XXI World Road Congress, 3 - 9 October -Kuala Lumpur
 

Reform of Financing and Management
of Road Maintenance
A New Generation of Road Funds in Latin America

Dr. Gunter J. Zietlow
Ing. Alberto Bull

International Road Federation (IRF)
UN-Economic Commission for Latin America and the Caribbean (ECLAC)
Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH
 

ABSTRACT

The extensive road networks of Latin America and the Caribbean, valued at over 350 billion US$, show alarming signs of neglect and decay. More than 16 billion US $ are being wasted annually due to the absence of adequate road maintenance. Individual countries in the region are losing between 1% and 3% of their annual GNP due to an unnecessary increase in vehicle operating costs and loss of road asset value alone. This devastating situation is not only true for Latin American countries, but can be found in other developing countries and some developed nations as well.

The prevailing financial and institution system of road maintenance has been clearly identified to be at the root of the problem. In most of these countries an adequate flow of funds cannot be secured by the general budgeting financing procedure. In addition, the rules and regulations of the public administrative system do not allow for an effective and efficient management of road maintenance. As it is unlikely that under the prevailing system substantial and sustainable improvements can be made a new approach is necessary to eradicate this problem.

As a consequence, several of the countries in Latin America and the Caribbean have started to put road maintenance on a fee-for-service basis and to transfer road maintenance management from a "government ministry environment" to a "company environment", which seems to be better suited in the long-run to keep roads in good condition. As a result, a new generation of road maintenance funds has been created in Honduras, Guatemala and Costa Rica. Most likely other countries such as Brazil, Colombia, El Salvador, Nicaragua, and Peru will soon follow suit. The article discusses the principles for creating sustainable road maintenance funds in general, as well as the approach taken by each of the different countries involved.
 
 

1. Introduction
 

In Latin America roads have been the backbone of passenger and freight transport for the last 50 years. Since then, road networks have been growing rapidly. Several years ago the rate of expansion started to slow down and the road networks began to age fast. Scarce resources, especially in the 80ís, have contributed to an ever-decreasing amount of money allocated to road maintenance. Towards the end of the decade several countries in the region spent less than 20% of the amounts necessary to maintain their road networks in adequate conditions. A typical example of how road maintenance spending has been falling steadily in those years can be seen from figure 1. In the early 90ís funding levels for the road sector slightly improved, but funds were and still are mainly used for road rehabilitation and only a little is being spent for the more cost effective routine and periodic maintenance activities. Nowadays, to raise funds for road rehabilitation is much easier than for road maintenance, due to the fact that loans to finance rehabilitation are (still) readily available from international lending agencies, while funding for road maintenance is subject to the political debate in parliament and is normally losing ground to other politically more attractive issues. Generally between 2% and 3% of the new investment value of the road network is required for routine and periodic maintenance alone. Unfortunately, even today, countries in the region are spending normally between 20% and 50% of the funding required for adequate road maintenance only. In addition, these already insufficient funds often are being used inefficiently in a poor state. Normally, only 1/3 of the paved main road network is in good, 1/3 in regular and 1/3 in poor condition. Unpaved roads are in even worse shape. Road conditions naturally vary from country to country. These appalling figures were true 10 years ago and still hold true today, despite the huge amounts poured into road rehabilitation during recent years. Past efforts to improve the level of financing for road maintenance have either failed or were not sustained. Equally unsuccessful were most of the countless efforts, mainly financed by multilateral or bilateral agencies, to improve the performance of the public road administrations in the region.

The lesson to be learned is clear. Only approaching the financing and management of road maintenance can make substantial improvements of road conditions in a completely different way. Instead of trying to solve the many apparent problems frequently put forward such as:

it is necessary to tackle the two underlying causes, namely the present financial and the present institutional system of road maintenance.
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Cause number 1:

Experiences clearly reveal that in nearly all developing and most developed countries as well, it is impossible to secure an adequate and stable flow of funds for road maintenance through general government budget financing procedures, especially if their allocation depends on the annual political budget debate.

