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Second Generation Road Funds: The W a y A h e a d

By lan G. Heggie

Visiting Professor, University of Birmingham While reviewing the first generation road funds, three important insights emerged. First, it became clear that roads were big business. For example, the Japan Highway Public Corporation - one of several toll road companies in Japan - manages assets the same size as General Motors, while the U.K. Highways Agency - a relatively small road agency with only 10,500 km of roads - manages assets the same size as IBM. Second, the financial needs of the road sector were typically growing faster than the government's tax revenues. Third, the size of the road business, combined with the growing financial needs of the road sector, meant it was becoming increasingly difficult to finance the road sector through general tax revenues. Government budgets were not designed to finance large global businesses. Instead, we needed to move roads off-budget, commercialize them and manage them like a business - bring roads into the market place, put them on a fee-for-service basis and manage them like a business. In a letter to the Senior Managing Director at the International Monetary Fund (IMF), the four main principles underlying commercialization of roads were descdbed as follows (Heggie and Vickers, 1998): Road users should pay for usage of roads through an explicit road tariff that must be clearly separated from the government's general taxes. It will usually take the form of an annual vehicle license fee which charges for access to the road network, a levy added to the price of fuel which charges for use of the road network, and, where feasible, a congestion charge to manage

Introducing the above road tariff must not abstract revenues from the government budget. The ministry of finance will usually be invited to convert the existing allocations for read maintenance into an equivalent fuel levy, but that is all. Any additional revenues must come from extra payments by road users. That is part of the objectivo road users pay for using the road network, they know that they are paying, and this encourages them to demand value for money. The proceeds from the road tariff are deposited into a road fund managed by a board that includes representatives of road users and the business community. At least half the board members generally come from outside government and are nominated by the organizations they represent. The chairperson is independent. This structure creates a form of surrogate market


discipline. Board members represent the people who are paying for the roads and they thus have a strong vested interest in seeing that they are not overcharged and that the money is well spent. Finally, the board should have a small secretariat to manage the funds, published legal regulations should govern the way the funds are managed, and the Auditor General's office or private sector auditors appointed by the Auditor General, should carry out independent technical and financial audits. Additional elements are that the road fund should ideally support maintenance of all roads (including cost-sharing with local governments and communities), responsibility for different parts of the road network should be clearly assigned to a competent road authority, and the road authorities should introduce sound business practices. IMF OFFICE MEMORANDUM MEMORANDUM FOR FILES January 13,1997 Subject: Meeting on Road Funds On January 9, Mr. Heller (FAD) chaired a meeting with Mr. Heggie (Bank), Mr. Ebrill (Tax Policy, FAD), Mr. Gupta (Expenditure Policy, FAD), Mr. Pellechio (Fiscal Review Division, FAD) and myself. The purpose of the meeting was to discuss the appropriate institutional structure and arrangements for separate Road Funds (covering the expenditure on Roads O&M and financed in part by user charges); Bank work in developing such funds; and the coordination of the Bank work with the work of IMF area department missions. The meeting followed the memorandum from Mr. Heggie to the DMD (December 19), seeking to create a closer understanding of the Banks position in, and better coordination with, the IMF. Etc. The IMF were favorably disposed to the concept of commercializing roads and moving the management of roads closer to the boundary between the public and private sectors. Following a meeting between myself and staff from the IMF's Fiscal Affairs Division, one of their staff set down the basic criteria which a second generation road fund should meet. "The road fund should:


Not simply be a means of avoiding stdct budget discipline, whether for roads or for wider public expenditures.



(c) (d)

Be in the form of an agency which acts as a purchaser, not as a provider of road maintenance services. As a minimum, it should have a mission statement, objectives, physical output indicators, and a total resource envelope. All work financed by the road fund should ideally come from the private sector. Have a financial management system which can handle the more complex tasks involved in managing total resource envelopes, and associated accounting requirements. Have a management board with a significant private sector presence, but genuinely free from a producer (whether supplier or trade union) interest. The criteria for membership should be objectivity and impartiality.

Ideally, one might also want to see a high degree of cost recovery through user charges. Any (supplementary) income from central or local government budgetary sources, should continue to be subject to normal government budgetary discipline. The road fund must not receive any guaranteed share of total tax revenue to which is added the money generated from road user charges. Finally, one must be cautious in constraining the capacity of countries to raise fuel duties as a means of increasing general revenues. Inevitably, this puts a burden on government and the road fund management to explain, at a minimum, why all petrol price increases are not created equal. It may also mean that, for some developing countries, where fuel charges are a particularly important source of tax revenue, road funds may simply not be appropriate. To sum up, the desirability of dedicated road funds needs to be assessed on a case-by-case basis. Provided the right conditions are met, road funds can be endorsed in practice as well as in principle. The question is just how often the right conditions can be met"(Potter, 1997). And so the second generation road fund was born (they were actually born in about 1992 and the documentation then followed). The guiding principles which underlie these road funds are as follows: the road fund should be managed through a separate road fund administration which channels funds to all parts of the road network; oversight should be by a public-private board made up of nominees of organisations with a strong vested interest in well managed roads (including government departments); ideally, the chairman should be an independent person of standing who can act - and be seen to be acting - in the public interest; revenues should come from charges related to road use - ideally a two-part tariff consisting of vehicle license fees (often also a heavy vehicle surcharge) and a fuel levy;


the ministry of finance should be asked to pay existing allocations for roads into the road fund (in the form of an equivalent fuel levy) - all additional revenues must come from extra payments by road users, to ensure that the road fund does not abstract revenues away from other sectors; once the fuel levy reaches about $0.03-0.05 per litre, procedures should be introduced to ensure non-road users do not have to pay the fuel levy; day-to-day management should be by a small secretariat which manages the road fund along commercial lines; there should be regular technical and financial audits of all works financed through the road fund and the results should be tabled before parliament and published in the press; funds should be disbursed to road agencies in a way which strengthens financial discipline (i.e., all funds should be accounted for and there should be evidence that all work has been done according to specification); the road fund should be supported by sound legislation and published financial rules and regulations.

The concept of the second generation, or commercially managed road fund, quickly caught on and a large number of countries have now either established such road funds or are in the final stages of setting them up. The next article in this series examines emerging "good practice" in relation to these second generation road funds. References: Heggie, lan G. and Piers Vickers. 1998. Commercial Management and Financing of Roads. Technical Paper 409, World Bank, Washington, D.C. Potter, B.H. 1997. Dedicated road funds: a preliminary view on a World Bank initiative. IMF Paper on Policy Analysis and Assessment. Fiscal Affairs Department, International Monetary Fund, Washington, D.C.