintenance (particu- get (South Africa and Honduras are the only countries larly in Latin America); some finance mainly mainte- that derive all their revenues from the general budget). nance but also permit a limited amount of rehabilita- Most of these road funds attempt to ensure that non- tion, upgrading, and new works (countries sometimes road users do not have to pay the diesel levy. put a cap on such expenditures); while others finance all road expenditures. There are also some special FuelLevy cases. The road fund in South Africa finances only The fuel levy is generally specified as a discrete amount national roads, that in Argentina only provincial road per liter or as a percentage of the ex-refinery or wholesale expenditures on a 50-50 cost-share basis, and the U.S. price.3 This ensures that the fuel levy can be clearly sep- Federal Highway Trust Fund finances primarily capital arated from the import duties, sales taxes, and excise works on the federal-aided network (most states have taxes that go into the consolidated fund. Japan and Korea their own highway or tran:sportation trust funds that are exceptions. In Japan 25 percent of the gasoline tax is finance the other roads uncder their jurisdiction) .2 paid into the national road fund, while in Korea 67.5 per- When a road fund finances all road expenditures, cent of the taxes on gasoline and diesel are paid into the 86 Commercial Management and Financing of Roads road fund. This old fashioned earmarking can lead to fis- This system often causes problems. A growing number cal inflexibility unless the percentage is adjusted each of countries (Ghana, Malawi, New Zealand, Romania, time the fuel tax rates are changed. Yemen) have therefore introduced legislation permitting the road-user charges to be deposited directly into the Adjusting the Charges road fund. In others (Lesotho, Sierra Leone) deposits Since most road funds still set the road tariff under the into the consolidated fund is treated as a paper transac- government's tax-making powers, they use the normal tion, while cash is deposited directly into the road fund. budget process to adjust the charges paid into the road fund. The oversight board often determines the level of Financial Regulations the charges and recommends them to the cabinet or min- These spell out how the road fund is to be managed. ister of finance for inclusion in the budget (this system is Some road funds have no special financial regulations used in Lesotho, Yemen, and Zambia). In Japan the or simply rely on general government audit proce- Ministry of Construction prepares the five-year road dures. Others have regulations that are unduly cum- improvement program and, after endorsement by the bersome and do not always provide sufficient coverage Road Council, the Ministry of Finance sets the appropri- (that is, do not specify who is entitled to receive money ate tax rates. In New Zealand the Ministry of Finance sets from the road fund, how withdrawals are to be autho- the cut-off benefit-cost ratio for all new road works, rized, and what the auditing arrangements and annu- Transfund prepares a national roading program based on al reporting procedures are). this cut-off ratio, and the Ministry of Finance then adjusts the gasoline levy to ensure that the program is fully fund- Auditing Arrangements ed. In Malawi the board sets its own charges, submits Most road funds are audited by the auditor general's them to the minister of works, and, provided the minis- office or by private auditors-often appointed or rec- ter is satisfied that the charges are consistent with the gov- ommended by the auditor general-who may be local ernment's fiscal targets, the charges become effective and or international. Current practice tends to favor inter- are published in the gazette. Since the tariff is no longer national auditors, although this may be due to the collected under the governments tax-making powers, influence of the international donor community. The there is no earmarking. Namibia has introduced similar audit normally includes a site inspection of selected procedures. In the United States charges are set as part of schemes financed through the road fund. Auditors' the overall budget debate. comments on the accounts are frequently included as Surprisingly, some road funds have no mechanism part of the road fund's annual report. for adjusting charges other than amending the basic road fund legislation (as in Georgia and Romania), or they have a mechanism that involves so many min- Problems with Conventional Road Funds istries that the charges cannot easily be changed (as in Mozambique). There are many road funds in Africa and Eastern Europe, and a few in Latin America and the Middle East, Depositing the Revenues that were set up during the 1970s and 1980s. Recent Some road funds are simply lines of credit-the treasury reviews have helped to identify what works and why. credits certain taxes and charges under a single heading Most of the early criticism of road funds focused on in the budget statement (as in Japan, New Zealand, and the fiscal objection to earmarking and to the operation the United States). The treasury often pays interest on of extra-budgetary funds (McCleary 1991). These the balance of the account to recognize that it is a sepa- objections have been well-stated elsewhere and can be rate fund. In some other countries (particularly those dealt with by designing the road fund to minimize the with old-style road funds, such as Mozambique and adverse fiscal consequences of earmarking and produce Tanzania) the revenues are first deposited into the con- efficiency gains that more than offset any remaining fis- solidated fund and are then transferred to the road fund. cal inflexibility. But the most telling argument against Managing the Revenues 87 road funds-at least those designated as conventional * Payment was made for vehicles and materials that or first-generation road funds-is that they simply do were never supplied to the road agency (they may have, not work.4 They do not provide a stable flow of funds however, been delivered to others). and they do not strengthen financial discipline. * An inspection of some rehabilitated roads showed The above assertion is proven by the audit reports on they were still in poor condition. the early road funds and by the fact that many road funds * Funds were used to lay 40 mm of premix asphalt are not even subjected to a separate technical and finan- concrete on a newly constructed carriageway. But an cial audit or, when they are, the results are not made audit site visit could not trace the newly constructed public. The available audit reports point to four generic carriageway, and the street was found to be in "pathet- problems: difficulties collecting the revenues attribut- ic" condition. able to the road fund; the rnaking of unauthorized with- * A contractor was paid to construct three culverts- drawals from the road fund-normally referred to as they could not be found during a site visit. "raids"; payment for goods and services that are either Finally, the audit reports are full of instances point- substandard or never delivered to the road agency; and ing to poor record keeping and weak financial man- poor financial management of the accounts. agement, largely attributable to lack of guidelines or Audit reports regularly mention problems encoun- financial regulations for control and management of tered with the revenues designated for the road fund: funds. Likewise, some road funds do not have any * Payments made to district treasuries and commer- accounting staff and do not even keep a ledger account cial banks failed to appear in the road fund account. to record deposits and withdrawals. The following * Documentation was insufficient to validate whether issues are regularly mentioned in audit reports: all fuel levies had been paid into the road fund account. * Inability to certify accounts because of inadequate * The revenues were collected, but customs disre- record keeping. garded the legislation ancd paid the proceeds into the * The absence of bank reconciliation statements to consolidated fund. support the cash shown in the balance sheet and held * Funds were collected by the oil company, but signif- in the bank account. icant amounts disappearecl before being deposited into * The absence of reliable records to show what work the road fund-funds disappeared between collection has been done. by the oil company and deposit into the ministry of * Money shown as having been paid to municipalities, works account, and again between the ministry of but without records to verify that the funds were works account and deposit into the road fund account. received. Audit reports regularly mention cases involving * Instances of overpayments, lapses in procurement unauthorized withdrawals from the road fund: procedures, and payment without supporting vouchers. * Money was taken from the road fund to pay civil ser- Road funds also experience other problems that vice salaries. tend to be associated with poor design or difficult * Although the funds were intended for road mainte- country conditions, rather than with weak governance nance, they were instead used to purchase vehicles and and poor financial management. These include: refurbish the state house and parliament building. * Legal problems. Road funds often lack a clear legal * Funds were used to pay for items that did not qual- basis-usually because the legislation is prepared too ify, including hotel bills, construction of houses, refur- quickly or without sufficient care and attention. The bishment of offices, utility bills, and gratuities. legislation may then carry inconsistencies, ambiguities, * Although the funds were intended for maintenance, or be too rigid. they were instead used to finance capital works. * No mechanism for objectively allocating funds among The audit reports also nmention numerous instances different road agencies. Many road funds have no objec- in which payment was made in full for substandard tive procedures for meting out funds to the different work and even for goods and services that were never road agencies. As a result, the allocations tend to be delivered: erratic and subject to political whim. 88 Commercial Management and Financing of Roads * Insufficient road fund coverage. When the road fund Technical and policy questions: finances part of the cost of road works, leaving the bal- * Where should the revenues come from and how ance to be paid from the government budget, it often should they be deposited into the road fund? becomes even more difficult to get hold of the agreed - How should the road tariff be adjusted? budget funds. Other ministries argue that the road sec- * How can non-road users be exempted from paying tor has already received its funds and that their sectors the diesel levy? now deserve funding. * How should funds be allocated among the different * Oil companies withhold payment. This usually hap- road agencies entitled to receive money from the road pens when the government is in arrears with its fuel fund? payments. The oil companies withhold payment of * What sort of cost-sharing arrangements should be government sales and excise taxes and may also stop used on local government roads financed through the paying the fuel levy into the road fund. road fund? * Excessive road fund revenues. If the road tariff is set * How should funds be disbursed to each road agency? too high, excessive funds may accrue. Other ministries Operational questions: may then raid the fund or bring pressure to have it * How should day-to-day management of the road closed. This happened in the Philippines (its road fund fund be organized? was set up in the early 1950s, modeled on the U.S. * What sort of financial rules and regulations are Federal Highway Trust Fund) in the early 1 970s and in needed? South Africa in 1988. About one-third of the pump * How should the road fund be audited? price of fuel was earmarked for the South African Road Fund. When the levy was abolished in 1988, more Strategic Questions than $0.15 per liter was earmarked. This high levy What kind of road fund is needed?This question is the caused the Road Fund to build up a large surplus, rais- most important of all. There are four broad options and ing concern that the South Africa Roads Board might numerous variations on these options. The first is to set start building uneconomic roads. The levy was even- up the road fund to finance only national roads (as in tually abolished. South Africa and the United States). This is not a par- ticularly good arrangement unless road-user charges can be confined to the national road network or each Setting Up a Commercially Managed Road Fund localjurisdiction has its own road fund (as in the United States). Most revenues normally come from a fuel levy The above reviews identify the issues that must be that is paid by all road users. The revenues should there- borne in mind when designing a new road fund or fore be used to finance all roads. It makes little sense to restructuring an existing one. If these issues are have only part of the road network well-financed. addressed up front, the road fund is likely to be sup- Furthermore, when setting up a new road fund, it is ported by the ministry of finance and the IMF (boxes important to have as much support as possible-which 8.3 and 8.4). Three groups of questions must be asked usually means providing some funds for urban and when designing such a road fund: rural roads to win the support of local governments. Strategic questions: The second option is to set up the road fund to * What kind of road fund is needed, that is, which finance all qualifying expenditures on the national road parts of the road network will it finance? network and to support maintenance and improve- * What kind of legal basis should it have? ment of local government roads through grants (as in * What sort of oversight arrangements (or gover- Korea, Latvia, and Russia). This option has several nance) does it need? attractions. The road fund supports all roads, but can * How should the road fund be managed (that is, confine transfers to local governments to what it can through what kind of agency)? afford after the demands of the national road network * Which expenditures should the road fund finance? have been met. Managing the Revenues 89 Box 8.3 Earmarking versus commercialization: A World Bank view Commercialization is not the same as earmarking general they represent. The chairperson is independent. This budget revenues as a means of capturing more of the gov- structure creates a form of surrogate market discipline. ernment's overall budget for the road sector. World Bank Board members represent the people who are paying for staff reject that approach, which was unfortunately a char- the roads and they thus have a strong vested interest in acteristic of many road funds in Latin America and Africa seeing that they are not overcharged and that the money in the 1970s and early 1980s. Straightforward earmark- is well spent. ing has never worked. This is clearly spelled out in sever- * Finally, the board must have a small secretariat to man- al World Bank reports. Furthermore, commercialization is age the funds, published legal regulations should govern not necessarily adopted in countries with dysfunctional the way the funds are managed, and the auditor general's budgetary systems. On the contrary, it is often adopted as office or private sector auditors appointed by the auditor part of the process of redefining the role of government, general must carryout independent technical and finan- as in New Zealand, which is normally held up as an exam- cial auditing. This system is referred to as commercial ple of a country with sound fiscal management. management. Commercialization calls for bringing roads into the Additional elements are that the fund should ideally marketplace, putting them on a fee-for-service basis, and support maintenance of all roads (including cost-sharing managing them like a business. Four main principles with local governments and communities), responsibility underlie this concept: for different parts of the network should be clearly * Road users pay for usage of roads through an explicit assigned to a competent road authority, and the road road tariff that must be clearly separated from the gov- authorities should introduce sound business practices. ernment's general taxes. It usually takes the form of a two- Indeed, once you have a representative road board, the or three-part tariff: an annual vehicle license fee that members usually insist that road agencies operate along charges for access to the road network (sometimes sup- commercial lines. plemented by a heavy-vehicle license fee), a road mainte- Some road funds already have procedures in which the nance levy added to the price of fuel that charges for use road tariff no longer forms part of the consolidated fund. of the road network, and, where feasible, a congestion Instead, the road sector has been set up as a road public charge to manage congestion. utility The board sets its own charges, submits them to the * Introducing the above road tariff must not abstract rev- minister responsible for transport, and, provided they are enues from the consolidated budget. The ministry of consistent with the governments overall fiscal targets, finance is generally invited to convert the existing alloca- publishes them in the government gazette. The road tar- tions for road maintenance into an equivalent fuel levy, iff is thus no longer collected under the government's tax- but that is all. Any additional revenues must come from making powers, and the revenues are no longer ear- extra payments by road users. That is part of the objec- marked taxes. Instead, the revenues are collected under tive-road users pay for using the road network, they contract by the oil companies and government depart- know that they are paying, and they are thus encouraged ments, and they are deposited directly into the road fund. to demand value for money Some of the strongest supporters of the above system are * The proceeds from the road tariff are deposited into a the ministries of finance. They see it as making road road fund managed by a board that includes representa- financing more transparent and as tightening financial tives of road users and the business community. At least discipline in the road sector. Ministries of works are less half of the board members generally come from outside enthusiastic, since it imposes on them a large measure of the government and are nominated by the organizations (unwelcome) financial discipline. Source: Extracts from a memo from the World Bank Roads Adviser to the IMF Senior Managing Director. The third option is a variation on this system and is lish its annual accounts in the press-quite a novel exemplified by the Latvian road fund. The legislation approach. provides for grants to regional municipalities but also The final option is to set up the road fund to finance permits each municipality to set up its own road fund all roads, but to finance local roads on a cost-share to manage the grant. The municipality must establish basis (as in Ghana, New Zealand, and Zambia). In a management board, include the regional representa- many ways this arrangement is ideal, although it com- tive of the transport ministry on the board, and pub- plicates management. If funds are going to be chan- 90 Commercial Management and Financing of Roads Box 8.4 Commercialization of roads: The view of Jordan's Minister of Finance 'To start with, we need to think of road funds which Fifth, the most fundamental requirement of all. The reflect a desire to pursue an Agency Model of service user charges going into the road fund must not take rev- delivery for roads under which the management of roads enues away from other sectors. We would like to see a is commercialized with expenditure on roads being clean break between the tax revenues which belong to the financed from user charges which should reflect the view consolidated budget, and the user charges which belong that 'roads should be managed like a business, not like a to the road fund. The only existing revenues which should bureaucracy'. My Ministry has no objection to the above go into the road fund, must be confined to what is already Iuser-pay' or 'fee-for-service' principle, but this involves allocated for roads through the annual budgeting process. not only the establishment of a road fund, but a rethink- Sixth, we expect to see the road fund managed by a ing of our whole approach to the road sector which often strong and independent management board which should leads us to conclude that we need to establish a road include private sector interests-both road users and the fund. Let me mention in some detail the main concerns business community-and should be genuinely free from of my Ministry regarding the establishment of a road any vested interest groups. fund. Seventh, we expect the management of the road fund First, we want assurance that the establishment of the to be handled by a secretariat and to employ commercial road fund is part of a longer term strategy to commercial- accounting systems and to have annual performance tar- ize the road sector, and that it is not simply a means of gets. avoiding strict budget discipline. Eighth, we want to see a fair degree of cost recovery Second, we expect the road fund to be dedicated to through the user charges. We look in the long-term for a maintenance. We must make sure that we maintain what road public utility which does not receive any government we have, before starting to build anything new. subsidy Third, we expect to see the road fund as a purchaser, Ninth, we cannot escape from the fact that fuel is a con- not a provider of services. It should be a separate agency venient tax handle from the point of view of fiscal policy. with a clear mission statement, transparent objectives, That will inevitably put a burden on the road fund admin- physical output indicators and it should ideally work istration to explain to the public why all fuel price increas- within an envelope of total input costs. es are not equal. Fourth, we expect the road fund revenues to come only In brief, we are perfectly willing not only to consider from road-user charges, not from any earmarked taxes. establishing a road fund, but even to actively help to get That would not prevent the government from topping up it established. However, you have to assure us that what the road fund from the consolidated budget, but topping we are establishing is the right kind of road fund and that up would only be done on a discretionary basis. it will be based on sound fiscal principles." Source: Text of speech given by His Excellency Suleiman Hafez. Minister of Finance, Jordan. June 3, 1997. neled to all roads, there must be an approved national account for a designated purpose, while many countries roads program, agreed cost-sharing arrangements with have legislation that permits the minister, president, or local governments, agreed procedures under which cabinet to publish a decree setting up a road fund. This local governments will manage their share of the road legislation can be as simple as publishing a legal notice fund, and appropriate financial and technical auditing in the government gazette or may involve passing a par- procedures. But once these procedures are in place, it liamentary resolution or a cabinet decree. Ideally, the is probably the best type of road fund to have. legal notice should state that a special road fund account is being opened, why it is being opened, what will be the What kind of legal basis should it have? A road fund can source of revenues, and how the account will be man- be established in one of three ways: through the finance aged. But in many cases it merely needs to state that a act, a device often used in countries with British-style special road fund account is being opened and that the legislation; by issuing a ministerial or presidential detailed arrangements for managing the road fund will decree; or by passing special-purpose legislation. The be published in a separate notice in the gazette (box 8.5). first two options are the simplest. The finance act often There are two drawbacks to the above procedures. gives the minister of finance power to open a special First, they provide only a temporary basis for the road Managing the Revenues 91 revise the operating modalities from time to time) and Box 8.5 Notice used in Lesotho to open a special which mechanism will be used to revise the road tariff. account (road fund) The choice of mechanism must be built into the leg- LEGAL NOTICE NO. 179 OF 1995 islation and made consistent with the country's consti- Finance (Roads Fund) Notice, 1995 tution and the finance act. There is little point to pass- In exercise of the powers conferred on me by Section ing new legislation if the road tariff will continue to be 16A of the Finance Order, 1988,I treated as if it were part of the government's tax-raising DR. MOKE1'SI SENAOANA mechanism. Annex 5 is an example of the full text that Minister of Finance and Economic Planning make the might be used to set up a road fund under new legis- following notice: lation, and annex 6 provides an example of the regula- Citation and Commencemrient tions that might be used to set up a road fund under 1. This Notice may be cited as the Finance (Roads existing legislation. Fund) Notice 1995 and shall come into operation on What sort of oversight arrangements does it need? the date of its publication in the gazette. Oversight arrangements are one of the most important Establishment of Special Fund design elements. Oversight is normally provided by 2. There is established a Special Fund to be known as appointing a board either to advise the minister on the ROADS RELIEF FUN:D. management of the road fund or to manage the road Dr. M. Senaoana fund directly through an executive board. Although it Minister of Finance and Economic Planning is better to have an executive board, advisory boards have their place and can be highly effective provided fund and should be accompanied by a sunset clause they have the right membership. The board should be (that is, once it has been decided to set up the road fund made up of about 9 to 12 members. Boards that are too on a permanent basis, basic legislation should be large tend to become unmanageable, while those that passed). And second, since the road tariff is collected are too small have difficulty capturing all the key con- under the government's tax-making powers, the rev- stituencies. enues have to be paid into the consolidated fund and The road fund can also be managed by a subcom- then transferred to the road fund, which introduces mittee of a larger road management board (as in Malawi delays and increases the risks of diversion. Some and South Africa). The board should be able to appoint decrees, however, provide for directly depositing rev- subcommittees to help with its work, and the subcom- enues-as in the road fund of Yemen, the former Ghana mittees should be able to include people who are not road fund, and some of the West African road funds- members of the main board. Even the main board and payment into the consolidated fund does not nec- should be able to invite outsiders to advise on special essarily mean that the cash has to be deposited into the topics. treasury account. The advantages of using existing leg- The board should comprise representatives of the islation are that the road fund can be set up quickly and key constituencies with vested interests in well-man- there is time to iron out early problems before passing aged roads (see box 8.6). For the central government basic legislation. this usually means representatives from the ministries The third option is to establish the road fund under of works, transport, finance, and agriculture, and rep- new legislation. This provides a much firmer basis for resentatives from local government. The nongovern- the road fund, although it takes longer and requires a ment members usually include representatives from committed minister willing to take the bill through par- the chamber of commerce, the road transport industry, liament. When contemplating new legislation, it is farmers (both commercial and small-holder), and the important to decide on what needs to go into the legis- professions (like the institute of engineers). Local gov- lation and what can be put into supplementary legal ernments should also be represented on the board if regulations (to shorten the act and make it easier to the road fund intends to channel funds to them. There 92 Commercial Management and Financing of Roads may need to be separate members representing large nominated by the constituencies they represent, rather and small local governments. than being selected by government officials or the Ideally, half or more of the members should be non- responsible minister, and should be formally appointed government or local government representatives. The by the minister, president, or cabinet. The names of director of roads should not be a member of the board, board members should be published in the government but should attend board meetings. Members should be gazette. Appointment should be for a period not exceed- Box 8.6 Membership of oversight boards in Latvia, Malawi, New Zealand, and South Africa LATVIA: STATE ROAD FUND. The State Road Fund was estab- tees. The board designates one of the employees of the lished under a cabinet decree in 1994. Management of the National Roads Authority to act as secretary to the Board. Fund is overseen by the State Road Fund Advisory Board. The National Roads Authority employs a small staff of The Board has 13 members: six represent the central gov- three to five people to manage the Road Fund. emnment (Minister of Transport, Director of Roads, Manager of State Road Fund Division, Director General of NEW ZEALAND: NATIONAL ROADS FUND. The National Roads Road Administration, Director of Road Safety Fund was established initially under the National Roads Administration, and Ministry of Environment and Act, 1953 and amended in 1989 and then in 1995. It is Regional Development); two represent local governments managed by the board of Transfund, which was set up (Riga City and union of local governments and munici- under the Transit New Zealand Amendment Act, 1995. palities); and six represent civil society (public transport The board consists of five people: two representing Transit association, automobile society, road builders, automobile New Zealand (either employees or members of the Roads dealers association, and Riga Technical University). The Authority), one representing local government, one rep- six members representing the central government are de resenting road users, and one representing an aspect of the facto ex officio members; the remainder are nominated by public interest not represented by the other members of the organizations they represent. The Minister of the board. The members are appointed by the governor- Transport acts as chairperson, and the manager of the general on the recommendation of the responsible minis- State Road Fund Division acts as secretary of the board. ter following consultation with people from the land The Fund is managed by the State Road Fund Division transport industry and elsewhere. The chairperson and within the Road Administration, which has a staff of three. deputy chairperson are appointed by the minister from the existing board members. The current chairperson is MALAWI: NATIONAL ROAD FUND. The National Road Fund the representative for local government and the deputy was established under the National Roads Authority Act chairperson is from academia. The remaining three mem- in 1997 and is managed by a subcommittee of the main bers are the former chairperson of the New Zealand Road National Roads Authority Board. The main Board has 13 Transport Association, chairperson of Transit New members: seven drawn from organizations representing Zealand Authority, and a further member of the Transit road users, farming interests, the business community, New Zealand Authority who is also a director of the Port local government, and the National Road Safety Council; of Marlborough. The board has a full-time secretary. three representing the public interest; and three ex officio Transfund currently has 35 staff, including a CEO members representing the Ministries of Works, Local appointed by the board. The CEO appoints all other staff. Government, and Transport. Members are appointed by the Minister of Works. The seven members representing SOUTH AFRIcA: NATIONAL ROAD FUND. The Road Fund was organizations of road users are nominated by those orga- set up under the National Roads Act, 1935, and is currently nizations. The ex officio members are the respective per- managed by a subcommittee of the South African Roads manent secretaries or their designated representatives, Board. The subcommittee consists of one member of the while the three people representing the public interest are main Board who acts as chairperson, the chief director nominated by the Permanent Secretary of Works. The (roads), the director of financial planning and administra- chairperson is appointed by the Minister of Transport tion, the departmental accountant, and a co-opted accoun- from among the members of the board. The deputy chair- tant from the private sector. The main Board member person is elected by the board from among its members. always acts as chairperson of the subcommittee. The road The board can establish subcommittees and co-opt non- fund is managed by staff in the office of the chief director voting advisers to assist with the work of the Authority. (roads). Management of the road fund currently absorbs The Road Fund is managed by one of these subcommit- the equivalent of about 10-12 full-time staff per year. Managing the Revenues 93 ing three to four years, and members should generally manage the day-to-day affairs of the road fund. Based be eligible for re-appointment for at least one more term. on the figures for the Latvian, New Zealand, Russian, There should be an independent chairperson. The and South African road funds, it should not take more procedure in Zambia, where the board elects its own than about five staff to manage an annual turnover of chairperson, is unusual, although it has worked well. about $100 million, and 30 to 35 staff to manage an Jordan is now proposing that board members elect the annual turnover of about $500 million. chairperson. Normally the minister either appoints one of the existing board members as chairperson or Which expenditures should the road fund finance? Most