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Options for public financing of roads off budget financing l.jpg

Options for Public Financing of Roads: Off-Budget Financing

Prof. Ian G. Heggie

University of Birmingham, UK

ECA GDLN Road Financing Series

Washington, DC


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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


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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


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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


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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


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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


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Typical Enterprise/Fund Structure

City/Town

Roads

National Road

Enterprise/Fund

(financed on a

cost-share basis)

National

Roads

$ $

(100% financing)

Regional/Rural

Roads


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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%


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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


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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


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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


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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)


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Strong Boardsare the Key


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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


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Road Financing: Current Arrangements

Funds allocated

for roads

Overall tax

envelope

Funds available

for other sectors


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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


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Road Financing: Road Enterprise/Fund

Funds allocated

for roads

Overall tax

envelope

Funds available

for other sectors


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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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