h44%0o;¶THE WORLD BANK

POLICY RESEARCH AND EXTERNAL AFFAIRS

Infrastructure and Urban Development Department

Report INU 92

Improving Management and Charging Policies

for Roads: An Agenda for Reform

- Ian G. Heggie

December 1991

This is a document published informally by the World Bank. The views and interpretations herein are those of theauthor and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting ontheir behalf.

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Copyright 1991The World Bank1818 H Street, N.W.Washington, D.C. 20433

All Rights ReservedFirst Printing December 1991

This is a document published informally by the World Bank. To ensure that theinformation contained in it is presented with the least possible delay, the typescript has not beenprepared in accordance with the procedures appropriate for formal printed texts, and the WorldBank accepts no responsibility for errors.

The World Bank does not accept responsibility for the views expressed herein, which arethose of the authors and should not be attributed to the World Bank or to its affiliatedorganizations. The findings, interpretations, and conclusions are the results of researchsupported by the Bank; they do not necessarily represent official policy of the Bank. Thedesignations employed, the presentation of material, and any maps used in this document aresolely for the convenience of the reader and do not imply the expression of any opinionwhatsoever on the part of the World Bank or its affiliates concerning the legal status of anycountry, territory, city, area, or of its authorities, or concerning the delimitations of itsboundaries or national affiliation.

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ACKNOWLEDGEMENT

This paper is a preliminary draft which is being issued as an INU Working Paper,pending revision for publication as a World Bank Technical or Discussion Paper. It wasprepared by Ian G. Heggie, Principal Economist, Infrastructure and Urban DevelopmentDepartment, under the initial direction of J.S. Gutman and finalized under the direction ofRichard Scurfield and Zmarak Shalizi. Preparation of the paper was guided by a steeringcommittee consisting of P. Blackshaw, C. Harral, and G. Smith. Several people preparedbackground documents to support the paper. They included Roy Bahl (consultant), JoseCarbajo, Rachel Kranton (consultant), W.D.O. Paterson and R. Archondo-Callao, and TaeOum, W.G. Waters and Jong Say Yong (consultants). Many other Bank staff also reviewedearlier drafts of the paper and offered useful criticism and advice. Several outside reviewers,including Professor C. Nash (Leeds University), Professors Tae Oum and W.G. Waters(University of British Columbia) and one of two unnamed referees, also provided helpfulcomments and advice. Other persons who provided research support, or helped to prepareexamples to illustrate the text, included M. Callan (consultant), Y. Crookes, V. Duff(consultant), T. Neuner (consultant) and T. Hau. Artwork was provided by S. Subasingheand the text was finalized and formatted by Pam Cook and Barbara Gregory.

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Abbreviations

General:

ALS = Area licensing schemeAVI Automatic vehicle identificationERP Electronic road pricingAADT Average annual daily trafficPAYG Pay as you go

Units of Measurement:

ESAL Equivalent standard axlesESAL-km Equivalent standard axles times distance travelledGDP = Gross domestic productGNP Gross national productGVW Gross vehicle weightGVW-km Gross vehicle weight times distance travelledIRI International roughness indexkmn Kilometerm MeterMSN Modified structural numbervpd Vehicles per dayveh-km = Vehicles times distance travelledvehr Vehicles

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TABLE OF CONTENTS

Acknowledgement

Abbreviations

Executive Overview

I. Introduction 1

HI. Characteristics of Roads 6

Types of Roads 6Administrative Arrangements 7The Costs of Road Use 8

Road Agency Costs 8Road Congestion Costs 10Environmental Damage 12Costs of Road Accidents 15

Available Charging Instruments 16Charging Beneficiaries 16Charging Road Users 16Indirect Market-Based Incentives 20

IfI. Policies and Problems 21

Current Management Policies 21Current User Charging Policies 22Implementing Management Policies 22

Implementing User Charging Policies 24The Agenda for Reform 28

IV. lmproving Management of Roads 29

Establishing Transparency 29Measuring Performance 29Physical Information on the State of the Road Network 32Financial Information on Overall Performance 34

Linking Revenues and Expenditures 36Strengthening the Institutional Framework 40

Decentralizing Road Responsibilities to Local Government Agencies 40Autonomous Road Agencies 41Involving the Private Sector 42

Determining Objectives and Monitoring Results 44

Setting Objectives 44Monitoring PerformanceW 44

V. Improving Charging Policies for Roads 47

Dealing With Externalities 47Road Congestion 47Environmental Damage 48Accident Costs 49

Financing the Road Deficit 50General Revenue Financing 51Long-Run Marginal Cost Pricing 52Optimal Departures From Marginal Cost Pricing 53Balancing Regional Roads Budgets 55

Financing Deferred Maintenance 56Mobilizing Fiscal Revenues 56

VI. Conclusions and Recommendations 60

General Policy Directions 60Implications for Bank Operations 62Directions for Research 62

Annexes

I. Separating Road User Charges from General Revenue Taxes 64

ii. Pricing and Cost Recovery: A Worked Example 67

Selected Bibliography 76

i

EXECUTIVE OVERVIEW

i. Road transport is the dominant means of transport in most countries and investment inroads accounts for a major part of the government's stock of public capital. The replacementcosts of main roads in developing countries is over $300 billion, which is greater than theinvestment in power generation and distribution in these countries. Roads are importanteconomic assets and need to be well-managed to ensure they produce value-for-money. Theyare nevertheless nearly always administered as government departments and are subject to littlemarket discipline. Most roads are badly managed, poorly maintained and under-funded. Pastallocations for road maintenance have been so low that over $43 billion of the capital stock hasbeen eroded. Studies furthermore show that introduction of commercial cost accounting systemscan reduce road maintenance costs by between 5 and 15 percent, while sub-contracting for roadmaintenance can reduce them by a further 20 percent.

ii. Local roads carrying low volumes of traffic are usually financed through general taxationand local property taxes. Main roads, on the other hand, are financed in one of the followingtwo ways. The first system treats them as public goods on the grounds that users cannot easilybe excluded from using them. Road users are taxed, the proceeds are credited to generalrevenues and road expenditures are financed from general revenues determined as part of theannual budgetary process. This system applies in nearly all developing countries. The secondsystem is more pragmatic. It accepts that non-motorized vehicles cannot usually be preventedfrom using roads and that motorists cannot be charged directly for usage of individual roads.On the other hand, they can be made to pay an access fee (a periodic license) and an indirectuser fee (a fuel or weight-distance charge). These charges are usually set on the basis of pay-as-you-go (PAYG), i.e., to cover total annual expenditures on roads. Most PAYG systems alsoexpect road users to make some contribution to overall fiscal revenues.

iii. It is generally agreed that public sector agencies will function most efficiently when theyare faced with competition, or a competition surrogate. The main thrust of overall Bank policyis thus to commercialize or corporatize public sector agencies to ensure they are subjected tosome form of market discipline, operate within a hard budget constraint without the need forbudget transfers, do not pursue cost-plus pricing policies, have clear management objectives andthat managers have sufficient autonomy to run the agency in a businesslike way. At the sectorlevel, the Bank's objectives have been more limited and have concentrated on increasingallocations for road maintenance, reducing force account work, sub-contracting work to theprivate sector and other government agencies, and strengthening management informationsystems. Little attempt has been made to systematically improve overall operation andmanagement of roads.

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iv. The Bank's policy on pricing and cost recovery has been to set prices equal to short-runmarginal costs and to then adjust these prices to account for other pricing objectives (i.e., fiscaland income distribution objectives). in the road sector, short-run marginal costs consist ofvariable road maintenance costs, the costs of road congestion and the external costs ofenvironmental damage and road accicdents. The fiscal objectives do not support a generalpresumption in favor of cost recovery and departures from short-run marginal cost pricingshould only be made after due consicleration of the economic losses they may cause. Thedesirability of cost recovery depends on the income of the beneficiaries. If they are poor, it maybe preferable to raise their share of the benefits rather than provide the government withadditional revenue.

v. The Bank's sector-level management policies are inconsistent with overall Bank policieson public sector management, which are themselves incompatible with the Bank's overall pricingand cost recovery policies. The sector-level management policies accept the format of atraditional government department within which roads are subjected to little market disciplineand are predominantly financed from general revenues. Revenues and expenditures are de-linked, user charges are not separated from other taxes on road use and most governments donot even know how much road users are paying for roads.

vi. Short-run marginal cost pricing policies add to this problem. It had always been hopedthat congestion costs were high, it was technically and administratively feasible to internalizethem, so that short-run marginal cost pricing would not only cover all road expenditures, butwould also contribute to overall fiscal revenues. This did not happen. Serious (andunavoidable) road congestion is confined to a finite number of large cities in developingcountries and case studies show it would not cover the fixed costs of operating, maintaining andimproving the road network and would make no contribution to overall fiscal revenues.Furthermore, even if congestion costs were high, there is limited scope for internalizing them.Singapore is still the only city which charges for road congestion and the method used there isnot readily exportable. Other externalities likewise make little contribution to cost recovery.Environmental damage is best dealt with through regulations and indirect market-basedinstruments, while road accidents are best dealt with through motor insurance. Short-runmarginal cost pricing therefore ends up covering little more than variable road maintenance costsand invariably results in large financial deficits. This introduces general revenue financingwhich breaks the hard budget constraint. Basing charges on costs (including inflated roadmaintenance costs) is furthermore comparable to cost-plus pricing. Both factors weaken marketdiscipline and provide little incentive - to either road users or the road agency - to useresources efficiently.

vii. This paper rejects the notion that roads have to be operated as a traditional governmentdepartment and that user charges should be set equal to short-run marginal costs. Instead, itargues in favor of: (i) dealing explicitly with the external costs of road use (whether throughpricing policies or other interventions); (ii) commercializing roads to strengthen marketdiscipline; and (iii) in the context of a commercially oriented organization (which avoidsconfusing user charges with general tax r evenues), developing pragmatic charging policies which

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promote efficient use of the road network, mobilize sufficient revenues to ensure roads areoperated and maintained to a reasonable standard and make some contribution to thegovernment's overall fiscal revenues.

Dealing With Extenalities

viii. There is growing concern about the costs of road congestion, the environmental impactsof road traffic (motor vehicle exhaust emissions, traffic noise and other sources of environmentaldamage) and the costs of road accidents. This raises important questions about the scope forusing charging policies to internalize these costs.

ix. Road congestion affects both inter-urban and urban road networks. On inter-urban roads,congestion is widely scattered and changes location in response to investments in new roadcapacity. It is therefore difficult to charge for inter-urban road congestion, other than on tollroads which only account for a small part of the overall road network. At least 20 major citiesin the Bank's main borrowing countries suffer from serious road congestion. This congestioncould be greatly reduced by improving traffic management and the costs of the congestion couldbe partly internalized through parking charges. There is considerable scope for extending andraising such charges. An aggressive parking strategy could mobilize annual revenues of between$100,000 and $500,000, depending on the size of city. Once the options of improved trafficmanagement and parking charges have been exhausted, attention will usually shift to explicitcongestion charges. The only off-the-shelf methods suitable for developing countries are themanual and mixed manual/electronic cordon pricing schemes. They are only suitable in somecities and it is estimated that about seven of the above 20 seriously congested cities wouldbenefit from cordon pricing. Cordon pricing could mobilize between $3 million and $6 millionper year. Parking charges and cordon pricing could make an important contribution to costrecovery at the municipal level, but will make little contribution to the fixed costs of the networkas a whole (roughly $30 million in Ghana and $60 million in Tunisia).

x. Road use causes environmental damage, with air and noise pollution being major sourcesof concern. The costs of this damage are specific to the time and place where the pollution takesplace and this makes it virtually impossible, given current measurement techniques and theavailable charging instruments, to attach a monetary value to these costs and to charge each roaduser for the actual damage they cause. However, although it is not possible to estimate thesecosts, it still makes sense to use indirect market-based incentives to reduce environmentaldamage. They will usually be used as part of a comprehensive package of measures - includingregulatory interventions - to internalize the environmental damage. The incentives shouldconcentrate on: (i) structuring vehicle purchase taxes in relation to measured fuel consumption(or life-time emissions) to encourage purchase of more fuel-efficient vehicles; (ii) complementingthe above taxes with structured periodic license fees to encourage scrapping/retro-fitting of oldervehicles; and (iii) structuring fuel taxes to encourage use of lead-free gasoline, alternativetransport fuels and low sulphur diesel fuel. Strategies for dealing with congestion will alsoreduce environmental damage. The above incentives will make no contribution to cost recovery.

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xi. Road accidents are one of the leading causes of death in developing countries. Onaverage, the annual costs of road accidents in developing countries amount to between one andtwo percent of GDP. One of the best ways of internalizing accident costs is through motorinsurance. Motor insurance is a risk-sharing device and a well-designed insurance scheme cancombine incentives to promote road safety and to recover their costs. To be effective, existingschemes need to be improved and some coverage needs to be made compulsory. A fullydeveloped system of motor insurance would cover all accident costs, including public medicalcosts and damage to public property. It might also be desirable to establish an indemnity fundto cover uninsured risks and to compensate the victims of uninsured, unknown, or insolventdrivers. Road user charges should thus include a small element to finance an indemnity fund.

Strengthening Management of Roads

xii. Governments world-wide are exploring ways of strengthening management of roads.Roads are being commercialized, corporatized and even privatized. Although overall strategicdecisions will continue to be influenced by political considerations, there is considerable scopefor improving management of roads to iensure they produce value-for-money. The strategy forimproving them should include four main elements: (i) making the performance of the roadagency more transparency; (ii) linking revenues and expenditures; (iii) strengthening theinstitutional arrangements for managing roads; and (iv) setting clear management objectives andmonitoring performance against these objectives. The aim is to create surrogate marketdiscipline, in the form of a clear customer-supplier relationship, to strengthen managerialincentives and improve performance.

xiii. The concept of managerial accountability requires transparency in the way the roadagency operates. It requires provision of effective information on the physical and financialperformance of the road agency to show how it plans expenditures, undertakes maintenance,addresses road safety issues and controls overloading. This requires an effective managementinformation system, together with a system for monitoring and evaluating managerialperformance. It also requires provision of better financial information. The accounting systemshould account for the capital invested in roads, its condition and how it is financed. A capitalaccount and a cash-flow statement showing sources and application of funds, should become aregular part of the road agency's accounts. There can furthermore be no real market disciplinewithout cost accounting. Cost accounts should therefore be developed, usually in the form ofperformance budgets, to plan expenditures, monitor implementation and evaluate performance.

xiv. Transparency will not be complete until there is a clearly perceived linkage betweenexpenditures on roads and the user charges needed to finance them. When revenues andexpenditures are de-linked, it destroys the customer-supplier relationship needed to ensure theroad agency only undertakes expenditures road users want and for which they are willing to pay.What is being sought is a mechanism for constraining road expenditures to the level which usersare willing to finance. Linking revenues and expenditures is not the same thing as traditionaleannarking. Earmarking is generally used to ensure a stable flow of funds, while linkingrevenues and expenditures recognizes that payments for road use are not general revenues

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(neither are power tariffs) and need to be accounted for separately to avoid confusing them withgeneral revenues. The arrangement proposed in this paper differs from traditional earmarkingin two important respects. First, the revenues need to be collected directly by the road agency(or collected by the oil companies on an agency basis) to avoid diversion by the treasury andprovide the road agency with an incentive to minimize avoidance, evasion and leakage. Second,the arrangement means that road expenditures are firmly linked to the user charges needed tofinance them and this should prompt users to question the need for increased road spending andits priority.

xv. Attempts to strengthen market discipline should be accompanied by other initiatives whichrecognize the institutional and political context in which roads are managed. All feasible optionsshould be explored for reforming institutions to promote more market discipline. They shouldinclude decentralization or delegation of central government responsibilities to lower levels ofgovernment, delegation of central and local government responsibilities to autonomous roadagencies, and involvement of the private sector. The aim in all cases is to bring administration,fnancing and management closer to the ultimate road user to make decisions more transparentand subject to the pressure of a more clearly defined constituency. Autonomy can either takethe form of an autonomous toll road authority, or corporatization of national and regional roadagencies. There are several ways of involving the private sector. Possibilities include use ofprivate contractors to collect bridge tolls (as in Pakistan), through provision and operation ofprivate toll roads (along the lines of Cofiroute in France), to roads which are built and operatedby the private sector under a concession agreement. These schemes can have a major impacton market discipline.

xvi. Finally, roads need to have clear management objectives which can be monitored andagainst which managerial performance can be judged. The objectives can be set out in the formof a performance contract (aying down the objectives and responsibilities of each contractingparty), as an annual statement of intent (as is done in New Zealand), or built into acomprehensive management assessment system (as done in Korea). The objectives furthermoreneed to be supported by an effective auditing system which ensures that financial resources arehandled according to established guidelines, funds are spent on the activity for which they wereapproved and have been used to finance the right facilities in the right place and at the righttime. Effective auditing also requires institutional independence. At the very least, there shouldbe an auditing office within the road agency or the transport ministry, answerable to the auditorgeneral. Ideally, there should be an independent audit carried out on the same basis as for otherpublic enterprises.

Charging Policies for Roads

xvii. Every effort should be made to establish a clear price for roads. Users need to knowwhat they are paying to encourage them to demand value-for-money. The voice of an informedpublic can play an important part in promoting market discipline and discouraging monopolisticbehavior. The price will usually be displayed in the form of a periodic license fee and a fuel

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charge. Weight-distance charges should be used to charge diesel vehicles in countries witheffective systems of tax administration, or road agencies able to administer them.

xviii. User charges should never be set lower than variable costs. These should include roadmaintenance costs, the public costs of road accidents and an element to finance a contingencyfund to cover the costs of uninsured road accidents. When roads are seriously congested, andthe congestion can not be reduced by improving traffic management and raising (or extending)parking charges, attempts should be made to introduce explicit congestion charges. They willnormally be confined to large urban areas and, given the current state of technology, will usuallyinvolve cordon pricing.

xix. User charges set equal to variable costs and the congestion costs which can beinternalized, will leave some expenditures unfunded. These expenditures have to be financed,either by road users, those who benefit from road access (e.g., through local property taxes),or from general tax revenues. In the case of local roads, these expenditures should generallybe financed by taxing beneficiaries (for investment), or from general revenues (for operation andmaintenance). On the main road network, they must nearly always be financed by road users.They can either be financed by applying a uniform mark-up to the variable costs and congestioncharges (particularly when weight-distance charges are used to charge diesel vehicles), or byusing a quasi two-part tariff consisting of a periodic license fee and a fuel charge (when thecharging instruments are confined to fuiel charges and license fees).

xx. The above user charging system involves a great deal of averaging. Since the scope forhaving different user charges on different parts of the road network is limited (other than on tollroads), it follows that collector and distributor roads will either incur large losses (which haveto be financed from general revenues), or there will have to be a uniform road tariff (with minorregional variations) and funds will have to be transferred between the various institutionsresponsible for different parts of the road network.

xxi. Road users should also make some contribution to the government's overall fiscalrevenues. A tax on gasoline is the preferred fiscal instrument, since diesel is used outside thetransport sector and road transport (the main user of diesel fuel) is an intermediate good. Theprecise level of the tax should be decidled as part of the government's overall fiscal strategy.A final pump price of 80 to 90 cents per liter at 1988 prices (including the border price, generaltax, road user charge and the fiscal tax) does not appear unreasonable.

