Reform of Financing and Management of Roads

Introduction

Roads form the backbone of social and economic activities. Roads provide access to markets, education, and health services and normally carry between 60 and 90% of all passenger and freight transport. Therefore, economic development is closely related to the extension and condition of the road network. Generally, roads are the biggest public capital asset, representing between 15% and 30% of Gross National Product (GDP) of a country.

In spite of their importance, most roads in developing countries are poorly financed and managed. Consequently, between 30% and 50% of roads in developing countries are in poor conditions, costing the national economy between 2 and 5% of GDP annually. Mainly, these costs are the result of increased vehicle operating costs, longer travel times, higher accident rates, more freight damages and additional road rehabilitation cost.

The alarming neglect of the roads in developing countries has been analyzed and documented in the World Bank Policy Paper Road Deterioration in Developing Countries: Causes and Remedies in 1988. The poor financing of road maintenance by the public budgeting procedures and the poor management by the public road administrations has been identified as principle causes of the deterioration of roads in developing countries.

Based on these findings and recommendations the World Bank together with other international and bilateral donors started the Road Management Initiative in Africa and the GTZ started a similar Regional Reform Program in Latin America and the Caribbean in close cooperation with the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), the International Road Federation (IRF), the Pan American Institute of Highways (PIH), the World Bank, the Inter-American Development Bank (IDB), and the Organization of American States (OAS).  

The new concept was to improve effectiveness and efficiency in the road sector by promoting competition or commercialization: bring roads into the market place, put them on a fee-for-service basis, and manage them like a business. Two books provide a detailed description of the concept and principles involved: Roads – A New Concept for Road Network Management and Conservation and Commercial Management and Financing of Roads.  

The main principals of the new concept are:

• to create autonomous and user controlled road funds financed by road user charges, and
• to introduce performance-based road management and maintenance contracts, whereby payments to these contractor is based on pre-established performance standards of the roads rather than on works executed.

Road Funds

Road Funds are not new in the road sector. The have been created in developed as well as in developing countries mainly to finance the development of new road networks. They were financed by earmarking taxes for the road sector and were administered by public road administrations. Especially in developing countries these funds proved to be neither effective nor efficient the political interference and the bureaucratic rules and regulations of the public sector administrations.  

Therefore, new “second generation” road fund have been created with certain autonomy, financed by road user charges and controlled by a mixed board with public and private sector participation.  

The basic principles of such funds are:

• Clearly defined legal executive powers of user-dominated Roads Board,
• Roads Board to serve as procurer of services,
• Roads Board to represent road user interest and to be managed according to sound business practice,
• governance free of political interest,
• funded by user charges (levies or surcharges) paid directly into the road fund account
• effective and efficient use of funds, and
• independent monitoring of performance.

Many of these new road funds have been created in developing countries in Africa, Latin America, Asia, and in some developed countries like in New Zealand. Not all of these funds are strictly following the principles mentioned above. But the closer they follow the principles the better is their effectiveness and efficiency. The Road Fund in New Zealand seems to be one of the best-managed road funds worldwide. The experiences with road funds in Latin America are described in Road Funds in Latin America .  

For a comprehensive compilation of literature and presentations on road funds worldwide, click on Road Funds. Some literature and presentations are in Spanish.  

Performance-based Road Management and Maintenance Contracts

The main reason for introducing Performance-based Road Management and Maintenance Contracts (PBC) is to increase efficiency in executing road maintenance. The traditional way of contracting out road maintenance is based on the amount of work being measured and paid for on agreed rates for different work items, giving the contractor little incentives for efficiency. By contrast, PBCs define minimum conditions of road, bridge, and traffic assets that have to be met by the contractor, as well as other services such as the collection and management of asset inventory data, call-out and attendance to emergencies, and response to public requests, complaints and feedback. Payments are based on how well the contractor manages to comply with the performance standards defined in the contract, and not on the amount of works and services executed. PBCs are defining the standards the roads have to be kept in and it is up to the contractor how to achieve this. Therefore, work-selection, design and delivery are all his responsibility. Hence, the choice and application of technology and the pursuit of innovative materials, processes and management are all up to the contractor. This allocates higher risk to the contractor compared to traditional contract arrangements, but at the same time opens up opportunities to increase his margins where improved efficiencies and effectiveness of design, process, technology or management are able to reduce the cost of achieving the specified performance standards. Cutting Costs and Improving Quality through Performance-Based Road Management and Maintenance Contracts - The Latin American and OECD Experiences – provides an excellent overview of the history, principles, and experiences of PBCs worldwide.  

For a comprehensive compilation of literature and presentations on performance-based road management and maintenance contracts worldwide, click on Performance-Based Road Management and Maintenance. Some literature and presentations are in Spanish.  

In addition to the issues of road funds and performance-based road management and maintenance contracts, the CD contains some important literature that deals with the reform of the road sector as such. For the compilation of this literature please go to Road Sector Reform.