appoints an outsider after consultation with the board. road funds have been set up primarily to finance rou- The vice chairperson is ofLten elected by the board. The tine and periodic maintenance of the existing road net- board must have a clear (published) terms of reference work. To ensure that spending on new works does not spelling out its role concerning public support for drive out maintenance. the road fund can be set up as more road spending (that is, its outreach program), a road conservation fund, which can finance only road which expenditures the road fund can finance, how it maintenance (as in Latin America), or the matter can is expected to manage the road fund, its relationship be dealt with in the legislation (or associated legal reg- with the minister, and the basis on which the minister ulations). In the latter case the legislation (or regula- can issue directives (box 3.7). tions) should state that maintenance has first claim on road fund revenues and that, only after all maintenance How should the road fund be managed? There are sev- has been fully funded, may the balance be spent on eral ways of managing the road fund. If one road rehabilitation and new works. Spending on road safe- agency is responsible for managing the entire road net- ty and administration of the road fund should also have work, the road fund and the road network can be man- first claim on revenues, though spending on adminis- aged by the same board without creating any conflict tration should be subject to a cap to prevent the road of interest (as in Sierra Leone). Likewise, if the road fund from simply becoming an employment agency fund finances only the main road network, it can be Most road funds also finance road rehabilitation or managed by the board that manages the main road net- provide counterpart funding for rehabilitation pro- work without creating any conflict of interest (as in grams financed by donors. A few finance new invest- South Africa). Otherwise, there is a danger that the ment. It is important that these priorities be clearly road fund will attend to the needs of its own roads first, stated and prioritized in the legislation. Alternatively, and channel only what is left over to the other road they can be spelled out in the legal regulations so that agencies. In such cases it is better to establish a sepa- they can be revised from time to time to reflect chang- rate road fund board to channel funds in an even- ing circumstances. If the road fund does finance new handed way to the appropriate road agencies. This sys- investment, it may be important to put a cap on the tem is now at work in Ghana, Lesotho, New Zealand, amount. If it does not finance new investment, the leg- Malawi, and Zambia. islation (or regulations) should state explicitly that new Not many staff are needed to manage the road fund. investment will continue to be financed through the They normally collate the road programs prepared by government's development budget. the various road agencies, review and consolidate them into the approved national road program, define the Technical and Policy Questions financial procedures to be followed by the agencies Where should revenues come from and what deposit receiving money from the road fund, allocate funds to procedures should be practiced? The only source of rev- support the approved programs, disburse funds to the enues should be the charges making up the two- or road agencies, and then audit results ex post. The staff three-part tariff, namely, vehicle license fees, supple- should also audit the systems and procedures used to mentary heavy-vehicle fees, international transit fees, prepare the road program and control expenditures- the fuel levy fines for overloading, and any charges as in New Zealand and the United States-and should imposed to internalize the costs of road congestion 94 Commercial Management and Financing of Roads Box 8.7 Terms of reference for road fund boards in Latvia, Malawi, New Zealand, and South Africa LATVIA: STATE ROAD FUND. The Fund is overseen by the and financial statements regarding operations of the State Road Fund Advisory Board, established by statute. Authority, the board, and the Fund. The detailed functions of the board are to: NEW ZEALAND: NATIONAL ROADS FUND. The principal task * Review general strategies for revenues and expendi- of the board is to allocate resources to maintain a safe and tures, together with the proposed annual expenditure pro- efficient roading system. The detailed functions of the gram. board include: * Periodically review collection of revenues for the Road * Approve and purchase a national roading program that Fund. prioritizes funding consistently on the basis of expected * Review the planning and use of funds allocated to national benefits for a given cost. municipalities. * Pursue efficiency in delivering roading and alternatives to * Inform the public about the work of the Road Fund. roading through contestability and through promoting en- * Report all matters reviewed by the board to the respon- hanced administrative and technical systems and processes. sible minister. * Establish contracts with road-controlling authorities and regional councils for the delivery of their respective MALAWI: NATIONAL ROAD FUND. The main functions of the programs. road fund subcommittee are to raise funds to ensure that - Audit all road-controlling authorities and regional public roads are fully maintained and rehabilitated. The councils on a timely basis to provide assurance as to the detailed functions of the subcommittee are to: efficient and effective use of resources. * Review the annual road programs prepared by the road * Establish the process for evaluating and funding efficient agencies and consolidate them into a national program, alternatives to the provision or maintenance of roading. submitted to the minister for approval. * Determine the allocation of financial resources SOUTH AFRICA: NATIONAL ROAD FUND. The Finance required by road agencies for maintenance, rehabilitation, Committee advises the board on: and development of public roads. * How to spend the available funds in the most cost- * Recommend to the minister appropriate road-user effective manner. charges, fines, penalties, levies, or any other sums to be * The annual budget, the five-year road expenditure pro- collected under the act and paid into the road fund. gram, and the overall financing strategies of the board. * Disburse funds or authorize payment of funds to con- * The financing of toll roads, including the timing, tractors only after it has been certified in writing that the amount, and rates on new bond issues. work has been carried out to the required standard. Since the fuel levy has been reinstated in 1998, the road * Prepare, publish, and submit to the minister audited fund is managed by a new audit committee that advises annual accounts for the fund and also submit, at such the board on all financing issues and undertakes perfor- intervals as the minister shall provide in writing, reports mance audits of all activities financed by the road fund. (parking charges, cordon charges). Revenues should omy. In other words, if the consolidated fund can afford not include any earmarked general taxes (import to finance only 20 percent of maintenance require- duties, sales and excise taxes). Miscellaneous sources ments, then only that 20 percent may be converted into of revenue, like bridge and ferry tolls, donor funding, the initial license fees and fuel levy transferred to the and contributions from the consolidated fund, may road fund. All additional revenues must come from also be added. extra payments made by road users. The fuel levy should be specified as a discrete The next question is, which mechanism should be amount (that is, so many cents per liter), or as a per- used to deposit revenues into the road fund? When the centage of the ex-refinery or wholesale price of fuel (or road fund is set up under the finance act, revenues must the equivalent). It should not be specified as a propor- be paid into the consolidated fund and then transferred tion of fuel taxes or other general revenue taxes, since to the road fund. But if the ministry of finance agrees, this would turn it into an earmarked tax. When first the funds can be deposited into the consolidated fund introduced, the charges must be set to ensure that they as a paper transaction, and the actual cash deposited do not abstract revenues from other sectors of the econ- directly into the road fund. Likewise, when the road Managing the Revenues 95 fund is set up under a decree, the revenues may have to When the road fund is first set up, the tariff will usu- be deposited into the consolidated fund, though some ally have to be raised gradually over a period of three to decrees provide for direct deposit into the road fund. five years. This slow build-up enables the board to show This method should be used whenever possible. results to its constituents before asking for further When the road fund is set up under new legislation, increases in the road tariff. Many boards operate exten- the act should be drafted to permit the proceeds from sive outreach programs to demonstrate to their con- the road tariff to be deposited directly into the road stituents that they are getting value-for-money from the fund. The act should also permit the tariff to be col- road tariff. Several boards also publish their accounts in lected under contract (even when collected by a gov- the press and plant road signs stating that the road works ernment department) and, when feasible, to be col- are being financed by the national roads board. All road lected under competitively awarded contracts (see fund boards should consider operating similar outreach chapter 7 for examples of contractual arrangements). programs. Finally while the road fund is building up its revenue base, the balance of required revenues should How should the road tariff be adjusted?A formal mech- come from donors or the general budget. anism should be in place for adjusting the road tariff- both upward and downward-to ensure that the road How can non-road users be exempted from paying the fuel fund generates sufficient revenues to meet approved levy? When significant amounts of gasoline or diesel are expenditure requirements but does not generate exces- used for non-transport purposes and the fuel levy is per- sive revenues. The oversight board should have the ceived to be high, efforts must be made to ensure that power to set the road tariff (in the same way that the nontransport users do not have to pay the fuel levy railways set their tariffs), or to at least recommend tar- (these problems apply primarily to diesel). Failure to iff levels to the ministry of finance for inclusion in the address this problem may generate strong public pres- annual budget statement. Malawi and Namibia are the sure to suspend the fuel levy. If there are a few large users only countries that have set up public utility-style road (mining companies, power stations), it may be possible financing mechanisms, although New Zealand expects to exempt them without encouraging too much avoid- to be operating as a road public utility within about two ance and evasion, although experience is not encourag- years. ing. For small users (such as farmers), the only realistic Under the public utility arrangement the road fund options are: coloring non-transport diesel, testing to board must set the level of the road tariff. In doing so, ensure it is not being used on the road, and applying stiff it should bear in mind the revenues required to finance penalties for infringements (although used in Finland, the approved road expenditure program and road users' the United Kingdom, and the United States, this is diffi- willingness to pay. The board then submits its recom- cult to administer); allowing nontransport users to apply mendation to the minister of works or transport and, for rebates based on invoiced consumption for non- provided that the minister is satisfied that their propos- transport uses (Namibia is proposing to use this method, als are reasonable and consistent with the government's although it requires extensive auditing and is also diffi- overall fiscal targets, the rievised tariff becomes effective cult to administer); or compensating non-transport and is published in the government gazette. users for having to pay the fuel levy. The last method is But most countries still set their charges under the probably the simplest to administer and is used suc- government's tax-making powers. Then, the board (or cessfully in both Latvia and Mozambique to compensate the responsible ministry when there is no board) rec- farmers. Latvia uses the same system to compensate the ommends the revised charges to the minister of finance railways and fishing industry. or the cabinet, and, once approved, these charges are included in the annual budget statement. The ministry Howshould funds be allocated amongdifferentroad agen- of finance or the cabinet is more likely to accept the cies? A simple and consistent procedure is needed for recommended changes automatically if they are sub- allocating funds among the different agencies entitled to mitted by a representative board. receive money from the road fund. The procedures must 96 Commercial Management and Financing of Roads be transparent, fair, related to need, and, where feasible, Hungary and Zambia use this system. It is not a par- related to the road agency's ability to generate funds from ticularly good way of meting out funds (some road other sources. There are two basic approaches. The road agencies end up being fully funded, while others get fund can either allocate the funds using formulas or base little or nothing), although it does encourage road the allocations on a direct assessment of need. agencies to put a lot of effort into planning and justi- A formula-based system usually starts by allocating fying their road programs. the funds among the main, urban, and rural road agen- Under the second system revenues for investment cies and then goes on to subdivide each allocation are usually allocated using benefit-cost analysis, as among the individual road agencies within each group. under the first system. The road fund usually issues The road fund will therefore allocate a certain percent- guidelines on how the investment programs are to be age of its revenues to urban roads and a certain per- prepared, offers advice on how to compute the bene- centage to rural roads, with the remainder going to the fit-cost ratios, may specify the minimum acceptable main road network. For example, Latvia allocates 27 benefit-cost ratio, and audits the calculations to ensure percent of the annual vehicle tax and 30 percent of the they have been carried out correctly Transfund New fuel levy to municipalities (both urban and rural), Zealand currently has a cut-off ratio of 4.0. Staff from Mozambique allocates 20 percent to urban municipal- Transfund audit a sample of all benefit-cost calcula- ities, Romania allocates 35 percent to county and com- tions, including those for all schemes over $700,000. munal (village) roads, and Zambia allocates 25 percent Revenues for maintenance, on the other hand, are for rural roads and 15 percent for urban roads. allocated on the basis of network and traffic character- Initially allocating the funds among the different road istics. The road fund generally does so using formulas agencies ensures that each gets a fair share of the revenues based on parameters like length of the road network, available, provided the proportions are regularly amend- volume of traffic, and ability to pay. The formulas gen- ed in light of experience. This is an important consider- erally include road length (or lane-km), which may be ation when strong urban councils bid against weak rural weighted to reflect estimated maintenance costs on dif- councils for the same share of the road fund. For exam- ferent types of roads (as in Latvia). They may also ple, in Tanzania 20 percent of the road fund is set aside include vehicle-km or the vehicle population and will to finance road works managed by 17 urban and 84 rural often include resident population. Some countries district councils. But the urban councils are generally able include a term to reflect ability to pay (like Korea, to prepare better road programs and have more political which includes an adverse financial ability index). The influence. Thus three-quarters of the funds have gone to U.S. Federal Highway Trust Fund includes a predeter- them, mainly to the capital city, Dar-es-Salaam. Another mined minimum maintenance allocation (box 8.8). reason for initially dividing funds at the source is that dif- The direct needs-based approach allocates mainte- ferent types of road agencies may use different criteria to nance funds according to a more careful assessment of establish priorities, reflecting their differing technical network needs (funds for investment are again evalu- capacities. Finally, initially allocating funds gives each ated using benefit-cost analysis). The methods can be group of road agencies an indicative guideline upon more or less complicated, depending on the technical which to base their spending plans. capacity of the road agencies involved. The simplest The next step is to separate each allocation among way to estimate needs is by using standard unit rates the road agencies in each group. There are two main for each routine and periodic maintenance activity ways of doing this. Either each road agency must com- according to type of road surface. Each rate is multi- pete for the available resources or the resources are plied by each road agency's length of maintainable road allocated on the basis of network and traffic charac- in each road class to arrive at the total required main- teristics. Under the first system the road agencies bid tenance budget. Adjustments may then be made for cli- for the funds, a panel evaluates the bids, and then matic variations and other factors. South Africa uses decides which road agency should get what. The bids this method to estimate multiyear allocations for rural cover both maintenance and investment programs. roads in the nine provinces (box 8.9). Managing the Revenues 97 Box 8.8 Allocating revenues on the basis of network and traffic characteristics UNITED STATES: Maintenance funds from the Highway provincial population) + 0.15* (provincial vehicle popula- Trust Fund are allocated among states according to the fol- tion/total provincial vehicle population) + 0.2*(adverse lowing formula: 0.55*(interstate lane miles/total inter- financial ability index for province/total adverse financial state miles) + 0.4 5* (vehicle miles on interstate roads/total ability index for all provinces). The adverse financial abil- interstate vehicle miles). The average allocation per state ity index = 1/[(local provincial tax revenues + government is about 2 percent of total maintenance funds, subject to grants)/local provincial expenditures)]. each state receiving a minimum allocation of 0.5 percent. These allocations cover 90 percent of costs. The General LATVIA: Funds allocated to municipalities from the national Accounting Office has recently suggested two alternative road fund are distributed among 7 city municipalities and allocation formulas: distribution based equally on total 26 regional municipalities (27 percent of the vehicle tax and lane miles and total vehicle miles traveled, and distribu- 30 percent of the fuel levy) on the following basis. Half of tion based equally on total lane miles, interstate vehicle the vehicle tax is allocated to the city municipalities and is miles traveled, and state population. distributed among them on the basis of vehicle registrations. The balance of the vehicle tax is allocated to the regional KoREA: Funds allocated to provinces from the national road municipalities on the basis of weighted (maintainable) road fund are divided up on the basis of a formula that takes length. The weights crudely reflect maintenance costs rela- into account the road length, demand for road space, and tive to traffic levels. The weights currently used are: urban provincial ability to pay. The formula is similar to that used roads of district cities and rural communes = 5; asphalt in the United States: 0. 5* (length of provincial road/total paved roads = 2; other roads = 1. The fuel levy is distributed provincial roads) + 0.15* (provincial population/total to all municipalities on the basis of weighted road length. A better way to assess maintenance needs is by bas- which may not always be the case, particularly at the ing requirements on the output of a standardized road local government level (box 8.10). management system. Staff from the road fund will usu- What sort of cost-sharing arrangements should be used? ally have to advise the rcad agencies on how to oper- The road fund will have to establish cost-sharing ate the systems and then carry out regular audits to arrangements for local government roads, since it gen- ensure that each authoril:y is applying the procedures erally finances only part of their maintenance and invest- correctly The audit should also ensure that the funds ment costs. Since local roads benefit not only road users are actually spent on maintenance and that the main- but also adjoining landowners, costs are usually shared tenance is carried out to agreed standards. This method between the two (through local property taxes). Cost- requires that road agencies be technically competent, sharing arrangements normally consider two factors: the Box 8.9 A simple method for estimating maintenance needs: South Africa In 1991 the Department of State Expenditure introduced each type of road, traffic condition, and activity group- a system for multiyear planning of public expenditures. is then applied to roads under thejurisdiction of each road The arrangements were implemented through a function authority, thus arriving at the total target maintenance committee, chaired by the Department of Transport, requirements. which developed procedures for equitably allocating Roads are classified by type and traffic volume. In the case funds for rural roads. of local access roads, for which no traffic figures are available To estimate maintenance needs, maintenance is divid- and very low maintenance standards are applied, a flat fig- ed into routine maintenarnce (patching and sealing cracks, ure of $70 per km is used. After these figures are adjusted to maintaining gravel shoulders, maintaining drainage, account for environmental conditions, they are then used as attending to the road reserve, and maintaining road signs part of a structured negotiation process in which the mem- and markings) and periodic maintenance (maintaining bers of the function committee have to agree on the alloca- bridges, resealing, and making minor road safety tion models to be used for each expenditure category and improvements). A matrix of unit maintenance rates-for the total allocation for each expenditure category. 98 Commercial Management and Financing of Roads offering volunteer labor or other in-kind services, the Box 8.10 Using a maintenance management system proportion financed by the road fund may be lower, to assess needs: New Zealand reflecting the difference between the market wage and Maintenance requirements for both Transit New the opportunity cost of labor in the countryside. Zealand and the local authorities are based on a com- bination of professional judgment and the outcome of How should funds be disbursed to each road agency?The a Road Assessment Maintenance Management system. road fund must have procedures for disbursing funds This system is a computerized pavement management to the road agencies. These procedures should be used system that includes road inventory data (road condi- tion) and treatment selection for determining work pro- to strengthen financial discipline. There are three main grams based on engineering and economic criteria. ways of structuring disbursement procedures. The Transfund requires all road agencies wishing to road fund can either: disburse funds directly to the receive financing from the road fund to base their esti- road agencies on a regular basis and then audit use of mated funding requirements on the Road Assessment Maintenance Management system. Staff from Transfund the funds ex post, issue approval for the work to be advise the transport authorities on how to operate the done and then reimburse the road agency after the system. Road authority requests are vetted on an ongo- work has been completed, or pay the contractors ing basis by Transfund staff, and the Review and Audit directly, but only after certification that the work has Division carries out audits every three years to ensure been completed according to specifications. that each road authority is maintaining minimum main- The first method works best when there is good gov- tenance standards and service levels. ernance, competent road agencies, and a highly decen- tralized road administration. The road fund finances revenues needed to fully finance the local governments road agencies if they agree to allow the road fund to road program and what the local government can afford review and audit the application of these funds, usual- to finance from its own resources. This affordability is ly against an approved annual expenditure program. largely related to the extent of fiscal decentralization and Staff from the road fund visit each road agency to review depends on which sources of taxation have been dele- their internal financial systems (including accounting gated to local governments. The revenues required to and related financial systems) to confirm that they are maintain local government roads are estimated using being used correctly and in conformity with the road benefit-cost analysis and formula-based or needs-based fund's policies. Technical and financial audits are car- methods. Affordability is generally measured in terms of ried out regularly, and procedural audits are carried out the local property tax base. The larger is the tax base, and every few years to check on the custody, recording, and hence the wealthier is the local governmentjurisdiction, use of road fund resources. If a road agency does not the smaller is the amount financed by the road fund. comply with the procedures laid down by the road When the tax base is not known, affordability is mea- fund, it may have to repay the funds received. sured indirectly in terms of population density or num- Transfund New Zealand operates this type of system. ber of people served by the road (box 8.11). The second method functions like a line of credit. When the road fund is first set up it will often finance The road fund first defines the systems and procedures all road expenditures-or at least all maintenance that each road agency must follow. These may involve expenditures-and will move toward an agreed cost- an annual audit carried out by independent auditors, sharing formula over a period of two to five years. covering both financial compliance and internal con- Thereafter, the formula should be reviewed and, if trol procedures. Staff from the road fund usually check needed, amended annually. Typically, the road fund will these procedures on an ad hoc basis and may also carry finance 50 percent of the costs of maintaining urban out field inspections of work financed through the road roads and 60 percent of the costs of maintaining rural fund. Each year an expenditure plan is approved, and roads. For investments like rehabilitation and upgrad- the road agency goes ahead with implementation. ing the proportions may be higher. In the case of unclas- Once work has been completed, the road agency pays sified roads, to which local communities contribute by the contractor and submits a voucher for reimburse- Managing the Revenues 99 Box 8.11 Cost-sharing arrangements for maintenance and investment Maintenance road, $800 is the estimated average maintenance cost per CANADA. Several provinces share maintenance costs with km, R is the number of permanent residents living along local authorities. Ontario provides basic funding that can the road, and C is the maintenance class of the road (C = be used to finance maintenance. Cost-sharing is general- 1.50 for class 1 roads, 1.25 for class 2 roads, 1.00 for class ly 50 percent for urban municipalities. For rural munici- 3 roads, and 0.75 for class 4 roads). In 1990 FinnRA and palities it is based on ability to pay, with the province gen- the municipalities financed 25 percent and 33 percent, erally paying 60 percent of costs. For unincorporated respectively, of the maintenance costs of these roads. areas, that is, roads managed under local road boards, the province meets two-thirds of basic maintenance costs. Investment CANADA. Provinces also provide funds for new investment. JAPAN. The central governrnent finances half the costs of The basic funding in Ontario can be used for either main- maintaining directly managed national highways. The tenance or new investment on the same cost-share basis. remainder is financed by prefectural governments and Supplementary funds are available for specific capital pro- designated large cities. jects and under various special programs. Under the strategic transportation improvement program costs are NEW ZEALAND. The road fund finances part of the costs of shared equally among the federal government, the maintaining local authority roads. The proportion province, and the municipality. For unincorporated areas, financed is equal to k, + k2 log (P/LV), where P is the cur- that is, roads managed under local road boards, the rent year allocation (thousands of dollars), LV is the three- province meets two-thirds of basic construction costs and year average net equalized land value (the local property finances 100 percent of specific projects. tax base in millions of dollars), and k1 and k2 are constants computed to ensure that the average national proportion JAPAN. The central government finances two-thirds of the is 50 percent. If the calculation results in a proportion that costs of improving directly managed national highways, differs by more than 2 percent from the previous year's, 70 percent of the national expressway network, and half the proportion is adjusted by half the difference to be the costs of subsidized national highways, main local (pre- within 2 percent of the indicator. If the calculation results fectural) roads, and main local (municipal) roads. in a difference of less than 2 percent, no change is made unless the trend continues for two consecutive years. The JORDAN. The Irbid municipality charges part of the costs actual proportions in 1996-97 varied from 43 percent to of road and street improvements to adjoining property 83 percent (the latter being an offshore island, which is an owners. It charges 10 percent of the costs of upgrading exception). and widening to landowners on each side of the road, the entire cost of constructing sidewalks, and if the land-take FINLAND. FinnRA and local authorities provide funds for is greater than 25 percent of an individual's holding, they maintaining unclassified roads managed by road cooper- pay compensation only for the excess over 25 percent. atives. FinnRA finances thie following amount per km: 0.75*L*$800* (L - 0. l*R)*C, where 0.75 is the maximum NEW ZEALAND. Funds for investment are provided on the proportion of costs to be linanced, L is the length of the same cost-share basis as for maintenance. ment to the road fund. If the work is done using in- program, but instead of transferring funds to the road 'house staff and equipment, the agency submits a claim agencies, the road fund pays contractors directly. for bought-out plant and materials together with in- Payment is made only after certification that the work house staff costs. The roadi fund certifies the payment has been carried out and completed according to spec- and then transfers the necessary funds. The mandato- ifications. This procedure works best when the work is ry certification prior to payment gives the road fund done under contract, but can also be applied to force additional control over the payment process. This sys- account work. Certification is usually done by a firm of tem is used by the U.S. Federal Highway Trust Fund. local consultants. In practice, the contractor typically The third method involves more oversight by the submits monthly statements of work completed (unless road fund. It starts with the same approved expenditure contracts are very small), and within a fixed period of 100 Commercial Management and Financing of Roads time the consultant certifies the work. These proce- interest-bearing savings accounts and the overnight dures are widely used in Africa for force account work money market. (Benin), work done by state contractors (Mozambique), Procedures for withdrawing funds should be made and work done by private sector contractors (Zambia). as simple as possible. It is usually sufficient to have each check drawn on the road fund signed by one Operational Questions member of the board and the road fund's senior Howshould day-to-daymanagementbe organized?The accountant. There should be alternates in case one of staff of the road fund must organize board meetings, the nominated signatories is unavailable. Road fund assist in developing and publishing the procedures to staff must also oversee the use of funds by each road be followed by road agencies, manage the road fund's agency. This involves specifying how investment and income and expenditures, and keep proper accounts to maintenance programs are to be prepared, advising ensure that the road fund can be audited. Managing road agencies on how to prepare their road programs, income and expenditures proactively requires staff that and auditing the results to ensure that the procedures will collect revenues, manage cash balances, establish laid down by the board have being correctly applied. withdrawal procedures, oversee the use of funds by the Finally, there is the important job of preventing different road agencies, and prevent unauthorized unauthorized withdrawals. Unfortunately, this is a con- withdrawals from the road fund (that is, prevent raids stant preoccupation for many road funds in countries on the road fund). where governance is weak and ministers and senior civil Collecting revenues involves drawing up agree- servants frequently attempt to use money from the road ments or legal contracts with the collection agencies. fund to finance other government programs or to oth- They usually include the oil companies, the transport erwise promote their own private interests. Some road ministry (for