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S e c o n d G e n e r a ti o n R o a d F u n d s : T h e W a y A h e a d

By lan G. HeggieVisiting Professor, University o f Birming ham

While reviewing the first generation road funds, three impo rtant insightseme rged. First, it became clear that roads we re big business. For example, theJapan Highw ay Public Corporation - one of several toll road comp anies in Japanmanages assets the same size as General Motors, while the U.K. HighwaysAge ncy - a relatively small road agency with only 10,500 km of roads - mana gesassets the sa me size as IBM. Second, the financial needs of the road sectorwe re typically grow ing faster than the govern men t s ta x revenues. Third, the sizeof the road business, comb ined with the grow ing financial needs of the roadsector, me ant it was beco ming increasingly difficult to finance the road sectorthrough general tax revenues. Government budgets were n ot designed tofinance large global businesses. Instead, we need ed to m ove roads off-budget,comm ercial ize them and manage them l ike a business bring roads into themarket place, put them on a fee-for-service basis and m anage them l ike abusiness.In a letter to th e S enior Managing Director at the International Monetary Fund(IMF), the four m ain principles underlying comme rcialization of roads wer edescdb ed as follows (H eggie and Vickers, 1998): Road users should pay for usage of roads through an explicit road tariff thatmust be clearly separated from the government s general taxes. I t wi l l usual lytake the form of an annual vehicle l icense fee which charges for acce ss to theroad network, a levy added to the price of fuel which charges for use of theroad network, and, where feasible, a congestion charge to manage

congest ion Introducing the abov e road tariff must not abstract revenue s from thegovernment budget. The ministry of finance will usually be invited to convertthe existing allocations for read m aintenance into an equ ivalent fuel levy, butthat is all . Any addit ional revenues must come from extra paym ents by roadusers. T hat is part of the objectivo road users pay for using the roadnetwork, they know that they are paying, and this encourages them todema nd value for money. The proceeds from the road tari f f are deposited into a road fund m anaged bya board that includes representatives of road users and th e businesscommunity. At least half the board members general ly come from outsidegovernm ent and are nominated by the organizations they represent. Thechairperson is independent. This structure creates a form of surroga te market

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discipline. B oard members re presen t the pe ople wh o ar e paying fo r the roadsand they thus have a strong vested interest in seeing that they are notovercharged and that the mon ey is well spent.Finally, the board should have a small secretariat to manage the funds,published legal regulations should govern the way the funds are managed,and the Auditor General's office or private sector auditors appointed by theAud itor General, should carry out independent techn ical and financial audits.

Add itional elem ents are that the road fund should ide ally support maintenance o fall roads (including cost-sharing with local governments and communities),responsibility f or different parts o f the road netwo rk should be clea rly assigned toa competent road authority, and the road authorities should introduce soundbusiness practices.IMF OFFICE MEMORANDUMMEMORANDUM FOR FILESJanuary 13,19 97Subject: Meeting on Road FundsOn January 9, Mr. Heller (FAD) chaired a mee ting with Mr. Heggie (Bank), Mr.Ebrill (Tax Policy, FAD ), Mr. Gup ta (Expenditure Po licy, FAD), Mr. Pellechio(Fiscal Review Division, FAD) and myself. The purpose of the meeting was todiscuss the appropriate institutional structure and arrangements for separateRoad Funds (covering the ex pen diture on Roads O&M and financ ed in part byuser charges); Bank work in develop ing such funds; and the coo rdination of theBank work with the w ork of IMF area departme nt missions. The meeting followedthe memorandum from Mr. Hegg ie to the DMD (D ecem ber 19), seeking to createa closer understanding of the Banks position in, and better coordination with, theIMF.Etc.The IMF we re favor ably dispos ed to the concept of commercializing roads andmoving the manag ement of roads closer to the boundary between the public andprivate sectors. Following a meeting between myse lf and staff from the IMF'sFiscal Affairs Division, one of their staff set down the basic criteria which asecond genera tion road fund should meet.The road fund should:i) Not simply be a means of avoiding stdct budget discipline, whether forroads o r for wide r public expenditures.

