Management of New Zealand's

National Roads Fund

 

 

Presented to: Philippines Country-Level Workshop on Institutional Development for the Maintenance of National Road Networks

 

Presented by: D.R. Rendall, Regional State Highway Manager, Transit New Zealand

 

Paper Prepared by: M F Fletcher and D R Rendall, Transit New Zealand, Wellington

 

Date: 30 May 1997

 

 

 

 

Road Funding and Management of NZ's National Roads Fund

 

 

This paper has five sections:

 

 

 

 

 

 

 

 

 

The paper will address each in turn along what lessons have been learnt since Roads Funds were first established in New Zealand.

 

 

The National Roads Fund/Account

 

History

 

New Zealand's first road fund was established by the National Roads Act 1953 with Fuel Excise, Registration Fees, Heavy Traffic Fees and a mileage tax as the main sources of revenue. By the 1979 financial year these sources had been rationalised to Fuel Excise and Road User Charges. Registration Fees were now credited to the central Government Account. Expenditure from this fund was solely roading related.

The enactment of the Transit New Zealand Act 1989 (The Act), created the Land Transport Fund (LTF) and Transit New Zealand (Transit). The LTF retained the revenue sources of the old Fund, and reacquired Registration Fees ($157M in 1997). However, the new Fund was also required to meet central government's contribution to:

 

 

 

 

 

The objective of funding all roading related expenditure from the same source was to optimise the allocations to each activity. This objective has only been partially achieved, because of the difficulty experienced in developing a rational agreed process of evaluating the benefits and costs of each activity.

 

The other important change to note is that Government established a control over both the rate at which funds were credited to the LTF and the total amount expended from it. The establishment of this control resulted in a loss of:

 

 

 

Following, in real terms, a 15% reduction in roading funding for the 1991 financial year, considerable energies were directed towards reducing the effects of Government's control mechanism. Roading is after all, a long-term business, with construction projects often running for more than one year. As a result significant one year increases and decreases in expenditure levels do not promote efficiency in roading provision.

 

The first success was getting an amendment to the Act, to guarantee in nominal terms:

 

 

 

The second success was encapsulated in the passing of the Transit New Zealand Amendment Act (The Amendment Act) and the establishment of the National Roads Fund (NRF) and Transfund New Zealand (Transfund). The NRF, while by and large the LTF reconstituted, in that it has the same sources of revenue and funds largely the same organisations and activities, does have one important difference. This difference is, that once the cost of the Police's and the LTSA's road safety activities have been met, any additional revenue is available for use by Transfund. This means that increased wear and tear on the roading network, caused by increased traffic paying additional revenue, can be compensated for by increased expenditure. Thereby creating a much closer relationship between road use and road expenditure and reinstating largely the pre 1989 position.

 

Government still sets the rates of taxation for inflows to the NRF. However, it can be argued that this is appropriate, because road taxes are established under legislation, as compared to the market and letting the willing buyer, willing seller concept, establish the level of charge. Currently Government has made the commitment that it will ensure that the rates of taxation will be sufficient to enable Transfund to fund projects down to a B/C of 4.

 

Delivery Mechanisms

 

The establishment of the National Roads Board (NRB) in 1954 established the separation between client and deliverer particularly for State Highways. Previously the Ministry of Works was responsible for the planning and delivery of all State Highway works. The establishment of the NRB as an independent client increased the rigour and accountability over the former Ministry as to what work was undertaken and to what standard. For State Highways the Ministry, (or its corporatised successor, Works Corporation Ltd), continued to supply virtually all-professional services and the bulk of maintenance works until 1991. The Act required that from July 1991 all State Highway professional services and works be competitively tendered, resulting in significant savings, i.e. in excess of 20% for professional services. These steps left Transit as the Funder of both State Highway and Local Authority works and the Client/Provider of State Highway works. It also left the suspicion in some sectors of Local Government that State Highways, despite the transparent funding allocation, were receiving more than a fair allocation of the available funding. On Transfund's establishment it acquired Transit's Funder responsibilities. There now exists a transparent separation of Funder, Client/Provider and delivery for State Highways. A similar position will be achieved for Local Authority roading by 1 July 1999, when all local roading works are required to be competitively tendered.