license fees and fines for overloading), funds have developed ingenious ways of discouraging and the customs department (for transit fees). Some of raids, like making judicious leaks to the press, hiding the revenues may also be collected by nongovernment revenues in provincial bank accounts, and even issuing entities. In all cases a formal contract should be signed a check, calling an emergency meeting of the board, and with the collecting agency-or at least a written mem- then canceling the check. But the best strategy-apart orandum of understanding. The document should from having a strong board-is to keep a minimum spell out procedures for collecting revenues, how cash balance in the road fund account. Work should be funds are to be deposited into the road fund bank programmed-and charges adjusted-to ensure that account (or into the consolidated fund for transmittal revenues and expenditures are closely matched, avoid- to the road fund), the information to be supplied to the ing the need to hold a large cash balance. road fund, and the fees payable to the collecting agency. Road fund staff must track movements in the charge- Which financial rules and regulations are needed? The able base (such as sales of diesel and gasoline and the financial rules governing management of the road fund base price), estimate how much revenue should have are usually included in the legislation, published as been collected, adjust the figures for exemptions and legal regulations in the government gazette, or pub- rebates, and then reconcile these figures with the lished by the road fund board. Publishing them as legal amount actually credited to the road fund during the regulations in the gazette makes it more difficult for period concerned. rogue ministers to pressure the board into amending Day-to-day management of funds involves making the regulations at short notice to suit their own partic- projections for revenues, commitments, and disburse- ular interests. Indeed, some countries even lay down ments. Based on cash-flow projections, the board will the procedures to be followed when making regula- have to decide how to handle short-term borrowing tions to prevent undue political interference. and what to do with any cash surpluses. Since the road The South African Water Services Act, 1997, requires fund should maintain only a small cash surplus, the that the responsible minister, before making regulations funds should be invested in short-term securities like under the Act, publish the draft regulations; invite com- Managing the Revenues 101 ments from a wide array of interested parties; consider after the end of each financial year. The minister then all comments received; on request, report on how spe- submits the report to parliament. The auditors' report cific comments have been taken into account; and sub- may also be included in the road fund's annual report. mit the draft regulations, together with amendments, to The accounts may be audited by independent auditors the Regulation Review Committee. appointed by the board, by the auditor general's office, The rules and regulations governing management of or by an independent firm of auditors selected by the the road fund spell out the way in which the road fund auditor general. The audits carried out by the auditor operates. The main issues covered in the regulations general's office are surprisingly thorough, although this normally include: the purpose of the road fund-which varies by country. Audits by independent auditors can types of expenditures it can and cannot finance: the be more variable.5 The qualifications and integrity of terms of reference for the rcad fund administration; the the auditors should therefore be closely monitored. procedures for nominating and appointing members of the board and for resignation and termination of board membership; the functions of board members and the Key Recommendations and Conclusions relationship between the board and the executive secre- tary or chief executive; the terms of reference for the The above discussion leads to the following general executive secretary or chief executive and how he/she is conclusions and recommendations: to be appointed; the role of the secretariat, including its * Many countries already have road funds, although size, terms of appointment, and other conditions of ser- most are poorly designed and do not deliver a secure vice; and the powers of the mninister relative to the board. and stable flow of funds nor do they strengthen finan- Sample regulations are included in annex 5 (for a road cial discipline. The most problematic "first-generation" fund being set up under new legislation) and annex 6 road funds are in Eastern Europe and Africa. (for a road fund being set up under existing legislation). * First-generation road funds suffer from systemic problems. The most important involve difficulties col- How should the road fund be audited? Once road main- lecting revenues, unauthorized withdrawals ('raids") tenance is fully funded, the road fund will be handling from the road fund, payment for goods and services large sums of money and it is important to ensure that that were either substandard or never delivered, and these funds are properly accounted for. That is the pur- poor financial management of accounts. pose of the audit. The audit should normally include: * Recent discussions between the World Bank and the examining the records of third parties responsible for col- IMEF together with ongoing discussions with ministries of lecting the revenues attributable to the road fund to finance in developing and transition economies, have ensure that all the revenues have been collected and identified the key principles for making commercially promptly paid into the correct road fund accounts; audit- managed road funds viable. First, introduction of the ing payments made from the road fund to ensure they are road fund should be part of a wider agenda to commer- supported by adequate documentation and are in accor- cialize road management. Second, only road-user charges dance with the purposes allowed in the legislation and (generally vehicle license fees and a fuel levy) should be supporting legal regulations; verifying that that the work paid into the road fund. Third, the arrangement must not financed from the road fund was carried out according to abstract revenues from other sectors (additional spend- specifications; auditing the transactions and balances of ing on roads must come from extra payments by road the bank accounts maintained by the road fund; review- users). Fourth, the road fund should be overseen by a ing the accounting and internal control procedures used representative public-private board and managed by a by the road fund to determine their adequacy; and strong, independent secretariat. And fifth, independent reviewing the accounts, files, records, and reports of the technical and financial audits must be carried out. road fund to determine their adequacy. * All new road funds should be set up according to the The audit report is normally submitted to the min- above conditions, and all existing road funds should be ister of the parent ministry no later than three months restructured or closed down. Furthermore, national 102 Commercial Management and Financing of Roads road funds should finance all roads, since road users dures should be prepared and published by the road pay for the use of all roads. The road fund should fully fund board. finance the expenditures associated with main roads, * There should be cost-sharing arrangements for local while local government and community roads should government roads. At the community level these be financed on a cost-share basis. Subsidiary road arrangements should permit local contributions to be funds may be set up to finance urban or rural roads. made in-kind (through volunteer labor, use of farm * The road fund should have a firm legal basis. If it is set equipment, and so on). up under existing legislation, a sunset clause should be * The procedures used to disburse funds to the vari- introduced to determine the date by when basic legisla- ous road agencies entitled to receive money from the tion should be passed, or the road fund be closed down. road fund should be designed to strengthen financial * The road fund should be overseen by a representa- discipline and guard against weak governance. tive management board that may be a subcommittee of c The legislative instrument used to set up the road the main road agency board. Members should be nom- fund should be supported by published regulations or inated by the constituencies they represent and there procedures. Ideally, these should be published as legal should be an independent chairperson. Members regulations in the government gazette. should be appointed for three- to four-year terms and * The road fund should be subjected to regular tech- should be eligible for reappointment for at least one nical and financial audits, carried out either by inde- more term. The director of roads should not be a mem- pendent auditors, by the auditor general's office, or by ber of the board but should have observer status. auditors appointed by the auditor general. * The road fund should be managed through a sepa- rate administration or through a separate division of the main road agency (the latter arrangement may cre- Notes ate a conflict of interest if several road agencies are enti- 1. Road transport operators regularly made this claim during tled to receive money from the road fund). The admin- road maintenance workshops in Africa, Latin America, the istration should be managed by a chief executive Middle East, and Asia. Furthermore, a recent survey carried out appointed by the board, and the chief executive should by the Automobile Association in South Africa established that 88 percent of road users were willing to pay an additional fuel appoint all staff. The road fund need not employ a large levy of about $0.015 per liter provided the proceeds were spent staff, but they must be qualified in engineering, plan- on national roads. ning, and finance. 2. The narrow focus of the South African road fund is unusu- * Revenues should be collected using a simple two- al-the result of a historical accident. It was set up in 1935 part tariff consisting primarily of a fuel levy, vehicle when there were few roads and when the main concern was to license fees, a supplementary heavy-vehicle fee, inter- develop a national network to connect the provinces. It has remained like that ever since. national transit fees, and fines for overloading The tar- rmie ieta vrsne ni laie adnfordg ha 3. Georgia specifies the fuel levy as a percentage of the value iff must be designed to ensure that it does not extract added on fuel. But it is extremely difficult to estimate the value revenues from other sectors. Extra spending on roads added, making it difficult to collect the fuel levy. must be financed through extra payments by road 4. Early statistical work showed a weak positive relationship users. When feasible, non-road users should be between earmarking and the proportion of investment devoted exempted from paying the diesel levy. to roads-hardly a good recommendation, since nearly all these road funds were established in countries where road mainte- * There should be consistent procedures for raising nance was grossly underfunded. See Eklund (1967). and lowering the road tariff. The road fund board 5. A recent audit report carried out by a private firm of auditors should either be empowered through the legislation to raised no issues about the toll revenues collected by a road set the road tariff, or the board should recommend the agency and deposited into the road fund. But an informal spot level to the ministry of finance for inclusion in the check by a visiting toll road company noted that, 'The only con- annual budget. trol [over toll revenue] was tickets torn off a roll and handed to the motorist as a receipt. In many cases the drivers paid and drove off without taking a ticket. In these cases, the toll is prac- ing funds among different road agencies. The proce- tically lost as the payment has not been recorded." 9. Introducing Sound Business Practices The road sector is big business. Many main road efficiently. The corollary is that managers must work agencies are among the Fortune Global 500.1 The within an organization that can respond to market dis- Japan Highway Public Corporation manages assets cipline. They need: ($216 billion) roughly equal in value to those of * A clear and unambiguous corporate mission. General Motors and Sumitomo Life Insurance, the * A strategy to separate planning and management U.K. Highways Agency ($80 billion) is in the same from the implementation of road works (which may league as IBM and AT&T, while a relatively small road involve contracting out implementation to the private agency like the Roads Department in South Africa sector). ($7.3 billion) is in the same league as Northwest * Effective ways of contracting work out (generally to Airlines and Fuji Electric.2 On the revenue side, some the private sector). of the larger road funds and toll road operators also * An appropriate number of technically qualified staff. rank among the Global 500. The Japan Road * A sound management structure. Improvement Special Account has roughly the same * Appropriate management information systems. turnover ($30 billion per year) as Nippon Steel and * Appropriate financial accounting systems. Pepsico, while the U.S. Federal Highway Trust Fund * Procedures for controlling quality of road works. ($21 billion per year) and Japan Highway Public * Sufficient autonomy to enable them to manage the Corporation ($17 billion per year) are in the same road agency efficiently league as Dow Chemical, Lyonnaise de Eau, and Chibu Electric power. Public sector road agencies will function more effi- Defining the Corporate Mission ciently if they are faced with some form of competi- tion or a surrogate for competition. Competition cre- The first task is to establish the role of the road agency. ates market discipline, vwhich is the primary factor Road agencies around the world are increasingly set- motivating managers to cut waste, improve perfor- ting down a vision or mission statement, from which mance, and allocate resources efficiently Previous they derive their principal operational or statutory chapters have suggested creating such discipline by objectives. The following are selected examples of such introducing an explicit road tariff (to encourage users statements: to demand value for money), linking revenues and * FinnRA-"FinnRA is responsible for public roads expenditures (to create a hard budget constraint), and and they make it possible for road users to travel safe- involving users in road management (to ensure that ly and conveniently" customers are able to influence the type and volume * National Highways Authority of India-"To meet of road services provided by the road agency). Another the Nation's need for the provision and maintenance of complementary option is to unbundle services and the National Highways network to world standards contract them out. within the strategic policy framework set by the The above strategies st:rengthen market discipline Government of India and thus promote economic well- and provide managers with the incentive to operate being and the quality of life of the people." 103 104 Commercial Management and Financing of Roads * South African Roads Department-"To deliver an * The maximum administrative overhead for FinnRA efficient, reliable and safe national road network; and will be less than $105 million. to manage, maintain and improve the national road * FinnRAs return on investment will be at least 5 per- network." cent, and the rotation speed of investment will exceed * Swedish National Road Administration-"To pro- 1.1 (see below for a definition of these indicators). vide the public at large and the productive sectors in The performance targets set for Transit New Zealand different parts of the country with a satisfactory, safe and the U.K. Highways Agency are similar. and environmentally friendly traffic service at the least Several developing and transition economies have socio-economic cost." mission statements, but few have specific performance * Transfund New Zealand-"To allocate resources to targets for their road networks. Instead, they tend to achieve a safe and efficient roading system." have general targets related to the condition of the road * Transit New Zealand-"To operate a safe and effi- pavement (percentage of the network in good. fair, and cient state highway system." poor condition) and to the status of the road agency * U.K. Highways Agency-"To secure the delivery of and its assets. The latter targets normally emerge from an efficient, reliable, safe and environmentally accept- the governments' general macroeconomic policies, able trunk road network," by, among other things, which they expect the road agency to follow. Although "being respected for excellence and environmental sen- these vary significantly among countries, they typical- sitivity in managing and developing our valuable ly relate to achieving a proper balance between work national road network." done in-house and work done under contract with the All of these statements express a desire to serve the private sector; doing as much work as possible using road user, the environment, and the tax payer by mak- labor-intensive work methods (particularly in Africa ing the road network safer, more reliable, more envi- and Asia); transforming parastatals-including gov- ronmentally acceptable, and more efficient. In other ernment plant and equipment pools, quarries, and fer- words, they are encouraging the road agency to ries-into autonomous agencies operating along com- become more customer-oriented. mercial lines (or privatizing or liquidating them); Within the context of these vision statements, the encouraging private sector interests to construct and parent ministry is increasingly setting a series of clear- operate toll roads under concession agreements or to ly specified performance targets for the road agency. design, build, finance, and operate existing roads For example, the performance targets set for FinnRA under concession agreements; and reducing staff num- during 1994 were: bers as part of overall civil service reform. * FinnRAs activities will result in a reduction of 70 Although the above targets may be specified in less injury accidents and seven fatal accidents (minimum precise terms, it is still worth attempting to develop target). The total number of accidents on public roads both a mission statement and a set of performance tar- will be less than 3,900. gets to guide the road agency's operational program. * FinnRA will reduce the pollution of ground water The targets should be set down in writing and includ- caused by road traffic and operations, reduce noise pol- ed in an annual business plan or the equivalent. Each lution, and improve the roadside milieu. subsequent plan should then review the extent to * The target level of service for the main roads during which the targets have been achieved and, if they have winter will be achieved during 88 percent of winter days. not, why not. * The current condition of the road network will be maintained. The ruts on the main roads will not exceed 20 mm. The maximum length of defective pavements Separating Planning and Management from shall be less that 7,500 km and that of structurally poor Implementation of Road Works roads shall not exceed 1,200 km. * The cost efficiency of FinnRA will improve by 1.0 Most countries are actively trying to separate planning percent. and management of roads from implementation of Introducing Sound Business Practices 105 road works-for two mai:n reasons. First, road agen- will enable the Administration to compare its in-house cies have too many conflicting responsibilities. They costs with private contractors on an item-by-item basis are typically responsible for planning, managing, and (see box 9.5). executing road works. Since they are both the cus- New Zealand, Finland, and Sweden have chosen the tomer for, and supplier of, the work they finance, there second option. New Zealand separated road manage- is an obvious conflict of interest that weakens financial ment from production in 1953 when management was discipline and compromises efforts to control costs and transferred to the National Roads Board, while produc- maintain quality. Second, road agencies are usually tion remained with the Ministry of Works. It stayed like public monopolies and are thus not subject to much this until 1989, when Transit New Zealand was estab- market discipline. As a result the costs of road works lished to manage the trunk road network and the Land are frequently 20 to 30 percent higher than work sub- Transport Fund. The production function stayed in the ject to competition. Some of the most startling evi- Ministry of Works, but was separated into a civil con- dence on the impact of market discipline comes from struction division and a consultancy division, both of New South Wales in Australia. In 1991 their Roads and which were later corporatized. In 1991 the two divisions Traffic Authority decided to start contracting work out were made into separate subsidiary companies and have to the private sector and to expose their own in-house now been privatized. Finally, in 1996 the funding of work to more outside competition. Four years later the roads was transferred to Transfund, and Transit New costs of in-house work hacl fallen by approximately 25 Zealand became exclusively a road management agency percent, while the costs of work done by contractors Finland and Sweden are still in the process of sepa- had fallen by approximately 37 percent. rating road management from production. The activi- Countries have tackled this problem in three main ties have already been relegated to different organiza- ways. They have maintained their integrated structure, tions, and the production units are increasingly having but assigned the procurer and producer functions to to bid for work in competition with the private sector. separate divisions or departments; divided the road In Finland 90 percent of all construction and periodic agency into separate clien,t and civil works organiza- maintenance and 60 percent of routine maintenance is tions (that is, kept the procurer separate from the pro- subject to competitive bidding. In Sweden all periodic ducer); or kept the road agency as the procurer and maintenance and nearly all routine maintenance are contracted out all producer functions to the private subject to competitive bidding. These changes have sector. increased productivity by about 25 percent. The inten- Norway has chosen the first option-it has kept the tion in both countries is to fully commercialize the pro- road management and procduction functions within the duction functions-perhaps in the form of a limited same overall organizational structure, but has separat- liability company-in the near future and eventually to ed these functions at the county level. This structure privatize them. eliminates some of the conflict of interest but does not Sweden has carried the process of adopting com- really address the cost and quality issues associated mercial management through to its logical conclusion. with in-house implementation. Norway chose this It has effectively turned the road agency into a holding structure probably because of its more relaxed attitude company with subsidiaries. The parent company is toward competition. Contractors carry out only 25 managed by a board that delegates day-to-day opera- percent of periodic maintenance, and all routine main- tions to a director general. The headquarters, together tenance continues to be done in-house. Furthermore, with seven regional offices under the director general, the domestic market for contractors is buoyant, and handle traffic safety, environmental issues, transport there is little pressure fromn the public to contract more planning, sector and regulatory issues, public road work out to the private sector. The Public Road management, economics and finance, personnel, pub- Administration is nevertheless concerned about the lic relations, and administration. costs and quality of its in-lhouse work and is currently All production units are organized as subsidiaries- implementing a detailed cost accounting system that called "result units"-which fall under the authority of 106 Commercial Management and Financing of Roads the director general, but have a high degree of auton- for the total work; admeasure contracts, in which pay- omy. They each have a director and an advisory com- ment is based on the quantity of completed work, val- mittee. The advisory committee includes no more than ued at tendered rates in a bill of quantities; cost-reim- eight members (five appointed by the director general) bursable contracts, in which payment is based on and it elects its own chairperson. The director is actual costs (this form requires "open book" account- appointed by the director general following consulta- ing) plus an agreed fee to cover overheads and profit; tion with the advisory committee. The production and target-cost contracts, in which payment is based unit, which is required to earn at least a 15 percent rate on actual costs, plus a fee, together with an additional of return on its equity, currently wins about 60 percent incentive payment related to any savings beyond the of its work through competitive bidding. The long- initial target costs. term goal is to turn all of the result units into The main difference among these forms relates to autonomous legal entities competing with the private the way the contract allocates risk between the con- sector on an equal basis. tractor and the client. In lump-sum and admeasure The United Kingdom and many other countries, contracts-which are essentially price-based con- particularly developing and transition economies, have tracts-the contractor bears much of the risk and has chosen the third option. Until the early 1980s the to price the tender accordingly When risks are high, trunk road network in the United Kingdom was man- bid prices must be correspondingly high, or else con- aged by the Department of Transport, virtually all tractors will be reluctant to bid at all. Cost-reim- design and supervision of motorways was undertaken bursable and target-cost contracts, on the other hand, in-house, and maintenance was carried out under stan- are cost-based contracts for which the client bears the dard agency agreements with local authorities who main risks. But the target cost contract also includes an relied on their own direct labor. These arrangements incentive for the contractor to work efficiently and were restructured in four broad phases. First, the in- minimize costs. Cost-based contracts are staff-inten- house design and supervision of trunk roads was pri- sive, require good cost accounts, and work only when vatized by inviting bids from consultants to take over there is good governance.3 Most road agencies in the staff and ongoing work programs. Second, when developing and transition economies thus favor price- the metropolitan councils were dissolved in the mid- based contracts, particularly admeasure contracts. 1980s, the maintenance that they previously carried Procedural specifications, in which the client out on an agency basis was competitively tendered. defines what work is to be carried out (hence often Third, in 1994 the planning and management of roads referred to as cook-book specifications), are tradition- was transferred from the Department of Transport to a ally used for roads-with good reason. Procedural new Highways Agency that operated along commercial specifications are relatively easy to identify and mea- lines. Finally the trunk road network has been divid- sure, particularly for new construction. But they ed into 24 zones, and all maintenance work is now require a lot of supervision, and since the contractor being competitively tendered. Work can be contracted cannot easily change the design, work methods, or out to private sector consortia, local authority consor- materials, there are few incentives to encourage con- tia, or joint private sector/local authority entities. tractor innovation. In recent years these problems have led to a gradual move in some countries from procedural (or method) Identifying Effective Ways to Contract Out specifications toward functional (or end-product) specifications, in which the client determines the When work is contracted out, the road agency nor- desired level of service required in terms of clearly mally has a choice between the form of the contract and defined functional or performance characteristics (for the type of specifications to be used. With regard to the example, specifying pavement performance in terms of form of the contract, there is a choice among lump sum roughness, rutting, surface friction, and so on). Such contracts, in which payment is based on a single price specifications help to minimize the amount of super- Introducing Sound Business Practices 107 vision required, since it is necessary to test only the A number of incentives are also being offered to con- performance of the facility, rather than each item con- tractors-in addition to those offered in target cost tributing to that performnance. Functional specifica- contracts-to encourage them to be more innovative. tions also encourage contractors to find the best way of For example, some contracts require the contractor to meeting the performance requirement (for example, by design, construct, and guarantee a road pavement for maximizing use of their own particular skills, equip- a specified period of time. Such contracts are being ment, and materials). Experience with performance used in some parts of the United States and are being contracts has been encouraging. The Road Transport piloted in South Africa. Authority in New South Wales, Australia, let a 10-year The United Kingdom is proposing an additional performance contract in 1996 that has reduced main- performance incentive by extending the contractor's tenance costs by 48 percent over their own 1991 in- guarantee period from the usual 12 months to 36 house costs. The main difficulty with such contracts is months. The United Kingdom, especially plagued by the need to define and describe the functional or per- congestion, has also been trying to provide the con- formance specifications. tractor with an incentive to complete road works as The scope of works covered by the typical road con- quickly as possible. This incentive is mainly used on tract has also begun to change. For example, periodic high-volume roads, where site works are hazardous and routine maintenance are usually contracted sepa- and seriously disrupt traffic. In regular price-based rately, often using different standard contract docu- contracts liquidated damages can be imposed for ments. But some countries, including Algeria and work completed late, thus giving the contractor an Brazil, are now letting combined contracts for execu- incentive to complete work within the specified con- tion of routine and minor periodic maintenance works tract period. But damages do not provide any incen- on specific road sections (average length 244 km in tive to complete road works early. The need for such Brazil). Other countries, including Canada (British incentives led to the development of lane rental con- Columbia), Chile, Colombia, Malaysia, the United tracts. These contracts provide an explicit financial Kingdom, and Uruguay, are combining all mainte- incentive to encourage the contractor to complete the nance works on specific routes, or within entire geo- work as fast as possible (box 9.1). The design, build, graphic areas, in comprehensive maintenance con- finance, and operate contracts being let in the United tracts that run for several years. The contracts are Kingdom and Finland include lane closure penal- currently running for five years in British Columbia; ties-graduated by time of day-to encourage early three and five years for unpaved and paved roads, completion.6 respectively, in Chile; twiD years in Malaysia; three to One of the major constraints hampering contracting five years in the United Kingdom;4 and four years in out-even for relatively simple road works-is the Uruguay Sweden is using contracts that run for three underdeveloped nature of the local consulting and to six years. The United Kingdom is now also letting construction industries in many developing and tran- 30-year performance contracts for roads requiring sition economies. The road agency cannot invite com- major rehabilitation or new investment. Contract pay- petitive bids unless the country already has consultants ments are either indexed to traffic flows with the con- and contractors with road work experience. tractor being paid through shadow tolls or are based Furthermore, the road agency cannot be expected to on lane availability. Finland has recently let a similar prepare bid documents, award contracts, and super- contract for 15 years.5 vise implementation of civil works using staff accus- Contractors in these countries prefer contracts that tomed only to doing work in-house. Staff in the road run for at least five years, since this amount of time pro- agency must know something about the preparation of vides sufficient incentive to invest in specialized equip- bid documents, contracting procedures, contract law, ment. These innovations bring considerable cost sav- and arbitration procedures before the road agency can ings, but require well-developed contractors and a effectively contract road works out to private firms and highly professional road agency to make them work. hire consultants to design and supervise implementa- 108 Commercial Management and Financing of Roads Box 9.1 Incentives for early completion: lane rental contracts in the United Kingdom Lane rental contracts were introduced in the United In setting the appropriate bonuses and charges, the Kingdom by the Department of Transport in 1984 on Department of Transport considered that it would be too major schemes to speed up maintenance works and costly to pay bonuses at the full daily delay rate and that reduce delays. According to the basic contract arrange- a lower rate would still provide the contractor with ade- ment a bonus is paid if the contractor finishes the works quate incentives. They also took into account the proba- before the contract completion date, but a charge (at the bility that charges based on the full daily rate might not same rate as the bonus) is imposed if the contractor is late. be