Principles of a Road Fund

1
Principles of a Road Fund

• Road Fund Task Force Secretariat
• Road Sector Development Programme (RSDP)
  Coordination Unit, MFPED

2
Outline

• Introduction
• Background
• Objectives of the Road Fund
• What problems will it address
• Understanding the Concept
• Key Elements of the Road Fund
• Road Map
• Conclusion

3
Introduction

• Government intends to establish a Road Fund in
  July 2007 as a measure to address the funding
  shortfall in road maintenance
• The Bill to establish the Fund is currently in
  Cabinet.

4
Background

• The Africa Road Maintenance Initiative has shown
  that roads are poorly managed and under financed
  because of weak institutional frameworks.
• The establishment of the Road Fund is part of the
  reforms aimed at commercialization of the roads
  subsector.
• Commercialisation entails bringing roads into the
  market place, putting them on a fee-for-service
  basis and managing them like a business

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Background, contd

• 4 Pillars of Commercialising roads
• Clarifying responsibility by assigning roles
  difinitevely
• Creating ownership by involving roads users in
  the management of roads to encourage better
  management, to win public support for road
  financing and to constrain spending to what is
  affordable
• Stabilising road financing by securing an
  adequate and stable flow of funds
• Strengthening management of roads by introducing
  sound business practices and improving managerial
  accountability

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Background, contd

• Government undertook a Road Management and
  Financing Study in 2001 and it recommended the
  Setting up of a Road Fund
• MFPED initially did not support because it
  believe this was earmarking of public resources
  which undermines budget discipline.
• Government committed itself to providing adequate
  funding for road maintenance

7
Unfortunately

• FY 2003/04 2006/07 Budget for national road
  maintenance stagnated at about U 39.59m while
  the actual financial performance (releases) over
  the same period average only 36.85m.
• And yet, total requirement is 120 m of which
  70m, 30m, 20m for national, district urban
  roads respectively.

8
Now! Time to reconsider

• Government has recognised the need of the Road
  Fund as the best way to guarantee sustained
  funding to Road Maintenance
• The setting of the Road Fund was announced in the
  Budget Speech for 2006/7.

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What problems is a Road Fund designed to address

• Inadequate level of funding for road maintenance
• Uncertain future revenues making maintenance
  planning difficult
• Irregularity of payments making maintenance
  planning difficult
• Inadequate maintenance funding resulting in
  higher reconstruction costs

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What do we mean by a Road Fund?

• Origin of Road Funds
• Jamaica Municipal and Road Board, 1866, South
  Africa, 1935
• In the early 1950s, when the New Zealand Land
  Transport Fund (1953) and the Japan Road
  Improvement Special Account (1954) and the US
  Federal Highway Trust Fund (1956) were
  established, they were set up on a "user-pay
  concept". This is now referred to as
  fee-for-service, NOT AN EARMARKED TAX
• These first funds were to cover new construction
  as well as maintenance
• Type 1Road Funds
• Set up in the 1980s and early 1990s. No clear
  specification of how the funds should be used, no
  strict audit or accounting procedures, gross
  misuse of funds

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Type 2 (2nd Generation) Road Funds

• Breakthrough for 2nd Generation funds in
  Sub-Saharan Africa happened during workshops in
  Zimbabwe and Zambia in 1993
• Participants came from broad cross-section of
  stakeholders and their opinions were
• You waste the money you have
• What is the point of providing more
• Must demonstrate value-for-money
• Agreement use of funds clearly specified,
  revenues managed by an independent Board and
  strict financial audit requirements

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Analysis of Road Funds in Sub-Saharan Africa

• 27 active Funds in place of which 9 established
  since 2000
• 18 out of 27 are established by a law
• 12 with a board with private sector majority
• 14 rely 80 or more on road user charges as
  revenues with fuel levy as the main source
• Average fuel levy in US cents/liter is 8 and 7
  for petrol and diesel respectively
• 11 have their revenues channeled directly
• Only about one third may now be meeting routine
  maintenance needs on a regular basis.

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User fees and Earmarked Taxes

• Definition of an Earmarked tax
• A charge for the use of a facility or the
  provision of a service, the revenue of which is
  allocated to a provision of a different service
  or facility
• Definition of a user fee
• A charge for the use of a facility or the
  provision of a service, the revenue of which is
  allocated to a provision of that service or
  facility
• Why opponents of Road Funds insist on saying they
  are funded by Earmarked Taxes
• Because fiscal and political theory states that
  Earmarked Taxes are bad

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Minimum conditions for a Road Fund to work

• Institutional structure and capacity to manage
  the Fund
• Knowledge of maintenance needs
• Transparent contracting procedures
• Technical and financial audit process
• Secure source of minimum revenue (user fee)

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Some objections to Road Funds