 

  

Board Structures

 

The three road fund boards have had their membership made as follows:

 

 

 

National Roads Board

1954-1989

 

Transit New Zealand

1989 to present

(The Authority)

 

Transfund New Zealand

1 July 1996 to present

 

 

2 officers of the Ministry of Works

 

7 to 10 members. No sector representation. Appointments made on their ability to ensure the objectives of Transit are achieved

 

2 representing Transit New Zealand

 

1 representing the Ministry of Transport

 

 

 

1 representing local government

 

2 nominated by the NZ Counties Association

 

 

 

1 representing road users

 

1 representing cities, i.e. >20,000 people

 

 

 

1 representing other aspects of the public interest

 

1 representing towns,

i.e. <20,000 people

 

 

 

 

 

1 representing commercial vehicles

 

 

 

 

 

1 representing private motorists

 

 

 

 

 

The Governor General on recommendation from the Minister appoints all Board members. The Governor General also appoints the Chairman and Deputy Chairman as part of this process. The only exception was for the 1973 - 1989 period, when the Chairman was the Minister of Works initially and then the Minister of Transport. Today the Board's and the Authority's accountability to the Minister is through the mechanism of a Performance Agreement, (copy available). In fact, the Amendment Act includes the following section,

 

For the avoidance of doubt, it is hereby declared that in performing or exorcising any functions or powers in relation to -

 

(a) The inclusion of outputs and capital projects in the National Roading Programme; and

(b) The making of payments from the National Roads Account, -

 

the Board shall act independently of the Minister

This means, that providing the Minister is in agreement with the methodology used to evaluate projects, (the basis is in the Performance Agreement), then Transfund can act independently. It also means that the Minister avoids project and location specific lobbying.

 

Lessons Learnt

 

The lessons learnt over the years include:

 

 

 

 

Funding Cycle

Before describing the detail of revenue and expenditure, a broader picture of the flow of road funds in the current New Zealand environment is appropriate. This is shown diagrammatically below. Apart from government directive, the Government has the ability to influence the flow of funds in only two places:

 

1. The contribution by road users to the Dedicated Road Fund.

 

2. The general petrol tax collected from road users, which goes directly to the Government.

 

Both of these are provided by a taxation on petrol and alternative fuel sales. They are currently set at 9.4 cents/litre and 20.8 cents/litre respectively.

Revenue

 

Current Revenue Sources

 

The NRF has the following sources:

 

 

 

 

 

 

 

Each revenue source will be addressed in turn.

 

Fuel Excise - $298M

 

The total Fuel Excise levied on petrol is 30.4 c/litre. For the year ended 30/6/97of the $900M total excise duty to be collected, $298M will be credited to the Fund. This is collected by NZ Customs and an amount of $600,000 per anum is paid by the NRF as a contribution towards collection costs. The level of evasion is minimal because it's collected at source i.e. NZ's sole refinery or at the ports for direct imports.

 

Since 1984 the amount credited to the NRF or its predecessors has varied as follows:

 

Date of Increase Portion allocated to Roading (cents/litre) Total Excise (cents/litre)

 

Nov 1984 8.9 --
April 1987 9.9 --
April 1988 10.9 30.2
July 1991 7.1 30.2
July 1992 9.4 30.2

 

June 1991 marks the last time a rationally based relationship existed between the total contribution paid for roads by the users of petrol vehicles (mainly cars and light vans) and diesel powered vehicles (mainly trucks, although the number of diesel powered cars is increasing rapidly).

 

Since the establishment of Transit, Government varied the rate at which Fuel Excise was credited to the LTF to prevent the balance of the LTF from climbing while it curtailed expenditure, thereby reducing potential political pressure. It did, however, still receive considerable political pressure for its diversion of road user funds. Amending Fuel Excise was chosen as the mechanism for achieving this objective because it was:

 

  • far easier than amending Road User Charges;
  •  

  • it was only a portion of a larger tax;
  •  

  • the increased revenue, i.e. residual amount after crediting the LTF could be used to balance the remainder of its budget without increasing taxation.
  • Road User Charges (RUC) - $467M

     

    Road user charges are levied on diesel powered vehicles on the basis of weight, axle configuration and distance. The collection of Road User charges is managed by the LTSA under contract from the Ministry of Transport at an approximate cost of $15M. The LTSA then contracts a number of providers to do the actual collection. The need for these contracts arises because RUC is a tax, and in New Zealand taxes must be collected by Government Departments.

