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