• Earmarked taxes are bad
• Excessive revenues to Road Fund can lead to gold
  plated investments
• They are an inefficient use of public funds
• Independent Road Fund taxes fiscal control away
  from Ministry of Finance
• Independent Road Fund is incompatible with
  democratic process and working of Parliament

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Advantages of a Type 2 Road Fund

• High proportion of revenue from user fees so that
  individual contributions are proportional to use
  or costs imposed on the road network
• Independent Board with strong user repre-
  sentation implies funds used in user interests
• Secure revenue permits planning of maintenance
• Technical and financial audit should ensure
  appropriate use of funds
• Transparent contracting should give confidence
  that funds are not being misused

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Supposed problems of Type 2 Road Funds

• Secure revenue sources avoids political
  determination of fiscal priorities
• Boards are not independent of government
• Audits are not trusted
• Contracting is not transparent
• When taken together with other Funds (many with
  Earmarked Taxes as their revenue source),
  government can lose control of expenditures

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What would make a Road Fund acceptable

• Clear specification of uses of the Fund
• Strong technical and financial audit requirements
• Secure revenue source does not cover all needs,
  so some budget allocation still needed
• Reduction in general level of taxation (or
  increase in allocations to others) to reflect
  reduced budget needs
• No additional burden on government finance
• Continued Ministry of Finance participation

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When is a Road Fund not a good idea

• When there is not an appropriate institutional
  set up
• When institutional capacity is lacking
• When corruption is prevalent or when public
  accounting principles cannot be applied
• When the political process is mature enough to
  make it unnecessary

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When and why to promote Road Funds

• When there is
• Technical and fiscal need for more maintenance
  expenditure
• political support
• technical capability
• strong user agencies to represent user interest
• an immature political process
• Why
• As part of a strategy to put road management on a
  sustainable and quasi commercial basis, with all
  the benefits that can bring

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Alternatives to a Road Fund

• Rely on political allocations of funds for
  maintenance
• Strengthen pressure groups to press for more
  funding for road maintenance
• Create private funds to invest in road
  maintenance

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Key Elements of the Road Fund

• Sound legal basis
• Agency is a purchaser not a provider of road
  maintenance services.
• Strong oversight broad based private/public
  board.
• Revenues incremental to the budget and channeled
  directly to the Road Fund bank account.
• Sound financial management systems.
• Regular technical and financial audits.

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1. Sound Legal Basis

• Needs Legislation accompanied by published
  financial rules regulations
• separate road fund administration
• clear rules and regulations

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2. Agency is a purchaser not a provider of
services.

• Road Authority separate from Road Fund
• Road Authority under MoWT, and
• Road Fund under MFPED

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3. Strong Oversight (1)

• An independent Board with non-executive capacity
• Mixed public-private board membership with
  private sector majority
• 7-9 Members nominated by organizations they
  represent, and may include
• MFPED
• MoWT
• MoLG
• Business eg. PSF, UNCCI
• Pubic passenger transporters eg. UBOA, UNATO,
  UTODA
• Road Transport Operators eg. Uganda Freight
  Forwarders
• Farmers eg. Uganda Farmers Federation
• Professionals - Uganda Institute of Professional
  Engineers, Institute of Chartered Public
  Accountants of Uganda

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Strong Oversight (2)

• Members should represent organizations with
  strong interest in well financed roads
• Normally appointed for 3-4 year renewable terms,
  paid allowances and meet at least once per month
  (less if sub-committees)
• Appointment procedures ensure that some members
  (1/3 rd) re-appointed each year
• Members usually need some training -- or study
  tour -- to prepare them for their work

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4. Sources of Revenue (1)

• Revenues incremental to the budget, coming from
  charges related to road use and channeled
  directly to the Road Fund bank account.

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Sources of Revenue (2)

• to provide a basis for linking revenues and
  expenditures, charging instruments should be
• Related to road use
• Easily recognisable by road users as a road user
  charge
• Easy to separate from taxes and other charges
  and
• Simple and inexpensive to administer (e.g., not
  subject to widespread evasion, avoidance, and
  leakage).

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Sources of Revenue (3)

• In addition, the instruments should be able to
  distinguish between
• paying for the right to use the road network,
• actual travel on the roads,
• the occupying of road space (either by parking or
  causing congestion), and
• the benefits of road access.

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Sources of Revenue (4)

• Revenues-
• fuel levy
• vehicle license fees
• International transit fees
• Weight distance charges
• Axle load fines
• Any sums appropriated by Parliament
• Any fees levied by the Fund in return for
  services provided.

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Process

• Board publicises the maintenance program and
  justifies need for more revenue
• consults road users on willingness to pay
• recommends to MFPED for inclusion in budget.

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Can Road Users Afford to Pay?

