Highway Sector Financing

South Asian countries have traditionally financed the construction and maintenance of their roads and highways through general government revenues, with little connection between the costs incurred in such activities and the taxes or charges paid by those who use the roads. However, as economic growth in the region fuels the demand for the rapid expansion and improvement of transport infrastructure, this approach is no longer sustainable. Adopting a commercial approach to financing highways has therefore become a matter of high priority for the South Asia region.

Importance of the commercial approach

A variety of approaches are adopted across the world for the construction and maintenance of roads and highways.

The traditional approach treats roads as a public good, with their construction and maintenance being financed from general government revenues, though fuel is often heavily taxed to contribute to the general revenues. There is also no attempt at direct road pricing.

The commercial approach, on the other hand, treats roads as capital assets, commercial accounting is applied, and road users are charged, either directly or indirectly, for their use of the road. In such cases, road transport remains a source of general revenue, but sector taxes are designed to minimize distortions to transport patterns or choices. Road finance is increasingly separated from general government expenditures and road users are increasingly involved in decision-making.

In the South Asia region, despite some efforts to commercialize the road sector, the traditional approach largely persists. This approach has contributed to the under-funding of road maintenance, a distorted vehicle fleet, skewed incentives for traffic allocation between road and rail, and substantial economic losses.

As economic growth fuels a demand for better transport infrastructure, it is important to adopt a coherent structure for financing highways, or else the distortions and costs to the these countries’ economies will rise.

Private Sector Participation

Private sector participation (PSP) in funding is increasingly perceived as a key ingredient to finance highways. This has some very substantial potential benefits. These include:

• Bridging the funding gap by postponing the cost of road investment to the taxpayer and/or road user,
• Increasing efficiencies in expenditure and in collecting revenue,
• Unbundling and reallocating various risks inherent in infrastructure provision. PSP alone will, however, not solve this problem. See weblink for more information (PPIAF toolkit).

Objectives for Road User Charging

Charging road users for their use of the road can contribute to:

• Efficient allocation of resources between sectors,
• Efficient use of resources within the road sector,
• Equity (payment in relation to the costs imposed on society plus for distributional reasons),
• Environmental improvements.

Governments need to determine and make explicit what objectives they intend to achieve by levying road user charges. As no SAR government has an explicit policy on the objectives they are trying to achieve, little progress has been made in this field thus far.

Costs to be recovered from road users

There is broad international consensus that road user charges should fund the full costs of routine road maintenance, administration, environmental/externality costs and congestion.

While views differ regarding the funding of new road constructions, road users alone cannot be expected to shoulder the costs of expanding the road networks of South Asia’s rapidly developing economies. Therefore, current and future taxpayers - the latter through long term public debt - will be expected to contribute towards the substantial investments required for road expansion.

Appropriate Charging Instruments

Internationally, a range of instruments is used to tax/charge road users for their use of the road. An important characteristic of these charges is the "directness" of the tax imposed.

Theoretically, an ideal road user charge would depend upon which road is used, when it is used, and by which type of vehicle, with what type of emissions.

However, for practical and political reasons such charges are only rarely applied and most countries still use relatively indirect instruments to raise revenues for roads. This is, nevertheless, changing as new technology develops and public pressure grows to link road charges more directly with use.

For the foreseeable future, however, road user charge regimes in the region are likely to rely on general taxes, fuel levies, annual vehicle license fees, fines, and distance related tolls.

Commercializing Road Funding and Management

Internationally, the trend is to move the road sector away from being treated like a social service by being funded by the tax payer and managed by a bureaucracy, towards a commercial approach which imposes a form of surrogate market discipline or competition, much like other utilities.

This reform is designed to motivate road agencies to perform efficiently, be held accountable for performance, match road sector revenues more closely with expenditures, and deliver clear signals to the road using public as to their travel demand.

Reform should be based on concurrent efforts to:

• Assign clearer responsibility for different activities
• Build ownership in and outside government to strengthen management and secure funding
• Finance key activities through a secure and stable source of user charges, separate from general tax,