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Road maintenance is politically unattractive; new road construction, road rehabilitation, social or education programs are more "visible" and produce more political prestige. In addition, lack of maintenance culture and little understanding of the economic consequences of poor maintenance even by those in charge of roads make it even more difficult to raise sufficient maintenance funds. Only very few countries in the world, such as Japan and some European countries have proven to be able to assign sufficient resources to road maintenance on a sustained basis. These are rather exceptions to the rule and cannot be taken as examples for the functioning of financing road maintenance through general taxes. Some countries, also in Latin America, used to finance road construction, rehabilitation and maintenance through earmarked taxes, especially on fuels used by motor vehicles. None of these funds had road maintenance as a priority norcould be sustained on a long-term basis. The main problem has been that governments regard these funds as "government funds" which they can (and do) utilize for other purposes, especially in times of crises, which often continue "indefinitely". ________________________________________________________________________

Cause number 2:

Rules and regulations of the public administrative system do not allow for an effective and efficient management of road maintenance, in spite of the good will of many public employees responsible for road maintenance.

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In Latin America and the Caribbean, government departments mainly carry out the management of road infrastructure. While most of the actual construction, rehabilitation and some of the maintenance of roads is being contracted out, the planning, contracting, supervision and most of the road maintenance works are still being undertaken by these government departments themselves, who face the typical problems of all public administrations, such as overstaffing, lack of discipline and control, lack of incentives and disincentives, and corruption.

In order to improve effectiveness and efficiency of road maintenance, e.g.

on a sustainable basis, it is paramount to reform the financing, the institutional set-up, and the management of road maintenance with the active participation of the direct and indirect road users. Any reform that does not tackle all these issues will face a high risk of failure.
 

2. Financial Reform of Road Maintenance

The best way to secure an adequate and stable flow of funds is to charge road users a road maintenance tariff in exchange for the services of maintaining roads and not to rely on taxes. In most countries the financing of road maintenance through taxes has never worked satisfactorily and it would be at best dangerously misleading to assume that this will change for the better in the future. Road maintenance can be treated as a public service similar to water supply, telephone and electricity services, where the user pays for the services received. To be able to do so, the following conditions must be met: the road user pays in relation to road usage, the one who pays should receive adequate road maintenance services, and somebody not using the road system should not pay. In addition to these criteria the charging system should be easy and inexpensive to administer and difficult to evade. The system that best suits these criteria is an electronic tolling system covering the whole road network. Each vehicle can thus be charged individually according to its usage of any particular road. Unfortunately, this system is not readily available yet and will not be implemented on a comprehensive scale in most of the developing countries in the near future. For the time being, a shadow toll system is recommended, which mainly uses the consumption of motor fuels on roads as a "service meter" and reflects usage of roads fairly well. This implies a service charge or road maintenance tariff to be levied and collected together with the sale of motor fuels. The only disadvantage of charging this tariff together with the sale of motor fuels is psychological, as most people consider anything charged together with motor fuels as "another tax" to finance general government expenses and not necessarily the provision of road maintenance services. Therefore, it is extremely important to identify and clearly mark this charge as road maintenance tariff and to collect the receipts into a separate fund, independent of any government, departmental or municipal funds and make sure that the proceeds are used for road maintenance only.

This way the pump price of motor fuel will continue to contain a tax element to finance general government budget expenses, one of which will be construction and rehabilitation of roads, and a road maintenance tariff to be paid into a separate Road Maintenance Fund to be spent exclusively on road maintenance (see figure 2).

Since motor fuels are being consumed on all roads it is also fair that all roads; e.g. interurban, urban and rural roads should participate in receiving funds from the Road Maintenance Fund. The question remains to what extent maintenance costs should be reimbursed by the Fund. This issue is especially relevant for roads with very low traffic, as the road maintenance tariff "collected" on these roads is far below the funds required for maintaining them. Most likely, the Road Maintenance Fund will have to contribute to these costs in a somewhat higher proportion than the contribution of the road maintenance tariffs collected from the motor fuels consumed on these roads. The actual amounts could be tied to a number of criteria or simply to a flat rate per kilometer. Fixing these amounts could be part of the decision process within the Fund where the road users have a stake.