Implications for Bank Operations

xxii. The above agenda has significant implications for the Bank's economic and sector workand for its lending operations. Past policy dialogue has concentrated on ensuring that trucks paidfor the damage they did to the road pavement (i.e., covered short-run marginal costs) and,although govemments were urged to allocate more revenues for road maintenance, the questionof where these revenues would come from and at what costs were hardly ever addressed. The

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above agenda requires a different approach and the Bank should in future help governments toaddress the following issues:

* Governments should be encouraged to commercialize their road agencies and usergroups should be encouraged to take an active interest in the management ofroads and to dialogue on the appropriate level of road spending and how it mightbe financed. More attention should be paid to introduction of better financialmanagement systems and introduction of improved auditing practices. Thegovernment should be encouraged to set clear management objectives and tomonitor performance against these objectives.

* User charges should be clearly distinguished from general tax revenues beforebeing compared with expenditures on roads. Otherwise, payments for use of theroad network will be over-estimated and the financial discipline - which ensuresthat increased road expenditures automatically raise questions about how they aregoing to be financed - will be lost.

* The Bank should help borrowers prepare sector financing plans showing how roadexpenditures are financed, by whom and at what cost. The financing plan shouldidentify the role of borrowing and make all financial flows transparent.

* UIrban transport projects in large cities should include an assessment of the extentof congestion, the scope for using traffic management and minor roadimprovements to reduce it and, beyond that, the feasibility of introducing cordonpricing to ration scarce road space and reduce motor vehicle exhaust emissions.

xxiii. There is also a need for further research. The main gaps in current knowledge are howthe institutional framework (and associated managerial incentive system) affects operationalperformance and how indirect market-based instruments can be used to internalize the externalcosts of road use. The Bank can help by encouraging work on the following topics:

* Different institutional arrangements are being introduced to improve theperformance of road agencies. They vary from commercialization of the roadagency, decentralization of responsibility and creation of autonomous roadagencies, to full-scale corporatization. Few studies have evaluated the impact ofthese arrangements and established what it takes to encourage improvedperformance. Further work is needed to explore these issues.

* About twenty major cities in the Bank's main borrowing countries suffer fromserious road congestion. This raises two important issues. First, more researchis needed on the technical and administrative requirements of cordon pricing.Second, the technology used for electronic road pricing is changing rapidly andthe Bank should remain informed on developments which might eventually makeit feasible to apply these systems in developing countries.

* Growing concern with the environmental impacts of road use and the paucity ofinformation on ways of dealing with it, means more research is needed on howto deal with these impacts. The main concern is to establish what steps might betaken - by way of market-based incentives and regulatory interventions - to

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minimize environmental impacts. In particular, the potential for using differentialtaxation warrants further study.The potential importance of motor insurance as a means of internalizing the costsof road accidents suggests more needs to be known about the current state ofmotor insurance in devreloping countries and how it can be strengthened toimprove road safety.

I. INTRODUCTION

1. This paper reviews the Bank's current policies on managing and charging for roads. Itdoes so because roads are important economic assets and arrangements for managing them andcharging for road services can have a major impact on overall economic performance. Thepaper has primarily been written for a technical audience. It seeks to provide a rational basisfor managing roads, designing road user charging policies, and attempts to provide practicalguidance on how to implement such policies in developing countries. The paper does notattempt to revise the theoretical basis of management and charging policies, but simply to setthese policies in a practical context where multiple - and often conflicting - objectives haveto be reconciled.

2. Road transport is now the dominant means of transport in most countries and roadexpenditures typically account for 5 to 10 percent of total government spending. More than halfthis spending is usually in the form of investment. Road spending thus adds significantly to thestock of public capital. This capital stock is substantial. The replacement costs of the main roadnetworks in developing countries amounted to over $300 billion in 1986 (Harral and Faiz, 1988)and figures for individual countries (see Table 1.1) show that it usually exceeds, by a widemargin, the capital invested in power generation and distribution systems in these countries. InCanada, recent estimates have furthermore shown that the net capital invested in roads, at 1986prices, is over Cn$51 million, which is nearly four times that invested in railways and twenty-one times that invested in airports (Lall, 1990). Roads are big business.

3. In spite of their importance, most road networks in developing countries are poorlymanaged, badly maintained and underfunded. They are operated as government departments,keep no balance sheets, record all financial transactions on a cash basis and are not subject toany serious market discipline. Autonomous toll roads, operated on a commercial basis, rarelyaccount for more than 5 to 10 percent of the road network and private sector roads arenegligible. As a result, operational efficiency is low. A recent study in the U.S.A. has shownthat introduction of commercial performance-based management systems can reduce roadmaintenance costs by between 5 and 15 percent. Most of these savings are attributable to betterscheduling of work, higher labor productivity and improved work methods (Federal HighwayAdministration, 1985). Sub-contracting for road maintenance can likewise reduce costssignificantly and also increase quality; there is a growing consensus that sub-contracting canreduce costs by 20 percent, net of the extra costs of administering the contracts (Harral, et al,1986; Cox, 1987; Glaister and Cox, 1989). In the U.S.A., sub-contracting has produced evenlarger savings, varying from nearly 50 percent for asphalt overlays, through 36 percent fortraffic signal maintenance, to 30 percent for street cleaning (Meyer, 1989). What this showsis that, although some road agencies may be efficient, most suffer from ineffective workplanning, inflated payrolls and low productivity.

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Table 1.1 Replacement Costs of Main Roads versus NetAssets of Power Generation and Transmission

($ million)

Replacement value Net assets of Column (1)of main roads power system Column (2)

(1) (2)

Chile 2,885 2,654 1.09Pakistan 4,933 2,024 2.43Ethiopia 1,361 395 3.44Thailand 9,061 5,108 1.77Kenya 2,302 322 7.15

Source: Bank documents. Figures for roads are for 1986. For the power system theyrelate to various years between 1985 and 1987.

4. Roads are also badly maintained.. The Bank's policy study on road deterioration showedthat allocations for road maintenance in. developing countries have been so low that nearly 15percent of the capital value of these roads - over $43 billion - has been eroded. This isequivalent to over two percent of GNP. A quarter of the paved road networks, together witha third of the unimproved networks, now need to be abandoned or reconstructed. Cuts in roadmaintenance are self-defeating. On a road carrying 3,000 vehicles per day, a reduction of$2,400 in annualized road maintenance expenditures increases annualized road user costs by$6,987. Each dollar saved by the road agency therefore adds roughly three dollars to the costsof road transport and reduces GDP by two dollars (Paterson and Archando-Callao, 1991). TheBank, being mindful of the high economic returns to road maintenance and rehabilitation -which typically produce rates of return in excess of 40 to 50 percent - has repeatedly urgedgovernment's to increase allocations for road maintenance.

5. Current arrangements for managing roads and charging for road use make little effort toaddress these issues. Local roads - residential streets and rural access roads - carrying lowvolumes of traffic are usually managed by local governments and are primarily financed throughgeneral taxation and local property taxes (a form of benefit taxation). Main roads, on the otherhand, are usually managed by central and regional governments and are financed in one of twoways. Under the first system, roads are simply treated as public goods on the grounds that userscannot easily be excluded from using them. Road users pay taxes, these are credited to generalrevenues and road expenditures are then financed through budget allocations determined as part

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of the annual budgetary process. There is no clear user charge and there is no connectionbetween road taxation, the costs of road use (either marginal or average) and expenditures onroads. This system applies in nearly all developing countries.

6. The second system plays down the public goods characteristics of roads. It recognizesthat some road users cannot easily be excluded - cyclists, animal-drawn vehicles andpedestrians - and that their usage has to be financed from general revenues. Motorizedvehicles, on the other hand, can be charged for use of the road network, though not for use ofparticular roads (other than on toll roads). They can be made to pay an access fee (in the formof a periodic license) and a usage fee (usually in the form of a fuel charge). The second systemtherefore charges for road use and usually does so on the basis of pay-as-you-go (PAYG). Allroad expenditures are allocated to road users, based on known relationships between vehiclecharacteristics and road costs and/or a subjective assessment of responsibility, and user chargesare set to mobilize sufficient revenues to cover total allocated costs. To improve managementof roads, some countries also attempt to charge more directly for roads (by using weight-distancecharges, rather than fuel taxes, for diesel vehicles), use earmarking to link road user revenuesmore closely to expenditures on roads, and have taken various steps to commercialize their roadnetworks to subject them to more market discipline.

7. Most PAYG systems also recognize that road usage - like all other goods and services- is subject to the general tax system and that road users are expected to pay general taxes inaddition to road user charges. Some countries do this explicitly (e.g., Ghana, New Zealand andSwitzerland), while others simply ensure that road user charges exceed - usually by a widemargin - annual expenditures on roads. This is illustrated in Table 1.2. None of theindustrialized countries included in the table charge less than average costs and, apart for Japanand the U.S.A. which operate balanced road funds, most countries use road taxation as a majorsource of fiscal revenues. Developing countries, on the other hand, rarely do the same. Of thesixteen countries included in Table 1.2, six fail to cover costs (the number is higher whenallowance is made for shortfalls in current road maintenance expenditures), five provide amodest contribution to fiscal revenues and only three provide a contribution comparable toindustrialized countries. This is surprising, since developing countries, which have lessdeveloped tax systems (fewer personal and corporate taxes and rudimentary social securityfunds), are more dependant on indirect taxes than are industrialized countries (World Bank, 1991(a)).

8. Neither of the above charging systems is wholly satisfactory. In the first system, theabsence of any linkage between revenues and expenditures, means that governments rarely knowhow much revenue they collect from road users. Road users and the road agency likewise haveevery incentive to press for increased spending on roads because they know it is financed fromgeneral revenues and has no direct impact on road taxation. General revenue financefurthermore provides no incentives to reduce costs. The second system is better but, sincecharges are only partly related to costs (particularly marginal costs), it does not promote efficientuse of the road network. In particular, it does not recognize the external costs of road use(congestion, road accidents and environmental damage) and makes no attempt to internalize

Table 1.2 Relationship Between Road Revenues and Expenditures in Selected Developed and Developing Countries

Revenue/ Revenue/Country Revenue Expenditure Expenditure Country Revenue Expenditure Actual

Industrialized Countries: Ghana, 1987 4,560 13,341 0.34Austria, 1987 3,133 2,256 1.39 Cedi, mill

SDRs, mill Tanzania, 1987 3,859 2,192 1.76Denmark, 1988 2,205 711 3.10 Sh, mill

SDRs, mill Zaire, 1985 2,656 4,634 0.57Finland, 1987 2,636 1,307 2.02 Z, millSDRs, mill Bangladesh, 1985 1,600 2,088 0.77

W. Germany, 1988 14,450 9,054 1.60 Taka, millSDRs, mill China, 1986 11 9 1.22

Italy, 1988 44,843 24,514 1.83 Yuan, billLira, bill Indonesia, 1988 1,495 1,707 0.88

Iceland, 1988 172 79 2.18 Rp, billSDRs, mill Thailand, 1985 19,566 9,861 1.98

Japan, 1985 6,559 6,526 1.01 Baht, millYen, bill Argentina, 1987 2,922 1,209 2.42

Netherlands, 1988 4,363 861 5.07 Australes, millSDRs, mill Bolivia, 1987 177 141 1.26

Spain, 1988 11,259 2,031 5.54 Bols, millSDRs, mill Colombia, 1986 47 53 0.89

Sweden, 1988 2,885 969 2.98 C$, millSDRs, mill Costa Rica, 1986 8,665 5,852 1.48

Switzerland, 1988 2,637 2,139 1.23 CR$, millSDRs, mill Algeria, 1984 8,130 5,240 1.55

U.K., 1988 23,013 4,854 4.74 DA, millSDRs, mill Pakistan, 1985 9,324 3,895 2.39

U.S.A., 1987 46,750 46,750 1.00 Rs, millSDRs, mill Tunisia, 1985 83 54 1.54

DT, millDevelopin2 Countries: Turkey, 1983 268 115 2.33Ethiopia, 1985 87 122 0.72

Birr, millSources: For Developed Countries: International Road Federation, 1990;

S. Granati, Autostrada, for Italy and Y. Okano, Tokyo University, for Japan.For Developing Countries: Heggie, 1989; also Annex 1.

5

them. Finally, even more so than the first system, it provides little incentive to reduce costs.Inflated costs are simply passed on to road users in the form of higher user charges.

9. The above user charging policies are not satisfactory. Too many countries still treatroads as public goods, operate them as government departments and finance them from generalrevenues. This is an anachronism. In other sectors of the economy the emphasis is oncommercializing major economic assets, corporatizing them and, where possible, privatizingthem. This means subjecting them, wherever and whenever possible, to some form of marketdiscipline, imposing on them a hard budget constraint (i.e., eliminating direct and indirectbudget transfers) and giving management the autonomy to run them in a business-like way(World Bank, 1991 (b)). The large maintenance backlog, together with continuing shortfalls inallocations for road maintenance, demonstrate that roads are poorly managed and under-funded.Few government' in developing countries furthermore use road taxation to systematicallymobilize general fiscal revenues and those that do rarely allocate sufficient revenues back to theroad sector to meet basic operation and maintenance requirements. Little effort has furthermorebeen made to deal with the external costs of road use and to find ways of internalizing them.

10. The conclusion is thus that management and charging policies for roads need to berevised. That is the rationale for this paper. Chapter 2 describes the characteristics of roads:the way they are administered, the costs of road use and the charging instruments available forinternalizing these costs. Chapter 3 outlines the Bank's current policies on managing andcharging for roads and examines the issues which arise when trying to apply them. Chapter 4focusses on the management of roads and outlines an agenda for improving it. Chapter 5 thendeals with the question of cost recovery and the role of road taxation as a means of mobilizinggeneral fiscal revenues. Finally, chapter 6 draws conclusions and makes recommendations forimproving management and charging policies for roads.

6

II. CHARACTERISTICS OF ROADS

11. This chapter provides the basic background information needed to understand what roadsin developing countries are like. It looks at the general characteristics of these road networks,the way they are administered, the costs of using them (the costs incurred by the road agencyand the external costs of road congestion, environmental damage and road accidents) and thetypes of charging instruments available for internalizing these costs. It thus provides a typologyof roads for purposes of managing roads and charging for road use.

Types of Roads

12. Roads vary from high capacity, multi-lane roads carrying large volumes of traffic, to lowvolume roads primarily providing access to property. Since they carry different traffic loadings,they are designed to different standards and this leads to differences in initial construction costsand in subsequent routine and periodic maintenance costs. Roads carrying large volumes oftraffic are generally designed to a high standard and this means the variable costs of road useare low and, because of the large traffic volume, non-variable costs per vehicle are also low.At the other extreme, roads which primarily provide access to property are designed to lowstandards and both variable and non-variable costs are high.

13. The characteristics of the road network - the types of road, volumes of traffic and extentof road congestion - are dependant on the country's stage of development. During early stagesof development, there are few roads, little traffic and much of the road network is unpaved.Average daily traffic volumes on the primary road network are typically less than 1,000 vehsper two-lane km. As a result, road spending tends to focus on road maintenance, extending theroad network and paving roads to reduce vehicle operating costs. About 60 percent ofdeveloping countries, including most of Sub-Saharan Africa, fall into this first category.

14. As traffic grows, attention shifts from extending the road network towards consolidatingand improving it, with average daily traffic volumes on the primary road network lying in therange of 1,000 to 3,000 vehs per two-lane km. Road congestion emerges as an issue in largeurban areas and on parts of the inter-urban road network, but is sporadic and only justifiesimproved traffic management, minor road improvements and minor widening of inter-urbanroads. About 20 percent of developing countries fall into this second category.

15. Finally, with the basic road network in place, growing motorization leads to morepersistent road congestion, with average daily traffic volumes on the primary road network inexcess of 3,000 vehs per two-lane km. As a result, priorities shift from consolidating andimproving the network towards management of urban road congestion, construction of reliefroads and expansion of inter-urban roads. About 20 percent of developing countries fall into

7

this last category. For purposes of comparison, it is worth noting that average daily trafficvolumes on the primary road networks in Western Europe and U.S.A. are between 10,000 and20,000 vehs per two-lane km.

16. Urban road congestion is a growing problem in the third group of countries, althoughmuch of it is caused by weak traffic management and minor defects in the road network. Urbanroad networks are plagued by a high proportion of non-motorized vehicles, lack of driverdiscipline, illegally parked vehicles, poor road maintenance and encroaching road-side activities.A fair amount of congestion is thus attributable to the poor performance of the road agency.Serious urban road congestion - congestion which cannot be avoided by improved trafficmanagement and minor road improvements - is generally confined to a few large cities in eachcountry (often a single capital city), exhibits marked peaks and affects about 20 to 30 percentof veh-km. It is estimated that about twenty cities in the Bank's main borrowing countries sufferfrom serious urban road congestion (Heggie, 1991 (a)).

17. Inter-urban road congestion is important in both the second and third group of countries.The second group have more narrow roads (roads less than 5.5 m wide) and these becomeseriously congested when traffic volumes reach about 2,000 vpd. The third group have moretwo-lane roads and these become seriously congested when lane volumes reach about 5,000 vpd(i.e., 10,000 vpd in both directions). At any one time, serious congestion probably affects lessthan 10 percent of the inter-urban road network (e.g., in Tunisia, it is estimated that less than6 percent of the classified inter-urban paved road network experiences serious congestion).

Administraive Arrangements

18. Administrative arrangements usually parallel the country's system of government. Themajor arterial roads - principal inter-city routes and connections to major ports, airports andrail terminals - are usually classified as national (or federal) roads and are operated by centralgovernment. Minor arterial roads, together with most collector and distributor roads, mainlyperform a regional function. They link smaller towns and provide connections between themand the main arterial road network. These roads are usually administered by some form ofregional government. Finally, there are local roads which are admninistered by municipalities(in urban areas) and local governments (in rural areas).

19. In addition, most countries operate some toll roads. However, since tolls are onlyeconomic on high volume roads, they rarely account for more than 5 percent of the main roadnetwork. The world's toll road network is nevertheless growing rapidly with over 5,400 krn inFrance, 5,100 km in Italy, 4,700 km in Japan, nearly 2,000 km in Spain and over 7,100 in theU.S.A. Developing countries are also building toll roads and already there are substantialnetworks in Mexico, Thailand, Malaysia, Indonesia, Korea and Argentina. Most toll roads areoperated on an autonomous basis (i.e., like a public enterprise) under the jurisdiction of national,regional or municipal government. There are also some private toll roads, like Cofiroute inFrance, which are operated on a wholly commercial basis. A growing number of bridges and

8

tunnels also charge tolls and are operated on a semi-autonomous basis under the jurisdiction ofmunicipal and local governments.

110. Roads are thus typically operated at four main levels under slightly differentadministrative anrangements. Roads at the highest level, those with highest traffic volumes, areoften operated as toll roads (enjoying different degrees of autonomy), with high designstandards, low unit costs and able to charge a specific fee for usage of the road. The other threelevels comprise the national road network, regional roads and local roads. With few exceptions,they are operated as government departments. National and regional roads are financed throughuser charges (often supplemented from general revenues) and, although there is some scope forcharging differential user fees in different jurisdictions, users of national roads usually cross-subsidize regional road users. The cross-subsidies usually take the form of transfers betweennational (or federal) and regional governments. Finally, the local roads - where costs arehighest and revenues lowest - are financed through a combination of local user charges,property taxes, other local taxes and transfers from higher levels of government.

The Costs of Road Use

111. Costs measure the resources consumed in providing road services. The followingsections focus on: (i) the costs incurred by the road agency; (ii) the costs of road congestion;(iii) the costs of the environmental damage caused by road use; and (iv) the costs of roadaccidents.

