The knowledge base was developed in direct response to the demand for good examples of legislation for setting-up or restructuring road funds by operational staff and consultants. Much of the work involved is done by consultants and borrower staff and most of the work is done in the field. Hence, any help facility must be available to outsiders and it must be accessible from the field. The knowledge base is on the TWU web page and is also available in floppy disc form. It is basically a primer in how to deal with issues related to the subject matter of the knowledge node and provides follow-up references. The quality of consultant reports appears to have improved significantly as a result of the portability of the knowledge base.
The road financing and road funds database focuses on the key issues that you need to know about road financing via the consolidated fund, or via off-budget financing to ensure they generate a secure and stable source of finance without introducing any undue fiscal inflexibility. The knowledge base covers developing a road financing plan, putting roads on a fee-for-service basis, setting up a new road fund, and managing a road fund. It also includes examples of Terms of Reference and Selected References.
Key Issues for Road Financing and Road Funds
1. Developing a Road Financing Plan. When revenues available to the road sector are significantly less than the amount required to maintain the road network in a stable long-term condition - and to undertake justified improvements (i.e., projects with an EIRR of more than 15.0) - the main road agency should prepare an explicit long-term financing plan showing the size of the financing gap and suggesting how the gap might be bridged.
Among other things, the financing plan should consider the scope for: (i) getting better use out of existing resources by, for example, contracting out more design and implementation work to the private sector (or exposing in-house work to competition from outside contractors); (ii) increasing revenue mobilization by simplifying road user taxes and charges, restructuring them and improving revenue administration to reduce avoidance, evasion and leakage. Want to know how to restructure road user taxes and charges? (Annex 1); and (iii) allocating additional revenues from the government’s consolidated budget. In the case of (iii), the financing plan needs to identify where the additional allocations will come from - whether by taking funds away from other sectors and/or raising clearly identified taxes and charges. Want an example of a financing plan and see how to prepare one? (Annex 2 in Excel).
2. Putting Roads on a Fee-for Service Basis. Once all the above options have been exhausted - including the option of bringing in the private sector to build, operate and transfer some roads under concession agreements (see main node on toll roads and concessions) - it is usually time to consider going for off-budget financing and generating the required revenues by putting roads on a fee-for-service basis and depositing the proceeds into a commercially-managed road fund. In the early 1950s, when the Japan Road Improvement Special Account, the US Federal Highway Trust Fund and the New Zealand Land Transport Fund were established, this concept was referred to as the user-pay concept. Want to see summaries of these road funds? (Annex 3). The modern version of the user pay concept is referred to as commercialization.
Putting roads on a fee-for-service basis and depositing the proceeds into a commercially-managed road fund, is not the same as the conventional earmarking practiced during the 1960s and 70s. These conventional (or first generation) road funds simply did not work and the earmarking of general tax revenues - often of tax revenues unrelated to road use - was bitterly opposed by the IMF and most staff in ministries of finance. Want to see some examples of the problems experienced by conventional, first generation, road funds, as recorded in annual audit reports? (Annex 4).
Winning public support for fee-for-service is one of the most difficult things to do. The government needs to get all the key actors together—the road agencies, MOF, road users, the business community, farmers, etc.—so that they can seriously discuss how to establish a secure and stable flow of funds for roads. The mechanism for doing this usually involves: (i) holding a workshop; (ii) ensuring there is a representative audience; (iii) having presentations by local people stating how they see the problem; (iv) having presentations by resource persons share experience from other countries; and (v) conducting a facilitated discussion session which aims to produce an Action Plan for establishing a commercially-managed road fund, usually in conjunction with restructuring of the main road agency to make it more commercial and responsive to users. The workshop could involve 15 to 20, or as many as 100. It could likewise last 1 day, 2 days, or longer. Want to see how to run a workshop and to see examples of programs, Ministerial speeches and conclusions and recommendations? (Annex 5).
The type of earmarking associated with a commercially-managed road fund is radically different from that associated with past road funds (particularly those set up in Africa and LAC during the 1970s) and most current road funds in Eastern Europe. It differs from conventional earmarking because: (i) the arrangements are specifically designed to minimize the adverse fiscal impacts of earmarking; (ii) they form part of an agenda to manage roads along commercial lines; and (iii) the stricter financial discipline created by strong financial management produces benefits which more than offset the costs of any remaining fiscal inflexibility. Such road funds are no longer automatically opposed by the IMF, or at least by their Fiscal Affairs Department. Recent exchanges with IMF field staff have been less clear cut. However, once they understand what is being proposed, they generally support the concept. Want to see what World Bank and IMF staff think about commercially-managed road funds? (Annex 6). The Ministry of Finance also tends to be a strong supporter of commercially-managed road funds. The Ministry of Works is less keen, because of the stricter financial discipline it imposes.
3. Setting up a New Road Fund. When setting up a road fund, it is important to ensure that it has a firm legal basis. If it is set up under existing legislation (like the Finance Act), or using simple decrees, there should be a sunset clause to determine when it should be regularized by passing basic legislation, or closed down. The legislative instrument opening the road fund should be supported by published financial regulations or procedures. These may either be published as legal regulations in the government Gazette, or published by the road fund board. Want to see some examples of legislation and other legal instruments used to set up a road fund, together with other documents associated with setting up a road fund? (Annex 7).
