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Evaluation of Bank Support for Road Funds
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| Background Paper |
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| Evaluation of Bank Support for Road Funds | 
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The focus of this section is road funds, an instrument several Bank operations have supported to redress the long-term underfunding of road maintenance. Over the past 10–15 years Bank projects or sector reviews have supported the restructuring of road management and road maintenance finance, including the creation of independent road boards, the establishment of road agencies, and the establishment of properly managed road funds. Such road funds are commonly known as second-generation funds.
The Bank's interest in road funds and road management originates in a long-standing "crisis" concerning the quality of road maintenance in most developing countries, especially in the lowerincome ones. The failure of governments to provide adequate funding for road maintenance was seen as one of the critical factors; road infrastructure had deteriorated and countries were rapidly losing the value of their road assets. Road funds, independent of the budget and providing an adequate level of funding to finance maintenance expenditures, were seen as a possible solution.
For more than 15 years the Bank has led a multidonor program to help Sub-Saharan African countries improve the performance of their transport systems and services. This program has supported the establishment of modern road funds and complementary reform of highway management. The Bank has also been involved in similar activities in other Regions. Three main sources have been used to prepare this section: (i) a literature review, (ii) IEG’s database, and (iii) a survey of Bank staff. All three elements together provide a reasonably clear picture of the effectiveness of the road funds and the conditions surrounding them. In particular, the SSATP Road Maintenance Initiative Monitor Series provides useful data.
Road Management Reform
From the 1990s, a majority of the Bank road projects focused on maintenance. Yet progress was erratic. Most countries did not have the capacity to increase and sustain budget funding for road maintenance at the required level. In response, the Bank in 1995 issued a report suggesting that the maintenance crisis could be effectively tackled by addressing four issues: - (i) Ownership: Empower road users and encourage them to take an interest in the management of roads; an essential component of this concept was creation of a roads board.
- (ii) Funding: Secure stable and adequate flows of funds.
- (iii) Responsibility: Creation of an organizational structure for managing the different components of the road network.
- (iv) Management of a businesslike road agency, including strong financial management and accountability.
The driving force for this approach was not road maintenance, but a broader perspective of the road sector. Could roads be put in the marketplace on a fee-for-service basis, like a business, as has been done with other infrastructure services? This would be a "commercial approach" to road financing.
Financing Road Maintenance and Road Funds
Two approaches are followed: (i) The budget approach is the most widely used. It assumes that road expenditures (except for toll roads), including maintenance, are a public expenditure that need to be covered by the national budget. Fuel taxes, vehicle registration fees, and other levies are taken as general taxes. Extrabudgetary funds are deemed to hinder government’s efforts to allocate funding to national priorities. (ii) The road fund approach postulates that road users should pay for the cost of the roads and that revenue thus generated should be applied to cover road costs. The instrument is a road fund that generally becomes the main source of finance for road maintenance and other road expenditures. This approach, with variations, has been used in the United States, Japan, and New Zealand since the mid-1950s and is being used in more than 30 emerging economies. Users pay "user charges" mainly in the form of a gasoline levy, which generally provides the bulk of revenues. Income from these charges is, in principle, automatically allocated to road expenditures, especially maintenance.
Road funds meeting the "commercial approach" are known as second-generation road funds, to differentiate them from older road funds that were basically a line in the budget. However, seldom do the funds meet all the second-generation criteria. The second-generation funds operate on the principle that any extra spending on roads is financed through extra payment by road users. Therefore, second-generation funds are budget neutral; some macroeconomists disagree with this view.
Bank Policy and Practice
The Bank for many years lacked an official policy toward road maintenance finance, and in some internal reports, notably in the 1980s, generally opposed road funds on macroeconomic grounds. More recently (in 2004) it was agreed that the "Bank sometimes endorses public enterprise-style road funds to redress long-term underfunding of maintenance." Although with variations among Regions, Bank economic reports have become increasingly supportive of road funds, sometimes improving existing funds and at other times creating second-generation funds from scratch.