Road Agency Costs

112. The costs incurred by the road agency can be examined by analyzing the costs of usingdifferent types of roads. The results of such an analysis are summarized in Table 2.1. Theroads have been designed to different standards (as reflected in the modified structural number),are subject to different traffic loadings and the resultant costs of road use have been divided intovariable costs (i.e., costs which vary clirectly with traffic) and non-variable costs (i.e., costsattributable to other factors, but which have to be incurred to keep the roads serviceable andopen to traffic). The analysis has been confined to recurrent costs which include management,administration, policing, and maintenance of roads and structures.

113. The table illustrates two important points. First, a significant proportion of the agency'srecurrent costs do not vary with traffic; they are effectively fixed. The proportion of fixed costson paved roads varies from 46 percent on major arterials, through 51 percent on minor arterialsand 61 percent on collector and distributor roads, to 79 percent on local roads. On unpavedroads, the proportion is 65 percent. A general rule of thumb in developing countries is thus thatabout half the recurrent costs are effeclively fixed. The second important point, is that costsvary significantly between different types of road. Variable costs are lowest on major arterialroads, are about twice that on minor arterials, four times higher on collector and distributorroads, five times higher on local roads and over twenty times higher on unpaved roads. Thevariations for fixed costs and total costs are even higher. Cost-based charging systems should

9

Table 2.1 Variable and Non-Variable Road Agency Costs on Different Types of Road (a)(U.S. cents per veh-km) (b)

Main Roads Local Access Roads AverageMajor Minor Collector/ Value for

Arterial Arterial Distributor High Low MainRoads Roads Roads Volume Volume Roads (e)

Traffic (AADT) (c) 10,000 6,000 3,000 1,000 300 50Pavement strength

(MSN) (d) 8 8 5 3 2 -

Paved Road. Normal Loading (8 tonne limit). High Motorization (20 percent trucks):Variable Costs 0.11 0.17 0.28 0.53 0.65 - 0.27Non-Variable Costs 0.10 0.14 0.29 0.84 2.40 - 0.34

Total 0.21 0.31 0.57 1.37 3.05 - 0.62

Paved Road, Normal Loading (8 tonne limit). Low Motorization (70 percent trucks):Variable Costs - - 0.50 1.01 1.92 - 0.38Non-Variable Costs - - 0.32 0.92 2.68 - 0.31

Total - - 0.82 1.93 4.60 - 0.69

Paved Road, Heavy Loading (13 tonne limit). Hi2h Motorization (20 percent trucks):Variable Costs 0.13 0.20 0.29 0.63 1.50 - 0.31Non-Variable Costs 0.10 0.14 0.29 0.84 2.40 - 0.34

Total 0.23 0.34 0.58 1.47 3.90 - 0.66

Paved Road. Light Loading (under 8 tonne limit). High Motorization (20 percent trucks):Variable Costs 0.10 0.16 0.27 0.46 0.69 - 0.25Non-Variable Costs 0.10 0.14 0.29 0.84 2.40 - 0.34

Total 0.20 0.30 0.56 1.30 3.09 - 0.59

Unpaved Road. Normal Loading (8 tonne limit). Low Motorization (70 percent trucks):Variable Costs - - - - 1.92 3.01Non-Variable Costs - - - - 0.91 5.48

Total - - - - 2.83 8.49

Notes: (a) Based on data from a selection of developing countries without any extremesof climate.

(b) The costs are the average for all vehicles per average veh-km. Individualvehicles with high ESALs incur higher costs and those with low ESALs incurlower costs.

(c) Average annual daily traffic.(d) Modified structural number of the road pavement.(e) Veh-km taken from Annex 2, Table A.2.1.

Source: Paterson and Archando-Callao, 1991.

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therefore charge much less on arterial roads than on collector & distributor and local roads.Alternatively, the charging system will incorporate a large element of cross-subsidy.

114. Finally, the table also shows how road agency costs are affected by heavy loading (eitherhigher legal limits, or over-loading) and light loading. On paved roads, which have beenspecifically designed to carry heavy axle weights, road agency costs increase by less than 10percent. This confirms earlier work which showed that the economic gain from use of largerand heavier vehicles outweighs the increased damage to the road pavement, provided the roadpavement is designed to carry these loads (Faiz and Fossberg, 1987). It also shows that, onlocal roads with weak pavements, costs increase sharply with heavy loadings. This illustratesthe importance of controlling vehicle weights on weak pavements and, where feasible, chargingthe extra costs associated with overloading against the vehicles which cause it.

Road Congestion Costs

115. In one sense road congestion is more important in developing countries than it is inindustrialized countries, while in another it is less important. It is more important, becausemuch of it is caused by poor traffic management and can therefore be reduced through simpleand inexpensive interventions. On the: other hand, it is less important, because there is lesstraffic in developing countries and the value of travel time is lower. Typical inter-urban trafficvolumes in a country like Indonesia are about 3,000 vpd per two-lane km (in a country likeTunisia they are about 1,500 vpd and in Ghana less than 300 vpd). In industrialized countriesthey are about 10,000 to 20,000 vpd. If 10 percent of this traffic occurs during the peak, whilethe remainder is unaffected by road congestion, the resulting vehicle delays will cost $70 per kmin Ghana (at 3,000 vpd) and $13,104 in the U.K. (at 10,000 vpd).!' The figure of $70, whichwould rise to $200 to $300 in countries with higher travel time values, is relatively unimportantin relation to both the variable and total costs per km incurred on a minor arterial road ($3,066and $6,242 respectively).

116. Road congestion is also a transitory phenomenon. Roads are only congested during partof their lives. This is illustrated in Figure 2.1. The road starts off as a single-lane roadcarrying very little traffic. It incurs some fixed costs, while the costs of building the originalroad have been ignored (they are treatei as a sunk cost). As traffic increases, congestion risesuntil - when traffic reaches about 2,000 vpd - the annual costs of road congestion, A, are justequal to B (the annualized costs of adding another lane and the additional fixed costs associatedwith adding that lane). At this, and all subsequent points of temporary equilibrium, congestioncosts will cover the capital costs of expanding the road, but will not cover existing fixed costs.Once a new lane is added, congestion furthermore disappears and only reappears some yearslater in response to continued growth in traffic. At about 10,000 vpd, the costs of congestionwill again have risen to the point where they justify adding further capacity (C will be equal to

1/ This calculation is based on the fo:llowing speed-flow function s = 71.9 -0.0115v where v isthe two-way volume. The value of travel time in Ghana is $0.87 per veh hr (Gronau, 1991(a)); the U.K. value is $11.39 per veh hr.

Single-lane Two-lane Four-lane

Costs D

B C

.. . .. ... . ............../.,

300 2,000 10,000

Average Annual Daily Traffic

congestion costs............ fixed costs

-------- fixed costs plus annualized costs of additional capacity

Figure 2.1: Life-cycle fixed and congestion costs on a typical developing country road

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D). On a life-cycle basis, congestion costs will therefore only cover part of the fixed and capitalcosts of the road. The same is true for the entire road network - some roads will be congestedwhile others will not - unless road capacity is artificially constrained and congestion is allowedto rise beyond the point where new caLpacity is justified (i.e., A> B and C> D).

117. Estimates of congestion costs for selected road networks support the above conclusion.They are summarized in Table 2.2. Costa Rica, Ghana, Honduras and Zimbabwe all have lowaverage traffic volumes Oess than 1,000 vpd) and are fairly representative of road networks atearly stages of development. Guatemala and Tunisia are representative of countries withmoderate traffic volumes (between 1,OD0 and 3,000 vpd) where road congestion is becoming anissue, but is still sporadic and only justifies improved traffic management, minor roadimprovements and minor widening. The table does not include any examples where daily trafficvolumes exceed 3,000 vpd, and where road congestion is more persistent and warrants explicitinterventions to manage it.

118. The table shows that congestion costs amount to 39 percent of total road agency costs inTunisia, 32 percent in Honduras, 24 percent in Ghana, 16 percent in Guatemala, 13 percent inCosta Rica and are zero in Zimbabwe. Comparable figures for congestion as a percentage offixed costs and investment are 60, 37, 44, 18, 18 and zero respectively. Even in the U.K.,where there has been serious under-investment for some years and the road network is notoptimally adjusted to traffic, estimated congestion costs only amount to 136 percent of the roadagency's costs (Newbery, 1987).

Environmental Damage

119. Road use causes on-going environmental damage, with air and noise pollution beingmajor sources of concern. In developing countries, road transport accounts for about 4 percentof global carbon dioxide emissions and about 30 percent of the global emissions of harmful toxicpollutants like carbon monoxide, nitrous oxides and hydrocarbons. It accounts for a largerproportion of lead and diesel particulates, because of poorer fuel quality and more extensive useof diesel vehicles. The concentration of population in large urban areas in developing countrieshas led to some of the worst congestion and air pollution in the world and pollution caused bymotor vehicles often exceeds WHO guidelines (Faiz, et al, 1990).

120. Air pollution damages health, flora & fauna and buildings, while noise (and associatedvibration) affects sleep, mental health and lowers property values. Water pollution, severanceof rights-of-way and solid waste problems tend to be less important. Table 2.3 presentsindicative estimates of the costs of motor vehicle air pollution in selected industrializedcountries. Although the various estimates use different methodologies (some estimate damagecaused, while others rely on expenditures on pollution abatement) and are subject to widemargins of error, they suggest that the costs of motor vehicle air pollution amount to between0.15 and 0.50 percent of GNP. For the OECD countries as a whole, it has been roughlyestimated that the costs of road traffic noise amounts to about 0.1 percent of GDP and otherenvironmental impacts - excluding carbon dioxide emissions which cause uncertain

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Table 2.2 Road Use Costs. Including the Costs of Road Congestion. for Selected Countries($, million)

Ghana, 1988 (a) Zimbabwe, 1987 (b) Tunisia, 1982 (c)Cost Item Variable Fixed Total Variable Fixed Total Variable Fixed Total

Maintenance:Routine 4.99 4.99 9.99 6.38 6.38 12.76 9.34 21.80 31.14Periodic 21.27 10.46 31.73 22.78 22.78 45.56 20.68 5.17 25.85Strengthening - - - 26.45 6.61 33.06 - - 0.00

Investment:New works - 14.24 14.24 - 32.92 32.92 - 29.40 29.40

Congestion:Urban 12.30 - 12.30 0.00 - 0.00 20.00 - 20.00Inter-Urban 0.90 - 0.90 0.00 - 0.00 13.68 - 13.68

Total 39.46 29.69 69.15 55.61 68.69 124.30 63.70 56.37 120.07

Congestion as % of:Road Agency Costs 24 0 39Maintenance costs 32 0 59Fixed costs and 44 0 60

Investment

Costa Rica (d) Guatamala (d) Honduras (d)Variable Fixed Total Variable Fixed Total Variable Fixed Total

Maintenance:All Maint. 5.29 9.16 14.45 1.73 6.05 7.78 1.15 2.18 3.33Administration - 0.92 0.92 - 1.12 1.12 - - 0.00

Investment:

Roads - 5.03 5.03 - 8.09 8.09 - 5.45 5.45Equipment - 0.88 0.88 - - 0.00 - - 0.00

Congestion:

Urban 2.80 - 2.80 2.80 - 2.80 2.80 - 2.80

Total 8.09 15.99 24.08 4.53 15.26 19.79 3.95 7.63 11.58

Congestion as % of:Road Agency Costs 13 16 32Maintenance costs 19 36 84Fixed costs and 18 18 37

Investment

Notes: (a) From Gronau, 1991 (a). Costs of routine maintenance have been taken from World Bank,1989 (b) assuming it includes 30 percent of construction costs (the rest isrehabilitation, together with expenditures on equipment and cocoa roads.

(b) From Gronau, 1991 (b). Strengthening refers to periodic overlays added to strengthenthe road pavement to carry heavy vehicles. Investment costs from World Bank, 1988 (c).

(c) From Heggie and Fon, 1991.(d) From Churchill, 1972; World Bank, 1967. Maintenance costs estimated from

World Bank, Washington, 1967. Maintenance costs estimated from the equations inChurchill. Congestion costs are peak period costs and include value of travel time.

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Table 2.3: Indicative Costs of Motor Vehicle Air Pollution in Selected Countries

Pollution Costs Road ExpenditureCountry Year (percent GNP) (percent GNP) Remarks

Netherlands 1983 0.15 - 0.20 0.38 Estimated damage costsGermany 1986 0.40 1.12 Estimated damage costsE.E.C. 1986 0.50 - Estimated abatement costsU.S.A. 1981 0.30 1.32U.S.A. 1978 0.35 1.56France 1977 0.21 1.64France 1978 0.07 - 0.17 1.49 Mainly estimated damage costsU.K. n.a. 0.116 0.95

Notes: GNP figures are for 1984, urness otherwise specified.Source: Pollution costs from Quinet, 1988.

Road expenditures from International Road Federation, 1990.

15

damage - for about 0.4 percent of GDP (OECD, 1990). This is equivalent to between 20 and50 percent of total annual expenditures on roads in these countries and amounts to between 0.12and 0.30 cents per veh km. Comparable figures are not available for developing countries.

121. The costs of environmental damage vary with vehicle usage (and the way vehicles aremaintained), the amount of emissions (which is affected by the average speed of vehicles andthe incidence of traffic congestion), their concentration (largely affected by geographicalconditions like altitude and thernal inversions), exposure to these emissions, the damage causedby the emissions and the monetary value of this damage. Costs are consequently high in urbanareas, particularly during peak periods, and are low in sparsely populated rural areas. Estimatesfor Sweden suggest that average costs in large urban areas are over three times higher than inrural areas (Tegner, 1991). Most of the damage furthermore occurs during peak periods. Coststherefore tend to be specific to a particular location at a given point in time. It is not possible,given current measurement techniques, to accurately measure these site-specific costs.

Costs of Road Accidents

122. Road accidents in developing countries are significantly higher, measured in terms offatalities per 100,000 vehicles, than in industrialized countries. They are now one of the leadingcauses of death in developing countries. Road accidents are the tenth most important cause ofdeath overall and, for the economically active, are the second most important cause. The costsof these accidents are substantial. Estimates suggest that 10 to 15 percent of the beds in largeurban hospitals in ASEAN countries are occupied by road accident casualties and, although therehas been some improvement in recent years, fatality rates in developing countries are typically10 to 20 times higher than in most European countries. The fatality rate per 100,000 vehiclesvary from 10 in cities like Bangkok to over 40 in Addis Ababa, Amman and Seoul. Comparablefigures for industrialized countries are about 2.0 per 100,000 vehicles. Most road accidents indeveloping countries occur in urban areas (even though much of the population lives in ruralareas), the proportion of pedestrian casualties is high and a lot of the accidents - particularlyin Asian cities - involve pedal cycles and two-wheeled vehicles (Ross and Mwiraria, 1989).

123. Road accidents cause both tangible and intangible costs. Tangible costs include directdamage to vehicles, medical expenses, policing and administration, together with the indirectcosts of the net reduction in output due to injury/death, the loss of future consumption and theimpact of income transfers. Intangible costs include pain, grief and suffering, and the risk ofbeing involved in an accident. There are several ways of estimating these costs, although onlytwo are used in practice. The first is the gross output approach which attempts to measure theimpact of an accident on current and future levels of national output. The second relies on thevalue of risk change which is the amount individuals are willing to pay for a small reduction inthe risk of being involved in an accident. The willingness to pay approach results in higherestimates for the value of life. In both the U.K. and New Zealand it has raised the value ofstatistical life to nearly $2 million (Department of Transport, 1988; Miller and Guria, 1991).Most countries continue to use the gross output method.

16

124. On average the annual costs of road accidents amount to between one and two percentof GNP, depending on the level of mctorization (Ross and Mwiraria, 1989). Recent estimatesfor the annual costs of road accidents vary from $786 million in China (0.4 percent of GNP) tobetween $19.0 million and $27.5 million in Botswana (1.8 to 2.6 percent of GMN) (see Table2.4). These costs amount to between $500 and $1,000 per vehicle. Roughly half these costsconsist of medical expenses and damage to vehicles. Many of these costs are already beingfinanced directly by road users in the form of insurance premiums. The costs which are notusually covered by motor insurance include public medical expenses, social security payments,damage to public property and the damage caused by uninsured or unknown drivers. Theirmagnitude depends on the level of motorization, the state of motor insurance and theadministrative arrangements for dealing with accident costs.

Available Charging Instruments

125. There are three main ways of charging for roads. The first is to charge people whobenefit from road access. This is mairly used to charge for residential streets and rural accessroads. The second is to charge road users directly and indirectly for usage of roads. The thirdis to use indirect market-based incentives to internalize the external costs of road use. Eachmethod is discussed below.

Charging Beneficiares

126. Traffic volumes on local roads aLre so low that charges related to road use will make littlecontribution to the costs of operating and maintaining these roads. Government's must thereforerely on indirect charging instruments or, when that is not feasible, general tax revenues. Thegeneral tax revenues may be collected. locally (local business taxes, property taxes and localmarket taxes), or collected nationally and transferred to local government in the form of grants.Briefly, investment in local roads is usually financed through: (i) land-value increment taxes,with all or part of the tax being paid in advance (this is popular in Latin America and both Japanand Korea employ some form of belterment tax); (ii) arrangements under which propertydevelopers are required by regulation to construct the roads and recover their costs fromsubsequent purchasers; (iii) levies imposed on crop marketing boards and producer associations(e.g., logging companies, rubber plantations, cocoa growers, etc.); or (iv) general tax revenues.In Korea, some municipalities also require car owners to take out a compulsory municipal bondto help finance construction of roads and other transport infrastructure. Operation andmaintenance, on the other hand, is nearly always financed from general tax revenues. In somecountries, attempts have been made to make local communities pay for road maintenance bydonating free labor and/or materials, but such arrangements are unusual.

Charging Road Users

127. Countries generally use a variety of charging instruments to collect revenues directlyfrom road users. The selection depends on the country's stage of development and theeffectiveness of its system of tax admirustration. Fuel taxes are usually the main charging

17

Table 2.4: Costs of Road Accidents in Selected Countries

($, million)

PapuaBotswana Kenya Korea New Guinea

Type of Expenditure 1986 1981 1982 1984

Administration 0.4 n.a. 52.9 1.0

Loss of Output 5.4 69.2 280.8 6.1

Medical Expenses 2.7 3.1 196.6 0.5

Damage to Vehicles 9.1 43.8 138.4 13.9

Pain, Grief and Suffering 1.1 - 9.6 - - 6.3

Miscellaneous 0.3 - 30.6

Total 19.0 - 27.5 116.1 699.2 27.8

Percent of GNP 1.8 - 2.6 1.8 1.0 1.2

No. of Vehicles (a) 40,000 212,000 675,000 26,000

Cost per Veh. ($) 688 548 1,036 1,069

Notes: (a) Registered cars, buses and trucks.

Sources: Nystrom and Karlsson, 1989; National Road Safety Council, 1983;Ross, 1984; Transpotech, 1986

18

instrument, because they bear some relationship to road use, are cheap and easy to administerand have desirable impacts on fuel efficiency. However, high fuel prices and wide pricedifferentials encourage fuel substitution to avoid paying these fuel taxes. Kerosene prices areoften kept low to minimize their impactl on low income households which use it for home heatingand cooking. Since kerosene, when mixed with a little engine oil, is a complete substitute fordiesel fuel, even moderate price diffeirentials quickly lead to substitution. Diesel fuel is alsoused outside the road sector (e.g., in industry and agriculture) and this further constrains dieselcharges. Some countries use rebate schemes and other administrative measures to discouragesubstitution and avoid taxing other sectors. The U.K. colors diesel fuel and inspects vehiclesfor signs of mixing, while Sri Lanka issues coupons to poor households to ensure they canpurchase kerosene at concessionary rates. These arrangements are not always administrativelyfeasible in developing countries and this tends to cap the charges on diesel fuel.