     

    Initially the collection of Road User charges was primarily made by NZ Post, but now a number of agencies may undertake this function. The result is that NZ Post currently collects approx. 50% of all RUC's at $3.30 per transaction.

     

    Other agencies include BP petrol stations, Vehicle Testing NZ Ltd, Vehicle Inspection New Zealand Ltd, NZ Automobile Association, and AMI Insurance Company. The system operated by the new agencies is an RUC specific electronic Funds Transfer (EFT Pos) system using a "swipe" card. One card can operate for up to 3 vehicles, enabling it to handle a tractor unit and two trailers. When purchasing an RUC licence, the trucker through a numeric keypad is simply asked, what type of licence they want, the distance, vehicle type and weight. The amount is calculated by the central computer, the trucker confirms that they are happy to pay the amount and the amount is debited to their bank account that night. The new licence is printed as soon as the trucker confirms their acceptance of the cost.

     

    Costs are transaction based, with costs per transaction ranging from $1 to $3. The actual cost depends on the level of Agency input or resources required to process the transaction, i.e. whether or not the trucker can purchase a licence directly from a machine or do the agency's staff have to become involved in the process.

     

    There is also a direct connect facility where, through use of special terminal (for security reasons), operators can buy licences from their own offices. The operator pays the cost of the terminal, $4,500, $85 per month for maintenance communication, and a net cost of 5c per transaction.

     

    The system enhancements to make this possible cost in the vicinity of $3M, with BP, the main provider, incurring an additional $1M.

     

    The changes since the old NZ Post days have been of profound benefit to the NZ trucking industry. Truckers can virtually purchase RUC licences at any time and without deviating from their route.

     

    However, the ease of licence purchase also assists "Just in Time", (i.e. just before a Police weigh point), purchasing. This leads to the next point.

     

    There has been growing concern experienced over the level of evasion of Road User Charges. A recent survey placed the level of evasion in the vicinity of $40M for heavy vehicles and $12M for light vehicles per anum or just under 12.3% of the $424M collected in 1996, the year of the survey. Also it is estimated that a further $30M has been legally avoided.

     

    The actions proposed to remedy this situation include:

     

     

     

     

     

     

     

     

    Motor Vehicle Registration Fees (MVR) - $157M

     

    Again the collection of motor vehicle registration fees is administered under contract by the LTSA with further contracts to service providers. Similarly all collections were initially made by NZ Post, but this has been diversified to Vehicle Testing NZ, Vehicle Inspection NZ, the Automobile Association and AMI Insurance. These alternative agencies are now responsible for 30% of all registrations processed thereby making a significant step in reducing the dependency on NZ Post and the possibility for it to monopoly price its services. The total costs for MVR charged to the LTF are $29M. This may seem high in relation to the $157M of revenue collected but it must be recognised that revenue collection is only part of the operation. The other functions include the maintenance of a vehicle ownership database and the collection of Accident Compensation & Rehabilitation Levies which is recovered on a marginal cost base only.

     

    Interest - $15M

     

    This revenue item, while only small, is a key component in Government recognising that the NRF is a dedicated fund, funded by the road user for road users. The payment of interest by the Government on the cash component of the NRF balance recognises that Government has in effect borrowed from Road Users, to minimise its global external debt servicing costs. As a result Transit, which undertakes the accounting function for the NRF, has to maintain both cash and accrual accounts. Also consistent with the borrowing concept is the use of a market derived interest rate, i.e. Treasury 90 day Bill rate which is determined by weekly tender, and applied to the NRF's daily cash balance.

     

     

     

    Sale of Surplus Roading Properties - $9M

     

    Whenever State Highway related land or buildings are sold the proceeds are credited to the NRF. The logic for this is that these properties have been purchased with road user money so the proceeds should return there.

     

    GST Compensation - $121M

     

    Compensation for Goods and Services Tax (GST) is credited to NRF at the rate of 1/9th of the NRF's expenditure. This is largely a bookkeeping entry to compensate for the payment of GST on all revenue collected.