recoverable or might deter companies from tendering. The contract replaces liquidated damages with a daily It was therefore decided that the bonus should normally charge for late completion that is related to the costs be set to cover 50 percent of the daily delay cost plus 100 imposed on road users. Bonuses paid on individual percent of the daily site supervision cost. Later, the schemes have ranged from $8,000 to $1.6 million. Both Department limited the daily bonus/charge rates to a min- bonuses and charges are based on an assessment of the imum of $3.000 and a maximum of $40,000. economic costs to road users of delays. Two variant sys- Between 1984 and 1989 the Department of Transport tems, continuous site rental and lane-by-lane rental, were let about 100 lane rental contracts worth approximately established one year after the concept was first intro- $400 million. It is estimated that these contracts saved duced. more than 2,400 days of lane closures, representing an * Bonus/rental charge. The contractor tenders a price for economic savings of about $80 million, at an additional the work and time of completion, and receives a bonus or cost of $13 million paid in bonuses. Although there is pays a charge according to the number of days that work some debate about the actual size of the benefits, a is completed ahead of or after the contract period. detailed comparison of contracts in 1987-88 estimated * Continuous site rental. The contractor is charged a daily that the average rate of spending on a lane rental contracts rental rate for each day that there is possession of the site. per week was 81 percent higher than that for a conven- * Lane-by-lane rental. The contractor is charged accord- tional contract, confirming that lane rental contracts have ing to the number of lanes occupied. quickened work substantially and reduced traffic delays. Sour-ce: U.K. National Audit Office, 1991. tion. Most efforts to promote competition therefore vate sector, should be able to plan and manage the net- must be accompanied by parallel efforts to develop the work with five or less staff members per 100 km. On local construction and consulting industries (box 9.2). networks with heavy traffic, where additional in-house staff may be involved in traffic control and driver infor- mation activities, the number per 100 km may be clos- Staffing Requirements er to 10. A main road network of about 15,000 km (10,000 km paved) with moderate traffic and orga- Once the road agency has developed a mission statement nized into 10 maintenance districts, may thus require and defined its key performance targets, it can turn its about 300 to 750 regular staff to plan and manage the attention to the number and type of staff needed to run network (about 50 managers and the remainder work- its operational program. If the emphasis is on contract- ing as engineers, technicians, administrators, and other ing out, the operational program could be handled by support staff). Between a quarter and a third might fewer staff, but they will need different qualifications. work in headquarters support services, while the rest The small regular staff could be supported by small-scale would be located in regional offices. Subcontractors local contractors for most routine maintenance work, would do the balance of the work, and they might in small-scale contractors for the rehabilitation and peri- turn employ an additional 1,500 staff if the work was odic maintenance of gravel roads, and medium- and done using capital-intensive techniques or 7,500 staff large-scale contractors for the patching, periodic main- if the contractors were using labor-intensive tech- tenance, and rehabilitation of paved roads (table 9.1). niques. By these standards most road agencies-which The figures in table 9.1 suggest that a fairly efficient typically employ several thousand workers-are over- road agency, which contracts most work out to the pri- staffed, primarily because they have not yet separated Introducing Sound Business Pjractices 109 Box 9.2 Developing domestic contractors for road maintenance A number of initiatives have been taken to develop the was not sufficient. Contractors therefore decided to buy capacity of local contractors. They include providing additional equipment and share it through a pool. Ministries preparatory and hands-on training, providing access to of works in several African countries are considering renting plant and equipment, helping road agencies to acquire the equipment to contractors, while several donor-financed pro- skills needed to supervise contracts, simplifying govern- jects are providing contractors with foreign exchange that ment procurement procedures, and setting up, adapting, enables them to buy equipment and spares. or strengthening permanent education and training insti- tutions for road specialists. CONTRACT SUPERVISION. Most road agencies have limited capacity to supervise contracts, and several initiatives are PREPARATORY TRAINING. Seminars have been organized in tran- under way to strengthen this capacity Many African coun- sition economies (such as Estonia, Latvia, Lithuania, Poland, tries are building or strengthening control units in the and Vietnam) to introduce consultants, contractors, and road agency to adequately supervise contracts. In each civil servants to competitive bidding, cost control, and con- case foreign experts are involved in compiling sample tract management. Similar seminars have been organized in documents for preparation, procurement, and supervi- Africa to teach contractors how to manage small civil works sion; staffing the unit during the initial years; and training contracts. The most comprehensive training program was civil servants in this new activity. given in Tanzania for administrative managers, engineers, site superintendents, and technicians. Owners and man- SIMPLIFYING PROCUREMENT PROCEDURES. Simplifying procure- agers of the firms were asked to participate in the training so ment procedures is essential for doing more work under that they could understand what was being taught to their contract and developing the local construction industry. In staff. The most creative scheme, in Malagasy, used multime- Ghana a comprehensive review of contract conditions for dia techniques to get the message across. international and local competitive bidding and LCB has been carried out, and proposals for changes have been pre- HANDS-ON TRAINING. Potential contractors have been per- pared and accepted. New conditions are being implement- mitted to work on small projects to gain practical contract ed. If they had been implemented earlier, some specific experience. Hands-on training covering labor-based con- clauses, such as provisions for compensation for delayed struction techniques has been used to develop small firms payments, might have prevented some contractors from for over two decades in Latin America, particularly the going bankrupt, although there is no substitute for prompt micro-empresas associativas in Colombia and the payment. Other countries have also decided to reshape and Dominican Republic. Similarly, in Guinea Bissau the simplify the regulations for procurement and contract International Labor Organization has organized 3-km administration to make them easier for contractors. training sections for labor-based rehabilitation of feeder roads. In Kenya contractors have been trained to bid for SETTING UP PERMANENT TRAINING INSTITUTIONS. In most coun- road rehabilitation works. First, unit prices were fixed by tries the training center of the ministry of works was the only the road agency Then, contractors were allowed to bid institution in charge of educating road specialists, and train- with the same rates but with a plus or minus factor. Now ing was often tied to the implementation of foreign-funded they have to compute their unit prices themselves. projects. Training must be funded on a permanent basis, it Current contracts amount to about $500,000 each. must be open to contractors, and the curricula should include contract management. Institutes in former centrally AVAILABILITy OF PLANT AND EQUIPMENT. These initiatives help planned economies are in danger of failing because of lack contractors gain better access to plant and equipment. In of funding and inappropriate privatization arrangements. It Uganda rented equipment belonging to the Ministry of is important to keep these institutions alive and to extend Works was made available to contractors, but the amount their curricula to contract management and cost control. Source: Prepared by J-M Lantran for this study. planning and management from implementation of tions of employment, particularly for older staff with road works. experience, the CEO, and directors. In general, current Any reduction in the size of the road agency must be salaries for engineers and technicians must be more than accompanied by an improvement in terms and condi- doubled to make them competitive with private sector 110 Commercial Management and Financing of Roads Table 9.1 Road agency staff involved in planning and managing road works in selected countries Road agency Length of network (km) Number of staff Number of staffper 100 km Transit New Zealand 10,500 189 1.8 Finnish National Road Administration 78,000 1,500 1.9 Swedish National Road Administration 97,908 2,000 2.0 South African Roads Departmenta 6,133 140 2.3 Ghana Highway Authority 14,100 688 4.9 INVIAS, Colombia 13,408 920 6.9 Korea Bureau of Public Roads 12,053 1,450 12.0 U.K. Highways Agency 10,500 1,600 15.2 a. Staff numbers projected as of end-March 1998. salaries, as must the salaries of the CEO and directors. Similarly in-house implementation of civil works is Fringe benefits must also be improved. Unfortunately, often restructured into one or more profit centers- very few road agencies have managed to better terms and which are then prepared for privatization or for opera- conditions of employment. Even FinnRA and the U.K. tion as state construction enterprises. Finland, Highways Agency are still classified as govemment Namibia, and Sweden are in the process of doing this. departments and employ all staff under civil service con- The road agency may also help in-house laborers to ditions, although often with some flexibility within convert into small-scale contractors. Assistance nor- salary ranges. Some road agencies have nevertheless mally takes the form of training, providing credit to pur- managed to become autonomous (New Zealand), semi- chase standard sets of equipment, and offering of initial autonomous (Sierra Leone), or have formed into non- trial contracts. The Ghana Highway Authority managed profit joint stock companies (Latvia), enabling them to to reduce their staff from 8,400 to 4,700 primarily by pay market-based wages and operate in a fully com- converting them into petty contractors. Moving staff mercial manner. into the local construction industry tends to be easier Restructuring and downsizing are likely to create if, along with restructuring the road agency, a road fund redundancies. This is normally handled by tackling the is established. A fully funded road maintenance pro- problem in stages. The usual first step is to offer older gram will usually create more than enough new jobs for staff incentives to retire early, although this generally former road agency staff. Finally, if all else fails, the road affects staff numbers only modestly The second step is agency must offer exit packages to redundant staff. to identify all the commercial activities within the road A smaller road agency must also address its skill-mix agency and to move them into units that can then be requirements. A restructured road agency will be more spun off as separate commercial enterprises (for exam- commercial and more of a planner, facilitator, and pay- ple, traffic data, civil works design, manufacture of master. It will thus need more managers, more staff with road signs, materials testing). The road agency usually financial backgrounds, and more engineers with experi- helps the staff to set up these enterprises under what is ence in contract management, contract law, and arbitra- effectively a management-staff buyout. tion procedures. If the road agency intends to promote Sometimes, as with civil works design, the road labor-based work methods, it will also need staff who agency is able to invite bids for design work from pri- know when such techniques are suitable and who can vate sector consultants. These contracts include a train small-scale contractors to do such work. These requirement to take on all, or most, of the in-house changes require new personnel policies and revised train- staff. The United Kingdom managed to reduce the ing programs. They also call for a new look at technical number of engineers and technicians working on assistance programs. With a clear mission and compe- design and supervision of road works by negotiating tent, well-paid staff, developing and transition economies their transfer to private sector consultants in conjunc- should not have to plan for long-term expatriates in line tion with the transfer of agreed design and supervision management positions. Technical assistance can instead work for a specified period of time. be refocused to meet clearly identified skill needs. Introducing Sound Business Practices 111 Management Structure with other parts of a larger ministry of works. Reporting arrangements have also been made more Some main road agencies have already been restruc- direct. Regional managers report directly to the CEO- tured to create a more cornmercially oriented manage- instead of to the permanent secretary, as in some coun- ment structure (figure 9.1). Several road agencies have tries-and the CEO reports through the board direct- established the post of CEO and created a new layer of ly to the parent ministry. line managers appointed at roughly the same level as The staffing structure within each of the depart- the former director of roads. In the United Kingdom the ments has also been simplified and made more relevant CEO is appointed on a per formance contract and his or to the restructured departmental functions. A tradi- her remuneration is partly related to the delivery of the tional road agency typically has a large number of job agreed road program. The agencies tend to have five or grades, which are rarely related to the size of the divi- six line managers (directors) who are responsible for sion or department and the needs of the task. There is functions like administration, road development, road also too much layering. Restructuring therefore tends network management and maintenance, design and to start by preparing new job descriptions based on the environment, and finance. Most also have small units redefined functional needs, designing a new organiza- that handle public relations and internal audits. tional structure for each division and department Such restructuring has also addressed the issues of based on the new job descriptions, reducing layering shared services within the usual ministerial structure by grouping staff into a limited number of job cate- and confused reporting arrangements. The agencies gories (senior management, middle management, and have been given their own support services (adminis- operating staff), introducing a new reward and career tration and accounting) instead of having to share these system, and reviewing and revising the disciplinary Figure 9.1 Proposal management structure for a main roads agency Parent ministry I Permanent secretary Roads board Secretariat Public relations Chiefl adi executive n au Director of Director Director Director safety and Director of of finance of development of maintenance environment administration Accounts Planning Regional offices Road safety Public relations Cost accounts Survey Mechanical services Occupational Personnel training Road fund Contracts Stores safety Legal services Environment Information systems 112 Commercial Management and Financing of Roads code. The reward system now often includes payment table 9.2 for the indicators suggested by the OECD of performance-related bonuses (as in Finland) and Scientific Expert Group IR7). wage bonuses tied to annual performance evaluated The management information system provides a against agreed road network goals (as in Korea). framework for making decisions on a number of issues The regional structure of the road agency is also usually handled by different divisions within the road important, particularly in large countries where cen- agency They include decisions on: tralized agencies tend to be too remote from their cus- * Carrying out routine and periodic maintenance of tomers. Several countries are attempting to address this gravel roads, paved roads, and bridges. issue by decentralizing operations to regional offices. * Rehabilitating pavements and bridges. Under such arrangements most planning and execu- * Upgrading gravel roads to paved standard. tion is done at the regional level, while the headquar- * Improving the geometric characteristics, or capaci- ters staff coordinate regional programs, operate the ty, of roads. management information system, and provide other * Setting charges for the use of roads and bridges. central support services. More than two-thirds of the Each of the above activities are interdependent with staff may thus be placed in regional offices (for exam- regard to the road agency's budget constraint. ple, in New Zealand more than 65 percent of staff work Resources have to be allocated among competing pro- in regional offices). grams to optimize expenditures, and user charges must The U.K. Highways Agency is carrying the concept be set to generate the resources required to finance of decentralization one step further. It plans to create them. The management information system should network managers who will be fully responsible for thus provide the basis for allocating resources to managing part of the road network. The network man- achieve the best overall road conditions. ager will buy in the services required to meet agreed tar- The management information system will usually gets and the headquarters staff will basically become a comprise data collection, storage, and analysis; esti- service unit serving the needs of the network managers. mated traffic, predicted future road conditions; and the FinnRA and the Swedish National Road Administration impact of alternative management strategies. The sys- are organizing their staffing along similar lines. tem should not be too complicated. Developing and transition economies are littered with the relics of failed management information systems that were poorly Management Information Systems designed, emphasized system over management, and were overly complicated. The key guiding principle is Management cannot plan, deploy, and control that systems should be affordable, suit the decision- resources without essential information. The road making needs of the road agency, be compatible with agency's parent ministry and constituents likewise the scarce human resources needed to operate them, need such information to judge whether the road and be capable of being incrementally upgraded when agency is using resources efficiently and providing road resources permit. The initial system should be simple users with value-for-money The management infor- and unpretentious and should focus on monitoring the mation system used by the average road agency con- condition of the road network. There is no substitute sists of a set of established and documented procedures for a monitoring system that includes regular visual that generate and evaluate alternative ways of operat- inspection of the road network to raise awareness of ing, maintaining, improving, and extending the road maintenance needs. network. It will generally show the condition of the Most road agencies generally begin with a central- road network and its use (traffic volumes and loading), ized, manual management information system with and can be used to explore the impact of management four modules: traffic information (classified counts interventions on current and future service levels. It with some axle-weight data), a survey database (peri- can also be used to generate information on the phys- odic, visual road condition survey data), road planning ical and financial performance of the road network (see (upgrading and new roads), and maintenance man- Introducing Sound Business Practices 113 Table 9.2 Performance indlicators suggested by the OECD Scientific Expert Group Measure Parent ministry Road agency Road user Accessibility, Primary: Hlighway Capacity Manual Primary: expenditure for maintenance Primary: level of satisfaction mobility level of seirvice: average road- and operation per vehicle km and regarding travel time and its user cost (car and truck) equivalent standard axles (ditto by reliability; quality of road user Secondary: composite access index; functional class); travel time and its information (both by user group, total transport cost per GNP variability from market surveys)a Secondary: quality of information Secondary: hours of congestion delay to road users (from audit) Safety Primary: ALccident risk: fatalities and Primary: existence of method to assess Primary: unprotected road user risk injury; accidents per vehicle-km (and results of safety programs (yes/no); Secondary: time from alert to the number of fatalities and injured); percentage of traffic speeding treatment (medivac); percentage existence of national traffic safety (weighted) of population that considers traffic program/plan; percentage of Secondary: percentage of roads not injuries a public health problem accidents involving drunk driver meeting minimum design standards; exposure of pedestrian and cyclists to vehicle traffic Environment Primary: existence of air quality Primary: environmental policy/ Primary: percentage of population standards program (yes/no); use of de-icing exposed to noise level greater than Secondary: cumulative land area taken agents; emissions per capita for 65 decibles by roads (percent); new land area cO2, NOx, VOCs, particulate matter Secondary: percentage of population taken for road use; existence of Secondary: pollutants in road run-off exposed to emission levels violating inspection/maintenance programs air quality standards for vehicular emissions Equity Secondary: regional distribution of Secondary: surplus (deficit) of road Secondary: travel cost, travel time by roads; law,s for mobility limited expenditures relative to road- user group; accident risk by user (yes/no) user charges collected by region group Community Secondary: processes for public Primary: processes in place for market Primary: satisfaction with the participation and procedures to research and customer feedback number and types of feedback reconsider prior decisions (yes/no) mechanisms Program Primary: long-term programs for Primary: management system for Primary: satisfaction with the development construction, maintenance and distribution of all resources (yes/no); programs development process operations (yes/no) benefit-cost analysis of the Secondary: benefit-cost analysis of the (proposed) road program adopted road programs; projected Secondary: quality management/ audit level of congestion program (yes/no) Program Primary: sufficiency of maintenance Primary: forecast values of road costs Primary: satisfaction with programs delivery funding versus the actual costs; delivery; road administration costs Secondary: degree of completion of cost of operations/ lane-km; and user delay costs associated the long-term road programs overhead percentage; percentage with operations and maintenance of construction materials recycled Secondary: number of staff/ lane-km; percentage of work done by direct labor Program Primary: value of assets (trend); Primary: roughness (by functional Primary: surface condition; performance ex-post value of benefit-cost analysis class); bearing capacity (by functional satisfaction with road condition class); percentage of defective bridges; Secondary: rest areas/ 100 km; Secondary: trends in road budget by percentage load posted bridges; percentage of main roads lighted; road programs (construction, deck area; congested road-km; quality of traffic conditions during maintenance, operations); return on incidence of truck overloading winter; user information system assets; total road expenditures per Secondary: existence of management (yes/no) GNP system for road furniture a. Level of satisfaction regarding travel time and its reliability and quality of road user information are combined into one indicator obtained from the same road user survey. 114 Commercial Management and Financing of Roads agement (using engineering judgment and standard ture of the road agency's overall financial health and be unit costs). Despite its simplicity, some road agencies, able to produce the financial data needed to plan as presently staffed, will not even be able to manage expenditures, compare alternative strategies, monitor this level of sophistication. For a 15,000 km road net- implementation, and account for the way funds are work (10,000 km paved), the system would require used. Standard government accounts, which focus about two to three traffic count teams, two road inspec- almost exclusively on cash expenditures, cannot do tion teams, and at least one engineer and one techni- this. A number of road agencies, notably in parts of cian to operate the system. Traffic counting and inspec- Australia, Finland, New Zealand, Pakistan, Romania, tion could be done by consultants. The engineer and Sierra Leone, and the United Kingdom, are therefore technician should ideally be in-house staff. restructuring their accounting systems along commer- The next level of sophistication is probably to com- cial lines to provide a better basis for making informed puterize the system, but to do so using simple analyt- management decisions. They are generally moving ical tools and in a way so that it is accessible to region- toward regular commercial accounting systems, which al engineers. The system in Pakistan has currently include a standard income statement, a balance sheet, reached this stage of development (box 9.3). Scoring and a sources and application of funds statement. Both sheets are used for each section of road, and key fea- Transit New Zealand and the U.K. Highways Agency tures, like cuts, fills, sign posts, and other maintenance are currently valuing their assets with a view to even- features, are recorded in diagrammatic form. The scor- tually earning a specified rate of return on capital. ing sheets are then used to work out quantities and to Many of the benefits of commercial accounting can prepare estimates that eventually form part of the con- be achieved with relatively simple reforms that do not tract documents. The sheets are also used for schedul- necessarily involve preparing full commercial ing work and, finally, for checking on what work has accounts. The most important reforms include: prepar- been done and its quality. ing an income statement that matches revenues and Simple systems can be incrementally upgraded to expenditures; accounting for all the assets owned expand the database and increase the sophistication of directly by the road agency (that is, excluding the cap- the analytical methods used to manipulate the data. The ital invested in roads); recording, in a simple and trans- survey database might be extended to include surface parent fashion, the financial condition of the road net- roughness and pavement strength, and the pavement work; and producing better information on actual management system might be strengthened by basing costs to support the above road management systems. it on an analytical model, like the World Bank's FinnRA and Transit New Zealand currently produce Highway Design and Maintenance model (version III; some of the best road agency accounts, and the U.K. version IV is currently being tested). But this takes more Highways Agency is not far behind. This has many resources, requires continuity among the staff operating advantages, including making it easier to specify per- the system, and should be attempted only when there formance targets to measure the road agency's overall are sufficient trained staff and other resources. Further performance. For example, in Finland the provincial sophistication can then follow, perhaps along the lines road administrations-there are nine of them, each being pursued in Indonesia, although that level of operating as a "profit center" of FinnRA-are required sophistication lies well in the future for most develop- to meet certain specified financial targets, including the ing and transition countries (box 9.4). return on investment (operating result/investment), the operating result (operating result/operation rev- enue), the rotation speed of investment (operation rev- Financial Accounting Systems enue/investment), and increased value per person (gross margin + salaries and wages + rents, all divided The road agency's financial accounting system should by the number of personnel).7 These performance be designed to complement and support the manage- indicators are then aggregated to become performance ment information system. It should present a clear pic- indicators for the administration as a whole. Introducing Sound Business Practices 115 Box 9.3 Simple road management systems: the case of Pakistan Pakistan's highway network has suffered from a combination * Greater than 70: Requires reconstruction/rehabilitation. of deferred maintenance ancd rapidly increasing traffic levels. Only safety-related maintenance should be carried out. To help remedy this, the National Highway Authority devel- * 60-69: Road pavement requires improvement. Major oped a simple Maintenance Intervention Level System to periodic overlays should be programmed. A road segment identify maintenance and rehabilitation needs along the with this rating needs localized periodic maintenance. entire National Highway System. This system produces * 40-49:Requiresroutinemaintenance.Shouldbegiven numerical ratings that allow engineers to determine how preferential status over other routine maintenance needs. much maintenance a roaclway needs and which roads * Less than 40: Requires routine maintenance. Should be require reconstruction or extensive rehabilitation. given attention only as budgets permit. The system works by taking simple, direct measurements The Maintenance Intervention Level score has been of the roadway and its environs. The network is divided into found to be fairly accurate in indicating the quantity of contiguous 5 km sections and measurements are taken along materials needed to rectify any deficiencies. Some of these one representative sample km in each section. Eighteen sep- relationships, using scores adopted by the National arate factors are measured to determine the maintenance Highway Authority, are shown below needs of each section. They are grouped into conditions that Erosion from edge-patching work: may be improved by maintenance (such as roughness) and Score: 7 up to 125 sq. m edge patching/km factors that influence how much maintenance is needed 9 up to 250 sq. m edge patching/km (such as climate, terrain, and traffic volume). 