128. Fuel charges are nevertheless likely to remain the principal, if not the only, instrumentused to charge gasoline-powered vehicles. In the case of trucks, fuel taxes are usuallycomplemented by other charging instruments to ensure they properly account for differences inaxle weights and the other characteristics which affect road use costs. This is generally donethrough a periodic vehicle license fee based on the size and weight of the vehicle (either GVWor axle-weight). Some countries also use weight-distance charges to charge diesel vehiclesdirectly for road use. They are purchased to travel a specific distance and are graduated byvehicle type (see Box 2.1 for a description of weight-distance charges). Such charges are notwidely used, but are used in New Zealand, Iceland, Norway and Sweden.

129. Many countries also charge tolls on high volume roads. Since they only apply to highvolume roads, they rarely cover more than 5 percent of the main road network and account forless than 10 percent of overall road user revenues (in Japan they account for nearly 20 percentof revenues). Tolls can be costly to collect, especially on roads with under 5,000 vehicles perday. Toll collection also suffers from problems of leakage which can only be reduced, at leastfor manual toll collection systems, at the expense of substantial monitoring. Finally, tollcollection delays traffic and this imposes substantial payment costs on road users. However,electronic toll collection is now a viable option and can reduce the costs of toll collection tounder 5 percent of gross revenues, cuts down on leakage and reduces delays at toll plazas.

130. Nearly all large cities use parking charges to reduce the number of vehicles usingcongested streets during peak periods and parking controls to reduce the number of parkedvehicles obstructing the road (which increases road capacity). Some cities also charge fees whenvehicles enter the city. Entry fee systems are currently used in Bergen, Oslo and Trondheim(all in Norway) and Singapore. Bergenl collects its fees manually, while the newer schemes inOslo and Trondheim use both manual and electronic collection systems. The Norwegianschemes are relatively inexpensive to install and easy to administer. The annualized costs of theBergen and Trondheim schemes are about $2.0 million. Singapore, on the other hand, uses anarea licensing scheme (ALS) which avoids the need for toll booths. Instead, vehicles have todisplay a supplementary license when entering and operating within the restricted zone. TheALS scheme is also inexpensive to install, but is more difficult to administer. The annualizedcosts of the Singapore scheme are about $2.5 milion. Recent developments in electronic

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Box 2.1 Weight-Distance Licenses for Diesel Vehicles

There are at least four countries, New Zealand, Iceland, Norway and Sweden whichhave devised ways of charging road users directly. The main charging instrument in allfour countries is a weight-distance tax applied to diesel vehicles. Although there are somevariations, the basic prnciple is that all diesel vehicles must buy a license (in New Zealandthey are issued in multples of 1 000 km) which are graduated according to axleconfiguration and gross vehicle weight. The charges are administered through sealed hubodometers, or other certified distance meters. The charge rate is lower for vehicles withmultiple axles and increases with gross vehicle weight.

The charging systems are best developed in Iceland and New Zealand. Othercharges on diese[veiJces are set at nominal levels, although New Zealand does tax dieselfuel for general fiscal purposes, and all the revenues collected through weight-distancelicenses are credited to the road agency. The systems in Norway and Sweden are similar,except that revenues are not credited to the road agency. In addition to the weight-distancelicense, Iceland and New Zealand also levy a special excise on gasoline to charge gasoline-powered vehicles. The revenue is credited to the road agency. Norway and Sweden donot levy specific charges for gasoline-powered vehicles and do not credit any of therevenues collected from car users to the road agency.

The weight-distance charge poses some administrative problems. There isconsiderable scope for evasion - mainly by under-buying and avoiding detection - unlessthe sale of licenses can be checked for consistency and linked to the enforcement systemIn New Zealand it is estimated that collection and enforcement costs absorb about 5percent of gross revenues and that evasion varies from 10 to 20 percent. The systemworks satisfactorily in at least four industrial market economies and should therefore worksatisfactorily in any country with a well-developed system of tax administration. Inprinciple, it should therefore be feasible in countries likeBotswana, Chile, Korea, Thailandand Yugoslavia.

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charging systems, using both automatic vehicle identification (AVI) and Smartcards, hold outthe prospect of eventually making it muich easier and cheaper to charge vehicles using congestedurban streets.

131. Other charging instruments include vehicle emission fees, payments related to vehicleownership (registration fees, vehicle inspection fees and vehicle transfer taxes) and paymentsrelated to vehicle acquisition (import duties, excise taxes and sales taxes). Emission fees chargevehicles according to total annual exhauist emissions to provide ex ante incentives to choose lesspolluting vehicles. No known attempts have been made to introduce such fees in developingcountries, because of the difficulty of administering them. Payments related to ownership aregenerally treated as service fees, rather than charges for road use. They are primarily designedto promote road safety, monitor payment of license fees and support law enforcement. Manycountries therefore register and record transfers of ownership as a free service, or charge feeswhich merely cover the costs of administering them. Payments related to vehicle acquisition areapplied to vehicles, tires and spare parts. Although these instruments are used to collect generaltax revenues, they are not generally used to collect road user charges. Taxes on vehicles andtires discourage purchase of new vehicles and encourage continued usage of older ones. Thisincreases fuel consumption and vehicle exhaust emissions, adversely affects road safety andincreases expenditures on vehicle mainlenance. It thus reduces the overall efficiency and safetyof the vehicle fleet. Import duties and sales taxes also suffer from high levels of avoidance andevasion and, apart from import duties, their costs of administration are high. There are,however, exceptions. In China, an aldded vehicle purchase fee is added to regular sales andexcise taxes to finance road expenditures.

Indirect Market-Based Incentives

132. Indirect market-based incentives include tradeable permits, differential taxes, taxallowances and subsidies. Tradeable permits are sold to vehicle manufacturers and importers -based on the characteristics of the vehicle - and are then sold to the vehicle's buyer. Cleanerand quieter vehicles have cheaper permits and expensive permits can be exchanged for cheaperones by retro-fitting vehicles. No known attempts have been made to use tradeable permits andtheir administration would pose serious difficulties in developing countries. Differential vehicleexcise and sales taxes are sometimes used to encourage purchase of more fuel-efficient vehiclesproducing less pollution and, in particular, less carbon dioxide. Since these tax differentials onlyapply to new vehicles, they are often supplemented by differential periodic license fees toprovide additional incentives to encourage retro-fitting and scrapping of older vehicles.

133. Differential fuel taxes are also used to encourage use of lead-free fuel to clear the wayfor introduction of exhaust after treatment devices (catalytic converters) to reduce hydro carbon,carbon monoxide and nitrous oxide emissions. Price differentials are also used to encourage useof alternative fuels and use of low sulphur diesel fuel. Subsidies (negative taxes) haveoccasionally been used to encourage quieter vehicles and are frequently used to encourage useof public transport. The Netherlands has used subsidies to encourage use of quieter vehicles (acomplementary tax on noisy vehicles was never implemented), but the program will probablynot be continued because of budgetary problems (O.E.C.D., 1991).

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m. POLICIES AND PROBLEMS

134. The first part of this chapter reviews Bank policies on managing roads and charging forthem. The second part then outlines the problems which have arisen when trying to implementthese policies in developing countries. In the case of management policies, it looks at thefinancial management systems, financing arrangements, institutional arrangements for managingroads and the managerial incentive system which motivates managers to operate efficiently. Thecharging policies focus on the definition of the user charge (and the difference between that andgeneral tax revenues), the charging instruments available for internalizing road costs and thecosts of road congestion, the question of cost recovery, the role of road user charges as part ofthe government's overall fiscal strategy and how to deal with the external costs of environmentaldamage and road accidents.

Current Management Policies

135. It is generally agreed that public sector agencies will function most efficiently when theyare faced with competition, or a competition surrogate. Competition is the primary factor whichmotivates managers to cut waste, improve operational performance and allocate resourcesefficiently. The main thrust of overall Bank policy is thus to commercialize or corporatizepublic sector agencies to ensure they are subjected to some form of market discipline, operatewithin a hard budget constraint without the need for direct and indirect budget transfers, do notpursue cost-plus pricing strategies, have clear management objectives and that managers havesufficient autonomy to run the agency in a businesslike way. Management objectives need tobe translated into quantified and monitorable targets and managers need to be held accountablefor their performance against these targets. Accountability furthermore requires effectivebudgeting arrangements, sound financial reporting and management systems, systematic auditingand creation or reinforcement of oversight arrangements (World Bank, 1991 (b); Shirley, 1989).

136. At the sector level, the focus has been on: (i) ensuring more funds are allocated for roadmaintenance, either by changing the balance between new construction and maintenance, or bydoing that and also increasing overall budgetary allocations for road maintenance; (ii) reducingforce account work and turning the road agency into an organization which plans, controls andevaluates work executed by the private sector or by separate government agencies; (iii)improving management information systems to monitor traffic, road conditions and internalagency performance; and (iv) increasing internal accountability and providing incentives toencourage improved performance (Harral and Faiz, 1988). The main emphasis has been onimproving road maintenance through sub-contracting, providing better incentives to encouragemore efficient road maintenance and better equipment management (Harral, et al, 1986; Cox,1987; Harral and Eaton, 1986). Efforts have also been made to improve road maintenance

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through introduction of Program Performance Budgeting systems (Faiz, 1991). Few attemptshave been made to systematically improve overall operation and management of roads.

Current User Charging Policies

137. The Bank's overall guidance on pricing and cost recovery for public sector projectsderives from Operational Manual Statement 2.25 (World Bank, 1977). This recommends a twostep approach. The first step is to set prices equal to the current economic costs of producingthe last unit sold, plus a mark-up to clear the market. This corresponds to the usual short-runmarginal cost pricing rule, which is primarily concerned with managing demand efficiently(hence the name efficiency prices). The second step is then to adjust these prices to take accountof other pricing objectives. For government agencies these include fiscal and incomedistribution objectives, while for public enterprises, they also include financial objectives. Theguidance points out that fiscal objectives do not support a general presumption in favor of fullcost recovery and that significant departures from efficiency prices should only be made afterdue consideration of the economic losses they may cause. The emphasis is on incomedistribution, with the desirability of cost recovery depending on the income of the beneficiaries.If the beneficiaries are poor, it may be preferable to raise their share of the benefits rather thanprovide the government with additional revenues. When additional revenues are considereddesirable, it argues that departures from efficiency prices are often not the best way of raise thisrevenue and recommends taxing project beneficiaries instead.

138. The sector level guidance adopts the same approach (Walters, 1968; Churchill, 1972;Walters 1983; Newbery et al, 1988). It identified three major goals of pricing policy in the roadsector: (i) promoting efficient use of the road system by setting user charges equal to short-runmarginal costs (including the costs of road congestion); (ii) redistributing income; and (iii)generating public revenues. The emphasis was on promoting efficient use of the road networkand, although the guidance attached a great deal of importance to charging for urban roadcongestion, it gave few details of how this might be done. Case studies undertaken in LatinAmerica simply proposed some form of area licensing (Churchill, 1972). The public revenueobjective was played down, because road user charges were not thought to be the most efficientway of generating public revenues. However, in spite of statements to the contrary - thereis no economic argument for balancing the road budget" (Walters, 1968, p. 115) - there was arecognition that departures from efficiency prices might be necessary under some circumstances.The important message was that there wras no preswnption, from economic arguments, that thebest way of financing the deficit (or generating general fiscal revenues) was by taxing road use.All possible sources of tax revenues should be examined and the decision on how to finance thedeficit should be based on a rational evaluation of all the consequences (Walters, 1983, p. 196).

Implementing Management Policies

139. The main problem with the sector-level policies is that they are not always consistent withoverall Bank policies for the public sector. They consist of isolated interventions and do notform part of a comprehensive strategy to improve overall operation of the road agency. For

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example, attempts have been made to instal management information systems, without ensuringthat managers face incentives which encourage them to use these systems. Likewise, efforts toincrease road funding have rarely been accompanied by systematic attempts to improve financialmanagement systems to ensure the additional resources would be spent on roads and properlyaccounted for. There are four areas where current sector-level policies do not deal adequatelywith the management of roads: (i) financial management systems lack transparency; (ii) financingarrangements discourage efficient operations; (iii) institutional arrangements weaken marketdiscipline; and (iv) managers are poorly motivated and have few incentives to control costs.

140. First, road agencies are responsible for large national assets. Their financial accountingsystems nevertheless give little idea of their importance and look more like the accountingsystems used by a charitable trust. The systems are simply designed to monitor expendituresagainst agreed budgetary targets, rather than to help managers make best use of the resourcesunder their control. There is no balance sheet, no depreciation, no systematic cost accounting,all financial transactions are recorded on a cash basis and accounts are rarely subjected toindependent audit. The systems lack transparency. The accounts do not keep track of capitalassets and this makes it impossible to tell - without carrying out detailed technical studies -whether assets are being kept intact, or allowed to erode through lack of maintenance. It islikewise impossible to calculate the usual financial ratios which measure overall financialperformance and enable it to be monitored over time. Road agencies do not have to be run asconventional government departments and would benefit from a more commercial managementapproach.

141. A second problem relates to financing arrangements. Most roads are still financed fromgeneral revenues, even when user charges are set on the basis of PAYG. The payments arecredited to general revenues and expenditures are financed through budget transfers agreed aspart of the annual budgetary process. In other words, road agencies do not keep cash flowstatements (and have no financing plan) and this makes it impossible to tell how investments arefinanced and the magnitude of the consequent interest and loan repayments attributable to roads.The lack of an explicit linkage between revenues and expenditures is a major weakness. First,it establishes a classic soft budget constraint which weakens the incentive to keep costs undercontrol (Komai, 1985). It is well known that soft budget constraints weaken financial disciplineand leads to higher wages, over-capitalization and a decline in total factor productivity (Bly andOldfield, 1984; Turk and Sullivan, 1987; Kim and Spiegel, 1987). Second, lack of linkagemeans that expenditures are no longer constrained by users' willingness-to-pay. The lack ofmarket discipline simply encourages the road agency and road users to press for increasedspending. Linking revenues and expenditures is a fundamental part of financial discipline.

142. The third problem relates to institutional arrangements. As government departments,often highly centralized departments, road agencies are remote from their users. Even if thereis linkage, their remoteness undermines attempts to create a customer-supplier relationship.There has been too much emphasis on operating roads as traditional government departments.There is a clear need for further institutional development. All possible options should beconsidered, including decentralization, establishment of autonomous agencies to administer parts

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of the road network, involvement of the private sector in management of roads and bridges, andoperation of roads by the private sector under franchise arrangements or on a wholly privatebasis.

143. The fourth and final problem, is that there is little managerial accountability. Publicsector managers are poorly motivated and have few incentives to minimize costs. It is notalways their fault. Government's rarely provide them with clear objectives. They are oftenrequired to employ too much labor, to build roads that are uneconomic, to cut back onmaintenance and to finance too many new roads. Managers can only be held accountable whenthere are clear management objectives and managers have sufficient autonomy to implementthem. The objectives need to be supported by an appropriate monitoring system and effectiveauditing arrangements. What is needed is market discipline. An arrangement which shows roadmanagement "that they can only charge [users] what the market can bear, not what they maywish to spend' to encourage 'a trend ... towards more cost-effective works and the deletion inannual programs of minor works of a type which fit into the category of ... being nice to dorather than being essential" (Fischer, 1986). Unless there are incentives to minimize costs, cost-based pricing becomes the same as cost-plus pricing.

Implementing User Charging Policies

144. Recent reviews of the Bank's pricing and cost recovery policies have found them unclear,confusing and largely ineffective. Despite years of country dialogue, the Bank has only achieveda limited impact on the pricing and cost recovery policies of its borrowers (World Bank, 1988(a)). The problems are deep-rooted. In the case of road user charging policies they include:(i) lack of a clear definition of the difference between user charges and general tax revenues;(ii) insufficient analysis of how the pricing instruments available for charging road users mightbe used to internalize road use costs; (iii) questions of cost recovery have been consistentlyignored; (iv) fiscal issues have received far too little attention; and (v) apart from roadcongestion, little effort has been made to deal with the external costs of road use (i.e.,environmental damage and road accidents).

145. The first issue is that the charges paid by road users are not all payments for road use.Until the mid-1970s it was commonplace, particularly in consultant studies, to consider usercharges as the difference between the payments made by road users and the average tax rate.This was then abandoned in favor of treating all these payments as road user charges, subjectto one exception. Value-added-taxes (VAT) were treated as general taxes and not counted asroad user charges. The difference (if any) between aggregate payments and costs (usuallymarginal costs) were then treated as the sector's contribution to overall fiscal revenues, althoughno advice was offered on the appropriate size of this contribution. The effect of this change wasto immediately raise road user revenues and weaken the case for increasing user charges. Thisis reflected in the figures in Annex 1. 'When all payments by road users are treated as road usercharges, six of the eight countries examined cover all expenditures and all cover recurrentexpenditures on roads (i.e., operation and maintenance expenditures). However, when general

25

revenues are excluded, only two cover total expenditures and some do not even cover recurrentexpenditures on roads.

146. The above procedure is incorrect and inconsistent. If it can be applied to roads, why notto airports and railways (at least those operated as government departments)? Road usage - likeall other goods and services - is subject to the general tax system and road users are expectedto pay general taxes in addition to specific user charges for usage of roads. If all indirect taxeswere collected via VAT, the above procedure would automatically separate the VAT payments,treat them as general tax revenues and only count the residual as the road user charge.However, only countries with well-developed tax systems operate VAT and the fact that acountry still has a rudimentary tax system - and has to rely on indirect taxes to collect itsgeneral revenues - does not change the nature of the revenue. It is still general tax revenue,whether collected through VAT, or any other indirect tax instrument. Unless transport servicesare an exempt tax category, the user charge is simply the difference (if any) between the tax ratepaid by road users and the rate applicable to all similar goods and services (see Box 3.1 for adescription of how to separate user charges from general tax revenues). Failure to separategeneral revenues from user charges is a sure way to distort inter-modal competition. Indirecttaxes on fuel, spare parts and equipment are not treated as part of the revenue of the railwaysand airlines. The same should be done with road transport.

147. The second issue relates to the available charging instruments. Chapter II emphasizedthe wide variations in costs between different types of road. Costs are lowest on major arterials,twice as high on minor arterials, twice as high again on collector and distributor roads, fivetimes higher on local roads and over twenty times higher on unpaved local roads. Similarly,congestion costs vary widely by location and time-of-day. They tend to be highest during peakperiods on selected parts of the inter-urban road network and in central urban areas, and are lowor negligible elsewhere. The charging instruments available for internalizing these costs arelimited and blunt. There are two ways of internalizing the road agency's costs. On roadscarrying significant volumes of traffic, road users can be charged by means of: (i) an ownershipor acquisition charge (a periodic vehicle license or vehicle excise tax); and (ii) a fuel charge or,for diesel vehicles in countries able to administer them, a weight-distance charge. Local roadsmust generally rely on taxes imposed on beneficiaries and on general revenues.