Road funds come in all shapes and sizes. Some only finance main roads, some finance provincial roads, some finance urban roads, while others finance all roads, including the unclassified road network. So, one of the first decisions to be taken, concerns the kind of road fund the country wants (or needs). If the road fund is only going to finance main roads, it could be managed through a separate division in the main road agency (as in South Africa). On the other hand, if it is going to finance a number of different road agencies, it should be managed through a separate road fund administration (to avoid any conflict of interest). The organization should be managed by an Executive Secretary appointed by the board who should, in turn, appoint the staff. The road fund need not employ more than about 10-30 staff trained in planning and finance. Want more information on the various options for managing a road fund? (Annex 8).
So where do we have commercially-managed road funds? The oldest road fund is the one in South Africa which was established in 1935. It has had its ups and downs and will be fully re-instated with a fuel levy as of March 1998. Ghana has had a road fund for 12 years (restructured in 1996), Mozambique has had one for 8 years, Zambia has had one for 5 years (managed by the national Roads Board for three), and Sierra Leone has had one for 5 years. In addition, there are several new road funds which have been set up during the past 2 to 3 years in Lesotho, Guatemala, Honduras, Jordan and Yemen. Armenia is also in the process of passing legislation for a road fund, and Philippines and Pakistan are studying the implications of setting up road funds. Want to see summaries of the road funds in Lesotho, Mozambique, Ghana and Yemen? (Annex 9).
4. Managing a Road Fund. The road fund should be overseen by a representative board which could either be a separate board, or sub-committee of the board which oversees management of the road network. Members should ideally be nominated by the constituencies they represent and there should be an independent chairperson. Want to see how to set up a board to oversee management of the road fund? (Annex 10).
The road fund revenues should be collected using a simple two-part tariff consisting primarily of a fuel levy, vehicle license fees, a supplementary heavy vehicle fee, international transit fees and fines for overloading. The tariff should be designed to ensure it does not abstract revenues from other sectors. Extra spending on roads should be financed through extra payments by road users, i.e., the extra revenues must be in addition to all pre-existing taxes going into the consolidated fund. Want an example of such contracts? (Annex 11).
There should be a consistent procedure for regularly raising and lowering the road tariff. If the tariff is collected under the government’s tax-making powers, the usual procedure is for the oversight board to recommend changes to the Minister (of Finance), following consultation with the organizations represented on the board (to ensure the changes are acceptable and will not result in a public outcry). The Minister then includes them in the budget. When the tariff is set under legislation (as a road public utility), the board normally decides on the revised tariff, submits it to the Minister (of Works or Transport) and, provided they make sense and are consistent with the government’s macro targets, the Minister will go ahead and publish the new charges in the Gazette. There needs to be clearly worked out arrangements to ensure that non-road users do not have to pay the diesel levy. Want some examples of how to exempt non-road users from paying the diesel levy? (Annex 12).
There should be a transparent mechanism for dividing funds between the different road agencies entitled to draw from the road fund. For maintenance, this is normally done in terms of "responsibility" and "affordability" as measured by indicators like road length, perhaps weighted to reflect differences in costs of maintenance, and size of the local property tax base. For capital works, the EIRR is normally used. Want some examples of procedures used to divide funds between different road agencies? (Annex 13).
There should also be well-thought out cost-sharing arrangements for local government and community roads. This helps to "stretch" the road fund resources and also helps to ensure that recipients only choose schemes to which they attach high priority. Cost-sharing is typically at 50 percent for both capital works and maintenance, often adjusted to reflect affordability. At the community level, the arrangements should permit local contributions to be made by way of contributions in kind, e.g., through volunteer labor, supply of materials, use of farm equipment, etc. Want some examples of cost-sharing arrangements? (Annex 14).
The procedures used to disburse funds to the various road agencies entitled to draw from the road fund, should be designed to strengthen financial discipline. There are three broad options. The road fund can: (a) operate a revolving fund and certify ex-post that withdrawals are in accordance with agreed regulations; (b) reimburse the road agency after the work has been done and payment has been certified; or (c) pay contractors directly after certification that the work has been done according to specification. Want some examples of ways to disburse funds to road agencies? (Annex 15).
The road fund should be subject to regular technical and financial audits. The audit may either be done by independent auditors, by the Auditor General's Office, or by auditors appointed by the Auditor General. Want to see some examples of what an audit report on a road fund looks like? (Annex 16).
5. Terms of Reference. Want to see examples of Terms of Reference for setting up a road fund, restructuring an existing one, auditing a road fund, technical assistance to strengthen a road fund, dividing funds between different road agencies and classes of road, improving administration of the road tariff, and a standard format for studies of road user charges? (Annex 17).
6. Good Practice Consultants report. Want to see an example of a consultants report summarizing what is involved in setting up a commercially-managed road fund? (Annex 18).
7. Selected References. A limited selection of references on road financing and road funds are available. (Annex 19).
For more information, contact:
Topic Node: Ian Heggie, X34552;
Kavita Mathur, X85050
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External (from IRF Website):