11 up to 325 sq. m edge patching/km Each measurement is assigned a severity score and the 13 up to 500 sq. m edge patching/km scores are combined to obtain a total measure indicating Potholes-carriageway repairs: the level of maintenance needed by each section. Scores are Score: 0 expect possible 10 sq. m /km/year forwarded to maintenance field offices where they are used 10 expect up to 200 sq. m /km/year to estimate the amount of materials needed to correct road- 13 expect up to 500 sq. m Ikm/year way deficiencies. Costs are also estimated, and this infor- 15 expect up to 1000 sq. m /km (7.3 m wide) mation is used to define priorities and prepare a finalized Wheel track rutting depth: work program that accords with the maintenance budget. Score: 4 = surface treatment Information collected includes: road type, road width, 5 = asphalt concrete overlay pavement type and roughness, number of potholes, Wheel track cracking: length and depth of rutting, pavement cracking, axle load- Score: 0-6 = surface treatment ing, pavement and subgrade strength, rainfall and avail- 7-8 = asphalt concrete overlay able drainage, and edge step and erosion. Rutting mea- Both wheel track and center line cracking: surements are made by laying an aluminum bar across the Score: 0-6 = double surface treatment pavement and sliding a wedge into the space between the 7-8 = asphalt concrete overlay bar and the rutted road. The wedge is divided into four After two years of experience with the Maintenance colored sections, and technicians record depths according Intervention Level, the National Highway Authority has re- to the color of the wedge. The simplicity of the measure- evaluated its intervention scores and assessment procedures. ment system means that data collection teams get consis- The updated version of the Maintencance Intervention Level tent results. Similar measurement systems are used for uses the same eighteen factors, but categorizes them into cracking, edge step, edge erosion, and subgrade strength. four groups: economic factors, pavement condition factors, Severity scores have been developed for each of the 18 environmental factors, and road classifications. These cate- factors. These are added together for each 5 km section of gories, combined with revised intervention level scoring road to yield a final intervention score. This score indicates techniques, allows NHA to define better necessary mainte- the overall level of maintenance needed on the roadway seg- nance levels. It also permits the National Highway Authority ment and is plotted on an intervention map. Intervention to investigate the effect of applying different maintenance scores are categorized into one of the following ranges: strategies and funding priorities. Source: Prepared by Robert Butler for this study Few developing and transition economies have started to produce commercial accounts, the National made similar progress in this direction, although the Administration of Roads in Romania has been produc- National Highway Authority in Pakistan has recently ing them since 1991, and the Sierra Leone Roads 116 Commercial Management and Financing of Roads Box 9.4 The integrated road management system in Indonesia The current version of the integrated road management * Budgeting: Prepares budget reports from the work pro- system prepares a rolling five-year expenditure plan and gram, assigning estimated costs to relevant budget categories. detailed one- and three-year programs for all periodic, rou- A construction implementation module is still being tine, and holding maintenance and betterment works on developed. This will manage contract procurement, pro- the 51,783 km national and provincial road networks. The vide for detailed engineering and design review under physical needs, costs, and quantities, and the pretender contract, monitor and manage routine maintenance, and documents are all prepared automatically, with some assist in contract supervision and quality assurance. allowance for manual interaction to fine-tune the program The central database is the core resource of the inte- within specified guidelines. Ongoing and committed pro- grated road management system, storing all of the data jects retain their program status, and the system can now that the application modules need to operate and the out- prioritize widening projects in the betterment program on put from those modules. The database also provides the the same economic basis as the entire program. basis for preparing road network statistics and manage- Project identification and program allocation are based ment reports. Similar but smaller databases reside in each on standardized engineering design and are selected and province. These contain all road, traffic, and program data prioritized to optimize economic benefits at the current collected for the province. The database is now structured official discount rate of 15 percent per year. Detailed allo- in seven data groups: cations, contract packaging, and bidding documents are * Administrative data: identifies the regional, province, prepared for the first year of the plan (as well as for com- Wilayah, and Seksi jurisdictions. mencing multiyear projects, such as betterment), and the * Road data: inventory attributes (link description, loca- system can account for other expenditure programs pre- tion reference, road description, road geometry); pave- pared outside of the integrated road management system. ment strength (structure, CBR, BB, deflections, FWD When budgeting constraints are applied, typically to redis- deflections); road condition (roughness, distress, minor tribute projects evenly across a three- to five-year period. structures, and sideworks condition); materials sources They are applied according to the incremental economic (quarry, soil cement zone); and project data (committed benefit gained from not deferring a project for a year. and ongoing projects). The integrated road management system currently * Bridge data: inventory and condition data for bridges comprises a central database and five application mod- longer than 6 m (maintained in the bridge management ules, each of which completes a phase of program and system). project preparation for all roadworks on existing nation- * Traffic data: traffic volume, classification, and loading data. al and provincial roads. The modules are: * Budget data: annual budgets and five-year plan budgets * Planning: Segments the network into design-level for national and provincial roads. homogeneous sublinks and identifies, designs, and eval- * Cost data: unit road works costs and road user cost uates treatment options for a six-year period to develop a parameters. five-year expenditure plan. * History data: historical record of date, type, and costs * Programming: Produces a five-year expenditure plan of works performed on the network. and a detailed first-year roadworks program for a net- The system can develop an economically optimal annu- work, applies any budgetary constraints, facilitates man- al works program and five-year plan, including preliminary ual refinement of program, and groups projects into pre- engineering design, contract packaging, and document tender packages. preparation for more than 6,000 sublinks and 200 con- * Road design: Performs prebid design of works and esti- tracts annually With full implementation in the central road mation of quantities and costs, and prepares bid documents. agency and most provincial roads departments, the inte- * Economic review: Makes formal economic evaluation of grated road management system covers more than 95 per- each contract package to meet requirements of funding cent of the national and provincial network and is among agencies. the most advanced systems in the world. Source: Prepared by WD.O. Paterson for this study Authority has been producing them since 1992. Road the road fund, proceeds from the sale of contract doc- agencies generally start by producing an income state- uments, government grants) together with the expen- ment and a statement of affairs. The income statement ditures associated with operating and maintaining the records the agency's income (for example, income from road network. The statement of affairs is a modest doc- Introducing Sound Business Practices 117 ument that simply lists the fixed assets owned by the results are to be used for illustrative purposes only It road agency (vehicles, plant and equipment, and office is done by multiplying the length of each type of road equipment), money owed to the road agency (debtors), by its estimated replacement cost, adding any required cash in hand, and money that the road agency owes to inflation adjustment to bring book values to their cur- others (creditors). These reforms represent little more rent replacement costs, and adding any new invest- than better bookkeeping arrangements. The next step ment completed during the year. This calculation gives is to turn the statement of affairs into a regular balance the total book value at the end of the year, set at cur- sheet and to add a,cash flow statement, which is a sim- rent replacement costs. plified sources and application of funds statement. The second part of the statement measures the erosion These financial reforms can have a major impact on of capital. It is made up of four items: the rehabilitation managerial behavior. They provide managers with a bet- backlog at the beginning of the fiscal year (the length of ter record of what is happening to the business; moti- road classified as being in poor condition, multiplied by vate them to locate all of their assets,8 assign them a value the average costs of rehabilitating such roads); the and record that value; encourage a culture of managing amount of rehabilitation completed during the year; the assets; and take a first step toward fully costing the over- shortfall in regular recurrent maintenance during the head and administrative expenses of operating and year (routine and periodic maintenance); and the addi- maintaining the road network. Financial reform is thus tional costs of future road rehabilitation caused by short- intimately related to managerial accountability. falls in recurrent maintenance (recall chapter 2 suggest- The next reform focuses on creating a financial state- ed that cuts in road maintenance increase the future cash ment that accounts for the capital invested in roads, the costs of rehabilitation by a factor of two to three). Every impact on this of new investment, and shortfalls in reg- four to five years the rough estimate of the rehabilitation ular road maintenance. It has two parts. The first esti- backlog should be replaced by a more accurate estimate, mates the total book value of the road network at the based on a road condition survey. The sum of these four end of the fiscal year. This value can be estimated either items provides an estimate of the current rehabilitation in great detail, as was done in Hungary (Hungary, backlog. Finally the above figures can be used to estimate Ministry of Transport 1996), or on an approximate the current value of the road network and the erosion of basis. An approximate estimate is acceptable if the capital as a percentage of current book values (table 9.3). Table 9.3 Prototype road asset statement for a road agency (millions of dollars) December 31, 1996 December 31, 1997 Fixed assets Total book value at beginning of yeara 2,030.00 2,035.70 Adjustment for inflation 0.00 0.00 New works completed during the yearb 5.70 3.90 Total book value at end of year 2,035.70 2,039.60 Erosion of capital: Rehabilitation backlog at beginning of yearc -670.00 -714.31 Rehabilitation completed during year 14.95 6.94 Shortfall in recurrent maintenanced -29.63 -26.59 Additional rehabilitation costse -29.63 -26.59 Rehabilitation backlog at end of year -714.31 -760.55 Current value of road network 1,321.39 1,279.05 Overall erosion of capital (percent) 35 37 a. Book values are calculated using the following replacement costs per km: paved, $250.000: gravel, $50,000; and earth. $20,000. b. Investment in new roads and upgrading existing roads. c. Calculated for all roads in poor condition using the following costs per km for rehabilitation: paved roads, $230,000; gravel, $36,000. d. Required maintenance expenditures based on the following annual costs per km: paved, $4,000; gravel, $1,000; and earth, $400. Shortfall is the dif- ference between actual maintenance expenditures (from income and expenditure statement) and required maintenance expenditures. e. A rough estimate based on figures given in chapter 2. 118 Commercial Management and Financing of Roads The third reform focuses on the development of a bet- reporting systerns, and capable of being operated given ter costing system, usually accomplished by setting up existing staffing and other resource constraints. some form of cost accounts. Several countries have already done this, including Finland, New Zealand, Norway, and Sierra Leone, and several developing and Controlling the Quality of Road Works transition economies are doing the same, including Botswana, Georgia, Pakistan, and Yemen (box 9.5). Cost To ensure that they can deliver quality road services, accounts show how resources are used, the purpose for road agencies must have an effective quality assurance which they are used, and how well they serve that pur- system. The modern view of quality assurance is that it pose. In particular, they show how financial performance must go well beyond the usual emphasis on controlling varies over time, among different parts of the road agency, the technical quality of road works. Road agencies are and between work done in-house and under contract. becoming customer-oriented organizations, thus quali- Cost accounts provide the basic raw materials needed to ty must be measured in terms of what customers want operate a maintenance management system effectively. and whether they are willing to pay for it. This means The maintenance management system defines the identifying customers, establishing their needs (surveys amount of work required, while the cost accounting sys- of customer satisfaction by road agencies are becoming tem estimates the cost and whether it will be cheaper to increasingly common), developing a prioritized pro- do the work in-house or under contract. The system gram to meet these needs, implementing the projects, must be kept simple, compatible with existing financial and then monitoring how well the projects perform. Box 9.5 Establishing a commercial cost accounting system for roads in Norway The Norwegian Public Road Administration is in the * Work activities: activities are coded according to the process of installing a comprehensive cost accounting sys- Standard Code of Processes, including about 60 process- tem as part of its management information system. About es. 60 percent of new construction and 25 percent of mainte- * Personnel: all personnel are coded individually by nance is contracted out to private firms. The planning of salary and overhead. all maintenance programs and the remaining 75 percent of * Plant and equipment: each item of equipment is coded routine and periodic maintenance are done in-house. In according to unit costs from a separate equipment man- keeping with the government's stated intention of contin- agement system outside of ECOSYS. Unit costs of equip- uously evaluating the productivity of the Administration's ment include capital costs. in-house civil works operations, a new cost accounting sys- * Materials and supplies: all materials and supplies are tem is being developed and implemented. The aim of this coded separately system is to ensure that work is carried out as planned and * Overheads: these include the cost of headquarters per- cost-effectively. The commercial cost accounting system, sonnel and the estimated rent of offices and workshops ECOSYS, should satisfy the government's new directives based on an evaluation of assets. for all public production units, issued by the Ministry of The operative unit at each county office processes data Finance and the Auditor General's office. ECOSYS has been every second week, based on reports from all personnel, fully operational since January 1, 1998. reports for each individual machine, and standard cost The main goals of ECOSYS are to: reports. The major outputs from the system are monthly * Provide unit costs for work activity and cost centers to and annual reports covering: determine productivity and efficiency on a project-by- * A commercial account separated for the production project and annual basis for each responsibility center. unit in each county showing income, expenditure, and * Monitor expenditures against the budget. balance. * Monitor procurement. * A comparison of budgeted unit costs and actual unit The system of coding runs as follows: costs. * Cost centers and responsibility centers: each cost item * A comparison of unit costs between force account pro- is coded according to project and location. duction units and private contractors. Source: Prepared by 0. Sylte for this study Introducing Sound Business Practices 119 Traditionally, quality was ensured through technical ty. Client requirements must be clearly defined and audits (for design work) and by appointing consultants specifications-or a program or project brief-must be to supervise implementation of works-regularly used agreed upon, setting down the requirements of the for work implemented by contractors and occasional- quality management system and how they are to be ly for work done by in-house staff and equipment. But met. Implementation must be subjected to regular pro- these arrangements are costly, often create an adver- cedural audits. sarial relationship between the two parties, and do not * Controlling quality of operations. Procedures are place responsibility for quality assurance with the party required for controlling the quality of all operational best able to control it. processes. The procedures must define: arrangements Hence came the concept of total quality manage- for coordinating among teams and between office and ment. The idea is to place responsibility for quality site staff; design methods to be adopted; expected out- assurance with the designers and implementers of puts from operations (for example, calculations, draw- works. They are best able to control the quality of the ings, and reports); and how modifications and changes products they produce. Total quality management in scope are to be controlled and approved. requires that they develop their own quality assurance * Document control. The issue, re-issue, and withdraw- procedures and have them certified by an independent al of documents and data must be controlled. The doc- third party. Consistent application of these procedures uments include quality procedures, instructions from is randomly checked by the client (the road agency) the client, project briefs, calculations, drawings, condi- and the supervising consultant. On each major project tions of contract, computer output, and certificates. the implementing organizations are required to pro- * Inspection and testing. The organization is responsi- duce a contract quality plan showing how they intend ble for the quality of all work carried out by subcon- to control quality and how they propose to monitor tractors. The quality control process should allow for their quality management systems. the vetting of subcontractors, contract staff, and spe- To assist with this process, the International cialist consultants. Design procedures must include Standards Organization (ISO) has developed a series of formal checking and approval of all relevant docu- standards for controlling the quality of different types ments and, before handing over completed work, the of works-the ISO 9000 family of standards (UNC- organization must ensure that all procedures identified TAD and WTO 1996). ISO 9001 to 9003 cover quali- ty assurance models for assessment under contractual situations, while other members of the family cover Box 9.6 Terminology associated with total quality quality assurance guidelines, quality system elements, management auditing arrangements, and requirements for measur- Quality: The characteristics of a product or service that ing systems (box 9.6). ISC) 9000 defines the system for bear on its ability to satisfy stated or implied customer total quality management in the following terms: requirements. * Management. Senior managers are responsible for Quality (management) system: The organizational struc- quality assurance and are expected to produce a quality ture, procedures, processes, and resources needed to policy statement, expressirig the overall intentions of the implement total quality management (defined below). Qualitypolicy: The overall intentions and direction of an organization relative to product quality. Managers are organization with regard to quality, as expressed for- expected to ensure that the policy is understood, that the mally by top management. roles and responsibilities of all staff operating within the Quality assurance: All those planned and systematic quality management systern are clearly defined, and that actions needed to satisfy management that a particular this policy is implemented throughout the organization. product will meet given quality standards. Senior managers are respcinsible for implementing any Quality control: The operational techniques and activities Senuiredorrmanagers areconsible for mplmeningany used to check that quality requirements have been met. Total quality management: The organization's approach * Quality (management) system. The organization must to managing quality. establish documented procedures for managing quali- 120 Commercial Management and Financing of Roads in the quality plan have been properly implemented. assurance systems cover all of the road agency's internal All equipment that might have a significant impact on business processes, provision of consulting and con- the final product (for example, survey equipment), tracting services (including materials suppliers), and must be properly cared for. partnering programs designed to improve implementa- * Records. Procedures have to be developed for filing, tion of large civil works projects. The main focus is usu- maintaining, and disposing of records. These should ally on introducing quality assurance systems for phys- include drawings and details of the works along with ical works suppliers and, to a lesser extent, professional audit reports and records of how quality was managed. services. But once a road agency starts requiring quali- * Audits. All elements of the quality management sys- ty assurance systems from its suppliers, it must impose tem must be audited regularly, following clearly docu- the same discipline on itself (see box 9.7). mented procedures. Checking and monitoring of Many consultants in industrial countries are already work, including procedural audits, should be carried accredited, or close to being accredited, under the ISO out by independent personnel. 9001 standard (the specific model for quality assur- A number of road agencies have already either imple- ance in design, development, production, installation, mented ISO 9000 quality assurance systems (FinnRA and servicing). Since evaluating tenders for profes- and Rijkswaterstaat in the Netherlands), are in the sional services provides a small competitive advantage process of implementing them (Transit New Zealand), to firms that have quality assurance accreditation, or have decided to implement partial quality assurance many consultants have voluntarily sought certification. systems that do not necessarily meet the ISO 9000 stan- Quality assurance for physical works tends to pro- dards (Maryland in the United States). The quality ceed faster, driven by the interests of major suppliers Box 9.7 Quality assurance for internal business processes: the case of Transit New Zealand Transit New Zealand proposes to have all of its internal not implementing their procedures fully. This constructive key business processes quality assured by 2000. The key style of auditing provided invaluable learning opportuni- document setting out quality assurance requirements is ties for both the auditors and the staff being audited. The the Project Management Quality Manual, which deals quality assurance procedures were developed primarily by with the delivery of consistent projects to Transfund, regional office personnel to ensure that the staff under- Transit New Zealands main client. The projects are stood the procedures, had an opportunity to suggest defined in broad terms related to the delivery and admin- improvements, and accepted them as fair and reasonable. istration of maintenance and capital improvement pro- An external consultant provided some guidance to ensure jects. But project quality plans can be applied to a wide that the procedures would meet ISO 9001 requirements. range of projects, including large capital projects, one-off The second party audits are expected to continue dur- minor projects, projects of a recurring nature, or projects ing 1997, becoming progressively more rigorous as the with a more administrative character. project quality plans and adherence to quality systems One chapter in the Project Management Quality becomes more widespread throughout Transit New Manual sets down proformas for project quality plans for Zealand's regional offices. A third-party audit by a suitable simple, standard, and complex projects. These proformas accreditation agency will initially be undertaken in the are downloaded from a master file and filled in to suit each first half of 1998 to identify any gaps in the proposed pro- project. They provide the basis of the initial project scop- cedures, with the expectation that a full audit for the pur- ing and help to prepare the request for tender. poses of accreditation to ISO 9001 will occur late in 1998. The development of project quality plans for all projects Implementation of the above quality assurance system involving external suppliers became a standard operating covering 150 in-house staff cost about $35,000 for the procedure in early 1997. The quality assurance audits were external consultants who helped to develop the quality initially carried out in selected regional offices by second assurance system, plus most of the time of one staff mem- parties comprising peers from other regional offices. The ber for nearly two years. Recurrent costs of operating the emphasis was on constructive auditing and process system are less, and operation is done primarily by project improvement, rather than on trying to catch staff who were managers in regional offices as part of their regular jobs. Soure: Prepared by David Rendall for this study. Introducing Sound Business Practices 121 and of the road agency itself. From the road agency's provides a basis for regular reviews, lists detailed actions perspective, quality assurance certification delegates required, and includes the partnering charter. Each of responsibility for achieving quality to the parties best the stakeholders typically displays these charters in able to manage the associaited risks, and it also reduces public places and in their offices. The system often the need for third-party supervision. Typically, a qual- improves project design, encourages local ownership of ity assurance system may increase bid prices by about the project, and may even reduce costs through better 2 percent and reduce supervision by about 30 percent collaboration between the consultant and contractor. (if the supervision fee is 10 percent of the cost of civil In Maryland in the United States partnering was works, the saving in supervision costs comes to about introduced for similar reasons, but with a greater 3 percent of the cost of civil works). emphasis on winning public support and reducing The level of quality assurance depends on the pro- claims. It is again voluntary, with the road agency invit- ject's complexity and size. In New Zealand quality ing the contractor, subcontractors, and suppliers tojoin assurance certification operates at two levels. About a in a voluntary partnering agreement. Federal and local quarter of Transit New Zealand's contracts require prior government agencies are also invited to join as needed. third-party certification of contractors to the higher The arrangement betters communication, speeds up ISO 9002 standard (the specific model for quality decisionmaking, helps resolve disputes, and expedites assurance in production, installation, and servicing). implementation. It has also increased innovation, par- The remainder do not require prior certification-the ticularly in relation to stakeholder interests. The most contractor simply develops and works according to a spectacular impact of the Maryland partnering program contract quality plan after the contract has been award- has been on the contractor's claims for payments over ed. These quality plans are considered commercially and above the original bid price. On nonpartnered pro- sensitive and are not readily available. In Finland the jects claims were running at nearly 20 percent of the bid quality assurance system is designed primarily to pro- price (settled at slightly more than 5 percent), while on duce uniform quality and to encourage the contractors partnered projects they are running at zero. Partnered to produce high quality products. It does this by using projects also show impressive savings in terms of the the individual quality measurements to produce an extra work time spent with extra work costs running at overall quality index, whiclh is in turn used to compute less than half those of nonpartnered projects. a quality bonus worth up to 5-6 percent of the con- Total quality management and partnering are clear- tract price. Actual bonuses have been running at about ly not panaceas that can be applied to all road agencies 1-2 percent of the contract price. in all countries. Third-party certification is not an easy Partnering offers a slightly different approach to thing to achieve-at least using domestic resources- quality assurance in that it is more concerned with the since the skills required are often not available outside quality of design and implementation, particularly of the main road agency itself and can be expensive for when projects may have adverse environmental effects smaller-scale contractors. But all road agencies should and hence low resident support. It is usually done on a aspire to a total quality management system and voluntary basis, and the roard agency tries to ensure that should at least start to consider second-party certifica- it is not seen to be driving the process for its own ends. tion of all internal business processes by their own In New Zealand partnering is used for major projects regional staff and selected third-party certification of and involves an initial one and a half day workshop for major suppliers (such as bitumen suppliers). Another all key stakeholders. The stakeholders usually include option might be to require third-party certification of the client (Transit New Zealand), consultants, contrac- contractors as part of the process of registering them as tors and subcontractors, affected property owners, the qualified to undertake certain types of road works. concerned local authority, and the traffic police. The Partnering might also be considered in a form adapted workshop is managed by a professional facilitator and to suit local conditions. It offers such important bene- has to produce a partnering monitoring matrix that fits that some attempt should be made to develop a documents the shared objectives of the stakeholders, framework applicable at least to very large projects. 122 Commercial Management and Financing of Roads Managerial Autonomy and Accountability Box 9.8 Basic principles governing the preparation The last issue is that of autonomy Greater autonomy is of contract plans normally one of the cornerstones of a more commer- The contract plan should be developed jointly by the cial approach to management. For more than 20 years road agency and the government, and formally ratified the World Bank has been urging governments to grant by both. It is primarily an implementing document, not more autonomy to the managers of parastatals. The a planning document, and will usually be based on the road agency's corporate plan or similar statement of objective was to reduce political interference in man- corporate intentions. agement decisions, develop a more commercial man- It should take the form of a clearly written document agerial outlook, reduce overstaffing, and strengthen ratifying and committing both the road agency and the accountability. The same rationale applies to road agen- government to the road agency's objectives and policy cies. Road managers will not behave commercially choices defined in its corporate plan. It should clarify until the road agency is more autonomous and man- who has the authority to make decisions, clearly spec- agers are held accountable for their performance. And ify those areas where government review or approval is necessary, and set down the road agency's performance managers cannot be held accountable unless they have goals (in terms of road conditions, staff productivity, sufficient freedom to sign and award contracts, are and financial targets). offered reasonable terms and conditions of employ- The performance goals should be simple, mutually ment, and operate without outside interference. consistent, and restricted to those items that define the The first step required to strengthen managerial direction of development and measure the performance of senior management. The contract plan should also include accountability is thus to specify clear objectives and, sementfe ment cmtn ich a statement of related government commitment, whiich based on these, set monitorable targets. This should be may include budgetary support, regulatory changes, and done in a written document, usually by preparing a potential changes in labor laws and procedures. corporate plan and using it as the basis for negotiating Source: Prepared by L. Thompson for this study. a performance contract with the parent ministry (box 9.8). In some cases the parent ministry sets targets for the road agency, and the business plan then spells out road projects or during annual and mid-term reviews how the agency intends to meet these targets during of such projects. Or, they produce reports that are the ensuing year (as in the United Kingdom). In others designed primarily to serve public relations needs. the road agency drafts its own performance agreement The annual report should cover such topics as the and then negotiates the final version with the parent road agency's mission, its main policies, any changes ministry (as in New Zealand); In Ghana the road in legislation, the core road program, maintenance agency prepares a three-year rolling corporate plan and strategies, donor funding, personnel policies, and uses the first year of the plan to draw up a draft per- community participation. It may also include sections formance contract, which is then agreed on with the on special topics like labor-based road works, devel- parent ministry. The performance contracts generally opment of the local construction industry, and opera- spell out the government's goals for the road agency tion of toll roads. The annual budget, the annual state- strategies for achieving them, and procedures for ment of accounts, and the auditor's report on the implementation, monitoring, and control. Monitoring accounts must also be covered. The main road agen- is usually done in terms of the sort of indicators out- cies in countries like Finland, Namibia, New Zealand, lined in table 9.2. Romania, South Africa, and the United Kingdom pro- Reporting systems are also an important tool for duce fairly comprehensive annual reports, either on strengthening managerial accountability and should be their overall operations or on their financial perfor- produced on a regular basis using the sort of indicators mance. All road agencies should do the same. included in the above performance contracts. Very few Effective auditing is also an important tool for road agencies produce such reports. Most simply pro- strengthening managerial accountability. Most audit- duce ad hoc reports when preparing donor-financed ing is done by the government audit office that checks, Introducing Sound Business Practices 123 on a sample basis, information on the amounts and dis- vision statement the parent ministry is increasingly set- closures in the road agency's financial statements. They ting a series of quantified performance targets that the also assess whether the accounting policies used are road agency is expected to meet. appropriate, consistently applied, and adequately dis- * Most countries are actively trying to separate plan- closed. A few countries are also starting to use private ning and management of roads from the implementa- sector auditors to carry ouit the financial audit, or to use tion of road works to reduce conflicting responsibili- well-known firms of international auditors (as in ties and subject implementation of road works to more Latvia, Romania, and Sierra Leone). market discipline. They have generally either assigned These auditors generally do not carry out any tech- the procurer and producer functions to separate divi- nical auditing, although such auditing is often com- sions, divided the road agency into separate client and pleted as part of the road agency's internal audit func- civil works orzanizations, or have contracted out all tion, or is done on an ad hoc basis by the government producer functions. audit office. More consistent technical and financial * When work is contracted out, the road agency has auditing, along the same lines as that done for many to choose between different forms of contracts and the road funds, would be an improvement. Only then can type of specifications to be used. With regard to the one be sure that the funds disbursed have been spent form of contract, there is a choice between lump-sum, on the approved expenditure program and the work admeasure, cost-reimbursable, and target-cost con- has been done according to specifications. tracts. Most road agencies in developing and transition countries favor price-based contracts, particularly admeasure contracts. Key Conclusions and Recommendations * With regard to specifications, there is a choice between procedural and functional specifications. With The above discussion leads to the following general procedural specifications, the client defines what work conclusions and recommendations: is to be carried out. These specifications are tradition- * In terms of both assets and turnover, main road ally used for roads, however, they require a lot of super- agencies and toll road authorities are well up among vision and provide few incentives to encourage the con- the Fortune Global 500. The Japan Highway Public tractor to innovate. These have led to a gradual move Corporation manages assets equal in volume to those toward functional specifications, in which the client of General Motors and has a turnover comparable to defines the desired level of service required and leaves Dow Chemicals. Roads are thus big business and the contractor to find the best way of meeting the per- deserve to be managed as such. formance requirements. Functional specifications have * Public sector road agencies are likely to function resulted in large cost savings, but are probably too com- more efficiently when they are faced with some form of plicated for most developing and transition economies. competition or a competition surrogate. Strategies to * Other innovations in contracting procedures include improve managerial performance thus need to con- the letting of combined routine and periodic mainte- centrate on strengthening market discipline and pro- nance contracts, multi-year maintenance contracts, and viding managers with incentives to operate efficiently. contracts covering several roads within an entire geo- The corollary is that managers need to work within an graphical area. Concessions to design, build, finance, organization that can respond to market discipline. and operate selected roads are now being let for periods * The first task is to state clearly the road agency's cor- of 15 to 30 years. Several other changes in contracting porate mission: what is it supposed to be doing and for procedures are also being tried to encourage innovation. whom? This is usually set down in a vision statement Some contracts require the contractor to design, con- that expresses a desire to serve the road user, the envi- struct, and guarantee a road pavement for a specified ronment, and the taxpayer by making the road net- period of time, while on heavily trafficked roads induce- work safer, more reliable, more environmentally ments are being offered to encourage the contractor to acceptable, and more efficient. In the context of this complete road works as quickly as possible. 