     

    Revenue Projections

     

    Accurate revenue projections have always been important, but with changes post 1 July 1996 and the projected decrease in the NRF's balance its importance will increase significantly. Recognising this, a joint project, which included the Treasury as a party, to develop a revenue forecasting model was commissioned. The resulting report identified close relationships have existed in the past between revenue collected and other variables. The prime relationship for the two major revenue sources are as follows:

     

  • Fuel Excise: the absolute level change in real private consumption and the absolute level change in real imports or goods and services.
  • Road User Charges: the level of change in real gross fixed capital formation and the level of change in real private sector consumption expenditure.
    •  

    The key lesson learnt in managing this project was that models of this type must be based on variables for which future projections are already obtainable.

     

    Lessons Learnt

     

    The following lessons have been learnt in ensuring revenue is collected:

     

     

     

    Expenditure

     

    Of the expenditure made from the NRF, I will only deal with the payments to Transfund New Zealand, as compared to the other transport Agencies, i.e. Police and the LTSA. This heading will be covered in four sections:

     

     

     

     

     

    Background

     

    Each year The Board approves the total value of the National Roading Programme (NRP). The only constraints on the Board regarding the Programme it approves are:

     

     

     

     

     

    less

     

     

     

     

    With the Board approving its Programme of work, i.e. without the need for Government approval or announcement as part the formal Government Estimates/Budget process, earlier approvals are possible. Early approvals provide significant advantages to RCA's in that they can obtain better pricing through letting their contracts earlier and from not trying to force a year's work programme into say 8 - 9 months. The other advantage for Local Authorities it that early approval provides alignment with their planning and property-tax fixing timetable.

     

    Preparation of the National Land Transport Programme

     

    Turning now to the programme preparation side of Transfund. The NRP, which forms the basis of Transfund's activity for the next 12 months and beyond for long term projects, is built up from bids by local government and Transit. These bids are then subject to checks on the reasonableness and appropriateness of any supporting B/C calculation before ranking them in order of priority. Maintenance is accorded the highest priority, with other projects ranked in B/C order until all available funds are utilised irrespective of where the project is located, i.e., there are no preset allocations for Transit, local authorities or work type.

     

    Funding levels for maintenance are determined using a combination of professional judgement supported by a number of information systems including the Road Assessment Maintenance Management Systems (RAMM). RAMM is a computerised pavement management system that includes road inventory and treatment selection for determining work programmes based on engineering and economic analysis. All RCA's in New Zealand are required to operate RAMM if they wish to receive Transfund funding.

     

    Road Controlling Authorities bids are then vetted by Transfund programming staff before a final recommendation for inclusion or otherwise into the NRP is made. The vetting process includes a sample audit of project B/C's. The sample selection is made on a stratified basis, with all projects costing more than $1M being automatically selected.

     

    To further refine the method of allocating maintenance funds a project has recently been commissioned with the objective of determining the level of maintenance funding provided by Transfund. The intended objectives of the project are to:

     

  • To develop a methodology for deriving optimal maintenance funding levels for individual road controlling authorities by defining levels of service for each maintenance category which are:
  •  

  • Appropriate to the particular RCA.
  •  

  • Economically justified and sound in terms of user benefits and life cycle costs of the asset. (The returns on expenditure are to be comparable with those from capital expenditure.)
  •  

  • Able to be integrated into asset management plans and maintenance contracts.
    •  

  • To Investigate the feasibility of producing tables containing recommended levels of service and corresponding maintenance strategies, based upon minimising life cycle costs for the given level of service.
  •  

    The results of this project, as can be imagined, are awaited with interest by roading authorities receiving Transfund funding.

     

     

    Cash Flows - The Cash Funding of Transfund by the NRF

     

    Moving more to the mechanics of the NRF's operation. Currently they pay Transfund at the beginning of each month, its estimated cash requirements for the month plus sufficient for an approximate $20M float. The Ministers of Finance and Transport agree the payment profile at the beginning of the year. To date month end balances have ranged from $7M to $23M , and Transfund has had an average of $50M invested in the short-term money market.

