Having identified the size of the financing gap, if any, the review should then consider ways of generating the additional revenues. There are six main ways in which countries have tried to do this by: (i) making better use of existing revenues; (ii) lowering selected technical standards; (iii) raising road user charges to generate additional revenues; (iv) introducing tolls (whether public or private); (v) private sector finance; and (vi) earmarking additional revenues for roads.  Better Use of Existing Revenues. Consider the potential for getting better use out of existing revenues (PDF 21 KB) by, for example, contracting out more design and implementation work to the private sector (or exposing in-house work to competition from outside contractors), improving procurement methods and strengthening financial controls and internal auditing. Unless the road agency can demonstrate that it is making best use of its existing budget allocations, the government is unlikely to accept the need for more finance.  Lower Technical Standards. There is some scope for reducing the size of the roads budget by lowering selected technical standards. This is not a simple option, since lower technical standards mean to lower road quality. However, if funds are simply not available, technical standards can be lowered by: (i) raising the rate of return criterion for periodic maintenance and new works (i.e., by raising the acceptable EIRR and B/C ratios); (ii) lowering routine maintenance standards (e.g., for removal of debris, snow plowing, etc.); and (iii) reducing the frequency of gravel and earth road blading. All these standards should be examined to ensure that they are as cost effective and as appropriate as possible. For example, Transfund New Zealand regularly adjusts the B/C ratio [Page 9, Transfund: Dividing Funds Between Road Agencies] (PDF 77 KB)  to ensure that the number of new investment projects fit within the available budget.  Raise Road User Charges. This was a common strategy during the 1970s and early 1980s. Heavy vehicles rarely cover the costs they impose on the road network and many countries were encouraged by the donor community to carry out studies of road user charges. The studies usually recommended raising road user charges, particularly for heavy vehicles. This was often done and additional revenues were collected from road users. MoF often allocated this extra revenue to the road sector, usually to finance the counterpart funding of ongoing donor-financed road projects. However, this arrangement rarely lasted for more than a few years. The extra road user revenues went into the general budget and the road sector eventually had to compete for these extra funds as part of the normal budgetary process. The strategy therefore lost favor, since it did not generate additional long-term revenues for the road sector.  Public Toll Roads and Private Sector Finance. Nearly all countries have introduced tolls to generate additional revenues for roads. However, tolls can only be economically collected on roads carrying relatively high volumes of traffic. The broad rule of thumb is that, with a 20-year cost recovery period and a toll of $0.03 to $0.06 per veh-km for light vehicles, you need at least 15,000 vpd to cover all costs, 6,500 vpd to cover rehabilitation, operation and maintenance, and 3,500 vpd to cover operation and maintenance only. Such volumes of traffic typically occur on no more than 1-2 percent of the overall road network and 10-20 percent of the national road network. Tolling can therefore only meet a small part of the road sector's overall financing needs [link to Toll Road Node]. However, since high volume roads are the busiest and most expensive roads to build and maintain, tolling can make a valuable contribution to the financing of the main trunk road network.  Private Sector Finance. The main ways of accessing private sector finance (PDF 56 KB) have been by: (i) persuading the private sector to build and operate new toll roads under concession agreements; (ii) when toll revenues do not cover all costs, forming a public-private partnership under which the private sector collects as much money as possible through tolls, while the public sector provides the balance of the required revenues in the form of a grant; (iii) using the revenue from a public toll road to borrow private finance on the domestic or international capital market; (iv) partially or fully securitizing an existing public toll road (i.e., selling some, or all of the financial interest in the toll road(s) to private sector interests); (v) entering into lease-back agreements with the private sector under which the private sector builds the road and leases it back to government; or (vi) encouraging groups of people to own and operate their own (private) roads through local roads associations. All these methods can help to support the roads budget, but, as with public toll roads, can only meet a small part of the road sector's overall financing needs.  Earmarking. During the early 1950s, New Zealand, Japan and the US set up earmarked road funds based on the "user pay" principle. This involved earmarking certain road related taxes and charges and depositing them into a special account, or road fund. The earmarked funds were higher than the previous allocations from the general budget and, since the funds were managed off-budget, they were subject to less stringent budget discipline. Many developing countries adopted this model in the 1970s and 1980s, while many Eastern European transition countries adopted it during the early 1990s. Apart from New Zealand (which restructured several times, most recently in 1996), the US (which also restructured several times) and Japan (which is a special case), virtually all these road funds failed to deliver a secure and stable flow of funds for roads (PDF 36 KB). They diverted funds away from other sectors, funds were poorly managed and the added revenues were often not spent on roads. As a result, the MoF, the International Monetary Fund (IMF) and donor organization now strongly oppose the establishment of such earmarked road funds. Return to top of document |
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