124 Commercial Management and Financing of Roads * Efforts to contract more work out to the private sec- patible with the scarce manpower resources needed to tor generally must be accompanied by initiatives to operate them, and be capable of being incrementally develop the local consulting and construction indus- upgraded when resources permit. All road agencies tries and train road agency staff about preparation of should at least have a visual inspection and monitor- bid documents, contracting procedures, contract law, ing system that can be used to raise awareness of main- and arbitration procedures. tenance needs. - The emphasis on establishing a more comrnercial- * Standard government accounting systems, which ly oriented road agency and contracting out means focus almost exclusively on cash accounting, do not that the road agency will need fewer staff with differ- present a clear picture of the road agency's overall ent qualifications. A fairly efficient road agency should financial health and are not capable of producing the be able to plan and manage the road network with financial data needed to plan expenditures and account about five or less staff per 100 km. On networks with for the way funds are used. A number of road agencies heavy traffic, the number may rise to 10 per 100 km. are therefore restructuring their accounting systems The balance of the work would be done by contrac- along commercial lines. They are generally moving tors, who might employ about 10 staff per 100 km toward regular commercial accounting systems with using capital- intensive construction and maintenance income statements, balance sheets, and cash flow state- techniques, or 50 per 100 km using labor-intensive ments. Many of the benefits of commercial accounting techniques. systems can be achieved with relatively simple reforms * Any reduction in the size of the road agency must that lie within the capacity of most road agencies. be accompanied by improved terms and conditions of * A relatively simple financial innovation involves service, particularly for managers and older staff with preparing a financial statement that clearly shows the experience. Restructuring and downsizing are likely to amount of capital invested in roads, the impact of new create redundancies. This is usually dealt with by offer- investment, and-most important-shortfalls in regu- ing incentives to staff to take early retirement, separat- lar maintenance. A more extensive reform focuses on ing all commercial activities into specialized units and developing better costing systems based on some form helping the staff to form separate commercial enter- of cost accounts. Cost accounts show how resources prises, assisting in-house laborers to become small- are used, for what purpose, and how well they serve scale contractors, and offering exit packages to the that purpose. Several countries are developing cost remaining redundant staff. accounts to support their new commercial accounting * Many road agencies are in the process of restructur- systems. ing their management systems to create a more com- * To ensure they can deliver quality road services, mercial system with a chief executive and five or six road agencies need to have an effective quality assur- line managers responsible for the main line functions. ance system. The traditional way of ensuring quality Staffing structures have been simplified, layering has was through technical audits. However, these are cost- been reduced, new job descriptions have been pre- ly, often create an adversarial relationship between the pared to reflect the new responsibilities of each section, parties, and do not place responsibility for quality and new career and reward systems have been intro- assurance with the party best able to control it. Hence duced. Most road agencies have also opted for a decen- the concept of total quality management-responsibil- tralized regional structure to place staff closer to the ity for quality assurance rests with the organizations customers they serve. carrying out the works, that is, with the designers and * Road agencies are working actively to develop road implementers. Total quality management requires that management systems to enable them to generate and they develop their own quality assurance procedures evaluate alternative ways of maintaining, improving, and have them certified by an independent third party. and extending the road network. The systems should Application of these procedures is then randomly not be too complicated. They should be affordable, suit checked by the client (the road agency) and the super- the decisionmaking needs of the road agency, be com- vising consultant. Introducing Sound Business Practices 125 * The International Standards Organization (ISO) has fore turning their main road agencies into more developed a series of standards for controlling the qual- autonomous arm's-length agencies operating under an ity of different types of works. A number of road agen- annual performance agreement with the parent min- cies have already either implemented ISO quality istry. To strengthen accountability, road agencies are assurance systems, are in the process of implementing also being required to publish indicators to measure them, or have decided to implement partial quality their performance and to publish comprehensive assurance systems that do not necessarily meet the ISO annual reports. More rigorous technical and financial standards. The systems tend to cover quality assurance auditing is also being used. systems for all the roaci agency's internal business processes, quality assurance systems covering provi- sion of consulting and contracting services (including Notes materials suppliers), and partnering programs 1. 'The Global 500." Fortune, August 5, 1996. designed to improve implementation of large civil 2. The estimated value of the assets of some other road agencies works projects. are: Transit New Zealand, $5 billion; the Public Roads * Total quality management is not a panacea that can Department in Hungary, $4 billion; FinnRA, $25-28 billion; be applied to quality control in all countries. Third- French Directorate of Roads, $132 billion; and Japan Road party certification is not an easy thing to achieve since Bureau, $235 billion. p ci t s ai si 3. Weak governance plagues many road contracts. Variation the skills required are often not available outside of the orders are a favored device for generating gratification payments main road agency itself and can be expensive for small- and can increase contract costs by as much as five times over er-scale contractors. However, all road agencies should the initial bid price. aspire to an eventual total quality management system 4. Payment includes an annual lump sum paid in monthly install- and might at least start to consider second-party certi- ments, a supervision fee for discrete maintenance, improvement or joint maintenance-improvement activities, and time charge fication of all internal business processes by their own fees for design and preparation of contract documents, mainte- regional staff and selected third-party certification of nance work valued at less than $150,000, and design and prepa- major suppliers. Another option might be to require ration of contract documents for all improvement works. third-party certification of contractors as part of the 5. These contracts are known as design, build, finance, and process of registering them as qualified to undertake operate contracts. certain types of road works. 6. During the construction period, the Finnish design, build, * Partnering offers a slightly different approach to finance, and operate contract includes penalties for neglecting quality assurance in thatiitismorecoe to provide a traffic management plan, a fixed sum per day for full closure of the road, a lane closure fee during maintenance quality of design and implementation, particularly periods paid per 10 minute period, and a lane closure fee for when projects may hLave adverse environmental every day the lane is closed. impacts and hence low resident support. It is usually 7. The operation revenue is all the revenue derived from the annu- done on a voluntary basis, and the road agency tries to al production contract with FinnRA, plus revenue from work ensure that it is not seen to be driving the process for done for outside clients. The operating result is the revenue less its own ends. The system often improves the project expenses and depreciation. Investment is the capital invested in itsswn, ends.rages local ownership of project, and equipment, buildings, borrow pits, property, stockpiled materi- design, encourages local ownership of project, and als, and work in progress, less current liabilities, which is the may even reduce costs through better collaboration sum of all credits for goods received, but not yet paid for. The between the consultant and contractor. gross margin is the operation revenue less operating expenses. * Finally, there is the question of managerial autono- 8. When the Ministry of Works in New Zealand was commer- my, which is one of the cornerstones of a more com- cialized and required to prepare regular commercial accounts, mercial approach to management. Managers cannot be it was astonished to learn how much land and other assets it held accountable unless they have sufficient freedom owned and how much these assets were worth. FinnRA has helsignand accountable uonl ts,t have suffiiend free e likewise identified that it owns 6,300 pieces of land (1,100 are gravel pits and stone quarries) and 1,800 buildings on another terms and conditions of employment, and operate 550 pieces of land. Thirty percent are surplus to requirements, without outside interference. Many countries are there- are being sold, and are expected to realize at least $70 million. Part IV. Annexes Annex 1. ILength of Road and Estimated Asset Values in Selected Countries (kilometers) Total Total Main Main Secondary Secondary Tertiary Tertiary asset network paved unpaved paved unpaved paved unpaved value' Country l'ength length length length5 length lengthb length (US$ million) Argentina 115,810 30,912 5,893 36,389 42,616 0 0 13,426 Chile 35.111 11,559 9,265 692 13,595 0 0 4,144 Ghana 14,750 6,000 8,750 0 0 0 0 1,665 Hungary 29,600 6,800 0 22,800 0 0 0 4,238 Indonesia 69,238 27,326 0 41,912 0 0 0 11,148 Jordan 7,041 2,843 0 2,116 0 2,082 0 820 Kazakhstan 87,523 15,876 1,186 40,063 30,398 0 0 10,391 Korea, Rep. of 31,194 12,052 60 12,508 4,810 0 0 4,870 Pakistan 54,843 6,580 0 48,263 0 0 0 5,739 Russia 465,895 35,978 4,223 238,631 187,063 0 0 41,963 SouthAfrica 331,266 6,100 33 55.564 269,569 0 0 21,017 Thailand 51,126 43,428 7,698 0 0 0 0 10,707 Uruguay 8,629 3,475 0 2,268 1,855 206 825 1,080 Note: Earth roads are not included for any country. a. Most often these are regional or provincial roads. b. Only those tertiary networks that are managed by a national road agency c. Value of bridges included, taken as additional 5 percent of total value of road network. 129 Annex 2. The Inverse Elasticity Rule T his Annex presents a simple exposition of the The overall loss of welfare is minimized by equating S inverse elasticity rule as it might be used to deter- across all user groups: mine an optimal set of road-user charges. The question is how to mobilize a given amount of revenue from (1) S= elA T1 = e2A T2=..= enA Tn, each group of road users (cars, buses, trucks) in a way that minimizes overall welfare loss by all user groups. where S represents the welfare gain associated with Heuristically, this problem involves minimizing the relaxing the revenue constraint, 1, 2, ... n represent the overall loss of welfare suffered by all road users by different user groups, and T1, T2, ... Tn represent the rel- equalizing the deadweight loss per dollar of revenue ative mark-up of price over the final gross price (AP/P;). raised from each user group. This is the familiar inverse elasticity rule: The ratio The rule will be illustrated in terms of a simple of the relative mark-up of user group 1 over user group example which assumes that short-run marginal costs 2, T1/T2, is inversely proportional to the ratio of their of road use are constant (that is, there is no congestion), respective own-price elasticities of demand, e2A/elA. cross-price elasticities are small enough to be ignored The solution is illustrated in figure A2.2. Note that with (that is, the travel demand for each user group is inde- a constant demand elasticity, the lines representing pendent of the demand of the other user groups), and group 1, group 2, and group n are straight; otherwise that relevant elasticities are compensated demand elas- ticities (see figure A2. 1). When the price of road use is Figure A2. 1 Loss of consumer surplus when price raised from P (where it is equal to vehicle operating is raised costs plus the short-run marginal costs of road use) to P', the deadweight loss per dollar of revenue raised, S, is equal to the triangular area ABC divided by the addi- tional net revenue raised, DCAE. In other words: p E A S = -1/2(AP*ANM/(AP*N) = -1A/ANIN' Short-run 2 marginal where AP= (P'- P), AN= (N- N). cost P BJI D C Since the compensated own-price point elasticity of demand eA evaluated at point A is defined to be: (AN/N)I(AP/P), S can be rewritten as: S = 0.5eA(AP/P). N' N Volume of traffic per time period 130 Annex 2. The Inverse Elasticity Rule 131 Figure A2.2 Equalizing the deadweight loss per dollar income effect is thought to be important, the compen- of revenue raised sated demand elasticity should be used. It is equal to Deadweight loss per dollar of tax revenue, S Deadweight lo's per dollar of tax revenue, S the ordinary demand elasticity plus the proportion of the household budget spent on transport multiplied by the income elasticity of demand for transport. When Group I the cross-price elasticities of demand between the dif- Group 2 ferent user groups are significant, the relevant cross- price elasticities should be subtracted: eA4= (e,1A - e2lA). Group N In practice, empirical estimates of the price elastici- ty of demand by different road users are subject to wide margins of error (see Oum, Waters, and Yong 1990). Recent estimates vary from: 0.10 to 1.1.0 for a car, 0.10 to 1.30 for a bus, to 0.70 to 1.10 for a truck. This vari- ance reflects the fact that demand elasticities depend on market conditions, which vary widely throughout the road network. It is therefore unwise to use average or typical demand elasticities to estimate road-user charges. Instead, it is better to use uniform mark-ups Relative price markup T A ~PP (that is, to assume demand elasticities are equal) and to use differential mark-ups only when accurate and consistent country-specific values are available. they are curved. Finally, when roads are congested and short-run The revenue generated by the above mark-ups is: marginal costs are not constant, the analysis must include the supply elasticities, which greatly compli- (2) R = TIP'N1' + T2P2'N2' + ... TrP,N' cates the analysis. = APINI'+ AP2N2 + *-- + APnNn', Note where N'l ... N,n represents the volume of each type of 1. The trial and error method goes as follows: Choose a starting traffic at the final traffic levels and AP, = Pi* [T/(I - T)], value for S and solve equation 1 for T,. Estimate AP, = Pi*[T/(l i=1,.,n. - T)]. Assume N, is approximately equal to N,. Calculate the Since the values of P, eA, and R are known, the only implied value of R from equation 2 and compare it to the actu- al value of R. If the implied value is less than the actual value, choose a higher value for S and repeat the calculation. The val- mated from equations 1 and 2 using trial and error or ues converge after three to five iterations. Finally, check whether a simple numerical algorithm. I AP, is large enough to make NI' significantly lower than N,. If Empirical estimates of the price elasticity of demand so, replace N, with a new estimate of NJ' and repeat the above for transport generally ignore income effects. When the calculations. Annex 3. Estimating Road-User Charges: A Worked Example This annex takes a hypothetical road network and, road class computed using the World Bank's HDM using the pricing and cost recovery policies model, which is based on data collected from develop- developed in chapter 7, estimates the user charges ing and transition economies worldwide. The figures required to ensure that: the costs of operating and in the attachment represent medium-size VOCs, maintaining the main trunk roads managed by the agency costs, and climatic (environment) conditions. If main road agency are fully funded, the grants made necessary, adjust or change the default unit annual to road agencies managing urban and rural roads are maintenance needs required to maintain each road sufficient to ensure that their maintenance programs class on a sustainable basis.2 are also fully funded, and sufficient funds are avail- * Estimate the costs of operating and maintaining the able to finance investment in main roads, support entire road network on a sustainable basis. The entire investment in urban and rural roads, and meet debt road network includes main trunk roads managed by service obligations. The estimates were prepared the main road agency; rural roads managed by the using the Road User Charges Model, version 2.0, main road agency, states, provinces or rural district developed by Ian Heggie and Rodrigo Archando- councils; and urban streets and avenues managed by Callao.I urban district councils or municipalities (see table The hypothetical road network consists of 8,550 km A3. 1). of trunk roads managed by the main road agency * Using the above costs, prepare an outline financing (7,500 km are paved); 66,000 km of rural roads man- table (table A3.3) defining all yearly needs for mainte- aged by the main road agency, states, provinces, or nance and investment to establish which costs have to rural district councils; and 5,300 km of urban roads be met through user charges. These costs will include managed by urban district councils or municipalities the entire costs of the main trunk road network and (see table A3. 1). Traffic volumes vary from 300 vpd to part of the costs associated with rural and urban roads. 10,000 vpd on paved roads (with 30 percent trucks), The remaining costs are assumed to be met with local from 50 vpd to 300 vpd on gravel roads, and are 25 revenues (such as parking charges and local property vpd on earth roads. The vehicle fleet consists of taxes). 351,000 vehicles (see table A3.2). About 8 percent are * Define the characteristics of vehicles using the road trucks and buses, which account for more than 20 per- network (table A3.2) and compute the variable costs cent of annual vehicle-kilometers. Average annual dis- attributable to each type of vehicle (table A3.4). Table tances traveled vary from 18,000 to 25,000 km for A3.2 also provides an estimate of total annual fuel con- cars, to 50,000 km for most trucks, to 80,000 km for sumption. taxis, buses, and articulated trucks. * Enter the current fuel levy, along with the annual There are six main steps to the analysis: license fees and, where relevant, the axle-loading * Review the road agency's annual financial needs for charge (that is, supplementary heavy vehicle license annual (routine and recurrent) and periodic mainte- fees) to ensure that: each vehicle class covers its vari- nance set out in attachment 1. It contains default road able costs and all vehicles together generate sufficient class descriptions and unit maintenance needs for each revenues to cover all the costs included in the outline 132 Annex 3. Estimating Road-User Charges: A Worked Example 133 Table A3.1 Yearly agency needs for maintaining the road network on a sustainable basis Road class Vehicle Annual maintenance Periodic maintenance Road Road Traffic Length utilization (M$/yr) (M$/yr) network type (vpd) Description (km) (M veh-km/yr) Fixed Variable Total Fixed Variable Total Main roads: Paved 300 30% Trucks/Loading: Low 3,400 372 3.40 0.08 3.48 7.21 4.12 11.33 Trunk roads 600 30% Trucks/Loading: Low 1,890 414 1.89 0.09 1.98 6.45 2.37 8.82 managed 1,000 30% Trucks/Loading: Low 880 321 0.88 0.05 0.93 3.77 0.74 4.51 by main road 3,000 30% Trucks/Loading: Low 1,150 1,259 1.15 0.14 1.29 6.85 1.20 8.05 agency 6,000 30% Trucks/Loading: Low 110 241 0.11 0.02 0.13 0.68 0.12 0.80 10,000 30% Trucks/Loading: Low 70 256 0.07 0.01 0.08 0.44 0.10 0.53 Total 7,500 2,863 7.50 0.40 7.90 25.41 8.64 34.05 Gravel 50 Importance: Primary 450 8 0.23 0.14 0.36 0.41 0.04 0.45 100 Importance: Primary 380 14 0.19 0.17 0.36 0.35 0.08 0.42 200 Importance: Primary 180 13 0.09 0.11 0.20 0.16 0.09 0.26 300 Importance: Primary 40 4 0.02 0.03 0.05 0.04 0.03 0.07 Total 1,050 40 0.53 0.44 0.97 0.95 0.24 1.20 Total 8,550 2,903 8.03 0.84 8.87 26.36 8.88 35.24 Rural roads: Paved 300 30% Trucks/Loading: Low 2,000 219 2.00 0.05 2.05 4.24 2.42 6.67 Rural roads Total 2,000 219 2.00 0.05 2.05 4.24 2.42 6.67 managed by Gravel 50 Importance: Primary 10,000 183 5.00 3.00 8.00 9.09 0.91 10.00 main road 100 Importance: Primary 10,000 365 5.00 4.50 9.50 9.09 2.02 11.11 agency, states, 200 Importance: Primary 4,000 292 2.00 2.40 4.40 3.64 2.08 5.71 or district Total 24,000 840 12.00 9.90 21.90 21.82 5.01 26.83 councils Earth 25 Importance: Primary 40,000 365 10.00 6.48 16.48 n.a. n.a. n.a. Total 40,000 365 10.00 6.5 16.5 n.a. n.a. n.a. Total 66,000 1,424 24.00 16.43 40.43 26.06 7.43 33.49 Urban Paved 300 30% Trucks/Loading: Low 1,700 186 1.70 0.04 1.74 3.61 2.06 5.67 streets and 600 30% Trucks/Loading: Low 300 66 0.30 0.01 0.31 1.02 0.38 1.40 avenues: 1,000 30% Trucks/Loading: Low 300 110 0.30 0.02 0.32 1.29 0.25 1.54 Urban roads 3,000 30% Trucks/Loading: Low 1,200 1,314 1.20 0.14 1.34 7.15 1.25 8.40 managed by 6,000 30% Trucks/Loading: Low 500 1,095 0.50 0.09 0.59 3.11 0.53 3.65 district 10,000 30% Trucks/Loading: Low 400 1,460 0.40 0.08 0.48 2.49 0.55 3.04 councils or Total 4,400 4,230 4.40 0.39 4.79 18.67 5.03 23.69 municipal- Gravel 50 Importance: Primary 900 16 0.45 0.27 0.72 0.82 0.08 0.90 ities Total 900 16 0.45 0.27 0.72 0.82 0.08 0.90 Total 5,300 4,247 4.85 0.66 5.51 19.48 5.11 24.59 n.a. Not applicable. financing table (table A3.3). These calculations are needs come to $227.78 million, including $54.8 mil- shown in tables A3.5-A3.7. lion for annual maintenance (24 percent), $93.33 * Find an optimal set of user charges (the axle-load- million for periodic maintenance (41 percent), and ing charge and the fuel levies), using the Solve option the balance of $79.65 million for investment (35 per- in Excel, that equilibrates revenues and financial cent). Of this total, $141.14 million would be needs, while also minimizing the surplus of road-user financed through road-user charges (62 percent) and revenues over costs. These calculations are shown in the balance through local revenues. The optimal tables A3.8-A3.1O. road-user charges required to generate these revenues Finally, tables A3. 11 to A3.13 provide a summary vary from 1.47 cents per km for a car (gasoline), to of yearly road agency needs, how they might be 1.14 cents per km for a light truck and 1.86 cents per financed, the road-user revenues generated by cur- km for a bus, to 4.21 cents per km for an articulated rent user charges and the optimal charges, and the truck. current unit road-user charges and the optimal The optimum axle-loading charge works out to be charges. Table A3. 11 shows that total road agency $96.47 per ESA per year, while the fuel levies work out 134 Commercial Management and Financing of Roads Table A3.2 Characteristics of vehicles using the road network Kilometers Equivalent Vehicle Loading Fuel driven standard axle Fuel utilization Impact consumption Number of per year per vehicle consumption veh-km/yr ESA-km/yr l/yr Vehicle type vehicles (km/yr) (ESA/veh) (1/ veh-km) (million) (million) (million) Car, gasoline 220,000 18,000 0.000 0.08 3,960 0 317 Car, diesel 80,000 25,000 0.000 0.10 2,000 0 200 Taxi, gasoline 0 0 0.000 0.08 0 0 0 Taxi, diesel 4,000 80,000 0.000 0.10 320 0 32 Utility 20,000 35,000 0.001 0.09 700 1 63 Light truck 2,000 50,000 0.100 0.15 100 10 15 Medium truck 11,600 50,000 1.250 0.20 580 725 116 Heavy truck 3,600 70,000 3.000 0.25 252 756 63 Articulated truck 6,000 80,000 5.000 0.35 480 2,400 168 Bus 4,400 80,000 0.500 0.25 352 176 88 Totala 351,600 8,744 4,068 1,062 a. Vehicle utilization from table A3.1 is 8,573 million veh-km/yr, which corresponds closely with the figure of 8,744 million veh-km/yr produced by this table. Table A3.3 Yearly needs and financing subdivided into main cost components (million dollars per year) Yearly needs Recurrent Fixed Variable Expenditure type costs costs Investments Total Recurrent Main roads Annual maintenance 8.03 0.84 8.87 expenditures Periodic maintenance 26.36 8.88 35.24 Traffic enforcementa 2.35 1.00 3.35 Administrationb 4.40 1.90 6.30 Interest chargesc 5.50 0.00 5.50 Total 46.64 12.62 59.26 Rural roads Grants for maintenanced Annual maintenance 24.00 16.43 40.43 Periodic maintenance 26.06 7.43 33.49 Total 50.06 23.86 73.92 Urban streets and avenues Grants for maintenanced Annual maintenance 4.85 0.66 5.51 Periodic maintenance 19.48 5.11 24.59 Total 24.33 5.77 30.10 Total 121.03 42.25 163.28 Investments Main roads 25.00 25.00 Debt service ! repayment 15.00 15.00 Grants for rural roadse 4.50 4.50 Grants for urban streets and avenuese 20.00 20.00 Total 64.50 64.50 Total 121.03 42.25 64.50 227.78 Variable costs that vary with vehicle utilization (annual maintenance, traffic enforcement, administration and interest) 20.83 Variable costs that vary with axle loading (periodic maintenance) 21.42 42.25 a. In this example an estimated 70 percent of traffic enforcement costs are fixed. Annex 3. Estimating Road-User Charges: A Worked Example 135 to be $0.08 per liter for gasoline and $0.05 per liter for $150 for a car, $621 for a medium-weight truck, diesel fuel. The combined annual vehicle license fee $1,289 for a heavy truck, $1,982 for an articulated and supplementary heavy vehicle fee work out to be truck, and $500 for a bus. Financing Financed by user charges Recurrent Fixed Variable Financed by local revenues costs costs Investments Total (%) Total 8.03 0.84 8.87 26.36 8.88 35.24 2.35 1.00 3.35 4.40 1.90 6.30 5.50 0.00 5.50 46.64 12.62 59.26 Percentage of fixed 0.00 16.43 16.43 100 24.00 0.00 7.43 7.43 100 26.06 0.00 23.86 23.86 Percentage 50.06 of fixed 0.00 0.66 0.66 100 4.85 0.00 5.11 5.11 100 19.48 0.00 5.77 5.77 24.33 46.64 42.25 88.89 74.39 25.00 25.00 Percentage 15.00 15.00 of total 2.25 2.25 50 2.25 Percentage of total 10.00 10.00 50 10.00 52.25 52.25 12.25 46.64 42.25 52.25 141.14 86.64 b. In this example fixed costs include expenditures on buildings and 70 percent of headquarters salaries. c. In this example interest charges on road loans are fixed costs. d. User charges cover all variable costs and, in this example, local revenues cover 100 percent of fixed costs. e. In this example local revenues cover 50 percent of the grants for investments for rural roads and urban streets and avenues. 136 Commercial Management and Financing of Roads Table A3.4 Road-user charges required to cover variable costs Variable cost requirements(MSfyr) Vehicle Charges to cover variable cost (c/veh-km) Vehicle Loading utilization Vehicle Loading Vehicle type related related Total veh-km/yr (million) Related related Total Car, gasoline 9.43 0.00 9.43 3,960 0.24 0.00 0.24 Car, diesel 4.76 0.00 4.77 2,000 0.24 0.00 0.24 Taxi, gasoline 0.00 0.00 0.00 0 0.00 0.00 0.00 Taxi, diesel 0.76 0.00 0.76 320 0.24 0.00 0.24 Utility 1.67 0.00 1.67 700 0.24 0.00 0.24 Light truck 0.24 0.05 0.29 100 0.24 0.05 0.29 Medium truck 1.38 3.82 5.20 580 0.24 0.66 0.90 Heavy truck 0.60 3.98 4.58 252 0.24 1.58 1.82 Articulated truck 1.14 12.64 13.78 480 0.24 2.63 2.87 Bus 0.84 0.93 1.77 352 0.24 0.26 0.50 Total 20.83 21.42 42.25 n.a. n.a. n.a. n.a. n.a. Not available. Table A3.5 Current license fees, axle loading charges, and fuel levies Standard Equivalent Axle loading license fee standard axle license fee Vehicle type ($/veh-yr) (ESA/veh) ($/veh-yr) Car, gasoline 150 n.a. n.a. Car, diesel 200 n.a. n.a. Taxi, gasoline 0 n.a. n.a. Taxi, diesel 150 n.a. n.a. Utility 150 n.a. n.a. Light truck 200 n.a. n.a. Medium truck 500 1.25 125 Heavy truck 1,000 3.00 300 Articulated truck 1,500 5.00 500 Bus 500 n.a. n.a. Not available. Axle loading charg ($1ESAlyr) 100.00 Gasoline levy-gasoline cars and taxis ($/1) 0.10 Diesel levy-diesel cars, taxis, buses, and trucks ($/1) 0.08 Table A3.6 Current unit and total road-user revenues Unit road-user revenues(c/veh-km) Vehicle Total road-user revenues (M$/yr) Fuel Standard Axle loading utilization Fuel Standard Axle loading Vehicle type levy license fee license fee Total veh-km/yr (million) levy license fee license fee Total Car, gasoline 0.80 0.83 0.00 1.63 3,960 31.68 33.00 0.00 64.68 Car, diesel 0.80 0.80 0.00 1.60 2,000 16.00 16.00 0.00 32.00 Taxi, gasoline 0.80 0.00 0.00 0.80 0 0.00 0.00 0.00 0.00 Taxi, diesel 0.80 0.19 0.00 0.99 320 2.56 0.60 0.00 3.16 Utility 0.72 0.43 0.00 1.15 700 5.04 3.00 0.00 8.04 Light truck 1.20 0.40 0.00 1.60 100 1.20 0.40 0.00 1.60 Medium truck 1.60 1.00 0.25 2.85 580 9.28 5.80 1.45 16.53 Heavy truck 2.00 1.43 0.43 3.86 252 5.04 3.60 1.08 9.72 Articulated truck 2.80 1.88 0.63 5.30 . 480 13.44 9.00 3.00 25.44 Bus 2.00 0.63 0.00 2.63 352 7.04 2.20 0.00 9.24 Total n.a. n.a. n.a. n.a. n.a. 91.28 73.60 5.53 170.41 n.a. Not available. Annex 3. Estimating Road-User Charges: A Worked Example 137 Table A3.7 Variable costs and total costs Charges needed to Current unit road- Current user Current user Variable user cover variable costs user revenues revenues > revenues charges needed- cost surplus Vehicle type (c/veh-km) (c/veh-krn) charges needed (c/veh-km) (M$/yr) Car, gasoline 0.24 1.63 Yes 1.40 55.2 Car, diesel 0.24 1.60 Yes 1.36 27.2 Taxi, gasoline 0.00 0.80 Yes 0.80 0.0 Taxi, diesel 0.24 0.99 Yes 0.75 2.4 Utility 0.24 1.15 Yes 0.91 6.4 Light truck 0.29 1.60 Yes 1.31 1.3 Medium truck 0.90 2.85 Yes 1.95 11.3 Heavy truck 1.82 3.86 Yes 2.04 5.1 Articulated truck 2.87 5.30 Yes 2.43 11.7 Bus 0.50 2.63 Yes 2.12 7.5 Total n.a. n.a. n.a. 15.07 128.2 n.a. Not available. Total financing needs (M$/yr) 141.12 Total revenues (M$/yr) 170.41 Revenues - financing needs (M$/yr) 29.27 Table A3.8 Optimal axle loading charge and fuel levy S'tandard license fee Equivalent standard axle Axle loading license fee Vehicle type ($/veh-yr) (ESA/veh) ($/veh-yr) Car, gasoline 150 n.a. n.a. Car, diesel 200 n.a. n.a. Taxi, gasoline 0 n.a. n.a. Taxi, diesel 150 n.a. n.a. Utility 150 n.a. n.a. Light truck 200 n.a. n.a. Medium truck 500 1.25 121 Heavy truck 1,000 3.00 289 Articulated truck 1,500 5.00 482 Bus 500 n.a. n.a. n.a. Not available. Axle loading charg ($/ESA/yr) 96.47 Gasoline levy-gasoline cars and taxis ($/1) 0.08 Diesel levy-diesel cars, taxis, buses, and trucks ($/1) 0.05 Table A3.9 Optimized unit road-user revenues and total road-user revenues Unit road-user revenues (clveh-km) Vehicle utilization Total road-user revenues M$/Ir) Fuel Standard Axle loading veh-krn/yr Fuel Standard Axle loading Vehicle type levy license fee license fee Total (million) levy license fee license fee Total Car, gasoline 0.64 0.83 0.00 1.47 3,960 25.27 33.00 0.00 58.27 Car, diesel 0.50 0.80 0.00 1.30 2,000 9.91 16.00 0.00 25.91 Taxi, gasoline 0.64 0.00 0.00 0.64 0 0.00 0.00 0.00 0.00 Taxi, diesel 0.50 0.19 0.00 0.68 320 1.59 0.60 0.00 2.19 Utility 0.45 0.43 0.00 0.87 700 3.12 3.00 0.00 6.12 Light truck 0.74 0.40 0.00 1.14 100 0.74 0.40 0.00 1.14 Medium truck 0.99 1.00 0.24 2.23 580 5.75 5.80 1.40 12.95 Heavy truck 1.24 1.43 0.41 3.08 252 3.12 3.60 1.04 7.76 Articulated truck 1.73 1.88 0.60 4.21 480 8.33 9.00 2.89 20.22 Bus 1.24 0.63 0.00 1.86 352 4.36 2.20 0.00 6.56 Total n.a. n.a. n.a. n.a. n.a. 62.20 73.60 5.33 141.14 n.a. Not available. 