148. Ways of internalizing congestion charges are even more limited. The available methodsinclude parking charges, ALS schemes, cordon pricing and electronic road pricing. Parkingcharges are already used in most large cities. Since they can only target parked vehicles, theyplay a limited (though important) part in internalizing the costs of urban road congestion. TheALS schemes are difficult to administer and not suitable for most developing countries. Evenin the U.K., it was concluded they were unsuitable for cities with about 100,000 vehicles,because of the high costs of operation, difficulties of enforcement and legislative implications(Department of Environment, 1976). Electronic schemes are still at a relatively early stage ofdevelopment, although area-wide electronic charging schemes using AVI and Smartcards are onthe horizon. To date, only Hong Kong has attempted to use an AVI system and only underexperimental conditions. Until such systems have been operating in a major city for some years

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Box 3.1. Separating Road User Charges from General Tax Revenues

1. The taxes and charges paid by road users fal into three broad categories: (i) some are clearly identifiable as specific chargesfor use of the road network (e.g., tolls and vehicle license fees); CiH) some are equaly clearly identifiable as general revenue taxes (e.g.,most value added taxes, corporate income taxes, trade protection taxes and octroi); while Ciii) some are used to collect user charges andgeneral tax revenues (e.g., imiport duties, excise taxes and sales taxes). It is the latter group which cause most confusion. Since it isfairly easy to identify the taxes/charges which fatl into categories Oi and (a), this Box outlines ways of dealing with category (ii).

Separalng Genera Taras From User Charges

2. Most of the combined general taxes/user charges in developing countries are collected in the form of indirect taxes (taxes ongoods and services and import duties). These taxes play a particularly important part in the tax structures of developing countries andusually account for over half the tax revenues collected. Indirect taxes generally differentiate between consumer luxuries, other consumergoods, intermediate goods (including raw materials) and capital goods. Within each group, items are treated in a fairly consistent way,although there are exceptions, since the tax rate wiUl also reflect other fiscal objectives (e.g., promoting domestic vehicle assembly,energy conservation, protection of local industry, etc.), The folowing four-step procedure is suggested as a means of separating generalrevenue taxes from road user charges.

* First, examine the tax code to see whether transport services are exempted from general taxation. The codeusually states how services are to be treated and wial usually list exempted items. If not, examine the variousrevenue headings to see whether transport is defacto exempted. For example, if aviation kerosene and aircraftspare parts bear general taxes, then there is a presumption that transport is not exempted.

* Second, there will usually be prior information available to show how the overall tax rate has been built up and,within the overall rate, how much represents a road user charge. In China, for example, purchase tax on newvehicles includes an added vehicle purchasefee which is credited to a special fund to support road construction.Likewise, in both Ghana and Newv Zealand, taxes on fuel are built up by adding together several components whichinclude a road filnd tax and a general excise tax. Such prior information often enables the general revenue tax tobe separated from the user charge without further ado.

* Third, when there is no prior information, examine the tax code to see how the taxes levied on road users relateto the taxes levied on other goods and services. For example, trucks are usually classified as plant and equipment.If the tax schedule levies the same tax rate on trucks as it does on all other plant and equipment, there is no usercharge element. On the other hand, if the rate is clearly higher than it is on other plant and equipment, thedifference can be regarded as a user charge (the difference represents the maximwn amount which can be treatedas a user charge, since the additional element may reflect other fiscal objectives).

* Fourth, when it is not possible to identify the tax rate applicable to road users, the analysis will have to make useof the average tax rate for all sinilar goods. For example, the rates applicable to individual items of plant andequipment may vary widely and in such cases there may be no alternative but to use the average rate to representthe rate applicable that category. This is calculated by dividing the tax revenue coUlected from that group (e.g.,general sales taxes, excise taxes and import duties on plant and equipment) by the base value of these items. Thedifference between the tax levied on road users and the average tax rate on the group as a whole can then betreated as the user charge (again, the amount represents the macimwn amount which can be treated as a usercharge).

3. Fuel taxes play a particularly important par: in most systems of road user charges. It is thus important to ensure that fueltaxes are correctly estimated. The overall tax rate (including the user charge element) is not simply the differernce between the retailprice and the ex refinery cost, plus margins. The ex refinery cost may be unrealistically low in oil exporting countries (because crudeoil is under-priced), or unrealistically high in oil importing countries (due to refinery inefficiencies or hidden taxes). The real, asopposed to the nominal, fuel tax is equal to the difference between the retail price and the border price of fuel. In oil importingcountries, the real tax rate may thus be greater than the nominal rate; in oil exporting countries, the real rate may be less than thenominal rate and can even be negative (in which case fiel prices are subsidized).

4. Application of the above method to eight countries is sunmuarized in Annex 1.

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- and have demonstrated the technology and shown that enforcement is manageable - they areunlikely to be suitable for developing countries (Heggie, 1991 (a)). Cordon schemes, bothmanual and electronic, are the only off-the-shelf systems which could currently be used indeveloping countries. They are likewise only suitable in some circumstances.

149. As an alternative to cordon pricing, some researchers have proposed adding the averagenetwork-wide costs of congestion to the regular road user charge (fuel and/or weight-distancecharge). When applied to a case study in Tunisia, this resulted in urban peak-period car userspaying less than one-eighth of the costs they caused, while rural car users (60 percent of all veh-km) paid nearly ten times these costs (Newbery, et al, 1988). Such gross averaging is unlikelyto promote efficient use of the urban and rural road networks. Congestion charges must be ableto target the vehicles which cause the congestion. For the time being, that means using cordonpricing. The above charging instruments are therefore crude, invariably involve a great deal ofaveraging, require transfers between the different administrative levels responsible for managingdifferent parts of the road network and are only able to internalize some congestion costs inseriously congested urban areas.

150. The third issue is the question of cost recovery. Since a sizeable number of road costsare fixed, avoidable road congestion is limited and there is little scope for internalizingcongestion costs, marginal cost pricing will nearly always result in financial deficits. Thequestion of cost recovery then arises since someone, somewhere has to finance the deficit. Thisissue has received little attention in the Bank's policy work. Instead, studies of road usercharges have emphasized the high costs of road congestion (without adequately exploring howto internalize them), have down-played the importance of fixed costs and have merely arguedthat "there is no economic argument for balancing the road budget" (Walters, 1968, p.1 15)without qualification (Newbery, et al, 1988, p. 37). This conclusion is based on a strict partialequilibrium analysis: any departures from short-run marginal cost pricing will reduce demandfor road use and must therefore be uneconomic. The wider question, which automatically arisesin the context of a general equilibrium analysis, "how are these deficits to be financed?" wassimply ignored. As a result, Bank sector work and related policy dialogue concentrated onincreasing allocations for road maintenance, but made little effort to identify where the requiredrevenues would come from and at what cost (World Bank, 1988(b)). Cost recovery needs tobe dealt with in a more explicit fashion.

151. The fourth issue concerns the role of road taxation as part of the government's overallstrategy for mobilizing domestic revenues. Most developing countries are seriously short offiscal revenues and, as noted in a recent review, the fiscal dimensions of public sector pricinghave received far too little attention (Julius and Alicbusan, 1989). The demand for roads isrelatively inelastic and any tax strategy utilizing Ramsey pricing would normally consider roadtaxes as an attractive way of mobilizing general fiscal revenues (i.e., provided cross-priceelasticities were negligible, the proportional mark-up of the tax over marginal costs would beinversely related to the good's own-price elasticity of demand). This is a standard strategy inmost industrialized countries, as shown in Table 1.1. Even though these countries collect muchof their fiscal revenue through VAT and social security taxes, they still impose high taxes on

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road use to mobilize additional fiscal revenues. In developing countries, with narrow tax basesand weak tax administration, road taxation - particularly taxation of gasoline - should be evenmore attractive. Gasoline taxes are cheap and easy to administer, have a limited impact on theconsumer price index and also have desirable distributional characteristics (Hughes, 1987).Road taxation should clearly play a more important role in the government's overall fiscalstrategy.

152. The fifth issue relates to other externalities: environmental damage and road accidents.There is growing concern about the environmental impacts of road use (motor vehicle exhaustemissions, traffic noise and other sources of traffic pollution) and the costs of road accidents.These topics have nevertheless receivecd little attention in the Bank's work on road user chargingpolicies. There are two main questions. First, can pricing instruments be used to internalizethe external costs of road use to provide better incentives to road users to reduce environmentalimpacts and road accidents and, second, do current road user charging policies take sufficientaccount of the full costs of these impacts, particularly those - like provision of sound insulationin school buildings, public medical expenses and damage to public property - which are borneby the public budget? These topics clearly warrant further examination.

The Agenda for Reform

153. Measures to improve performance of roads must concentrate on both sides of themanagement equation. On the one hand, they must encourage the road agency to operateefficiently to ensure the public gets value-for-money from road spending, while on the other theymust promote efficient use of the road network, but must reconcile this with the practicalitiesof the available charging instruments and the government's overall fiscal objectives. Roadmanagement is unlikely to improve performance unless financial arrangements are transparent,expenditures are constrained by what the market will bear, they are given clear objectives andperformance is monitored against these objectives. This requires some form of market discipline- either actual or in surrogate form -- involving an explicit customer-supplier relationship.User charging policies will only support that relationship when users know what they are payingfor and insist on getting value-for-money while, conversely, the performance of the road agencyis reflected in charges for road use and they are held responsible by their customers for the costsand the quality of the services they provide.

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IV. EIPROVING MANAGEMENT OF ROADS

154. Governments worldwide are exploring ways of strengthening the management of roads.Countries as privatized Malaysia, disparate as Hungary, Iceland and Switzerland are allintroducing commercial concepts into the management of roads, while roads are beingcorporatized in parts of Australia and New Zealand and ECLAC is urging Latin Americancountries to corporatize their roads (Schliesser, 1991). Although overall strategic decisions willstill be influenced by the political process, improved management can make the implications ofthese decisions more transparent and raise the quality of the political dialogue surrounding suchdecisions. A strategy for improving management of roads should include four main elements:(i) making the performance of the road agency more transparent; (ii) linking revenues andexpenditures; (iii) strengthening the institutional arrangements for managing roads; and (iv)setting clear management objectives and monitoring performance against these objectives.

Establishing Transparency

155. The concept of managerial accountability - being responsible for meeting the demandsof the marketplace and being answerable to customers when it is not fulfilled - requirestransparency in the way the road agency operates. The road agency's constituents (i.e., itsowners and customers) need sufficient information to judge whether they are getting value-for-money. A number of interest groups have a vested interest in the physical and financialperformance of the road agency: road users in general, the agriculture and manufacturingsectors, exporters, road transport organizations, government finance and planning ministries, thebanking community, the contracting and consulting industry, and the public at large. A look atthe types of information currently available to such groups shows how little transparency thereis (see Box 4.1 for an example of the current financial systems used by road agencies). Thesefinancial systems make it virtually impossible for interested parties to tell how much money isspent on roads, what it is spent on and how efficiently the agency uses its financial resources.One of the main ways to strengthen market discipline is thus to improve the supply of qualityinformation on the physical and financial performance of the road agency.

Measuring Performance

156. What is needed to evaluate the efficiency of the road agency - how well it plans itsexpenditures, undertakes maintenance, addresses road safety issues and controls overloading -is a set of performance measures. Evaluation of performance has generally focussed onindividual projects and has seldom provided an assessment of the performance of the roadnetwork as a whole. An evaluation of overall performance requires a picture of the roadnetwork which can be monitored over time in response to road usage, levels of expenditure andpolicy interventions. There are four main types of performance measure (see Box 4.2). The

30

Box 4.1 Current Fsinacial Systems for Recording Road Expenditures: Tanzania

Tama se the sta_drd Brish system of public scount. u thi system, expendte we aggregated ito linme tem der sub-vote heamgs adsre then consolidatd ito total expcndit debdibk agamnt tie ministy's approved vote. ID Tanzan, roads are admmtred by the nustry of conmimicationsand works and their f cal ccos for 1986/87 ar summarized in Box Table4.1.1. Th fu rlte to recurrentexpenditu on tnmk roads. Investmcztis recorded m the govrment's developmmt budget which is kept by the miisty of fiance.

A recent reiew of road revenues sad expenditue ia Tanzani a pte d to use these account to estmate how much the govement was spendimg onroads snd how it was being finnced. The firt difficuywna that te accounting system does ot ue functional headig and does not bave sp elie items foractvities like routine maineane and periodic maeaome. The first tak was therefore to try sad identify which ependures rpresentd expenditur on roads.The review attmpted to do his as foLows:

* the entir cosa of the central road traunsport liceming brach were allocated to roads;* al expenditurs on palnning & research were alocated to roads, although it was known that the brach also regulated transport parastatas; it was not

posible to stare these expenditures;o alt road expenditur, line item 3900. were abocated to roads;* the balance of expenditures On coastuction and maintenace wer also alocated to roads (road admintatdon) on the assumption that any expendtre

on other items (e.g., public buildings) were probably of fet by the administrative & generl expenses which were not specifally allocated to roads;eighty percent of expendires on clectrial & rmechical were allocatd to roads, hough m retrspect this appears too high;

* none of the expenditures recorded under fnance & accounts and sVpplies & services were allcated to roads, aldtugh it was known that some of theseexpenses were atriutable to roads; it was simply not possible to apportion them.

Tle above rough-and-ready procedure arrived at a figrue of TSSh. 765 million for total expenditur on trumk roads. A further amount, about TSh. 30million, was recorded for traffic police under the mriistry of interior vote. It was not possible to identify the costs caused by road accidents (ambulani. medicalexpense andsocial security payment) buied somewhere in the helthminity vote. It wasM ikewise not posible to divide these expendies into routine and periodicm tennce; some periodic maintenance is fnacd frm the recurrent budget and some from the devebpmentebudget managed by the ministry of fiance.

The maim weshesse ofthis system are that it cannot accurately identify: (i) how much is spent on roads; (ii) the breakdownbetwee routine maintenance.periodic mamtenance and investment; and (iu) the breakdown betveen variable and fixed cots.

Box Table 4.1.1 inisy of Comnunicatio and Works Actual E,Penditures. 19S6/87: Tanzania(Tsn-zon Shillipg TSh 51.2 = $ 1.0)

AAArtmlstrath* Distits and Sub-Vote Number

AA-t- & Cantrl Pl=i= & Coatca,s. Fmcace & Ccasten Eetrical Supplies &Item Doscripti- Gmal Limng Nasih & Trmpo Areose & Maim. & Mcih. Se&vin:

20m) (344) (345) (346) (349) )350t (351) t352)

1101 Persosal Frohseasm 12.2 0.77 0.94 56.77 3.33 79.72 62.69 33.211210 TeDiug 7.77 1.01 0.92 2.53 1.14 2.38 6.13 1.521300 Of;e E zens 2.92 03 0.73 1.78 5.64 4.37 11.01 2.571400 Mast. &h RLanu Epeqns 8.88 0.89 1.04 3.90 2.77 22.88 0.70 0.9715M Misc. Other Chss tI-6 0.06 0.01 0.93 - 1.78 - 0.461ao Uploep of Sbe & Estals. 0.49 OM 0.04 1.46 0.16 58.31 8.01 0.7017c Rep1- - - - - 0.29 23.39 15.19ism0 Spocal Expeaiiure 038 0.29 026 2.17 0.01 5.50 S.60 6.621900 RItes - - 0.31 5 08

o vInits, cooa. & Misses 1.12 - 0.61 0.32 0.03 0.03 - 0.062100 Trabnlig 20.45 - - 2.21 - - 0.02 0.8022DO LeMe . - -

16DD Supply & Oednse rvi 0.09 - --- 0.32 0.10

38B ril Expeases . - - - 1.04 4.36 -

3900 Reeds - - . - - 32D.194200 Avin Sri - 75.55 - -

4300 auiming Seni%s-- - 1.26 0.9456Do Subvoiw, etc. (IDeirsI) 8.11 - 24.86 11.10 -

5700 &&besior,etc. (Extual) - 0.58 3.7800 L1boratoty Sea - - 0.16 - - 13.47 - -

F-i& Chb bs . - - - - 11.50-Govermoc Store's . -- 2529

- Regirsal Wortebeps . .R . .os30.91- }eeries& Fes & o .- - - -- 7z33

-. M p.er .ie. . . . - . . 3039

- Goven Transpot Aency - - - - - - 1152 -

Itemm na 1ei 7.85 - - - - -

Total S&b-Votc 71.90 3.60 5.30 176.57 18.44 545.42 263.11 93.80

Sounm: RepubIic of Tairani: Fmnncial Sta5ca & Rewasc Estimus, vats II and II, 1987M88.

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BOX 4.2 Key Performance Measures for a Road Agency

I. Condition of Network:

These reflect the serviceability of the road system.

- condition of pavementpercentage length in good/fair/poor condition by road type and class in terms ofspecific physical measures such as roughness or condition ratings, or in terms ofvisual assessment;km backlog of rehabilitation and resurfacing

- condition of bridgesnumber of bridges in terms of structurally and functionally sound/structuralydeficient/functionaUy deficient

H. Utilization and Management of Network:

These indicate traffic flow, degree of congestion, vehicle size and loading, and safety record.

- traffic flowkm of road by range of average annual daily traffic (ADT) according to functionalclass and road width

- vehicle size and weightsingle and tandem axle load limitsaverage gross vehicle weight per heavy vehicleaverage equivalent standard axle per heavy vehicle

- safetytotal accidents, fatalitiesaccidents and/or fatalities per road km, per vehicle, per vehicle-km

m. Administration and Productivity:

These indicate the use of resources and cost of production by the road agency.

- staffmg byfunction (administration, planning, design, maintenance, construction, etc.), agerange

- annual salary rangehighest paid:lowest paid

- labor intensitystaffing ratios: rate of administrative to technical staff; ratio of skiled tounskiled workers, ratio of permanent to temporary staff.total staff, engineers per lane-km (for aU activities and separately for maintenance)

- equipmentavailability and utilization of equipment (by major categories/types of equipment,hours or mileage worked)age (by major types of equipment)

- average construction cost per km (two-lane road) by terrain: (flat, hilly, mountainous).- average maintenance cost per km

routine maintenance by class of roadperiodic maintenance

- percent maintenance by contractroutineperiodic

- share of expenditure: construction versus maintenance

IV. Finance:

These indicate the financial status of the agency.

- ratio of user revenues to expenditures (total and by class of user)- inventory value as percent of total expenditures (when a significant amount of work is by

force account)- bills payable as percent of total expenditure (when a significant amount of work is by

contract)- deferred maintenance as percent of total expenditures and/or as percent of network value

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first describe the physical condition of the road network and show the adequacy of roadmaintenance. The second deal with the utilization of the road network in terms of capacity,extent of congestion, traffic loading (including vehicle weights and the extent of overloading),road safety, and measures the overall level of service provided. Traffic count data are essentialfor these measures, but are not always available in developing countries. The final two typesfocus more directly on the efficiency of the road agency. One set of indicators focus on use oflabor, equipment and the relative costs of civil works, while the others focus on standardfinancial indicators provided by most public enterprises. The latter are not normally compiledfor roads (except for Toll Authorities). The above performance measures provide the basicindicators which can be used to set agency objectives and to monitor performance against theseobjectives.