Design and Management of Second-Generation Road Funds
There are large variations from country to country. Many of the second-generation funds have been restructured frequently since they were first created. Restructuring of the fund in Benin has been effective, converting it into an autonomous agency with less staff and a competent team and providing it with adequate resources. Attempts to reform the fund in the Republic of Yemen, however, have been less successful so far. This is partly because the country has been in a financial crisis resulting in the need to keep a strict control of all income and expenditures. In Argentina, between the 1970s and 2006, there have been cycles of creating and then reforming or dismantling road funds. The existing road fund has recently been amended to compensate private toll-road operators for low toll rates.
Road Boards—Composition and Mandate
Practically all the second-generation funds have private sector representation on their boards. In more than half, the private sector representatives are in the majority. Some boards have executive and others only advisory powers.
Revenue Sources and Channeling and Allocation of Resources
Funding for the road boards is generated mainly by a fuel levy, generally set as a fixed amount per liter and complemented by other sources, such as tolls and fees. Most second-generation funds focus on routine and periodic maintenance of the national network, but some allow part of the resources to be used for road rehabilitation. Others also allocate resources to maintain municipal or provincial roads and even subsidies to road transport.
Performance of Road Funds—Outcome Indicators
In several countries the percentage of roads in good condition has significantly increased. In Benin, the increase has been 9.4 percent per year since the creation of the road fund. In Guatemala, the percentage of roads in bad condition dropped from 40 percent in 1994 to less than 20 percent in 2001. In countries without this information, a proxy indicator is the percentage of estimated needs financed. The level of maintenance funding was reported to have increased significantly in Honduras and in Guatemala, which had a 250 percent increase over 6 years. In Uzbekistan, the resources of the road fund increased almost five times over a period of 4 years. In contrast, the experience in Africa is less positive; only one third of the 27 road funds in SSATP member countries are regularly meeting routine maintenance expenditure needs.
Performance of Road Funds—Process Indicators
- The percentage of maintenance works contracted out has increased significantly, reaching close to 90 percent in Zambia and Ghana.
- The percentage of funding for road maintenance from local rather than external sources has also increased in some Latin American countries (in Honduras, from about 20 percent in 1995 to almost 100 percent in 2000).
- Results regarding the allocation of resources have been mixed, as many countries continue to use standard formulae rather than a systematic assessment of maintenance needs. In some African countries, disbursements appear to be generally biased toward urban and main roads. In Ghana, the road fund provides funding to the districts and this is supported by the Ministry of Finance.
- In Honduras, microenterprises for carrying out routine road maintenance have been created as a result of a requirement by the road fund.
- Some of the boards have put in place measures to improve transparency. In Ethiopia, the board publishes its budget quarterly. In Zambia, any user can access information on the disbursement of the fuel levy. In most countries, bids are advertised in the local press and sometimes through the Internet.
- Few countries appear to carry out regular technical assessments of the works. Ghana is an exception, as its road fund regularly produces technical audits. In Tanzania, the road fund undertakes annual technical audits of 20 percent of the work it finances; generally, administrative costs are set not to exceed 3 percent of the funds income.
Lessons
- Second-generation funds are appropriate when the lack of finance for maintenance has led to a severe deterioration of the road network, provided there is government commitment to off-budget financing of maintenance and to commercially oriented reforms of road management.
- A road fund should not be established when there is a high level of corruption and little likelihood of having independent audits and transparent procurement.
- Financing of road maintenance should be viewed in the broader context of road management.
- Monitoring and evaluation of secondgeneration funds should start with credible assessments of road condition, trends in allocation for road maintenance, and efficiency of road maintenance operations.
- Private sector participation in the secondgeneration road boards is an effective way to improve transparency and accountability in the use of road maintenance funds.
- There is improved effectiveness of the funds disbursed through multiyear budgeting arrangements.
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