Since one of the conditions of a tariff is that only road users should pay for the road maintenance services, the issue of diesel not used on roads remains to be resolved. There are several options to deal with this problem. One possibility is to chemically differentiate between the two diesels by coloring the one, which is not to be used in road vehicles. This method is being used in many developed countries and requires either a good control system or very disciplined road users. Another possibility is to give a rebate equivalent to the amount of the road maintenance tariff to those not using the diesel in road vehicles. This is fairly easy to handle in the case of power stations and others using big quantities of diesel, while it is almost impossible to administer for small scale users like farmers. In this case other methods of compensation could be applied like assigning more maintenance funds to farm roads than justified under normal road maintenance cost allocation systems for these roads.

How much is normally required to cover the maintenance cost of a countryís road network? Based on the analysis of various developing countries in Latin America, between 7 and 9 US cents per liter of motor fuel would be required to cover the costs of maintaining the entire road network of a country, if motor fuels were the only source of road maintenance funding and these roads were in maintainable conditions. For most countries this means that large sections of their road networks will require rehabilitation first, before they would be eligible to receive funds from the Road Maintenance Fund. If additional road maintenance tariffs for heavy vehicles are being applied, the tariffs to be raised in connection with motor fuels could be reduced accordingly.

An often-asked question regarding road tariffs is why not use the conventional toll collection system to pay for road maintenance? Unfortunately, conventional toll collection costs are fairly high. Only for roads with more than 1500 vehicles per day do these costs stay within a reasonable range of 10% - 30% of the tolls collected, depending on the level of tolls and the number of vehicles per day. Therefore, this system is economically viable for a small percentage of roads only, less than 5% of all roads in Latin America, and cannot solve the financing of road maintenance for a countryís whole road network. Tolls could contribute to recover road maintenance costs, but due to the conflict of "double charging" (tolls plus road maintenance tariffs) they are not recommended for this purpose. Tolls on toll roads should preferably be used to recover construction or rehabilitation costs while maintenance cost should be reimbursed by the Road Maintenance Fund.

It might be difficult to convince road users to pay an additional road maintenance tariff, because they will argue that the government already receives enough funds from taxes on motor fuels, motor vehicles, licensing fees, etc. to cover the cost of road construction, rehabilitation and maintenance. Probably equally difficult might be to persuade governments to renounce part of "their" taxes and thus leave room for levying road maintenance tariffs so that the pump price of motor fuels will hardly be affected. The fact is that road users presently face the consequences of poor road maintenance in the form of higher vehicle operating costs. Investing 1/3 of the additional vehicle operating costs now spent on bad roads in road maintenance, would save the road user the other 2/3 (see figure 3). Most road users are not aware of these facts. Knowing what they could save by paying a road maintenance tariff, most road users would be willing to pay, even if this would mean paying in addition to what they pay already in the form of fuel taxes and other road vehicle related taxes, but only if they can be sure that the funds raised through tariffs will be used for road maintenance only. On the other hand, governments very often are willing to decrease fuel taxes by the amount actually used for road maintenance when the responsibility for the funding of road maintenance and maintaining roads in good condition, shifts to the Road Maintenance Fund.
 

3. Institutional Reform of Road Maintenance

In order to assure an effective and efficient management of road maintenance it is recommended to create an institution to safeguard the public interest in keeping roads in good condition, and to transfer the responsibility of road maintenance from the public to the private sector.