Physical Information on the State of the Road Network

157. Measuring physical performance depends on the ability of the road agency to collect andprocess information on the volume and type of traffic using roads and the condition of the roadnetwork. During the early stages of development, the emphasis is usually on forecasting thevolume and composition of traffic to improve physical planning. However, once the basicnetwork is in place, performance measures tend to focus on the condition of the network andservice standards. The Bank has been instrumental in developing analytical tools to improveeconomic evaluation of road schemes and to estimate vehicle operating costs, includingdevelopment of comprehensive analytical models like the Highway Design and Maintenancestandards model (HDM III) (Watanatada, et. al. 1987). While these analytical tools haveimproved the ability to evaluate individual investment priorities, and have emphasized thecomplex nature of the interrelationship between user costs and road design and maintenancestandards, it has been difficult to persuade governments to apply them to the road network asa whole. Even in countries where information systems have been installed, there has been littlecommitment to using them. Part of the problem has been caused by the difficulty ofinstitutionalizing the collection of basic traffic count data and part by the subjective nature (andresulting inconsistencies) of road condition surveys.

158. The greatest change in road management in recent years has been the proliferation ofmanagement information systems. The problem facing road agencies is how to select among thevarious systems, given that some countries have the potential to apply more detailed andsophisticated systems than others. Any strategy for developing an information system shouldprovide for an incremental approach which allows the road agency to move from a basic levelof information - which includes the rminimum data required to monitor and manage the roadsystem - to more comprehensive and detailed information which helps improve networkplanning, programming and budgeting (see Box 4.3). The equipment and software used shouldcomplement the data collection and processing technology to ensure the road agency can developits information systems in an incremental and compatible way.

33

BOX 4.3 nforaion Framework for Managing RoaI

Information on the highway system has to be relevant, reliable, current, accessible and affordable if management is tomake informed decisions. While good information does not guarantee good decisions, good decision-making is notpossible without it. Guidelines on "Information Systems for Road Management" are currently being developed by theBank for worldwide application with the help of an international task force. They provide an objective reference to helpagencies make appropriate choices about the information needed for decision-makdng, how to collect and manage it, andhow to design, implement and administer an infornation system. A generic modular framework is used to make thesystem flexible, relevant to the diverse needs of different levels of management, appropriate to the size, skils andresources of different agencies, and amenable to upgrading with future changes in technology or circumstances. Asinformation is a comerstone for improving management, the system design and progressive implementation should beamong the first elements of reform.

Groups of information are defined to serve the various applications, in which data needs vary from aggregateperformance indicators at a system-level to detailed parameters for design at project-level. The skills and technologicaland financial resources available also limit what is affordable and sustainable on a continual basis. To cover all theseaspects, four levels of information quality (IQL), ranging from basic to comprehensive, are defined:

IQL 4 Basic summary statistics of inventory, performance and utilization, of interest to providers and users. Suitssimplest planning or programming models, but for project design suits only standardized low-volume roaddesign.

IQL 3 Sufficient detail for network-wide standard programming models and advanced planning models. Supportselementary project design methods, catalogue-based and low-volume roads. Requires semi-automated datacollection.

IQL 2 Detail sufficient for standard project design or for comprehensive network programming models. Normallycollected at project-level, but can apply network-wide with automated equipment. Moderately high skiDls andresources required.

IQL 1 Comprehensive detail, suitable for research, measurement calibration, problem diagnosis, and high-classproject design. Usually used at project-level. Unsuited to network monitoring except for some parameterswith highly automated equipment. High level of skils and resources required.

For each item of information, progressively more data items are identified in moving from IQL 4 to IQL 1, and theconsistent manner of definition allows the higher level data to be condensed and transformed into the summary level,IQL 4. Agencies beginning the information system with collection at IQLs 4 and 3, can thus progress to higher levelsand still maintain a quantitative relationship with previous data.

Data collection methods can be categorized generically so that the method rather than the equipment can be specified,and guidance is given on the accuracy, resolution, sampling rates and survey frequencies suitable for each IQL andapplication. The design of the computer system architecture must suit the structure and circumstances of the agency,with hardware ranging from an independent microcomputer to networked computers, and a preference for relationaldatabase software. An overall system design, including the technical aspects, administrative details and progressiveimplementation over a period of time, is a vital and necessary first step in selecting, developing and implementing asuccessful system.

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Financial Infonmation on Oveall Performance

159. Performance measures should also include financial information. They should be capableof distinguishing clearly between the various functions of the road agency - rather than lumpingthem together into heterogeneous line--items like labor, materials and equipment - and shouldbe designed as a tool to plan expenditures, monitor implementation of budgetary targets andprovide the basic financial indicators needed to evaluate managerial performance. Three of thekey elements in any financial management system are: (i) an explicit financing plan; (ii) someway of accounting for capital assets; and (iii) some form of cost accounting. These arediscussed below.

160. Financing arrangements. The most conspicuous omission in current financial systemsrelates to treatment of revenues. There are three problems. First, payments by road users arecredited to general revenues and, apart from license fees, are usually consolidated under genericheadings like import duties, excise taxes and sales taxes. Without a special analysis of thegovernment's revenue budget, it is impossible to identify how much road users are paying forroad use. Second, the aggregate revenues are not separated into general tax revenues and roa,.user charges. Third, it is difficult to allocate revenues according to the political jurisdictionwhere they were generated. Fuel taxes collected by the central government cannot easily beidentified with the state or municipality where the road use took place. These reasons make itdifficult to establish how much road users are paying for roads and hence whether user chargesare too high or too low. The Bank has financed numerous studies on road user charges.However, unless they are integrated into ongoing financial accounting arrangements, they havelittle effect on charging policies and on the financial performance of the road agency.

161. What is needed is a clear accounting for the sources of funds used to supportexpenditures on roads, distinguishing between user charges, charges collected from beneficiaries,transfers from general revenues and borrowing. At the very least it should show the contributionof each class of road user and whether they are covering their costs, as is done in the U.K.(Department of Transport, annual), but should ideally consist of a cash flow statement showingSources and Application of Funds. A prototype cash flow statement, modeled on the roadagency in Tunisia, is shown in Table 4.1. Such a statement shows how roads are financed andindicates whether: (i) user charges need to be increased; (ii) if they are not increased, whatdemands this will place on general revenues; and (iii) taking all sources of finance into account,whether the road program is affordable.

162. Accounting for capital assets. Road agencies rarely account for capital assets. Capitalexpenditures are simply written off as a cash expense when they are incurred. Inventories ofmaterials, spare parts and equipment are likewise not included in the agency's financial accounts,although they may lock up substantial sums of working capital. More significantly, roadsthemselves are not valued. The pervasive failure to properly maintain roads is partly due to thefact that road agencies do not treat roads as part of the country's capital stock which needs tobe efficiently managed and properly maintained if it is to continue producing benefits. Proper

35

Table 4.1 Prototype Cash Flow Statement Showing Sources and Apulication of Funds(Current $, milnion)

1982 1983Road Road

Government Agency Government AgencyFunds Available

From Current Operations

Net Current RevenuesRoad Users 62.47 22.22 76.93 27.44Property Taxes

Govermment Current Grants (16.92) 16.92 (19.34) 19.34

Sub-Total Net Current Revenues 45.55 39.14 57.59 46.78Long Term Loans

World Bank 10.90 - 11.95

Other n.a.

Sub-Total Long Term Loans 10.90 0.00 11.95 0.00

Short Term Loans (Suppliers Credit) n.a. n.a. n.a. n.a.

Funds Transferred to Road AgencyLoan Funds (10.90) 10.90 (11.95) 11.95Government Capital Grants (6.31) 6.31 (16.88) 16.88

Total Investment FundsTransferred (17.21) 17.21 (28.83) 28.83

Total Funds Available 39.24 56.35 40.71 75.61

Use Of FundsCurrent Expenditures - 39.15 - 46.78

Debt ServiceLoan Repayments

World Bank 2.29 - 4.17Other n.a. - n.a.

Loan InterestWorld Bank 3.36 - 4.98Other n.a. - n.a.

Sub-Total Debt Service 5.65 - 9.15Investment

Construction - 12.88 - 22.56Buildings and Equipment - 4.32 - 6.27

Sub-Total Investment - 17.20 - 28.83Transfer to Fiscal Revenues 33.59 - 31.56

Total Funds Used 39.24 56.35 40.71 75.61

36

accounting for the capital invested in roads would show the relative importance of roads in thecountry's public capital stock and would present a transparent picture showing whether the roadagency was keeping this capital intact or allowing it to erode through lack of maintenance.

163. Although few countries currently account for the capital invested in roads, capitalaccounting is being introduced in some countries and there is growing interest in others.Hungary has valued its road network and uses an estimate of annual depreciation to help decidethe level of expenditure required to keep this capital intact (Highway Department, 1988).Switzerland has done the same and user charges are expected to cover all costs, includinginterest and depreciation on the capitad invested in roads (Federal Office of Statistics, 1988).New Zealand and some states in Australia have also valued their road networks and are in theprocess of adopting commercial accounting systems which would record such assets in theirbalance sheets.

164. Roads and structures are noimally valued in terms of replacement costs and areperiodically updated to account for inflation (Smith and Harral,1987; Highway Department,1988). The problem is to estimate shortfalls in regular road maintenance and hence the erosionof capital. What is needed is a method for examining the expenditures required to maintain thenetwork in a stable long-term condition compared to those actually spent on roads. Thedifference represents deferred maintenance, which grows each year in response to furthershortfalls in maintenance, or is reduced as a result of road rehabilitation. Ways of estimatingshortfalls in regular road maintenance are outlined in Paterson and Archondo-Callao, 1991,while a format for recording this information and relating it to the capital value of the roadnetwork is illustrated in Table 4.2.

165. Cost accounting. There can be no real market discipline without some form of costaccounting. The system must be able to show how resources are used, for what purpose andhow well they serve that purpose. In particular, it should show how financial performancevaries over time, between different parts of the road agency and between work done in-houseor under contract. It should clearly display the management choices available and theconsequences of these choices. The standard way of doing this in the road sector is through theperformance budget (Faiz, 1991). This consists of a detailed work program broken down intoactivities with pre-determined estimates of output for each activity. The program budget definesthe amount of work planned and what it will cost. It provides an explicit plan showing howresources will be used (e.g., labor, equipment and materials), shows which activities must beforegone if the budget is reduced, provides clear targets for monitoring implementation andgenerates basic data on unit costs for evaluating performance.

Linking Revenues and Expenditures

166. The previous section focussed on the types of physical and financial information requiredto improve transparency. Transparency will not be complete, however, until there is a clearlyperceived linkage between expenditures on roads and what users have to pay for usage of roads(whether such payments cover marginal costs, or average costs). When payments by road users

37

Table 4.2 Value of the Road Network. New Investanent and Erosion of Capital(S, million)

1982 1983December 31 December 31

Fixed Assets:Highways 1,237.20 1,453.64Buildings and Equipment 30.00 32.55

Sub-Total .1,267.20 1,486.19Additional Investment

Roads 7.60 13.31Buildings and Equipment 2.55 3.70

Inflation AdjustmentRoads 208.84 111.10Provision for Bldgs and Eqpt n.a. n.a.

Total Gross Value 1,486.19 1,614.30Less Depreciation of Bldgs and Eqpt n.a. n.a.

Net Fixed Assets in Use 1,486.19 1,614.30Add-Work in Progress n.a. n.a.

Total Fixed Assets 1,486.19 1,614.30

Provision For Maintenance DeficiencyBalance End of Previous Year 98.36 101.11Current Year 2.75 3.11Less Road Rehabilitation

Total Erosion of Capital 101.11 104.22

Erosion of Capital as 6.80 6.46percent of Total Fixed Assets

38

are de-linked from expenditures on roads, it destroys the customer-supplier relationship neededto ensure the road agency only undertakes expenditures which road users want and for whichthey are willing to pay. Instead, de-linildng encourages both road users and the road agency topress for ever increasing expenditures on roads because they know it will not affect the level ofuser charges. What is being sought is a mechanism for constraining road expenditures to thelevel which users are willing to finance.

167. It is also important to explain wrhat linkage does not mean. It does not mean traditionalearmarking. Such arrangements are used in a number of OECD countries, including Belgium,Denmark, Japan and the United States (Tait and Morgan, 1980). It has occasionally been usedin Bank projects, particularly in Africa, on the grounds that it conforms to the benefit principalof taxation (particularly in relation to fuel taxes), ensures a minimum level of funding for roadmaintenance and lowers the costs of undertaking road maintenance by providing stability andcontinuity of funding (McCleary, 199:1). In practice, it has neither conformed to the benefitprinciple of taxation (fuel taxes have not varied in relation to road spending), nor has it ensureda stable flow of funds. Whenever governments have been short of fiscal revenues, they haveeither diverted the earmarked revenues to other uses, or frozen them to cut public expenditures.

168. Linking revenues and expenditures to strengthen market discipline, is not the same thingas earmarking to ensure a stable flow of funds. Stable funding simply focuses on establishingan automatic source of revenues insulated from the normal budgetary process. On the otherhand, linking revenues and expenditures recognizes that payments for road use are not generalrevenues - in the same way that power tariffs are not - and need to be accounted forseparately to avoid confusing them with general revenues. The linkage proposed here is thusnot the same as traditional earmarking. It differs in two important respects. First, revenuesfrom license fees and weight-distance charges need to be collected directly by the road agency,fuel charges and vehicle purchase charges (if any) need to be collected on an agency basis bythe oil companies and credited directly to the road agency. This ensures that funds are notdiverted by the treasury and provides the road agency with a strong incentive to ensure that theserevenues are collected efficiently (i.e., evasion, avoidance and leakage are minimized). Thearrangement is also more dynamic. Road expenditures are firmly linked to the charges neededto finance them, so that increases in expenditures automatically prompt questions from usersabout the need for increased road spending and focuses attention on its priority.

169. Tolls represent the most direct way of linking revenues and expenditures and sucharrangements can significantly improve road standards. A study in the U.S. concluded thatpavement conditions on toll roads were significantly better than on other roads (CongressionalBudget Office, 1985). When road users pay for a facility they expect value-for-money. Thesame is true in developing countries. The condition of roads operated by Toll Road Authoritiesin Mexico and Korea are generally better than on other roads. Although the availability ofdedicated funds is a major factor in better performance, the better market discipline associatedwith the charging mechanisms - and the expectations it creates in users - is also important.New York City provides a graphic examiple of the impact of charging and financing mechanismson the relative condition of tolled and free bridges (see Box 4.4).

39

BOX 4.4 Inproved Maintenance Through Better Market Discipline: New YorkCity Bridges and Tunnels

New York City provides a good example of how market discipline can affectthe maintenance of roads. The island of Manhattan is connected with its neighbors througha series of free and tolled bridges and tunnels. The free connections (13) are operated byCity government and have suffered from severe deterioration due to neglected maintenance.Even after having identified the problems, budgetary constraints have limited the City'sability to address them. By comparison, the 7 tolled facilities are operated by 2 publicauthorities (the New York and New Jersey Port Authority and the Triborough Bridge andTunnel Authority), are financed through bond issues, and are well-maintained.

What is apparent from this example is that under a revenue bond mechanism,maintaining the revenue-generating asset is treated as an indispensable cost of doingbusiness. The self-interest of the financiers guarantees future bond interest payments byensuring that facilities are adequately maintained. When the Authorities attempt to divertfunds to other uses, e.g., mass transit or land development, the bondholders activelyprotest.

While it is clear that part of the story is explained by having a dedicatedrevenue source not subject to the volatility of the city budget, the procedures surroundingthe sale and servicing of the bonds provide clear signals to management on the importanceof maintenance. Bond rating agencies assess the Authorities' record in terms of managingassets, repayment of debt and reliable and regular maintenance of physical plant. Moreexplicitly, the "Official Statement" of the bond issue in the case of the TBTA states thatthe Authority promises to "maintain, preserve, reconstruct" its facilities and to keep them"in good repair, working order and condition". Outside consultant firms review thephysical condition of the facilities for each bond issue, making specific observations on thequality of the maintenance and related policies and programs on staffing, inspectionfrequency and management systems. The consultant thus confirms that the useful life ofthe facility will extend beyond the maturity date of the bonds. Systems for internal controlare established which provide for internal audits of the bond issue to examine operationsand report on performance including maintenance and repair cycles.

40

170. The most extensive linldng of revenues and expenditures occur in Iceland and NewZealand. In New Zealand, Transit NZ prepares an annual expenditure program, estimates thelevels of user charges needed to finance the program, and the required user charges are then setby the Govemment as part of the annual budgetary process. User groups - trucking,agricultural, bus and car associations -are consulted when charges are set and are quick tomobilize when attempts are made to undertake inessential expenditures, or to divert funds. Sinceroad spending, and the ensuing user c]harges have remained quite stable, the arrangement hasnot led to much debate. User groups have furthermore been more interested in overall spendinglevels than in the detailed composition of the road program. Linkage has neverthelessstrengthened market discipline and made Transit NZ more aware of their customers, theirrequirements and - more importantly - their willingness to pay (Fisher, 1986).

Strengthening the Institutional Framework

171. Attempts to strengthen market discipline have to recognize the wide geographical spreadof the road network and the multitude of users served. Planning, design, finance and executionof road works have traditionally been highly centralized and controlled through a national roadagency. In large countries, this inhibits; the creation of a customer-supplier relationship becauseof the heterogeneity of users and their remoteness from national government. This means thatprovision of tansparent information on performance, combined with a clear linkage betweenrevenues and expenditures, will not be enough to promote market discipline. These steps needto be accompanied by a third element which recognizes the institutional and political context inwhich roads are managed. Possible solutions include: (i) decentralization or delegation of centralgovernment responsibilities to locaL government agencies (e.g., maintenance and/orconstruction); (ii) delegation of central or local government responsibilities to an autonomousroad agency; and (iii) delegation of responsibility to the private sector, either directly or undera lease arrangement. These options are examined below.

Decentralizing Road Responsibilities to Local Govemment Agencies

172. The main form of decentralization is the delegation of road responsibilities to local andmunicipal government. This has a direct impact on market discipline. It brings administration,financing and management responsibility closer to the user and enables decisions to be taken ina more transparent manner. The road constituency has a more homogeneous set of needs andtradeoffs between sectors can be judged within a local framework. The affordability of theprogram and the linkage of revenues to expenditures likewise becomes more tractable.Decentralization can also encourage flexibility in expenditure programs and provides the abilityto respond to changing local priorities.

173. Central government frequently attempts to hand over all responsibilities for provincial,regional and local roads to local government. These roads often account for a significantproportion of the overall road network. Moreover, they may also decentralize responsibility forportions of the national road network (e.g., as in Brazil and the Philippines). Decentralizationvaries from simply maldng local offices of the Public Works Ministry more responsible to local

41

governments, to actually delegating contracting and force account responsibilities to localgovernment agencies. In some cases, rationalization and reclassification of the national roadnetwork has led to delegation of all planning, design and financing responsibilities to localgovernments (as in Brazil). However, experience with decentralization has been mixed.Regional and local roads already face serious problems of underfunding and there are significantmaintenance backlogs. In some instances, central government has had to take back responsibilityfor maintenance of selected regional and local roads (as in Chile, Pakistan and Costa Rica). Aquick look at state roads in countries with federal governments also shows that investmentdecisions are less consistent at the local level and are subject to more political interference.They are plagued by requests to provide too many new roads.

174. This does not mean decentralization cannot work. It is rather that local participation, byitself, is not sufficient to ensure efficient management of roads. As with national road agencies,there is a need for extensive technical and institutional development. Recent attempts todecentralize responsibility for roads have highlighted the main weaknesses of local governmentagencies. There are thus three issues which need to be borne in mind when designingdecentralization schemes:

(i) Decentralization of management responsibility must be accompanied by devolutionof financial responsibility. This will often be difficult, since charges related tofuel usage are more efficiently collected at the national level. Some user chargesmay therefore need to be collected at the national level and transferred to localgovernment in a manner which does not undermine market discipline.