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i i )

c)

d)

Be in the form o f an agency which acts as a purchaser, not as a p roviderof road maintena nce services. As a m inimum, it should have a missionstatement, objectives, physical output indicators, and a total resourceenvelope. All work financed by the road fund shou ld ideally com e from theprivat e sector.Have a f inancial man agement system which can handle the more com plextasks involved in managing total resource envelopes, and associatedaccounting requirements.Have a ma nag em ent board with a significant private sector presence, butgenuinely free from a produc er (whethe r supp lier or trade union) interest.The criteria for mem bership should be objectivity and impartiality.

Ideally, one migh t also wan t to see a high degr ee of cost recovery through usercharges. Any (supplem entary) income from central or local govern men tbudgeta ry sources, should continue to be subjec t to norm al governm entbudge tary discipline. The roa d fund must not receive any guarante ed share oftotal tax revenue to which is added the money generated from road usercharges.Finally, one must be cautious in constraining the capacity of countries to raisefuel dutie s as a mean s of increasing ge nera l reven ues. Inevitably, this puts aburden on governm ent and the road fund m anagem ent to explain, at a minimum,wh y all petrol price increases are not created equal. It may also me an that, forsome developing countries, where fuel charges are a particularly importantsource of tax revenue, road funds ma y simply not be appropriate.To sum up, the desirability of dedicated road funds needs to be a ssessed on acase-by-case basis. Provided the right conditions are m et, road funds can beendorse d in practice as well as in principle. The q uestion is just h ow often theright cond itions can be met (Potter, 1997).And so the second generation road fund was born (they were actually born inabout 1992 and the docume ntation then followed ). The guiding principles whichunderlie these road funds a re as follows: the road fund should be ma naged through a se parate road fundadm inistration which channels funds to l l parts of the road network; oversight should be by a publ ic-private board m ade up of nominees oforganisation s with a strong vested interest in well m anag ed roads

(including gove rnm ent departmen ts); ideally, the chairman should be an independe nt person of standing wh o canact - and be see n to be acting - in the pub lic interest; revenues should com e from charges related to road use - ideally a two-par ttariff consisting of vehicle license fees (often also a heavy vehiclesurch arge ) and a fuel levy;

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the ministry of f inance should be asked to pay existing allocations for roadsinto the road fund (in the form o f an equivalent fuel levy) - all addit ionalrevenues must come from extra payments by road users, to ensure thatthe road fund does n ot abstract revenues awa y from oth er sectors; once the fuel levy reaches abo ut $0.03-0.05 per litre, procedures should beintroduced to ensure n on-road users do not ha ve to pa y the fuel levy;day-to-day manage ment should be by a small secretariat which manages theroad fund along comm ercial lines; there should be regular technical and f inancial audits of all wo rks f inancedthrough the road fund and the results should be tabled before parliamen tand publis hed in the press; funds should be disbursed to road agenc ies in a wa y which strengthensfinancial discipline (i.e., all funds should be a ccounted for a nd there shouldbe evid ence that all wo rk has been don e according to specif ication); the road fund should b e suppo rted by sound legislat ion and publishedfinancial rules and regulations.The concept of the second generat ion, or commercial ly managed road fund,quickly caught on and a large number of countries have now either establishedsuch road funds or are in the f inal stages of sett ing them up. The next article inthis series exam ines emerg ing good practice in relat ion to these secondgene ration road funds.

References:Heggie, lan G. and Piers Vickers. 1998. Commercial Management and Financingof Roads Technical Pa per 409, World Bank, Washington, D.C.Potter, B.H. 1997. D edicated road funds: a pre limin ary vie w on a World Bankinitiative. IMF Paper on Policy Analysis and Assessment Fiscal AffairsDepartment, International Monetary Fund, Washington, D.C.

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