138 Commercial Management and Financing of Roads Table A3. 10 Variable costs and total costs Charges needed Optimized unit Optimized to cover road-user Optimized user user revenues - Variable user variable costs revenues revenues > charges needed cost surplus Vehicle type (c/veh-km) (c/veh-km) charges needed (c/veh-km) (M$/yr) Car, gasoline 0.24 1.47 Yes 1.23 48.8 Car, diesel 0.24 1.30 Yes 1.06 21.1 Taxi, gasoline 0.00 0.64 Yes 0.64 0.0 Taxi, diesel 0.24 0.68 Yes 0.44 1.4 Utility 0.24 0.87 Yes 0.64 4.5 Light truck 0.29 1.14 Yes 0.85 0.9 Medium truck 0.90 2.23 Yes 1.34 7.7 Heavy truck 1.82 3.08 Yes 1.26 3.2 Articulated truck 2.87 4.21 Yes 1.34 6.4 Bus 0.50 1.86 Yes 1.36 4.8 Total n.a. n.a. n.a. 10.17 98.9 n.a. Not available. Total financing needs (M$/yr) 141.14 Total revenues (M$Iyr) 141.14 Revenues - financing needs (M$/yr) 0.00 Notes Bank's HDM model, or the default values supplied in attach- 1. The model can be accessed and down-loaded from the World ment i can be replaced by other default values-reflecting dif- Bank's transport web page located at http://www-int.world- ferent VOCs, agency costs, traffic composition, loading, and , . ,. , , . ^ ^ ~~~environmental conditions-by using the Excel model bank.org/fpsi/infra/transport/. It appears in the Rural Roads & e Highways knowledge base under Databases & Software. (PNEEDS1OXLS for paved roads and UNEEDS.XLS for 2. More accurate costs can be computed by using the World unpaved roads) supplied with the Road User Charges Model. Annex 4. Review of Selected Road Funds Japan: Road Improvement Special Account the remainder is transferred to local governments as motor vehicle liquid petroleum gas transfer tax. Japan introduced a special funding system for roads in * Seventy-five percent of the motor vehicle tonnage 1954, coninciding with the introduction of the first tax ($51 per half ton per year) is paid into the special five-year road improvement program. At the end of the account, while the remainder is transferred to local war there were about 130,000 motor vehicles in Japan, governments as the motor vehicle tonnage transfer tax. but this figure jumped to one million by 1953, and it At the local level tax revenues earmarked for roads became clear that the road network-which was out- are allocated among the various road authorities as fol- dated and in poor condition-had to be improved. lows: These five-year rolling lprograms were designed to * The liquid petroleum gas tax is spent on roads in the bring the Japanese road system into the twentieth cen- Tokyo Metropolitan Area, Hokkaido, prefectures, and tury and to adjust to the rapid growth in motor vehi- designated cities. cles. Since then, the five-year road improvement pro- * The motor vehicle tonnage tax is spent on roads in grams have been renewed and implemented cities, towns, and villages. continuously to provide road users with better driving * Forty-three percent of the local gasoline tax ($0.05 conditions and to provide people living in urban areas per liter) is spent on roads in the Tokyo Metropolitan with better access to the countryside. Area, Hokkaido, prefectures, and designated cities, The new funding system for roads involved ear- while the other 57 percent is spent on roads in cities, marking certain road-related taxes and depositing them towns, and villages. into a special account, or road fund. This funding sys- * The local diesel fuel tax ($0.31 per liter) is spent on tem was introduced to meet the needs of the postwar roads in the Tokyo Metropolitan Area, Hokkaido, pre- road improvement program and was "based on the con- fectures, and designated cities. cept that road users who enjoy the benefits of improved - Thirty percent of the motor vehicle purchase tax (5 roads should bear the burden for their improvement" percent of the purchase price for private motor vehi- (that is, it was based on the user pay concept). cles) is spent on roads in the Tokyo Metropolitan Area, The road fund employs an elaborate system of ear- Hokkaido, and prefectures, while the other 70 percent marked national and local taxes to finance the mainte- is spent on roads in cities, towns, and villages. nance, improvement, and construction of national, Earmarked revenues at both the national and local prefectural, and local roads. At the national level tax levels are supplemented by general tax revenues and, revenues earmarked for roads are allocated among the in the case of the national government, are also various road authorities as follows: deposited into the Road Improvement Special Account * Twenty-five percent of the gasoline tax ($0.12 per to ensure comprehensive management of the funds. liter) is transferred to the road improvement special Revenue from user fees in 1995 was roughly $30 bil- account. lion. * Half the motor vehicle liquid petroleum gas tax Funds from the Road Improvement Special Account ($0.14 per kg) is paid into the special account, while are provided to road authorities on a cost-share basis. 139 140 Commercial Management and Financing of Roads The central government finances half the costs of main- person has traditionally been the president of Japan taining directly managed national highways. The Road Association (always a former undersecretary from remaining costs are financed by prefectural govern- the Ministry of Construction), but is currently the for- ments and designated large cities. The central govern- mer president and chairperson of Nissan Corporation. ment also finances two-thirds of the costs of improv- Board members include representatives of the motor ing directly managed national highways, 70 percent of industry, business community, trade unions, academia, the national expressway network, and 50 percent of and local government. Much of the Council's substan- subsidized national highways, main local (prefectural) tive work is carried out by three subcommittees: one roads, and main local (municipal) roads. deals with road policy, one with toll roads, and the Road spending in Japan is based on five-year road other with environmental issues. The Council has no improvement programs prepared by the Ministry of permanent secretariat, but is serviced by staff from the Construction. The process worked well up until the start Roads Bureau of the Ministry of Construction. of the Ninth Road Improvement Program. Programs Day-to-day management of the road fund is carried were prepared and approved, and corresponding tax out by the General Affairs Division of the Roads rates were then written into a new proper tax law, which Bureau. They have about 12 staff who are responsible ensured that the road fund generated sufficient funds to for forecasting revenues, liasing with Ministry of cover costs during the next five-year period. But in 1982 Finance, and monitoring use of funds by the other divi- a concerted effort was made to abolish the road fund and sions of the Roads Bureau and the prefectures. Each of replace it with allocations from the government's con- these divisions (for example, the Expressway solidated budget. Although a roads board was in place- Corporation and the Highway Division) and the pre- the Japan Road Council-up to that point it had played fectures have two or more accountants who monitor a relatively nominal role relative to the road fund. The the expenditure programs and report back to the role and duties of the Council are laid down in article 77 General Affairs Division. Expenditures on roads in of the Road Law. The law held that a Council must be cities, towns, and villages are monitored by the prefec- established by the Ministry of Construction at the tures who then report back to the General Affairs request of the minister. Among other things, the Council Division on programs supported by the road fund. is asked to, "deliberate on management of the road fund The road fund acts like a line of credit. Once parlia- and on toll road financing and advise the Minister on ment has approved the overall spending limits, the changes necessary to reorient road financing. Ministry of Construction can draw down the funds Faced with this crisis of the road fund, the Ministry regardless of the actual revenue in the road fund of Construction asked the Road Council to conduct an account at the central bank (that is, the government inquiry and make recommendations regarding how provides working capital). Contractors are paid direct- the overall road network should be developed as the ly after work has been inspected by an experienced country approached the twenty-first century. Their Ministry of Construction engineer who has not been report, Proposal for Road Improvement Approaching the involved in planning or implementing the work. Work 21st Century, not only set the future direction of the carried out by prefectures and designated cities is also road program, but also saved the road fund and estab- inspected by Ministry of Construction engineers. lished the credibility of the Road Council. Since then, All work financed from the road fund is subjected the Ministry of Construction has always asked the to an audit by the Japanese Institute of Audits, which Road Council to submit its views on a long-term strat- is independent of the government and influential egy for road improvement as part of the preparations amongst the public. The audit is conducted on a sam- for the Five-Year Road Improvement Program. ple basis, targeting several specific works per office. The Council was established in 1952 and consists of The audit team visits the work office, examines control a chairperson and 12 other members. The members are procedures and financial records, and dispatches civil nominated by the director general of roads and are engineers to inspect the selected work sites. Problems appointed by the minister of construction. The chair- and queries are resolved with the Ministry of Annex 4. Review of Selected Road Funds 141 Construction and the audlit report is then submitted to by a unit within the Land Transport Safety Authority at parliament. a cost of about $ 10 million (including $5 million spent on enforcement). A number of agencies sell the weight- distance certificates, including the New Zealand Post Transfund New Zealancl (approximately 50 percent), BP petrol stations, Vehicle Testing New Zealand, Vehicle Inspection New Zealand, The original road fund in New Zealand was established New Zealand Automobile Association, and AMI in 1953. In 1989 the roacl fund was renamed the Land Insurance. There is also an arrangement whereby oper- Transport Fund and its rnanagement fund was trans- ators can buy licenses from their own offices by way of ferred to Transit New Zealand, which had been set up a remote terminal. The overall costs are about $1 to $2 in 1989. But since the road fund was used to finance per transaction. Evasion accounts for about 12 percent Transit New Zealand's road program, as well as those of revenues (9.4 percent from heavy vehicles and 2.8 of the Regional Councils and District Councils, there percent from light vehicles) and legal avoidance for was thought to be a conflict of interest. Thus on July 1, about 7 percent of net revenues. 1996 the Transit New Zealand Amendment Act came * Motor vehicle registration fees are expected to gener- into effect, creating a new agency called Transfund New ate about $104 million in 1996. The collection is man- Zealand (Transfund). Management of the road fund aged by the Land Transport Safety Authority at a cost of was therefore separated firom Transit New Zealand and about $19.3 million (nearly 19 percent of total rev- placed under the jurisdiction of a separate manage- enues). Similar agencies sell the registration certificates: ment board. New Zealand Post, Vehicle Testing New Zealand, Vehicle The board consists of five members: two represent- Inspection New Zealand, the Automobile Association, ing Transit New Zealand (either employees or members and AMI Insurance. The extent of evasion is unknown. of the Transit New Zealand Authority), one represent- * Interest and sale of surplus property are minor ing local government, one representing road users, and items. But payment of interest recognizes that the one representing other aspects of the public interest. funds held by the Treasury belong to Transfund and Members are appointed by the governor-general on the that short-term borrowing must be paid for. recommendation of the responsible minister. The * Reimbursement of GST is at a rate of one-ninth of chairperson is appointed by the governor-general from the expenditures made by the Land Transport Fund to among the existing members of the board. compensate for payment of GST on all revenues The revenue for the road fund comes from: a fuel received by the road fund. excise added to the price of gasoline, weight-distance The main objective of the board is to "allocate charges paid by diesel vehicles, motor vehicle registra- resources to achieve a safe and efficient roading sys- tion fees, interest earned on the road fund account, rev-. tem." In this connection its key functions are to: enues earned from sale of surplus property, and refund * Approve and purchase a national roading program of the GST (the New Zealand equivalent of a value- from the various road agencies, including capital pro- added tax) . jects. * The fuel excise in 1996 was set at about $0.065 per * Approve the competitive pricing procedures applic- liter (the total excise tax on gasoline was $0.21 per able to the roading program. liter) and is expected to generate about $204 million. * Audit the performance of Transit New Zealand and The funds are collected by the New Zealand Customs, local authorities against their respective roading pro- which is paid about $414,000 (about 0.2 percent of the grams. revenue) to cover their costs. Evasion is negligible since * Provide advice and assistance to local authorities in the funds are collected at source at New Zealand's only relation to the new Transfund Act. refinery or at ports of entry. Transfund has 36 staff members, including a chief * Weight-distance charges are expected to generate executive who is appointed by the board. The chief about $293 million in 1996. The collection is managed executive appoints all other staff members. They 142 Commercial Management and Financing of Roads include four policy staff, four administrative staff, eight Transfund staff, and the Review and Audit Division car- programming and contracts staff, nine audit staff, and ries out audits every three years to ensure that mini- ten staff in seven regional offices. mum maintenance standards and service levels are Transfund manages the National Roads Fund, which being maintained by each road authority. To further has been reconstituted from the old Land Transport refine the method of allocating maintenance funds, a Fund. The key changes are the new management struc- project has recently been launched to determine the ture and the removal of the need for separate decisions best way of estimating optimal maintenance funding on the funding level and the expenditure program. The levels for the different road authorities. government still sets the charges that determine the The Review and Audit Division carries out system- inflows to the road fund, but no longer determines the atic reviews and appraisals of activities wholly or part- outflows. Once the costs of police and the Land Transport ly funded from the road fund. The chief executive Safety Authority have been met, the balance of the rev- reports to the board and, in exceptional circumstances, enues are available for use by Transfund without any fur- may report directly to the chairperson. One of the con- ther controls. In other words, the charges are still being ditions for providing funds to the road authorities is collected as if they were taxes, but Transfund is now that they provide all the information and cooperation wholly responsible for what happens to the revenues. necessary to enable the division to review and audit the The specific responsibilities of Transfund are to: correct application of these funds. The aim of the * Prepare the Annual National Roading Program. audits is to ensure that the funds have been used in an * Recommend to the government income and expen- efficient and effective manner. The division monitors diture levels needed to support the Program. outputs in relation to stated performance measures and * Advise on the suitability of the Land Transport sys- tests compliance with agreed plans. The latter include tem. Transit New Zealand's Statement of Intent, the Land * Fund the approved projects within the Program. Transport Programs prepared by the local authorities, * Make payments to road agencies to finance the and the policies and decisions of Transfund. approved projects. The division visits the regional offices of Transit New The National Land Transport Plan is thus the basic Zealand and the Local Authorities at appropriate inter- building block for Transfund's short-term and long- vals and reviews their internal systems (including term activities. It is built up from bids submitted by accounting and related systems) to confirm that they are Transit New Zealand and the local authorities. The bids being operated correctly and in conformity with the var- are subject to checks on the reasonableness and appro- ious Acts and policies of Transfund. The division carries priateness of supporting benefit-cost calculations, out this work under the standards for internal auditing before projects are ranked in order of priority. laid down by the New Zealand Institute of Internal Maintenance is accorded highest priority, with other Auditors. Technical and economic audits are made on a projects ranked in order until all available funds are regular, planned basis about every five years, while pro- used (the current cut-off benefit-cost ratio is 4). cedural audits are made every three years. The purpose Maintenance requirements are based on a combina- of the procedural audits is to assess the accuracy of the tion of professional judgment and the outcome of the financial assistance claims made by the road authorities Road Assessment Maintenance Management System and the extent to which the road authorities are com- (RAMM). RAMM is a computerized pavement man- plying with Transfund's policies with regard to the cus- agement system that includes road inventory (road tody, recording, and utilization of road fund resources. condition) and treatment selection for determining work programs based on engineering and economic criteria. Transfund requires that all road agencies wish- United States: Federal Highway Trust Fund ing to receive funds from the road fund base their esti- mated funding requirements on RAMM. Road author- The United States established the Highway Trust Fund ity requests are vetted on an ongoing basis by in 1956 to finance the federal share of the interstate Annex 4. Review of Selected Road Funds 143 highway network and support most other federal-aid Trust Fund revenues are derived from a variety of highway projects. Later amendments extended fund- highway user taxes, including: motor fuel taxes on ing to other transport programs as follows: gasoline, diesel, and gasohol; a graduated tax on tires * The Highway Safety Act of 1966 made funds avail- weighing 40 lbs. or more; a retail tax on selected new able for state and community road safety programs. trucks and trailers; a heavy-vehicle use tax on all trucks * Inl982thescopewas widenedtopermitthefinanc- with a gross vehicle weight (GVW) of more than ing of mass transit. 55,000 lb.; and interest on the Trust Fund balance. Tax * In 1991 the Intermodal Surface Transportation rates are adjusted as part of the regular budgetary Efficiency Act (ISTEA) confirmed the new role of the process. In 1995, the tax rates were: gasoline, 12 Highway Trust Fund as an "Intermodal Fund" by cents/gallon; diesel, 18 cents/gallon; special fuels, 12 extending support to high-speed rail lines and bike cents/gallon; tires, sliding incremental scale which trails. varies from 15 cents/lb. to 50 cents/lb. over 90 lbs.; a The funding system involved earmarking certain 12 percent tax on the retail price of trucks over 33,000 road-related taxes and depositing them into a special lbs. GVW and trailers over 26,000 lbs. GVW; $100 account, or road fund. The special account was intro- plus $22 for each 1,000 lbs. over 55,000 lbs. GVW up duced primarily to finance construction of the inter- to a flat fee of $550 for trucks over 75,000 lbs. GVW; state highway network and was based on the user-pay and interest at about 6.75 percent per year. In 1995 the concept. The concept involves two elements: first, the revenues from the above tax rates were $ 17.323 billion user pays, and, second, the government credits the (about two-thirds from gasoline), $395 million, $2.0 user fees directly to a highway special account to avoid billion, $682 million, and $548 million, respectively, confusing them with other government revenues. The giving a total of $20.967 billion for the year. An addi- user-pay concept is well established in the United tional $2.8 billion was paid into the Mass Transit States. All but six states now dedicate their user-fee Account during the year. revenues to special highway or transportation Some vehicles, like school buses and state, local gov- accounts. ernment, and nonprofit vehicles are exempted from The U.S. Federal Highway Trust Fund exists only as paying federal highway motor fuel taxes. In addition, an accounting mechanism. The taxes earmarked for fuels purchased for off-highway uses (such as agricul- the Trust Fund are deposited into the general fund of ture and industry) are exempt from these taxes. Off- the U.S. Treasury, and a paper transfer of these taxes highway uses are dealt with by coloring untaxed diesel is made to the Trust Fund as needed. Earmarked tax and testing nonexempt diesel vehicles to ensure they revenues in excess of those required to meet current are using regular (taxed) fuel. expenditures are invested in public debt, and interest The federal-aid highway program is a reimbursable earned is credited to the Trust Fund. The Trust Fund program. The states are allocated a line of credit against finances the federal-aid highway program, adminis- which they can draw to meet obligations. Funds are tered by the Federal Highway Administration allocated on the basis of formulas that, though not per- (FHWA). Since 1982 a portion of the Fund has also fect, are difficult to change. The U.S. Government been used to finance mass transit projects adminis- Accounting Office has recently criticized these formu- tered by the Urban Mass Transportation las, but concluded that, "because the selection of a Administration. Revenues from the highway portion highway apportionment formula is a judgment for the of the Trust Fund are used to reimburse states for Congress, GAO is making no specific recommenda- expenditures on approved projects. These include tions." In other words, the allocation formulas are (at heavy maintenance (reconstruction, rehabilitation, least in the United States) highly political. The formu- and resurfacing), road improvement, new construc- las are relatively simple and generally use variables like tion, road safety programs, studies, and other high- population, road mileage, and traffic density. For way-related expenditures. The Trust Fund does not example, heavy maintenance funds are allocated currently finance regular maintenance. according to the following formula: 144 Commerrial Management and Financing of Roads (interstate lane miles/total interstate miles)*0.55 + and approval. (vehicle miles on interstate roads/total interstate * Claims are certified by FHWA (this is a formality, vehicle miles) *0.45 certification is automatic). This formula means that the average allocation per state * Certified schedules are submitted to the Treasury. is about 2 percent of total maintenance allocations, sub- * The federal share is transferred to a state bank ject to each state receiving a minimum allocation of 0.5 account by electronic transfer. percent. Allocations do not cover all costs, but general- Each state participating in the scheme is required by ly cover 80 percent of costs or, in the case of mainte- law to carry out an annual audit. The audits are normally nance, 90 percent of costs (funds from the Highway carried out by outside auditors and cover financial mat- Trust Fund are provided on a cost-share basis). In look- ters, compliance, and internal control procedures (that ing at this allocation formula, the General Accounting is, the audit is more extensive that a purely financial Office suggested consideration of two alternatives: audit in that it also covers control procedures). Staff from Alternative 1: Distribution based equally on total FHWA also check these procedures on an ad hoc basis. lane miles and total vehicle miles traveled. There is no formal technical audit. Staff from FHWA Alternative 2: Distribution based equally on total used to carry out field inspections but they do not any lane miles, interstate vehicle miles traveled, and longer because of staff shortages. However, occasional state population. field inspections are still carried out. Payment for work financed through the Highway FHWA is also subjected to an annual audit to ensure Trust Fund is made in the following way: it follows established procedures and can account for * Work is done by a contractor. funds spent. * The contractor is paid by the state. About 3,000 staff manage the federal-aid highway * Vouchers for reimbursement (usually covering sev- program. They are stationed in Washington, D.C. and eral project withdrawals) are sent to FHWA for review in each of the states. Annex 5. Draft Road Fund Administration Bill A Bill Part II-Establishment of Administration entitled 3. There is hereby established a body to be known as An Act to make provision for the establishment of the the National Road Fund Administration of ........ which National Road Fund Administration (the shall- Administration) and for purposes connected therewith (a) be a body corporate with perpetual succession; and incidental thereto. Enacted by the Parliament of (b) have a common seal; ....... as follows: (c) be capable of- (i) acquiring, holding and disposing of real and personal property; Part I-Definitions (ii) suing and being sued in its corporate name; and 1. This Act may be cited. as the National Road Fund (iii) doing or performing all such acts and things Administration Act, 199... and shall come into force on as a body corporate may legally do or perform. such date as the Minister shall, by notice published in the Gazette, appoint. 4. The purpose of the Administration shall be to- (a) ensure that public roads are maintained and 2. In this Act, unless the context otherwise requires- rehabilitated at all times; "Administration" means the National Road Fund (b) raise funds for the maintenance and rehabilita- Administration; tion of public roads; and "Board" means the Board of Directors of the National (c) advise the Minister on- Road Fund Administration; (i) The preparation and the efficient and effective "Secretary" means the Executive Secretary of the implementation of the annual national roads pro- National Road Fund Administration; gram referred to in Part VII; and "Minister" is the minister responsible for public (ii) The control of overloading of vehicles on pub- roads .. ; lic roads. "Public road" has the same meaning as that ascribed to it in the Public Roads Act;2 "Road" has the same meaning as that ascribed to it Part III-Board Of Directors in the Public Roads Act; "Road agency" includes any institution or body, 5. (1) The operations of the Administration shall be whether or not incorpcirated, charged under any law managed and controlled by a Board that shall consist with the responsibility of, or, designated as a road of the following members to be appointed by the agency by the Minister, by notice published in the Minister- Gazette, for purposes of maintaining, rehabilitating, (a) Four ex-officio members, being nominees of or developing public roads. each of the following Ministries: 145 146 Commercial Management and Financing of Roads (i) Ministry of Finance, the functions of the Board consisting of some members (ii) Ministry of Works; and such other persons with prescribed qualifications, (iii) Ministry of Transport and Communications; and define the objectives of such groups or commit- and tees. (iv) Ministry of Local Government. (2) The provisions of this Act relating to meetings of (b) Six nongovernmental members, being nominees the Board shall apply mutatis mutandis to the meetings elected from the following constituencies: of the committees. (v) Chamber of Commerce and Industry; (3) The Board shall appoint the Chairperson of each (vi) Bus and Taxi Operators Association; committee from among the inembers of the board. (vii) Road Transport Operators Association; (viii) National Association of Tourism Operators; 8. The Board may in its discretion, at any time and for (ix) Institution of Engineers; and any length of period invite any person to attend any (x) National Farmers Association. deliberations of the Board, but such person shall not (c) Two other nongovernmental members, being be entitled to vote on any matter at any meeting of the nominees of the Board. [Alternatively, two members, board. being nominees of one urban and one rural district coun- cil]. 9. The office of a member, other than an ex officio (2) All ex officio members shall not be officers hold- member, shall be vacated- ing office below the level of Director or equivalent and (a) upon the expiry of the period of appointment; shall be appointed by their respective ministers. (b) upon his death; (3) The members of the Board shall, at the first meet- (c) if his nomination is withdrawn by the organiza- ing of the Board, elect a Chairperson and Vice tion he represents; Chairperson from among their members. The (d) if he is adjudged bankrupt; Chairperson shall be endorsed by the Minister. (e) if he is sentenced for an offense against any writ- (4) Members of the Board shall not, by virtue only ten law to a term of imprisonment of, or exceeding, of their appointments to the Board, be deemed to be six months, otherwise than as an alternative to, or officers in the public service. in default of, the payment of a fine; (5) The names of all members of the Board as first (f) if he is convicted of an offense involving fraud or constituted and every change in membership there- dishonesty; after shall be published in the Gazette by the Minister. (g) if he has been absent from three consecutive (6) A member of the Board, other than an ex officio meetings of the Board of which he has had notice member, shall hold office for a period of three years without the permission of the Chairperson; or from the date of his or her appointment and shall be (h) if, in the opinion of the Board, he becomes by eligible for re-appointment for one further term at the reason of mental or physical infirmity, incapable of expiration of that period. performing his duties as a member of the Board. 6. If a member of the Board acquires any pecuniary inter- 10. (1) The Board shall meet at such place and at such est, direct or indirect, in any contract, proposed con- times as the Chairperson may determine and shall meet tract, or in any other matter in which private interests at least once per month. conflict the duties as a member and that is the subject of (2) Ordinary meetings of the Board shall be con- consideration by the Board, shall, as soon as he or she is vened by at least fourteen days written notice to the aware of the interest in the contract, proposed contract, members by the Chairperson. The Chairperson may, at or any other matter, disclose such facts to the Board. his discretion, and shall at the written request of not less than four members of the Board and within seven 7. (1) The Board may appoint such number of com- days of such request, convene a special meeting of the mittees as may be necessary for the proper discharge of Board to transact any extraordinary business on a date Annex 5. Draft Road Fund Admninistration Bill 147 specified in the request. A written notice shall be ties, levies, or any other sums to be collected under addressed and sent to the rnembers at least three days this Act and paid into the Fund; prior to the date of the meeting. (e) to identify and recommend to the Minister donor (3) The Chairperson or, in his absence, the Vice funding for the maintenance, rehabilitation, and Chairperson shall preside at each meeting of the Board. development of public roads; The quorum necessary for the transaction of the busi- (f) to establish the allocation criteria to be used to ness shall be five members present at any meeting of divide moneys among the various road agencies; the Board. (g) to ensure that road agencies carry out effective (4) When the Chairperson and Vice Chairperson are monitoring of the condition of all public roads for both absent, the members present shall appoint a the purpose of timely implementation of road main- Chairperson to preside at the meeting. tenance, rehabilitation and development programs: (5) Subject to the provisions of this Act, the Board (h) to institute an integrated and coordinated may make standing orders for the regulation of its pro- approach to planning of road works by establishing ceedings and business or the proceedings and business the form and content of the Annual Road Program; of any of its committees and may vary, suspend, or (i) to provide guidance and establish procedures to revoke such standing orders. be followed in the preparation of the Annual Road (6) The minutes of every meeting of the Board shall Program by the various road agencies; be recorded in a register by the secretary of the Board (j) to review and approve the Annual Road Program; and confirmed at the next succeeding ordinary meet- (k) to establish procedures for disbursing funds for ing. the Annual Road Program; (7) The Board decisions shall be taken by the major- (1) to prepare, publish, and submit to the Minister ity vote and, when the votes are equal, the audited annual accounts of the Fund; and Chairperson has a casting vote, with dissenting mem- (m) to publish periodic reports on the activities and bers having the right to have their views recorded in achievements of the Administration and make the the minutes. reports available to the general public. (8) Members of the Board shall be paid from the road fund such allowances as the Board may, subject to the 12. Subject to the Finance and Audit Act, the Board approval of the Minister, determine and the Board may may raise on behalf of the Administration, moneys by make provision for the reimbursement of any reason- way of loans or bank overdrafts on such reasonable able expenses incurred by a member of the Board or a terms and conditions as the Board may in writing agree committee of the Board in connection with the busi- with the lender. ness of the Board or the committee. 