(ii) Local govemment must have the technical capacity to plan, design, execute andmaintain roads. Provision of technical assistance may thus be an integral part ofdecentralization.

(iii) Local government agencies should be subject to regular physical and financialaudits.

Autonomous Road Agencies

175. A number of countries, including Australia and New Zealand, are actively pursuingcorporatization of their national and state road agencies to make them more autonomous,improve performance and generally strengthen market discipline. In Australia this has led toreorganization of some state road agencies under a board of directors consisting of the heads ofthe various functional departments. Each director is responsible for a business center withclearly stated objectives and agreed budgetary targets. Different business centers contract witheach other for support services, or have the option of sub-contracting with outside suppliers.Where feasible, business centers can also bid to supply services to third parties under contract.Systems are likewise in place to give managers greater autonomy over personnel.

176. A more limited form of devolution is through establishment of an autonomous roadauthority with full responsibility for planning, financing, constructing and maintaining selectedroads. They are usually constituted as autonomous Toll Authorities and can be either public or

42

private. The major benefit of these arrangements are that such agencies maintain their accountsalong normal commercial lines. One of the most ambitious toll road systems is that of Japan.It is operated as a public enterprise with about 4,700 km in operation, 1800 km underconstruction and another 5100 km being planned. It uses regular commercial accountingsystems, finances its operations through tolls, bonds and long-term loans and receives littlesupport from the government other than a small interest equalization payment. It is currentlyearning over 6 percent on capital employed (see Box 4.5 for a description of the accountingsystems used by the Japanese toll road authority).

177. The degree of autonomy enjoyed by toll roads varies greatly and the effect on marketdiscipline depends on the nature of the contract between government and the authority. Unlessthere are parallel roads which provide an alternative route, the authority will be a monopoly andwill need to be regulated by government. Finding the right level of govemment intervention,and ensuring it is consistent with the technical capacity of available staff, determines howeffectively this type of road organization improves performance. The main concern is over tolllevels and profitability. The authority cannot be held responsible when government holds tollsat unreasonably low levels, as happened in Mexico where tolls were held almost constant from1952 to 1975. On the other hand, given the potential monopoly position of a toll authority andthe low price elasticity of demand for road use, regulation is needed to avoid excessive tolls andmonopoly profits. Governments often attempt to regulate these profits by specifying a permittedrate of return on net assets. These regulatory interventions usually have adverse impacts onincentives and lead to over-investment and inflated costs. Some form of regulation isnevertheless unavoidable.

Involving the Private Sector

178. There is growing interest in involving the private sector in the management and provisionof roads. This is done to improve market discipline and also to draw on private sector finance.Schemes range from use of private contractors to collect bridge tolls (as in Pakistan), throughprovision and operation of private toll roads (along the lines of Cofiroute in France), to Build,Operate and Transfer (BOT) schemes where the private sector agrees to build and operate a tollroad under a concession agreement for a specific period of time. These schemes can have amajor impact on performance. Use olf contractors to collect toll revenue will usually increasenet revenues significantly by reducing costs of administration and cutting down on evasion. Sub-contracting could be used more widely, either to operate and manage specific facilities (e.g.,bridges and tunnels), or to manage parts of the road network under a management contract.This has the advantage of keeping the right-of-way in public hands, but allows the road agencyto operate as an autonomous enterprise accountable to its customers (road users) andshareholders (government). There is also scope for having more private sector roads (providedthere are some alternative routes available). Studies in France have shown that private sectortoll roads are 10 to 15 percent cheaper to design and construct than are public toll roads(Cofiroute, 1991). There is no substitute for real market discipline.

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BOX 4.5 Accounting Systems for Toil Roads: The Case of Japan

The mandate of Nihan Doron Kodan, the Japanese Toll Road Authority, is to design, raise financing, managethe construction and operation of highways on a financially self-sufficient basis. The ownership and operation ofthe roadways reverts to the national or regional roads authorities after the external costs of financing constructionhave been fully paid or after 30 years of NDK management, whichever comes first. NDK accounts are organizedand reported in a standard accounting framework which permits the calculation and monitoring of financial meas-ures for the road authority.

NIHON DORON KODAN(Japan Highway Public Corporation)

Balance Sheets Inme Statement(Bilon Yen) (Billion Yen)

1988 1989 1990 1988 1989 1990

Assets Revenues: 1005 1131 1289

Toils Revenucs 27 5 6

Fixed Assets: Other Operating Revenues 1032 1136 1295Completed Network: NatioWal Motorways 11228 11967 13145

Regional Motorways 1316 1611 173812544 13578 14883

Other 321 276 286 Operating Expenses:12865 13854 15169 Motorway Expenses 153 172 190

Construction Work-in-Proeress: Administrative Expenses 50 49 72

National Motorways 1997 2475 2668 Depreciation - -

Regional Motorways 456 415 457 203 221 262Other 2 2 1

2455 2892 3126Current Assets: Operating Income 834 920 1038

Cash 75 59 57

Advance Payments 8 8 10Other 14 3 4 Net Miscellaneous Income 2 2 4

97 90 71 Interest Payable (615) (689) (701)Current Liabilities: Subsidies from Government 59 20 23

Accounts Payable & Accruals 235 244 285 Provisions for Reserves (259) (229) (339)

Prepayment and Other 53 42 21 Net Income 21 24 25

288 286 306

Net Current Assets (191) (216) (235)Ratios:

Total Assets 15129 16530 18060 Operating lncome Margin(T) 81% 80%

Rctmn os Capital Employed (%) 6.1% 6.3%

Financed BY: Free Cash Flow from Operations (bn Yena) 931 1059

Bond Issucs & Other Lang-Term Debt 12637 13755 14883 Free Cash (After Interest Paymeats) 242 358

Government Capital 528 582 651 DebttCapital Employed (%) 83% 82%

Retained Eanings: Non-Motorway Operations 17 IS 19 Outstanding Debt/Free Casb (years) 57 42

Provision for StaffRetirement 56 59 62 Operating ExpensesfFixed Operating Aet (%) 1.6% 1.7%

Rcservcs: Motorways Operations 1891 2116 2445 Toll Revenues/Fixed Operating Assets (%) 8.2% 8.5%

15129 16530 180 Toll Revenue/VeLicle (Yen) 1324 1379

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179. There is a growing interest in BOT schemes and there are examples in Hong Kong,Malaysia and Thailand. A BOT scheme does not necessarily increase market discipline. Itdepends on the way the financial risks are distributed between the financier, the operator andthe government. When there is genuine limited recourse financing without governmentguarantees and the operator and financiiers have to cover all costs out of revenues, responsibilityis clear. In practice, however, most schemes include minimum traffic guarantees, governmentguarantees to financiers, pooling of revenues from other parts of the road network, governmentcontributions and/or government equity. While some sharing of risk may be necessary - todeal with non-commercial risks or the cash-flow problems associated with provision of long-termassets - it is important to strike the right balance to ensure the private sector operator is leftwith sufficient incentive to operate efficiently.

Determining Objectives and Monitoring Results

180. The previous sections focussed on the information and institutional structures needed tostrengthen market discipline. The following section turn to the way these can be translated into:(i) a suitable framework for setting objectives; and (ii) monitoring managerial performanceagainst these objectives.

Setting Objectives

181. What is needed is an arrangement which sets forth clear management objectives whichcan be monitored and against which rnanagerial performance can be judged. In the case ofpublic enterprises, there has been a growth in the use of Performance Contracts under which thegovernment enters into a contract with the enterprise laying down the objectives andresponsibilities of each contracting party. Although these contracts have not always beensuccessful, the process does help to clarify management objectives and is being increasingly usedto improve performance of public enterprises. On the other hand, most roads continue to beoperated as government departments and have not been subjected to formal PerformanceContracts. However, some countries have attempted to establish clear management objectivesfor roads. Korea has developed an elaborate set of goals for the Korean Highway Corporationagainst which managers are evaluated. The final performance grade determines the cash bonusespaid to senior management (see Box 4. 6 for a description of the management assessment criteriaused in Korea). Similarly, in New Zealand, Transit NZ has to prepare an annual Statement ofIntent setting out the agency's overall, intentions and objectives for the ensuing year. TheStatement, which has to be approved by the Minister of Transport, includes detailed physicaltargets, institutional objectives and how implementation of the objectives will be monitored.

Monitoring Performance

182. The main instruments for monitoring performance are the agency's auditingarrangements. There are three main parts to the auditing process. First, there is the financialaudit which ensures that the financial resources allocated for roads - and formally entered inthe annual budget document - have been handled according to the guidelines established by the

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Box 4.6: Management Assessment Criteria - Korea Highway Corporation

The Korean Highway Corporation is a governnent enterprise responsible for 1550 km of toll roads. The Corporationand its management are evaluated annually on the basis of their fulfillment of goals established at the beginning ofeach year. The goals and the evaluation methods are established through a panel which includes professionals andacademic specialists selected by the Economic Planning Board. A system of wage bonuses are tied to the finalperformance grade and the grades are published annually. The general criteria and the weighting system are shownbelow. They include quantified and non-quantified elements.

Category Method Weight Rernark

1 . Overall Management <20>Productivity of managerial Evaluated by trend (15) *fixed assets for the past 8 yearsEfficiency of overall Graded by 1-5 levels (5) **management

2. Projects of Corporation's Goal <40>Gross revenue Evaluated by trend for (3) *the past 8 yearsConstruction of expressways (10)* New construction Plan/Actual 4 ** Widening construction Plan/Actual 3 ** Management of construction Graded by 1-5 levels 3 **Improvements of expressways (7)* Safety facilities Plan/Actual 1 ** Service facilities Plan/Actual 1 ** Repavement Plan/Actual 1 ** Management of improvements Graded by 1-5 levels 4 **Management of expressways (18)* Repairs and maintenance Evaluated by trend for 5 *

cost the past 8 years* Total service areas Evaluated by trend for 4 *

the past 8 years* Decrease of accident rate Evaluated by trend for 3 *

the past 7 years* Management of repairs and Graded by 1-5 levels 4 **

maintenance* Improvements of service Graded by 1-5 levels 2 **

area facilitiesBetterment of service for Graded by 1-5 levels (2) **users according toCorporation's goal

3. Management and Administration <40>

Efficiency of management (15)* Administrative expenses Evaluated by consumer 5 *

trend* Salaries, wages and Evaluated by trend for 5 *

allowance the past 8 years* Efficiency of current Evaluated by trend for 3 *

assets the past 8 years* Efficiency of inventories Evaluated by trend for 2 *

the past 8 yearsManagement strategy Graded by 1-5 levels (4) **Renovation of Systems Graded by 1-5 levels (14) **Operation of Internal Graded by 1-5 levels (3) **Assessment SystemResearch and Development Graded by 1-5 levels (4) **

Total <100>

Note: * Quantified Sector; ** Non-quantified Sector

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government's audit office. Auditing in this sense merely checks to see that paperwork is inorder and that rules for disbursement of funds have been adhered to. These audit reports areusually internal government documents and do not have the same status as the independent auditcarried out for most public enterprises. Since road agencies manage substantial expenditures(annual expenditures on main roads in Turkey exceed $500 milLion and even in Bangladesh areover $70 million), there is a need to strengthen financial auditing to ensure these large sums ofmoney are spent efficiently and are adequately accounted for.

183. The second audit is a technical one. The intention here is to ensure that the fundsdisbursed were actually spent on roads and that the work was completed according tospecifications. Technical auditing is notoriously weak. Funds are often disbursed againstsubjective assessments of work completed and little if any ex post inspection is carried out toensure the civil works exist and have 'been carried out according to specifications. The usualcause of weak technical auditing is shortage of qualified staff, lack of vehicles and qualitycontrol equipment for carrying out regular field inspections, and weak disciplinary procedures.Efforts are needed to strengthen technical auditing.

184. The third audit consists of benefit monitoring. It ensures the funds disbursed were usedto build or maintain the right facilities, at the right time and in the right place. It is an audit ofthe way the road agency establishes priorities and carries them out. The main emphasis is onwhether benefits were actually achieved. It is an extension of the Bank's Project PerformanceAudit Reports prepared when projects have been completed and calls for institutionalizing suchpractices in road agencies. However, benefit monitoring cannot simply stop at project benefitmonitoring; it also needs to monitor the effectiveness of network-wide programs of roadmaintenance and betterment. This requires network-wide measures of performance as usee. inmost industrialized countries. In both the U.S. and Europe, extensive systems have beenestablished for monitoring performance of the road network as a whole, based on annual roadcondition surveys and preparation of serviceability indexes. This enables the effectiveness ofroad maintenance to be monitored over time and also enables the condition of the road networkto be monitored in relation to overall levels of road spending.

185. Effective auditing requires institutional independence and a technical understanding of theroad agency. At the very least, this suggests the need for an auditing office within the roadagency answerable to the auditor general. Alternatively, there could be an auditing office withinthe transport ministry, answerable to the Minister, but overseen by a committee drawn from theprofessional community and selected user organizations. In Korea, such a committee has beenestablished to help prepare, monitor and evaluate the performance measures set by governmentfor the Korea Highway Corporation. The ideal solution is to have an independent audit, carriedout on the same basis as for other pub]Lic enterprises.

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V. IMPROVING CHARGING POLICIES FOR ROADS

186. This chapter looks at ways of improving charging policies for roads. It recognizes thattraffic densities are relatively low in developing countries, operating and maintenance costs varywidely between different types of road, about half the costs of operating and maintaining thenetwork are fixed, road congestion is confined to a limited number of large cities and there area limited number of charging instruments available for internalizing the external costs of roaduse (congestion, environmental damage and road accidents). As a result, short-run marginal costpricing will nearly always result in financial deficits. The objectives of road user chargingpolicies in this context are thus to ensure they: (i) take adequate account of the external costsof road use and attempt to internalize them; (ii) generate sufficient revenues to operate andmaintain the road network to a reasonable standard (this does not necessarily mean all revenuesmust come from road users); (iii) ensure that all road jurisdictions, whether national or regional,are able to balance their road budgets; (iv) recognize the large backlog of deferred maintenanceand address the issue of how to finance it; and (v) ensure that taxation of road users plays aproper role in the government's overall fiscal strategy.

Dealing With Externalities

187. Externalities have played a central role in past discussions of road user charging policies.The discussions have focussed on road congestion and, although it was recognized that short-runmarginal cost pricing might result in financial deficits, there was no presumption that theywould. Whether there would be deficits was an empirical question and the only way to testshort-run marginal cost pricing policies was to calculate such prices and see what happened(Walters, 1968). This section therefore examines the scope for internalizing the costs of roadcongestion, environmental damage and road accidents and looks at their implications for costrecovery.

Road Congestion

188. It has always been accepted that congestion charges would mainly be used in urban areas.Inter-urban road congestion is widely scattered and changes location in response to increases inroad capacity. It is thus difficult to charge for inter-urban road congestion. There is somescope for introducing congestion charges on toll roads, but this generally applies to a limited partof the overall road network (usually less than 10 percent) and only some of these roads will becongested.

189. Strategies for dealing with urban road congestion usually start by focussing on improvedtraffic management, including regulation and charging for parking. Parking charges offer anatural transition between physical measures to improve road capacity and using congestion

48

charges to ration scarce road space. Parking charges can be used to discourage inessentialjourneys, discriminate against commtuters in favor of shoppers, and can encourage betterutilization of available parking spaces. Although they can also be a useful source of municipalrevenue, developing countries rarely take advantage of this. For example, during 1991, Nairobiearned $17,500 from car parks and parking meters, but it cost them $82,000 to operate andmaintain these parking facilities! (World Bank, 1991 (c)). However, a more aggressive approachto parking policy should enable cities' to mobilize annual revenues of between $100,000 and$500,000, depending on the size of city.

190. Once the options of improved traffic management and parking charges have beenexhausted, attention will usually shift towards managing urban traffic using explicit congestioncharges. The only off-the-shelf methods suitable for use in developing countries are the manualand mixed manual/electronic cordon pricing schemes. Such schemes are only suitable when:(i) there are a limited number of major arterial roads entering the city; (ii) traffic using theseroads is a major cause of urban road congestion; and (iii) it is possible to erect toll booths atpoints which intercept a significant amiount of this traffic. The twenty or so cities which wereare considered to be seriously congested in the Bank's main borrowing countries include sevencities which conceivably satisfy these criteria: Algiers, Bangkok, Bombay, Lagos, Nairobi, Tunisand Seoul. In a few cities, like Jakarta, cordon pricing could also be used to deal with localcongestion in the central business district. Singapore, with a per capita GNP of $10,450, earnedabout $13 million from congestion charges in 1989. Since per capita GNP in these cities is lessthan half that of Singapore, cordon pricing could raise between $3 million and $6 million peryear. Congestion charging is nevertheless likely to remain the exception rather than the ruleand, other than in countries experiencing serious urban road congestion, is unlikely to makemuch contribution to cost recovery.

Environmental Damage

191. The costs of environmental darnage vary with vehicle usage (and the way vehicles aremaintained), the amount of emissions (which is affected by the average speed of vehicles andthe incidence of traffic congestion), the concentration of emissions (argely affected bygeographical conditions like altitude and thermal inversions), exposure to these emissions, thedamage caused by the emissions and the monetary value of this damage. Costs are consequentlyhigh in urban areas, particularly during peak periods, and are low in sparsely populated ruralareas. The external costs are therefore specific to a particular location at a given point in time.This makes it impossible, given current measurement techniques and the available charginginstruments, to attach a monetary value to these costs and to internalize them so that road userspay for the actual damage they cause. The only way to charge directly for environmentaldamage is to take a rough, global esti:mate of damage costs and then to allocate it uniformlyacross all vehicles, probably in the forn of a fuel charge. As a result some road users wouldbe charged too much (i.e., off-peak and non-urban road users), while others would be chargedfar too little (i.e., peak- period urban road users). This would not increase economic efficiencyand would have little impact on the amount of environmental damage.

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192. Although it is not possible to estimate environmental costs and internalize them as partof the user charge, it is still worth using indirect market-based incentives to reduceenvironmental damage. These measures would normally be used as part of a comprehensivepackage of measures - including regulations (e.g., governing inspection and maintenance ofvehicles) - designed to reduce overall vehicle pollution. The incentives should concentrate on:(i) structuring vehicle excise/sales taxes on new vehicles in relation to measured fuelconsumption or estimated life-time emissions to encourage purchase of more fuel-efficientvehicles; (ii) complementing these taxes with a similarly structured periodic license fee toencourage scrapping and retro-fitting of older vehicles; and (iii) structuring fuel taxes toencourage use of lead-free gasoline, alternative transport fuels and low-sulphur diesel fuel. Theattraction of vehicle excise and sales taxes is that they are usually fairly high and influence roadusers at the time they are deciding on the size and type of vehicle to buy. These indirectmarket-based incentives can have an appreciable effect on vehicle emissions, but will make nocontribution to cost recovery.

Accident Costs

193. Some of these costs are already borne by road users in the form of motor insurancepremiums. Any additional charges would therefore result in double-counting, unless the chargewas merely designed to recover expenditures not already reimbursed through motor insurance(e.g., public health expenditures, social security payments and damage to public property). Theprobabilistic nature of road accidents suggests that motor insurance is the most effective way ofinternalizing the external costs of road accidents. Motor insurance is a risk-sharing device anda well-designed scheme can provide incentives which reduce road accidents and also recovertheir costs.