How can we safeguard public interest in preserving roads in good condition? Presently, in most of the developing world, public road administrations and the respective ministries are responsible for keeping the road networks in good condition. But hardly anybody in those institutions cares whether this is done well or not. None of them has to face any real consequences of not preserving roads in good condition. Often they donít even know the conditions of the roads under their jurisdiction, even less so they know the asset value of these roads (which is often the biggest or one of the biggest assets governments are responsible for) or whether the asset value is increasing or decreasing. Any commercial enterprise neglecting its assets as governments do would be out of business soon. The ones who actually have to bear the consequences of poor road maintenance are the road users. Therefore, they are the ones who have a direct interest in maintaining roads in good condition and therefore should have a more direct control of overseeing road maintenance spending. One way of achieving such control is to create a Road Maintenance Board, a public institution with complete financial, administrative and technical autonomy and with active road user participation. Depending on the size of a country, there might be either subsidiary or independent local Road Maintenance Boards for the different categories of roads and or road administration districts. The principal attributions of such road boards should be:

Road Boards exist in various countries around the world, either with executive functions such as in New Zealand, Zambia, and Honduras or advisory functions as in Japan, Tanzania, and Guatemala. Based upon the positive and negative experience gained from road boards/funds worldwide, certain design criteria can be established which might help to create sustainable Road Maintenance Boards/Funds, namely:

In order to be effective the Road Maintenance Board/Fund has to channel and control funds to other agencies, corporations or companies for planning, executing and supervising road maintenance works. Depending on the structure of the road administration in a specific country, there are several possibilities of how the Road Maintenance Board can operate. The principal decision to be taken by an executive Board is whether or not it is going to contract out work directly or whether it wants to make use of an existing road administration or agency. The more effective and efficient these organizations are, the more likely they will be given a major role to play. If there exists an efficient road agency or corporation a performance contract between the agency and the Board might be the best choice (see figure 4). Alternatively, the Board might decide to contract out maintenance works directly, while making use of the planning and contract preparation skills of the existing road administration. One ultimate administrative structure could be the Road Maintenance Board contracting all road maintenance to Road Maintenance Management Companies in charge of maintaining roads to a certain standard in a specific area on a long term basis (see figure 5). For smaller countries, having one National Road Maintenance Board might be sufficient; for bigger countries, creating Provincial and Municipal Boards as well might be the better solution.

One question still remains: Who is going to contract and pay for road construction, rehabilitation and major improvements? As long as government bodies are receiving motor fuel taxes, it seems fair that they should continue to finance these works and either contract them directly or let the Road Maintenance Board(s) contract the work on their behalf. The second solution would have the advantage that it might better ensure that quality of road design and construction suits road maintenance needs. Examples of the composition and characteristics of some Road Fund Boards can be taken from box 1.
 

4. The Reform Process

To change the present financing of road maintenance from a tax to a "fee-for-service" basis is a fairly new approach too and requires the support of a wide base of road users as well as the approval of the government and the politicians in control of the legislative bodies. The easiest way to convince somebody to change something is to clearly demonstrate to him the advantages he would receive from doing so. This doesnít seem to be too difficult in this case, because the road users finally will save more on vehicle operating cost than they will have to spend on road maintenance tariffs, and the government and ultimately the taxpayers will have to spend less on future road rehabilitation as well. Experiences reveal that road users very often are willing to pay more if they can be assured that the proceeds will go to road maintenance only. And the best way to ensure this is by giving road users a control over where and how to spend the tariffs collected. A few but influential people might lose from introducing the new charging system. These are mainly people who can take advantage of the present situation in order to favor private or political interests, which certainly will be more difficult to do in a more transparent system controlled by road users. Therefore, awareness building, orientation and organization of the direct and indirect road users are essential for implementing such reform. Typical groups to involve in this process are, for example, passenger and freight transport organizations, automobile associations, farmers associations, chambers of commerce and industry, and road associations.

Often the question arises whether or not to include the financing of road rehabilitation in such a financial scheme as well. This depends on whether the users are willing to pay for rehabilitation too. They might argue that road rehabilitation is necessary only because the government did not maintain the roads in the first place, and thus will be reluctant to pay in form of user fees. As long as governments find enough funds or are pressed by the road users to do so, the road users might succeed with this line of argument. If public administrations are neither able nor willing to mobilize enough resources of their own, external credit organizations like the World Bank or Regional Banks might step in to assist in financing road rehabilitation (which they presently still do), or the road users will have to allow for road rehabilitation costs to be covered by road maintenance tariffs. Since many countries are faced with a high percentage of their road system being in poor condition, requiring rehabilitation first, before regular maintenance can take place, it might be necessary for some of them to temporarily include financing of road rehabilitation in this financing scheme as well. This of course will be reflected in the tariff levels, which for avoiding inflationary pressure should rise only gradually, to allow for a parallel saving in vehicle operating cost.