13. The Board shall be responsible and accountable to the Minister for ensuring efficiency, transparency and Part IV-Functions and Powers of the Board propriety in the- (a) collection and utilization of public funds under 11. The functions of the Board are: this Act; (a) to administer and manage the road fund; (b) conduct of its business; and (b) to ensure that all tenders for the maintenance, (c) operations and activities of the Administration. rehabilitation, and development of public roads are conducted through open and competitive bidding, 14. [The legislation will often include a special section here in a transparent and fair manner; outlining the procedures to be followed and penalties that (c) to improve arrangements for collecting road-user may apply if the Minister has reason to suspect that the charges to minimize avoidance and evasion; Board has failed in its performance, has performed any act (d) to recommend to the Minister, from time to time, without due authority, or has willingly participated in any appropriate levels of road-user charges, fines, penal- fraudulent activity.] 148 Commercial Management and Financing of Roads Part V-Secretariat external body of persons, corporate or undesignat- ed. 15. (1) The Board will be assisted by a Secretariat head- ed by an Executive Secretary. The Secretariat shall be 17. (1) The purpose of the Fund shall be to finance- responsible for the day-to-day management of the (a) the administrative expenses associated with the Administration and for implementation of the deci- execution of the duties and responsibilities of the sions of the Board. Authority and the management of the Fund; (2) The Executive Secretary shall be appointed by (b) routine, recurrent, and periodic maintenance of the Board and shall perform such functions as the public roads; Board may direct or delegate to him or her. The (c) on a cost-sharing basis, the routine, recurrent, Executive Secretary will also act as secretary to the and periodic maintenance of local government Board. roads and of undesignated roads, tracks, and (3) The terms and conditions of employment of the trails; Secretariat shall be decided by the Board based on a (d) any monetary contribution required to be made comparison of best practices in other similar organiza- by the Government for the implementation and exe- tions. cution of a donor-funded project for the mainte- nance, rehabilitation, or development of any public road; Part VI-Establishment of the Road Fund (e) such road safety projects as the Board may deter- mine; 16. (1) There is hereby established a fund to be known (f the enforcement of the limits on weights and as the Road Fund. dimensions of vehicles; and (2) The Fund shall consist of- (g) research related to the maintenance and devel- (a) such road-user charges as may, from time to time, opment of roads. be determined by the Minister, by order published (2) Any surplus from the road fund, not exceeding in the Gazette, on the recommendation of the Board; ..... percent of the total revenue collected or estimat- [or, alternatively, "such road user charges as may from ed to be collected in any financial year, may be uti- time to time, be determined by the Administration and lized to finance such minor road works including published in the Gazette in accordance with the relevant upgrading of existing public roads as the Board may, provisions of any regulations made under section 25; ] on the recommendation of the road agencies, (b) such sums that may be appropriated by approve. Parliament for purposes of the Fund; (c) such sums or assets as may accrue to or vest in 18. The Board shall ensure that in any financial year the Fund whether in the course of the exercise by expenditures and commitments from the Fund shall the Board of its function or powers, or otherwise; not exceed the annual income of the Fund. If, howev- (d) grants, subsidies, bequests, donations, gifts, and er, in exceptional circumstances, the income of the subscriptions from Government or any other per- Fund together with any surplus income brought for- son; ward from a previous year, is insufficient to meet the (e) the sale of any property, real or personal, by or actual or estimated liabilities of the Administration, the on behalf of the Administration; Minister of Finance may make advances to the Fund in (f) sums received by the Fund by way of voluntary order to meet the deficiency or any part thereof and contributions; such advances shall be made on such terms and con- (g) penalties and fines imposed on overloaded vehi- ditions, whether as to repayment or otherwise, as the cles; and Minister may determine, provided that such advances (h) sums that may be donated or loaned by any for- shall be repaid from the income of the Fund in the next eign government, international agency, or other financial year. Annex 5. Draft Road Fund Administration Bill 149 Part VII-Annual Road Program(s) dures,and criteria established by the Board; and the effectiveness of the management of the road fund. 19. An Annual Road Program(s) shall be prepared at (4) The Board shall, as soon as is practicable, but not least three months before the start of the new fiscal year later than six months after the end of the financial year in such form and containing such details as may be pre- of the Administration, submit to the Minister an annu- scribed by the Board. The Program (s) shall be prepared al report on all the financial transactions of the road by the road agencies responsible for maintaining the fund and on the work, activities, and operations of the road network or by agents designated for this purpose Administration. by the Board. (5) The Authority shall at all times comply with the provisions of the Finance and Audit Act. 20. The Board shall review the Annual Expenditure Program(s) decide on- 24. (1) All sums received for the purposes of the (a) the affordability of the overall program(s); and Administration shall be paid into a banking account, (b) the appropriateness of the amounts allocated for and no amount shall be withdrawn therefrom except each class of road. under the authority of the Board and by means of checks signed by such persons as are authorized in that 21. The Board shall transmit to the Minister of Public behalf by the Board. Works and Housing and the Directors of other road (2) Any part of the road fund not immediately agencies together with the Minister of Finance the required for the purposes of the Administration may, approved Annual Road Program(s). on the recommendation of the Board, be invested in such manner as the Board may, in its discretion, deter- 22. Pursuant to Section 11, the Board may recom- mine. [The legislation may limit these investments to bills mend a rise in the level of the road tariff to ensure it carrying a Standard and Poors or Moodys rating of "A" or generates sufficient revenues to finance the approved better.] Annual Road Program(s) and shall provide the Minister (3) The financial year of the Authority and the Fund with an estimate of the additional income to the road shall be the period of twelve months commencing on fund from such increases. the 1st of April of each year and ending on the 31st March of the following year. The first financial year may be shorter of longer than twelve months as the Part VIII-Accounts Board may determine, but in any case not longer then eighteen months. 23. (1) The Board shall cause to be kept proper books and other records of accournt in respect of receipts and expenditures of the road fund in accordance with Part IX-Miscellaneous acceptable principles of accounting. (2) The accounts of the road fund shall be audited 25. The Minister shall, by notice published in the annually by independent professional auditors nomi- Gazette, make regulations stipulating the detailed nated by the Board and approved by the Auditor procedures to be followed by the Board regarding the General's Office. The expenses of the audit shall be paid works to be financed through the road fund, proce- out of the road fund. dures to be followed in preparing the Annual Road (3) The auditors shall complete their audit of the Program(s), procedures for allocating funds among accounts within three months of the end of each finan- the different road agencies, arrangements for dis- cial year and shall include in their report assessments bursing funds for road works, and the detailed finan- relating to the achievement of the objectives of the cial management procedures to be followed by the Administration;compliance with the policies, proce- Board. 150 Commercial Management and Financing of Roads Draft Regulations for the Management 8. For the better performance of its functions, the of the Road Maintenance Fund Board and its subcommittees shall, subject to the pro- visions of the Act, have power to: (a) affiliate or cooperate with government depart- National Road Fund Administration Regulations ments; universities; technical colleges; persons 199.. engaged in the maintenance, rehabilitation, or development of public roads; and such other orga- under s.25 nizations or persons as may appear to the Board to 1. These regulations may be cited as the National Road be proper or beneficial to associate with: and Fund Administration Regulations 199.. and shall come (b) publish from time to time such technical and into operation on the date of publication in the Gazette. other information as it deems necessary or expedi- ent for the promotion of knowledge on the mainte- under s.l nance, rehabilitation, and development of public 2. Within 14 days from the date of Presidential assent roads. to the National Road Fund Administration Bill, the Minister shall cause a notice to be published in the under s. 11 Gazette appointing the effective date of the Act. 9. The Road Fund shall be managed by the Board who shall: under s.5 (a) devise and put in place a mechanism for collect- 3. Within 28 days from the effective date of the Act, the ing road-user charges; Minister, in consultation with the various sectors (b) when relevant, devise and put in place arrange- required to be represented on the Board of the ments for collecting from the Treasury any road-user Authority, shall appoint members of the Board. charges collected for the Road Fund; 4. Within 14 days after expiry of the 28 days in (c) establish and publish the criteria to be used to Regulation 3, the Minister shall cause a notice of the divide Road Fund revenues among the different members appointed to the Board to be published in the road agencies entitled to draw on the Road Fund, Gazette, specifying the place, date, and hour of the first where such criteria may be based on the condition meeting of the Board. of the road network, the type of maintenance required (whether routine or periodic), the length of under s.7 the road network, and the volume of traffic; 5. The Board may delegate any of its powers to com- (d) negotiate an annual Framework Agreement with mittees consisting of such member or members of its the Ministry of Finance establishing the procedures body as it may consider fit, or expedient, and any com- to be followed when adjusting the road-user charges mittee so formed shall conform to any regulations or during the year concerned, which shall include the direction of the Board. general financial policies of the Administration, the 6. The Board and its subcommittees may appoint such maximum annual increase in the road-user charges, study groups or committees as may be necessary for the the size of the Administration's administrative budget, proper discharge of its functions consisting of some and any matters which that have an impact on the members and other persons with such prescribed qual- Governments fiscal and macroeconomic policies; ifications as may be required, and define the objectives (e) establish procedures for disbursing funds for of such groups or committees. works forming part of the approved Annual Road 7. The Board and its subcommittees may co-opt any Program(s); person to advise it during its deliberations, provided (f) establish and publish procedures that ensure that that any person so co-opted shall not be entitled to non-transport users of diesel are not unduly penal- vote at any meeting of the Board or of its subcommit- ized by introduction of the road maintenance levy; tees. and Annex 5. Draft Road Fund Administration Bill 151 (g) advise the Minister on ways to control the over- fuels, and shall be used exclusively as a source of loading of vehicles, particularly on international revenue for the Road Fund; transit routes. (b) international transit charges to be paid by for- 10. Major upgrading and new works will continue to eign vehicle operators using the roads of ........ ; and be financed through the governments development (c) vehicle license fees. budget, and all financial resources made available for The road user charges mentioned in paragraphs (a) to such purpose shall be channeled through the Road (c) above shall be subject to revision by the Minister Fund. from time to time on the recommendation of the Board, and upon such revision the public shall be duly under s. 15 informed of the same through the press. 11. The Secretariat will consist of no more than [....] 15. The road-user charges shall, to the extent possible, regular staff who shall be appointed by the Board on be collected under contract, and the proceeds shall be the recommendation of the Executive Secretary A firm directly deposited into the Administration's bank of chartered accountants, or a bank, may be appoint- accounts. Contracts will be entered into with the Oil ed to act as Secretariat or to assist the Secretariat. Companies, the Department of Customs, the Ministry 12. Without prejudice to the generality of these regu- of Transport and Communications, and/or with private lations, the Secretariat shall be responsible for: contractors. Otherwise, the collection shall be the (a) keeping proper accounts and records in respect responsibility of the Treasury, provided that having of the Fund; been so collected the moneys shall without delay be (b) maintaining separate bank accounts for local and transferred by the Treasury to the Road Fund. donor funds, in which shall be recorded all receipts 16. The Administration shall open and maintain sepa- into the Fund and all disbursements from the Fund; rate bank accounts for each of the sources of funds allo- (c) preparing and submnitting for audit in respect of cated to the Road Fund. each financial year a balance sheet, a statement of 17. All moneys provided by international donors for income and expenditure, and a statement of cash the Road Fund shall be given by the donor directly to flow in such forms and manners as the the Fund and not through the Government. Administration may prescribe; 18. Disbursement of moneys from any of the accounts (d) preparing the Annual Report of the Fund in such holding donor funds shall be subject to the provisions form and with such content as may be prescribed by of section 11 and the prior authority of the relevant the Authority; and donor. (e) arranging the business for meetings of the Board and its subcommittees. under s. 17 13. The Administration shall, at such intervals as the 19. The detailed basis of the cost-sharing arrangements Minister may, by order in writing, require, submit to will be decided by the Administration and shall be the Minister reports and financial statements in such published and revised from time to time. form as the Minister may by like order determine, 20. Urban and Rural District Councils shall use rev- regarding the operations and activities of the enue from rates, local taxes, and other local revenue Administration and the Fund. sources to contribute to the financing of routine and periodic maintenance of roads, tracks, and trails under under s. 16 their responsibility. 14. The road user charges referred to in section 16 (2) 21. Individuals and communities living in areas with (a) shall consist of unclassified roads shall also be entitled to receive funds (a) a surcharge on the price of gasoline and diesel for maintenance on a cost-share basis. Such groups shall fuel to be known as the fuel levy. The said fuel levy be required to register their interests in the roads, form shall be a charge over and above ordinary import themselves into local roads committees, and agree on duties, general sales taxes, and other charges on cost-sharing arrangements for maintaining their roads. 152 Commercial Management and Financing of Roads 22. Local roads committees may contribute their share 27. Funds shall be withdrawn from the Road Fund on of the costs in the form of materials, direct labor, cash presentation of a check signed by two authorized sig- or by a combination of any or all of these. natories, being either the Chairperson of the Board and 23. Funds shall be disbursed only for goods and ser- the Secretary, or one of them and a designated member vices forming part of the approved Annual Road of the Secretariat. Program(s) according to procedures to be established 28. In the interim, and until such time as the road agen- by the Board. cies have developed the capacity to prepare their sub- 24. Work undertaken by contractors with a value in missions to the Administration, the Administration excess of $ ... shall be certified by a registered engineer, may enter into a contract with local consultants for the and, once so certified, payment shall be made directly purposes of assisting the road agencies to prepare their to the contractor. individual road programs. 25. Work undertaken by small-scale contractors, or by 29. The consultants so appointed shall work in close force account, will be subject to similar controls to be consultation with the concerned central and local gov- agreed among the Administration, the Minister, and ernment agencies to assist the various road agencies the various District Councils. with the preparation of their road maintenance, reha- bilitation, and development programs; set priorities; under s. 19 and consolidate the individual programs into an over- 26. The Annual Road Program(s) shall allocate the rev- all Annual Road Program to fit within the available enues of the road maintenance fund to various cate- resources. Such plans shall include medium-term gories of roads for the year, following the allocation cri- maintenance programs and longer-term rehabilitation teria prescribed by the Board. Without prejudice to the and development programs. other factors that the Board may take into account in determining the allocation criteria, some of the major factors to consider shall be the condition of the road Notes network, the type of maintenance required (whether 1. It could also be the Minister of Transport, Minister of Finance, routine, recurrent, or resurfacing), the length of the or Prime Minister's Office. road network, and the volume of traffic. 2. The Act may need to be amended if the road fund intends to finance undesignated (community) roads. Annex 6. Sltandard Format for Setting Up a Road Fund Under Existing Legislation Legal Notice No. ?? of 199? (b) on a cost share basis, Urban Council roads and Financing (Roads Fund) Regulations 199? the unclassified roads under the jurisdiction of Development Councils; In exercise of the powers conferred on me by section (c) road safety projects; and ... of the Finance Order 19...., [or other relevant Orders (d) a limited amount of road upgrading, rehabilita- or Decrees] tion, and new works. ......................... Minister of Finance and Economic Planning [adjust as Road Fund Revenues needed] make the following Regulations: 4. The Road Fund shall have one or more commercial bank accounts into which the following fees and Citation and Commencement charges (the road tariff) shall be deposited: 1. These regulations may be cited as the Finance (a) vehicle license fees, including any supplemen- (Roads Fund) Regulations 199? and shall come into tary heavy vehicle fees that may be introduced by operation on the date of publication in the Gazette. the Road Fund Board; (b) a road maintenance levy on petrol and diesel; Interpretation (c) fines imposed on overloaded vehicles; and 2. In these regulations, unless the context otherwise (d) any other road-user charges and/or donor fund- requires, ing that may from time to time be allocated by "Appointed member" means a member of the Board Parliament. who is appointed by the Minister under regulation These revenues constitute the road tariff and no one 9; will be exempted from paying it. "Board" means the board constituted under regula- tion 8; Collection and Deposit Procedures "Secretary" means the Executive Secretary of the 5. The Board will undertake all necessary actions to Fund appointed under regulation 12; ensure that: "Fund" means the Roads Fund established by the (a) license fees and any heavy vehicle license fees [relevant Order or Decree], 199?; and that may be introduced by the Board are separately "Minister" means the minister responsible for deposited into the Consolidated Fund by the Finance. Department of Customs and the [vehicle licensing authority], and thereafter directly deposited into the Purpose of the Fund Road Fund bank account; and 3. The purpose of the Fund is to finance (b) the road maintenance levy on petrol and diesel (a) routine and periodic maintenance of all classified is separately deposited into the Consolidated Fund roads under the jurisdiction of the Ministry of by the oil companies and thereafter directly deposit- Works and of the Ministry of Local Government ed into the Road Fund bank account. [adjust as needed]; The Board will take steps to ensure that all funds due 153 154 Commercial Management and Financing of Roads to the Road Fund are collected and deposited in a time- Road Fund revenues among the different road agen- ly manner into the Road Fund bank account. cies entitled to draw on the Road Fund; (d) review and approve the Annual Road Authorized Expenditures Expenditure Program prepared by the various 6. The Road Fund shall be used primarily to finance implementing agencies; routine and periodic maintenance, which shall remain (e) recommend to the Minister of Finance the level as the first charge on the Road Fund. The Road Fund of fees and charges required to finance the recom- will also meet the costs of administering the Road mended road maintenance program for inclusion in Fund. Once all road maintenance requirements have the government's annual or supplementary budget; been met, the remaining funds shall be used exclu- (f) mobilize a publicity program to inform the pub- sively to finance selected road safety projects, road lic about the maintenance programs being financed rehabilitation, minor improvements, and new works from the Road Fund, assure the public that the Road (minor improvement and new works not to exceed ...... Fund is well managed, and seek their support for percent of annual revenues). possible increases in the level of the road user 7. Roads under the jurisdiction of the Ministry of charges as and when such increases are needed; and ..... [that is, the trunk road network] will be fully funded (g) establish procedures for disbursing funds for by the Road Fund, while roads under thejurisdiction of works forming part of the approved Annual the municipalities [or other local government agencies] will Expenditure Program. be financed on a cost-sharing basis. The detailed basis of the cost-sharing arrangements will be decided by the Composition of the National Roads Board Board, published, and revised from time to time. 9. The Board will be appointed by the Minister of . Municipalities will be expected to contribute their share and will consist of twelve members: the Chairperson, of the costs using revenues from rates and other local four ex officio members representing government taxes. Individuals and communities living in areas with departments, five members representing nongovern- unclassified roads will also be entitled to receive funds mental organizations, and two members representing for maintenance. Such groups will first have to register municipalities [or other local government agencies]. The their interests in these roads, form themselves into local members of the Board will be as follows: roads committees, and agree on cost-sharing arrange- (a) (1) The Chairperson of the Board; ments for maintaining these roads. Local roads commit- (b) Four ex officio members, being nominees of the tees may contribute their share of the costs in the form following Ministries: of materials, direct labor, and/or cash. (2) Ministry of Finance; (3) Ministry of Transport; Management of the Road Fund (4) Ministry of Local Government; and 8. The Road Fund will be managed by a National Roads (5) Ministry of Energy. Board, which will report to the Ministry of ....... as its (c) five nongovernmental members, being nominees parent ministry. The Board will manage the Road Fund of the following organizations: in an executive capacity and advise the Minister on all (6} Chamber of Commerce and Industry; matters pertaining to the financing of roads. Among (7) Bus and Taxi Operators Association; other things, the Board will: (8) Road Transport Operators Association; (a) improve arrangements for collecting all the fees (9) Association of Consulting Engineers (or and charges assigned to the Road Fund to minimize Institution of Engineers); and avoidance and evasion; (10) National Farmers Association. (b) institute an integrated and coordinated approach (d) ( 11) two members, being nominees of munici- to the planning of road works by establishing the palities [or other local government agencies]. form and content of the Annual Road Program; 10. The Chairperson of the Board will be appointed by (c) establish and publish the criteria used to divide the Minister of ...........,.following consultations with Annex 6. Standard Format for Setting Up a Road Fund Under Existing Legislation 155 the Board. The ex officio members will not be below responsible for the day-to-day management of the the level of Director, or the equivalent. Members of the Road Fund and for implementing the decisions of the Board will be appointed for a term of two years. Board. The Executive Secretary will be appointed by Members of the Board shall cease to be members if their the Board and shall perform such functions as the nomination is canceled by the organization responsi- Board may direct or delegate to him. The Executive ble for nominating them. Secretary will also act as Secretary to the Board. 11. If a member of the Board acquires any pecuniary 18. The Secretariat will consist of no more than [...] interest, direct or indirect" in any contract or proposed staff. A firm of chartered accountants, or a bank, may contract being considered by the Board, or in any other be appointed to act as Secretariat. matter in which his private interests conflict with his 19. Among other things, the Secretariat will be expect- duties as a member of the Board, he shall, as soon as ed to: he becomes aware of his interest in the contract or pro- (a) keep proper accounts and records in respect of posed contract or any other matter, disclose the facts the Road Fund; to the Board and withdraw from all meetings at which (b) maintain the Road Fund bank account in which such matters may be discussed. shall be recorded all receipts into the Fund and all 12. The Board may establish subcommittees dealing disbursements from the Fund; with subjects like: road safety, environment, engineer- (c) prepare monthly statements of revenues collect- ing, and road fees. The Board may also invite additional ed, amounts deposited into the Road Fund bank nonvoting members to attend any of its meetings. accounts, commitments entered into by the Board, withdrawals authorized, and actual withdrawals; Meetings of the Board (d) prepare and submit for audit in respect of each 13. The Board shall meet at least once a month for a reg- financial year a statement of income and expendi- ular board meeting at a time and place decided by the ture, a statement of cash flow, and such other finan- Chairperson. The Chairperson shall, at the written cial statements as the Accountant General may pre- request of not less than four members of the Board, con- scribe; vene a special meeting of the Board to transact any extra- (e) prepare the Annual Report in such form and with ordinary business on a date specified in the request. A such content as prescribed by the Board; and written notice of such a meeting shall be sent to the mem- (f) prepare the Agenda and arrange the meetings of bers at least three days prior to the date of the meeting. the Board. 14. At all meetings of the Board the quorum necessary for the transaction of the business shall be a majority Annual Road Program of the members then in office. The Board decisions will 20. At least three months before the beginning of each be taken by majority vote, and when the votes are fiscal year, the Board shall review the Annual Road equal, the Chairperson shall have a casting vote, with Program for that year. The Annual Road Program, in the dissenting members having the right to have their such form and containing such details as may be pre- views recorded in the minutes. scribed by the Board, shall be prepared by the road 15. The minutes of every meeting of the Board shall be agencies responsible for maintaining the road net- recorded in a register by t'he Secretary of the Board and works funded by the Road Fund. signed by the Chairperson of the meeting and the 21. The Annual Road Program shall comprise: Secretary (a) the Annual Expenditure Program for the next 16. Members of the Board will be compensated for the year; and time spent attending board meetings. (b) the revenue projections of the Road Fund for the next year. Road Fund Secretariat 22. The Annual Expenditure Program shall allocate the 17. The Board will be assisted by a Secretariat headed revenues of the Road Fund to various categories of roads by an Executive Secretary The Secretariat will be for the year, following the allocation criteria prescribed 156 Commercial Management and Financing of Roads by the Board. Allocation criteria may be based on the natories: either one member of the Board and the condition of the road network, the type of maintenance Executive Secretary or one member of the Board and a required (routine or periodic), the length of the road net- designated Accountant from the Ministry of Finance. work, the volumes of traffic, the population served by [other options are also possible] the roads, and any other factors decided by the Board. 23. In consultation with the Minister of Finance, the Audits Board will review the Annual Expenditure Program to 28. The accounts and other financial statements of the be financed by the Road Fund and decide on the afford- Road Fund will be audited annually by an independent ability of the overall program and the appropriateness firm of auditors selected by the Auditor General. The of the amounts allocated for each class of road. auditor will be expected to use international audit stan- 24. The Board shall transmit to the Minister of dards. The auditor will present a report to the Board .............. and to the Minister of Finance the approved that will give an opinion on the accuracy of the records Annual Expenditure Program. and financial accounts of the Road Fund, the com- 25. Pursuant to regulation 8 (e), the Board may rec- pleteness of income of the Road Fund, the conformity ommend to the Minister of Finance any increase in the of payments with the priorities laid down in regulation level of fees and charges required to finance the 6, whether disbursements are in accordance with reg- approved Annual Expenditure Program, and will pro- ulation 26, and the accuracy of accounting procedures vide an estimate of the additional income to the Road and internal control procedures. Fund from such increases. 29. Technical audits of works will also be carried out on a selective basis as recommended by the Board in Disbursement of Funds consultation with the Minister of . 26. Funds will be disbursed only for goods and services forming part of the approved Annual Expenditure Annual Report Program and according to procedures to be established 30. Within four months after the end of each financial by the Board. Work undertaken by contractors with a year, the Board will publish an Annual Report. The value over $ ... must be certified by a registered engi- Annual Report will summarize the policies of the neer, and payment will then be made directly to the Board, the main activities of the Road Fund during the contractor. Work undertaken by small-scale contrac- preceding year, the audited accounts for the year just tors or using in-house staff and equipment will be sub- ended, and the auditors report on the accounts. ject to similar controls to be agreed between the Board [The regulations may also want to deal with: the Board's and the Minister of .............. power to lend and borrow funds and the preparation of an annual contract plan between the Board and the parent Withdrawal Procedures ministry covering the business objectives to be followed by 27. Funds will be withdrawn from the Road Fund on the Board during the ensuing year]. presentation of a check signed by two authorized sig- References Austroads. 1996. National Performance Indicators. Sydney Charging Road Users." Report INU 95, World Bank, Bahl, Roy. 1992. 'The Administration of Road User Taxes in Infrastructure and Urban Development Department, Developing Countries." Working Paper Series 986, World Washington, D.C. 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"Road Maintenance by Contract: Technical Department, Washington, D.C. Dissemination of Good Practice in Latin America." Report 15627-LAG, Central America and Mexico Department, Stock, Elizabeth. and Jan de Veen. 1996. Expanding Labor-based Washingto, C. Methods for Road Works in Africa. Technical Paper 347. Washington, D.C. Washington, D.C.: World Bank. Distributors of COLOMBIA GERMANY IRELAND MEXICO PHILIPPINES Mundi-Prensa Barcelona l nfoenlace Lda. UNO-Vedag Govement Supplies Agency INFOTEC Intemational BDoksource Center Inc. Consell de Cent, 391 World Bank Carrera 6 No. 51-21 Poppelsdoder Allee 55 Oig gan tSoldihair Av. San Femando No.37 1127-A Antlipolo St, Baraugay, Venezuela 08009 Barcelona Aprtrado Aerno 34270 53115Bonn 4-5 Harcourt Road Col. To1ell Guerna Makati City Tel: (343) 488-3492 Publications Santald de Bogold, D.C. 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