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Roads dominant form of transport road assets now

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  1. Options for Public Financing of Roads: Off-Budget Financing Prof. Ian G. Heggie University of Birmingham, UK ECA GDLN Road Financing Series Washington, DC

  2. Overview of Presentation • Why off-budget financing? • Correct terminology • Fee-for-service road enterprise/fund • Common questions asked about road enterprises/funds • Selected examples: New Zealand and Kenya • Problems with road enterprises/funds • Strong and empowered boards are key • Summary

  3. Why Off-Budget Financing • Roads dominant form of transport – road assets now “big business” (Fortune 500) • Road transport growing 1.5-2.0 times GDP -- faster than government tax revenues • Cannot easily finance large business enterprises through regular budget • In adition, inability to let long term contracts raises civil works costs 25+% • Erosion of road assets now a major problem: • rehabilitation costs >> timely maintenance • cuts in maintenance raise VOCs by 2-3 times

  4. Correct Terminology • Generally bad experience with earmarking & “user pay” road funds: • funds for roads diverted from other sectors • less budget discipline & poor governance • raids, robbery and worse • fiscal inflexibility • New financing mechanism based on public enterprise, market-based model: • bring roads into the market place • put them on a fee-for-service basis • manage them like a business

  5. Fee-for-Service Fund/Enterprise 1 • Independent agency channels some funds to all parts of the road network • Purchaser not provider of services • Revenues only from charges related to road use: • access/fixed charge = license fee • user charge = surcharge added to fuel • peak load surcharge = congestion fee • No diversion from other sectors • Exemptions for off-road usage of diesel

  6. Fee-for-Service Fund/Enterprise 2 • Managed by a broad-based oversight board • More than half board members non government with independent chairman • Strong outreach program to win public support for road program and its financing • Day-to-day management by small Secretariat • Published financial rules & regulations • Independent technical & financial audit

  7. Typical Enterprise/Fund Structure City/Town Roads National Road Enterprise/Fund (financed on a cost-share basis) National Roads $ $ (100% financing) Regional/Rural Roads

  8. Common Questions on Road Enterprises/Funds • Can road users afford to pay? • Several case studies show: • $010/l fuel levy costs car users $1.00/100km • if proceeds spent on maintenance, road user costs fall $2.00-3.00/100km • How will a fuel levy affect inflation? • Similar case study likewise shows: • $0.10/l fuel levy raises VOCs by 5-9% • CPI increases by 0.6-1.2% • if proceeds spent on maintenance, road user costs fall 8%

  9. Common Questions on Road Enterprises/Funds • Does good governance make a road enterprise/fund unnecessary? • Definitely NOT -- good governance does not drive economic efficiency • Governments everywhere trying to commercialise and/or privatise state enterprises – why not roads? • Better market discipline: • can lower costs by 20-50% • increase long term productivity • help to offset impact of weak governance

  10. Example I: New Zealand • Independent financing agency – Transfund • 5 member board – all private (too small) • Revenue from registration fees, weight-distance charges & fuel levy (gasoline only) • Priority = road safety, maintenance, new works • All road agencies use standard road management systems • Cost-sharing with local governments • Strong audit function

  11. Example II: Kenya • Independent financing agency • 13 member board – 5 government, CEO (bad idea) and 7 road users and business • Chairman from 7 non government members • Revenues primarily from fuel levy • Board recommends level of levy to MoF • Board appoints CEO and Secretariat • Prepares annual road program based on submissions from road agencies • Independent audit

  12. Problems With Enterprises/Funds • Some road enterprises/funds have not performed well • Need constant attention to detail • Major problem is with boards: • poor board structures – Minister often Chairman • boards not empowered – cannot win public support • not genuine fee-for-service (generate too much revenue)

  13. Strong Boardsare the Key

  14. Summary • Fee-for-service road enterprise/fund replacing earmarked/user pay road funds • Key features are strong, empowered board, with no diversion from other sectors • Extra spending on roads from extra payments by road users • Several examples of emerging good practice • Some road enterprises not performing – usually due to poor board structure • Require constant attention – learn by doing

  15. Road Financing: Current Arrangements Funds allocated for roads Overall tax envelope Funds available for other sectors

  16. Road Financing: Earmarking Additional earmarked amount Funds allocated for roads Additional earmarked amount taken away from other sectors Overall tax envelope Fewer funds available for other sectors

  17. Road Financing: Road Enterprise/Fund Funds allocated for roads Overall tax envelope Funds available for other sectors

  18. Road Financing: Road Enterprise/Fund Additional payments by road users Funds allocated for roads + = Budget neutral Overall tax envelope Funds available for other sectors

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