Since in the late 80ís whole road networks were collapsing in several developing countries, as was the case in Peru for example, and since governments began to recognize that the present financial and institutional system of road maintenance is at the root of the problem, many countries, especially in the developing world, have begun to ride the road towards reform. More than ten years ago, and with the help of The World Bank and bilateral donors in what was called the Road Maintenance Initiative, several countries in Africa started to reform their road maintenance systems by creating Road Boards with road user participation to oversee Road Funds to finance road maintenance and partially road rehabilitation as well. Until now Zambia, Tanzania, Sierra Leone and Ghana have successfully managed to establish Road Boards in Africa. Zambia even managed to create an executive Board where only the representatives of the private sector are eligible to vote.
 

5. The Reform in Latin America

For the road maintenance reform to take shape in Latin America and the Caribbean the reform concept developed by ECLAC was instrumental. The development of this concept and its dissemination in the whole region as well as a favorable reform climate made various countries susceptible to engage in such a reform. In 1993 the International Road Federation, the UN Economic Commission for Latin America and the Caribbean, the World Bank and the Pan American Institute of Highways joined forces in promoting regional and national seminars on improving the highway system in Latin America and the Caribbean under the name PROVIAL. Thefinancial and institutional reform of road maintenance played and still plays a major role in all of these seminars. After several countries expressed their interest in embarking on such a reform, in 1994 the International Road Federation and the German Agency for Technical Cooperation initiated a project to assist these countries in creating Roads Maintenance Funds and contracting out road maintenance by performance standards.

In order to initiate the reform process in each participating country, strategy papers and a draft legislation have been developed and high-level seminars have been conducted in cooperation with the respective governments, political parties and all major stakeholders in the road transport sector. In most cases the World Bank as well as the Interamerican Development Bank, being major lenders in the road transport sector, have actively supported the process.

So far Honduras, Guatemala, and Costa Rica have succeeded in creating a Road Maintenance Board which oversees a Road Maintenance Fund, other countries such as Brazil, Nicaragua, and El Salvador are also well advanced in their efforts towards creating such a fund. Each country is faced with a different situation and is therefore shaping its very unique solution to the problem, but all are more or less following the basic principles which govern the reform.

In Honduras the legislation to create the Road Maintenance Fund was passed in 1993. The fund is being supervised by a Board which consists of 4 representatives from the central government, one representative from the municipalities and 3 representatives from the direct and indirect road users. The principal financial source of the fund is a levy on fuel in the form of a dedicated tax. The Board is responsible for the routine and periodic maintenance of the official road network, excluding urban and municipal roads. Up to 10% of the funds can be disbursed for road rehabilitation works. All works as well as services have to be contracted out to the private sector. In addition, to avoid creating another bureaucracy, the administrative cost of the fund has been restricted to 2.5% of its annual budget. Unfortunately, the law, that was created by an outgoing government, stipulated that all proceeds from taxes related to road transport, such as fuel taxes, import duties on motor vehicles, licensing fees, etc. have to form part of the income of the fund. This was unacceptable to the new government. In addition, these proceeds would have supplied twice the amount of funds needed for road maintenance. Only recently, the issue has been solved by an amendment to the existing law, stipulating that a specific portion of the fuel tax be dedicated to the fund.

In late 1996 Guatemala passed a law increasing the taxes on motor fuel, dedicating this increase and part of the existing fuel taxes to a special fund to be disbursed exclusively for road maintenance and improvement. The body governing this fund was created by government decree in early 1997. Three members of its Board are government officials and three members are from the private sector. As in the case of Honduras all works and services have to be contracted out to the private sector and the administrative cost of the Fund has been limited to 2% of its annual turnover. The original intent by the Minister of Transport to create an autonomous Road Maintenance Fund had to be abandoned, as it required a 2/3 majority of parliament for its approval, which the government was unable to secure. So far, this fund has worked very effectively, creating a very favorable perception in the general public of the work of the present government, which certainly will create votes in favor of the government in the upcoming elections.