• Road users feel they already pay too much BUT
  proceeds not spent on roads
• Some examples
• Honduras (100km) 0.10/l levy costs car users
  1.00 if spent on maintenance VOCs fall by
  3.50
• Malawi 10 fuel levy raises car VOCs 1.5 -- if
  revenue spent on maintenance VOCs fall by 5.4
• Hence win-win PROVIDED extra funds spent on
  maintenance -- 1.00 on maintenance reduces VOCs
  by 2.0 to 3.0

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Impact on Inflation

• Zambia case study provides useful data
• Fuel levy of 0.10/l increases price/costs by
• gasoline, 20.1, diesel 21.5
• Vehicle Operating Costs (VOCs) for cars/trucks,
  5-9
• Consumer Price Index, 0.6 - 1.2
• If proceeds spent on maintenance, realistic
  outcome is 8 fall in VOCs
• Hence fuel levy short term increase in CPI,
  followed by fall as proceeds spent on maintenance

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Setting the Initial Road Tariff

• Fund must be budget neutral-revenues not
  abstracted from other sectors
• Example
• Maintenance Needs 150 bn
• Maintenance Budget 100 bn
• Road Fund sources
• All Vehicle license fees, approx. 70.00 bn
• All International transit fees, approx. 05.00
  bn
• Part of fuel excise duty (fuel levy) 25.00 bn
• Total 100.0 bn
• Funding gap (road users pay) 50.00 bn

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Road User Charges (RUC) Underlying Theory

• Recover fixed and variable costs separately using
  the user pay principle.
• license and international transit fees - fixed
• fuel levy and weight distance charges Variable
• RUC on three main principles -
• Full cost recovery
• Economic efficiency
• Equity

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Principles of RUC (1)

• Full cost recovery to ensure that the full cost
  for provision and maintenance of economically
  viable roads and projects is recovered from road
  users.
• Infrastructure provided on the basis of social or
  political considerations will be paid for from
  the general tax revenue

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Principles of RUC (2)

• Economic efficiency to ensure that the selected
  cost recovery instruments (fixed or variable
  instruments) are able to appropriately recover
  the road user imposed costs based on either
  traffic usage, access to the network or damage to
  the road infrastructure

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Principles of RUC (3)

• Equity to ensure that no road user pays more
  than his/her fair share towards road upkeep. As
  such, for off-road users, a rebate system will be
  applied and at the same time heavy diesel driven
  vehicles will be made to pay their fair share for
  road damage costs.

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Raising the Charges

• Additional revenues to come from extra payments
  by road users
• Raise charges gradually over time -- 3 to 5 yrs
  while road fund administration builds up
  credibility
• Until then, balance of revenues from donors,
  borrowing, or the general budget

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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
Earmarked amount taken away from other sectors
Overall tax envelope
Fewer funds available for other sectors
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Road Financing New Style Road Fund


Budget neutral
Funds allocated for roads
Additional payments By road users
Overall tax envelope
Funds available for other sectors
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Depositing the Revenues

• Revenues should be paid directly into road fund
  administration bank account
• To be included in legislation that funds are paid
  directly into road fund administration account

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5. Sound Management

• Sound financial management systems
• Lean efficient administrative structure
• Secretariat of 10 technical staff
• 5-10 for turnover of 100 mill p.a.
• 30-50 for turnover of 500 mill p.a.
• Head appointed by Board -- head appoints staff
  with skills in planning, accounting, engineering.
• Staff may be Full time Consultants, or
  Outsourced.

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Role of Secretariat

• Arrange collection of revenues (prepare
  contracts, reconcile deposits with rate base)
• Manage cash balance (keep minimum cash in account
  to prevent raids, invest surplus in AAA managed
  funds)
• Handle withdrawals and disbursements
• Oversee use of funds (develop planning procedures
  and check their application)
• Prevent raids (unauthorized withdrawals) and
  arrange technical/financial audits

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6. Regular technical and financial audits.

• Review appropriateness of financing and operating
  procedures
• Review the daily management of road funds
• Review the performance of the supervisory board
  with respect to their obligations under the
  legislation act.

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Road Map for Road Fund
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Summary (1)

• Independent road fund preferred solution
• Oversight arrangements (board of directors) most
  important design parameter
• Affects governance, but also ability to win
  public support for more road spending
• broad-based, representative board -- members from
  groups with strong interest in well managed roads

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Summary (2)

• Revenues only from charges related to road use --
  no diversion from other sectors
• Small secretariat -- board selects CEO who then
  selects other staff
• Essential to have sound legal basis to avoid
  raids on the fund

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For more information

• Secretary, Road Fund Task Force
• RSDP Coordination Unit
• Ministry of Finance, Planning and Economic
  Development
• Tel. [phone]
• email rsdp_at_finance.go.ug