     

    Cash Flows - The Cash Paid to Transit and Local Authorities by Transfund

     

    Currently Transfund pay Transit for work completed in a "back to back" arrangement. The amount paid by Transfund matches the value of payments made by Transit, less any income it earned from investing cash balances, managing properties purchased ahead of State Highway construction and any other trading revenue. Total revenue from these sources is approximately $9M, compared to Transit's total budget in 1997 of $420M. The logic for this approach is that Transfund has determined the value of State Highway outputs and capital projects it wishes to purchase and wants to pay the least amount possible for them. However, this approach has provided little tangible incentive to maximum returns from investment and property management activities.

     

    Local authorities, on the other hand, are paid on the basis of monthly claims for work invoiced. The other important difference is that, while Transit is effectively 100% funded by Transfund, Local Authorities are paid on average 50% of the works total value. The balance is met from the property taxes raised by the local authority. Within the "on average 50%" paid to local authorities a multitude of rates exist depending on the local authority's ability to pay and the type of work undertaken. The most important rate is the "base rate", which is calculated after considering :

     

     

     

    using the following formula:

     

    Formula: FAR = k1 + k2 log (P/LV)

     

    Where: FAR = Financial Assistance Rate

    P = the current years allocation for maintenance, reseals, rehabilitation and minor safety projects ($000's)

    LV = 3 yearly average net equalised land value ($M)

    k1 & k2 = constants which are established to give a national FAR of 50%

     

    The result of this calculation is then compared to previous years base rate. If the result of the calculation indicates:

     

     

     

    The aim of these adjustments from the pure formula driven approach is to reduce the impact that significant variations to financial assistance rates could have on the continued financial viability of individual local authorities. This is particularly so for local authorities located in rural areas where roading expenditure frequently makes up a major part of their annual budget.

     

    The minimum base rate is 43% and the highest in the 1996/97 year is 75%.

     

    The Audit Function

     

    Transfund's Review and Audit function monitors on a 3 yearly cycle:

     

     

     

     

     

     

    A local authority's failure to comply with Transfund's policies and standards may result in require them being required to repay the funding received. The final amount to be repaid, if any, is determined by the Board.

    The Review and Audit Division also conducts what it calls "theme audits". In these audits it will take a particular type of project, e.g. rehabilitation, review how projects of this type are managed and performed, with a view of recommending improved practise.

     

    Two important things to note are, that the majority of audits have at least one external party in the audit team, drawn from either local government, consultants or another Transit region and that the virtually all audit reports are made public. Adopting this approach, firstly, improves the technical competency of the team, and secondly, but perhaps more importantly, provides an independent element that removes the potential for accusations of bias and favouritism, particularly for the state highway sector.

     

    Transfund itself is also subject to an independent external audit by the Office of the Controller and Auditor General. This Office has the authority to not only conduct financial audits in the normal way, but also effective and efficiency audits. Financial audit reports on Transfund's activities are tabled with its annual report in Parliament. The reports emanating from effectiveness and audits are tabled directly in Parliament.

     

    Lessons learnt

     

    In summary, the following are the key lessons learnt:

     

     

     

     

    Conclusion

     

    While significant parts of this paper have dealt with:

     

     

     

     

     

    as with any successful business, the key to a successful road fund is revenue. Without revenue adequacy, certainty, predictability and collectibility a road fund is destined to face severe difficulties in its continued operation, possibly even failure. As stated earlier, in New Zealand, that was almost the case as Government was subjected to significant amounts of political pressure for the Transit concept to be abandoned as a result of the flow-on effect to local authorities from the 15% budget cut referred to earlier in the paper.

     

    On the other hand if the key revenue elements are present, then significant efficiencies can arise as longer-term strategies can be planned and adopted by both the road funder and contracting industry.

     

     

     

    DISCLAIMER

     

    The views expressed in this paper are those of the author and do not necessarily reflect the views of Transit New Zealand, Transfund New Zealand and the New Zealand Government. The contents of this paper are necessarily generalised. Readers are urged to obtain appropriate advice upon their own particular circumstances, and must rely solely on the judgement of such independent advice.

     

     

    APPENDIX - Charts from the presentation

     

    NEW ZEALAND TRANSPORT ORGANISATIONAL STRUCTURE

      

     

     

    NATIONAL ROADS FUND