Costa Rica created its Road Fund in mid 1998, which is mainly funded by a levy on fuel. The fund takes care of the maintenance, rehabilitation and improvement of the national road network. Priority in funding has to be given to routine and periodic maintenance. The Board has three members coming from the central government (all from the Ministry of Public Works and Transport), one member representing the municipalities, and three members from the private sector. The private sector representatives are nominated by their respective organizations. As in the cases of Honduras and Guatemala, the fund is obliged to contract out all works and services to the private sector. Unfortunately, the fund has to abide by the government rules concerning wages and letting of contracts, which might have negative effects on its efficiency.

The government of Nicaragua has just submitted a proposal to parliament for the creation of a Road Maintenance Fund. The intention is to allow up to 10% of its annual budget to be spent on rehabilitation works. The fund will eventually take care of the entire road network including urban and municipal roads in line with a gradual increase of the levy on fuel which is its main source of funding. The composition of the Board is slightly in favor of the private sector, as two members will be representing the government, one will come from the local governments and three will be from the private sector, representing direct and indirect road users. As in the other three countries mentioned above, all works and services will have to be contracted out and in this case the administrative cost of the fund will be restricted to 5% of its annual budget. Besides having an internal audit, the fund will be audited annually by an independent auditor. In addition, it is planned to regularly inform the road users about the performance of the fund. In order to gain public support, the government has undertaken an extensive public awareness campaign and has decided not to increase the fuel price at the initial stage of the fund, but will transform part of the existing fuel taxes into a dedicated fuel levy.

El Salvador is in the process of preparing a draft law very similar to the one in Nicaragua. The present government is planning to submit the proposal to parliament at the beginning of the next legislative period in mid-1999. Other countries such as Brazil and Ecuador are still far from reaching a consensus on creating a road maintenance fund. In Peru and Colombia initial progress towards establishing a road maintenance fund has suffered major setbacks as governments or priorities have changed. Nevertheless, the urgency to reform the present ineffective and inefficient system of maintaining roads in these countries is mounting, thus producing increasing pressure for major reform to finance and manage their road maintenance.
 

6. Lessons Learned

Since all of the road maintenance funds in Latin America have started operating recently, it is far too early to judge their performance or long-term sustainability. Nevertheless, some lessons can be learned from the process of creating these Funds.
 

Whether the Road Maintenance Funds which have been established already or are in the process of being created in Latin America will survive in the long run is yet to be seen. The more a Road Maintenance Fund follows the principles which help to make it sustainable, the more are its chances of survival. But it is also dependent on the environment in which it operates. Therefore, the political, economic and social stability of a country, as well as a well-established culture of citizen participation in public and communal affairs, are essential for long-term survival. And it is the operating environment in many countries in Latin America that seems to pose the greatest challenge for the existing and future Road Maintenance Funds in this region.
 
 

Bibliography

-Dunlop, Robin J. 1995. A Comprehensive Reorganization of a Road Agency. The New Zealand

Experience, Presentation at the World Bank, September 13, 1995.

-Heggie, Ian G. and Vickers, Piers. 1998. Commercial Management and Financing of Roads, World Bank Technical Paper Number 409, The World Bank, Washington D.C.

-Jhala, Raymond A. 1995. Ownership: Involvement of Road Users in the Management of Roads. Paper presented at the XXth World Road Congress, Montreal.

-Schliessler, Andreas and A. Bull. 1993. Roads: A New Approach for Road Network Manage-ment and Conservation. United Nations Economic Commission for Latin America (ECLAC) Santiago de Chile.

-Zietlow, Gunter J. 1996. Public Private Partnerships to Finance and Manage Road Mainte- nance. Paper prepared for presentation at the Road Construction Rehabilitation and Maintenance Session of the 1997 XIIIth IRF World Meeting, Toronto, Ontario, Canada.



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