194. In developing countries, motor insurance is not always compulsory and the availableschemes are often weak and ineffective. Motorists are therefore reluctant to pay the premiums.As a result, accident costs are not internalized through motor insurance. There are two waysof dealing with this, either by: (i) operating a compulsory state insurance scheme financedthrough road user charges; or (ii) taking steps to improve current private and/or public sectormotor insurance schemes. The trouble with schemes financed through road user charges is thatthey do not differentiate between the different classes of risk and simply become part of the fixedcosts of operating a vehicle. Furthermore, since the revenues accrue to the government, thereis no guarantee that victims will be adequately compensated. It is usually better to improveprivate motor insurance schemes and to extend compulsory coverage.

195. The first step is usually to make some coverage compulsory. In countries with weakinsurance industries, this might initially be confined to third-party insurance, which could beextended to cover all risks as the industry develops. A fully developed system of motorinsurance would cover all the costs associated with road accidents, including public medical costsand damage to public property. It might also be desirable to establish an indemnity fund tocover uninsured risks and provide compensation for the victims of unknown or insolvent drivers.The fund could be financed from a surcharge added to the regular road user charge and could

50

be operated by the govemment, or by the insurance industry under government supervision.Road user charges should thus include a small element to finance an indemnity fund and, untilmotor insurance is fully developed, may also have to cover public medical costs and damage topublic property.

Financing the Road Deficit

196. The road deficit is the difference between revenues and expenditures when user chargesare set equal to short-run marginal costs. The following discussion is confined to the main roadnetwork - arterial, collector and distributor roads - on the assumption that local roads areprimarily financed by charges levied on beneficiaries and general tax revenues. The firstquestion is a factual one: will there be a deficit and, if so, how large is it likely to be? Thiscomes down to externalities. Is it feasible to internalize them and are they large enough to coverthe road agency's non-variable costs? The externalities include road congestion, environmentaldamage and accident costs. Table 2.1 showed that the non-variable costs of operating andmaintaining the road network vary from roughly $70 million in Zimbabwe, through $30 millionin Ghana, $56 million in Tunisia, $15 million in Guatemala and $16 million in Costa Rica, to$8 million in Honduras ($36 million, 15 million, $27 million, $7 million, $10 million and $2million respectively if investment is excluded). Honduras is furthermore atypical: it only had430 km of paved roads and 3,213 km of unpaved roads when these estimates were prepared.

197. Congestion charges would only have made a modest contribution to these costs. If it wastechnicaUy feasible to internalize about half the congestion costs, the resulting revenues wouldhave amounted to zero in Zimbabwe, $7 million in Ghana, $10 million in Tunisia, $1.5 millionin Costa Rica, $1.5 million in Costa Rica and $1.5 million in Honduras. These are modest sumscompared to the fixed costs of operating and maintaining roads in these countries. Only inHonduras would congestion charges have made a significant contribution to fixed maintenancecosts (i.e., fixed costs excluding investment). Although all cities should make strenuous effortsto internalize congestion costs, either through parking charges or by introducing explicitcongestion charges, they will not make much contribution to cost recovery.

198. The costs of environmental damage and road accidents will make even less contributionto cost recovery. The previous section argued in favor of using indirect market-basedincentives, combined with regulatory interventions, to internalize the costs of environmentaldamage. This will not generate any nelt revenues. In the case of road accidents, it was likewiseargued that motor insurance appeared to be the most effective way of internalizing accidentcosts. Although it also argued in favor a contingency fund, financed from road user charges,the fund would be designed to cover uninsured risks, provide compensation to the victims ofunknown or insolvent drivers and cover public medical costs and damage to public property.It would thus make no contribution to the road agency's non-variable costs.

199. It thus seems inevitable in developing countries that short-run marginal cost pricing willresult in financial deficits. The issue of cost recovery then arises: how are the balance ofexpenditures going to be financed? Sonlebody, somewhere has to finance the deficit. There are

51

two possible ways of dealing with this. The first is to stick with short-run marginal cost pricingand to finance the deficit from general tax revenues. The other is to collect the requiredrevenues from road users either by adopting a long-run approach to pricing, or by using optimaldepartures from short-run marginal cost pricing.

General Revenue Financing

200. The decision on whether to finance the deficit from general revenues involves three mainconsiderations: (i) will the welfare losses be lower? (ii) how will it affect equity? and (iii) howdoes it affect inter-modal competition? The first consideration involves a comparison betweenthe welfare costs of mobilizing additional general tax revenues and the welfare costs of raisinguser charges. The starting point of the analysis is that most governments in developing countriesare seriously short of fiscal revenues and do not welcome charging policies which use generaltax revenues to meet expenditures which would otherwise be financed by road users. Thewelfare costs of mobilizing general tax revenues to finance such expenditures are high. Recentestimates for developed countries have shown that a one per cent increase in existing generaltaxes resulted in welfare losses equivalent to about 20 percent of the extra revenues raised(Ballard, et. al., 1985; Dodgson and Topham, 1987). In developing countries, with narrowertax bases and weaker tax administration, the costs are higher. Recent estimates of the marginalwelfare costs of excise taxation in Bangladesh, suggest it is between 100 and 200 percent of thenet revenues raised (Dahl and Mitra, 1991), while in the Philippines the welfare costs of importtariffs in the region of 30 percent are close to 600 percent of the net revenue raised (WorldBank, 1991 (a)).

201. The tentative conclusion is thus that welfare losses will be lower if the deficit is financedthrough user charges rather than general tax revenues. This conclusion needs to be examinedin more detail and will be discussed in greater depth in the next draft of this paper. The nextdraft will illustrate the conclusions with reference to a new Box 5.1.

202. The other two considerations relate to equity and inter-modal competition. First, israising user charges likely to have a greater impact on the poor than general taxation and doesthis justify using general tax revenues to finance non-variable costs? The answer is almostcertainly no. Motorists, whether car owners or truckers, are among the wealthier members ofsociety and it is generally better to help poor households by subsidizing selected transportservzces, or by using other forms of income support. There is no obvious equity argument infavor of financing non-variable costs from general tax revenues.

203. Second, should the method of financing non-variable costs be neutral with regard to inter-modal competition? Road transport competes with railways, inland waterways, domestic airservices and coastal shipping. In an ideal world, avoiding inter-modal distortion means chargingaccording to marginal social costs, or diverging from this principle according to recognizedsecond-best rules. Most competing transport modes are operated as public enterprises and areexpected to operate without subsidies, except for provision of social services which should befinanced through explicit subsidies negotiated and administered on a contractual basis. The

52

second-best rule is thus that competing transport modes should finance all recurrent expendituresfrom users, while all unremunerative services should be fully compensated. To ensure effectiveinter-modal competition, roads should thus also cover their recurrent costs from users and shouldreceive full compensation for all unremunerative services (e.g., exemption of diplomatic andgovernment vehicles).

Long-Run Marginal Cost Pricing

204. There are two ways to look at long-run pricing. The first is to consider what happensto short-run pricing in the long-run and the other is to move directly to long-run marginal costpricing. Applying short-run prices in the long-run has obvious advantages. It preserves the linkwith existing policies and can be more easily defended as an economically efficient way ofpromoting optimal use of the road network. The logic of the approach is that congestion costsare low in the short-term because roads are over-built. On the other hand, in the long-run trafficwill grow, congestion will increase and the network will eventually reach a point of equilibriumwhere "the optimal user charge will recover the capital costs of the road network and the totalexpenditure on road maintenance" (Newbery, 1987).

205. However, the above conclusion only holds if: (i) all investments are to expand capacity(rather than to reduce vehicle operating costs or improve road safety); (ii) there are constantreturns to scale in road construction; (iii) there are no fixed maintenance costs on the existingroad network; (iv) there are constant returns to scale in road use (i.e., a two-lane road has twicethe capacity of a single-lane road); ancl (v) roads can be smoothly adjusted to traffic. The lasttwo assumptions are crucial and are not valid for the road network as a whole. A four-lane roadhas over four times the capacity of a two-lane road and over 30 times the capacity of a single-lane road. Roads furthermore cannot be smoothly adjusted to traffic: there are majorindivisibilities which automatically lead to deficits when prices are set equal to marginal costs.When these assumptions are relaxed, the optimal user charges - even in the long-run - fail tocover total costs (Heggie and Fon, 1991). The only way to cover total costs is by under-investing and allowing congestion to increase well beyond the point where economic criteriajustify expanding capacity.

206. The second approach is to abandon the short-run and go for long-run marginal costpricing. This means adding an element to the road agency's variable operating costs to coverinvestment. It is usually calculated as the long-run average incremental cost of providing roadservices. This consists of the road agency's variable costs, the average fixed costs of operatingand maintaining the road network, and the incremental investment costs required to expand roadcapacity, reduce vehicle operating costs and generally improve roads. In equilibrium, providedthere are no non-variable costs on the existing road network and all investments are to expandcapacity, short-run and long-run marginal costs will be the same. The long-run approach isclearly a form of average cost pricing and will reduce welfare more than optimally designeddepartures from short-run marginal cost pricing.

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Optimal Departures From Marginal Cost Pricing

207. Optimal departures from marginal cost pricing produce the same revenues as long-runaverage incremental cost pricing. The method of getting there is nevertheless more commercial,since it focusses on the road agency's revenue requirements and attempts to mobilize them inthe most economically efficient way. The procedure will therefore be referred to as bottom linepricing to differentiate it from other pricing strategies. The basic principles of bottom linepricing are: (i) road users should never be charged less than short-run marginal costs; and (ii)the balance of the required revenues should be mobilized in a manner which minimizes theensuing loss of welfare. There are two ways of doing this: (i) by charging an access feetogether with a use-related charge (i.e., using a two-part tariff); or (ii) by raising the user chargeabove short-run marginal costs. In principle, the two-part tariff causes least loss of welfare,since the user charge remains equal to short-run marginal costs, while fixed costs are financedthrough an access fee which does not affect marginal decisions on road use.

208. The bluntness of the available charging instruments nevertheless complicates this process.The user charge must either be based on fuel usage, or on a combination of charges based onfuel usage (for gasoline-powered vehicles) and weight-distance charges (for diesel vehicles). Insome cities, a congestion charge (an area license or cordon fee) may also be payable for use ofcongested urban roads. Although weight-distance charges can be closely related to marginalcosts, charges based on fuel usage and congestion charges only bear an indirect relationship tosuch costs. As a result, the access fee must serve two purposes. It must compensate formarginal costs which are not related to fuel usage (i.e., those related to axle weights) and mustrecover fixed costs. The allocation of fixed costs between cars, buses and trucks cannot thusbe done on an optimal basis. The best one can do is use a quasi two-part tariff, combining avariable element which bears some relationship to uncongested short-run marginal costs and anaccess fee which covers fixed costs and compensates for the effect of axle weights on short-runmarginal costs.

209. The alternative to a two-part tariff is to generate the required revenues by raising usercharges above short-run marginal costs using the value-of-service concept (i.e., charge morewhere demand is inelastic and less where it is elastic). This is the way transport enterprises settheir tariffs. They use discriminatory pricing and charge what the market will bear. Theobjective is to raise user charges in a manner which equalizes the loss of welfare per dollar ofextra revenue raised from each group of users. This is the standard Ramsey pricing procedure:the proportional mark-up of the user charge over costs (including vehicle operating costs),divided by the price elasticity of demand for road transport, should be equal for all types oftraffic. It is usually referred to as the inverse elasticity rule. Box 5.2 provides a fullerdescription of the inverse elasticity rule and the conditions under which it is valid.

210. Practical applications of the inverse elasticity rule are rather cruder than Box 5.2. Theelasticity estimates are subject to wide margins of error and the charging instruments availablefor internalizing short-run marginal costs are limited. Empirical estimates of the price elasticityof demand for road use vary from 0.10 to 1.10 (car), through 0.10 to 1.30 (bus) to 0.70 to 1.10

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Box 5.2 The Inverse Flastiity Rule

This box presents a simplified exposition of the inverse elasticity rule. The question posed is how to raise road user chargesto mobilize a given amount of revenue in a way which minimizes the ensuing loss of welfare. Heuristically, it involves mninimizing theoverall loss of welfare suffered by all road users by equalizing the dead-weight loss per dollar of revenue raised from each user group(Ramsey, 1927; Rosen, 1988).

This process is iMlustrated in Box Figure 5.2.1 which assumes, for purposes of exposition, that short-run marginal costs(SRMCs) are constant. When the price of road use is raised from P (where it is equal to SRMC) to P', the dead-weight loss per dollarof revenue raised tbrough the increased user charge, S, is equal to the triangular dead-weight loss area ABC divided by the additionalnet revenue DCAE. In other words:

S = -'h(AP-AN)/(AP.N') = JhAN/N'where AP = (P' - P), AN = (N - N').

Since the compensated own-price point elasticity of demand eA evaluated at point A is defined to be (AN/N')/(AP/P'), S can be rewrittenas:

S = ½eN^(AP/P')

The overall loss of welfare is minimized by equalizinig S across all user groups:

S = eA T, = %A T2 = . . = e,A T. (1)

where S represents the welfare gain associated with relaxation of the revenue constraint;1, 2 ... n represent the different user groups;T,, T2 ... T. is the relaitive mark-up of price over marginal cost, (A/P').

The foregoing analysis assumes that the demand for each of the user groups is independant of one another, resulting in the familiarinverse elasticity rule. Intuitively, the ratio of the relative mark-up of user group I over user group 2, T1/T2 , is inversely proportionalto the ratio of their respective own-price elasticities of demand, eC, e'A. This process is ilustrated in Box Fig. 5.2.2. Note that, witha constant demand elasticity demand, the lines representing mode 1, mode 2 and mode n are straight lines; otherwise they are curved.

The revenue generated by the above mark-ups is:

R = TLP'Nl' + T2P2'N2 ' + ... T.P,.N,' (2)

= AP1N,' + AP2N2' + ... + AP,N,'

where N', ... N'. represents the volume of each type of traffic at the final traffic levels and APi = Pi' - MC, = Pi' - Pj. Since the valuesof N' and R are known, the only unknowns are the values of T. These are estimated from equation (1) using trial and error or a simplenumerical algorithm. An initial value is chosen for S, substituted in equation (1) and an initial set of values are generated for T, T. *--T,. These are substituted in equation (2) to solve for R. R is then compared with the required R and the process is repeated until thetwo values converge. This usuaLly requires no more than 3 to 5 iterations.

Empirical estimates of the price elasticity of demand for transport generaLly ignore income effects. When the income effectis thought to be important, the comnpensated demand elasticity should be used; it is equal to the ordinary demand elasticity plus theproportion of the household budget spent on transport multiplied by the income elasticity of demand for transport. Cross-price elasticitiesare often small enough to be ignored. They are effectively zero for passenger versus freight transport, are low for public transport versuscar (Baum and Kentner, p. 19, 1980) and even lower for car versus public transport. They are more significant when there are competingpublic transport modes (e.g., mini-bus versus bus). When the cross-price elasticities of demand between the different user groups aresignificant, the relevant cross-price elasticities should be subtracted : e = (e,iA - e2,) (Taplin and Waters, 1985). Fmnally, whenmarginal costs are not constant (i.e., when roads are congested), the analysis has to include the supply elasticities. This adds greatlyto the complexity of the analysis and it can no longer be illustrated in the above simple way.

moeol * Xmo rrde 2

a X ~~ ~ ~ ~ ~ ~ ~~B SF I / r

D

Vokirne of bank per tirnf perbd NR r9mri,Ttp

Box Fig. 5.2.1 Loss of consumer surplus when Box Fig. 5 .2.2 EquaLizing the dead-weight loss perprice is raised doLlar of revenue raised

55

(truck) (Oum et al, 1990). The wide range, which reflects the fact that elasticities depend onmarket conditions which vary widely throughout most road networks, makes it unwise to basethe mark-ups on average or typical elasticity values. Instead, it is better to use a uniform mark-up and to only use differential mark-ups when accurate and consistent country-specific elasticitiesare available. The charging instruments used to internalize short-run marginal costs are limitedto fuel charges (which may vary slightly between jurisdictions) and/or weight-distance charges.A congestion fee may also be payable in some cities for use of congested urban roads. Theuniform mark-up must therefore be applied to the fuel and weight-distance charges (rather thanmarginal costs) and, when a congestion fee is payable, to this fee as well.

211. There is little to choose between the above quasi two-part tariff and a uniform mark-up.In countries which rely on fuel charges and have to use a periodic fee to account for differencesin axle weights, the quasi two-part tariff is probably more appropriate. In countries with weight-distance charges, on the other hand, a uniform mark-up will usually be preferred. It would beapplied to both gasoline and weight-distance charges and the periodic license fee could beabolished to save administrative costs. Annex 2 presents a worked example illustrating bothcharging methods.

Balancing Regional Roads Budgets

212. Chapter 11 pointed out that roads are typically operated at four main levels, as: (i) tollroads; (ii) national roads; (iii) regional roads; and (iv) local roads. Toll roads clearly set theirown charges and are expected to operate autonomously without the need for transfers fromgeneral revenues. Local roads, on the other hand, are financed through a combination of usercharges, property taxes, other local taxes and transfers of general revenues from higher levelsof government. The two intermediate categories - national and regional roads - require morecomplicated financial arrangements. Referring to Table 2.1, the average user charge on thenational and regional road networks (arterial, collector and distributor roads) is 0.63 cents perveh km. Variable costs are 0.29 cents per veh km and fixed costs 0.34 cents per veh kan. Inuncongested conditions, ensuring that user charges are never set lower than marginal costs,means setting them on average no lower than 0.29 cents per veh km. This means that users ofmajor arterial roads pay a basic charge which is too high, while users of collector and distributorroads pay a basic charge which is far too low. This is an unavoidable consequence of settinguser charges on a network-wide basis.

213. The user charges then have to be raised above variable costs, by an average of 0.34 centsper veh km, to mobilize the additional revenues required to balance the combined national-regional road budgets. Again this means that users of major arterial roads are charged toomuch, while users of collector and distributor roads are charged far too little. Although thereis some scope for having different license fees in the two jurisdictions - and even havingslightly different fuel charges - there will have to be some revenue transfers between nationaland regional jurisdictions. In other words, the revenue collected through fuel and/or weight-distance charges will have to be shared between national and regional jurisdictions on the basis

56

of a formula which: (i) compensates for differences in road costs; while (ii) retaining theincentive to reduce unit costs and maximize net revenues.

Financing Deferred Maintenance

214. Most developing countries have a large maintenance backlog which needs to be financed.There are several ways of doing this. The first is to temporarily reallocate road expendituresfrom investment to rehabilitation. If this were done, it is estimated it would release sufficientrevenues to enable about a third of the ]Bank's borrowing countries to restore their road networkswithin five years and still enable them to spend about 20 percent of their road budgets oninvestment. These countries include Korea, the Philippines and Nigeria (Harral and Faiz, 1988).The remaining countries must either mobilize additional revenues for rehabilitation, transfersome roads to lower levels of government, or abandon selected roads. They can raise additionalrevenues in one of two ways, by (i) raising or reallocating general tax revenues; or (ii) addinga temporary surcharge to existing user charges in conjunction with borrowing to spreadrepayments.

215. Governments of developing countries are seriously short of fiscal revenues and it is rarelypossible to finance deferred maintenance from general revenues. It must usually be financed byadding a temporary surcharge to existing user charges. Borrowing makes this easier, since itenables temporary peaks in expenditures to be flattened and spread over several years. It ismore attractive when traffic volumes are growing, since the burden of repayments can then bespread over an increasing number of future users (see Box 5.3 for a discussion on the merits ofborrowing to finance deferred maintenance). It is nevertheless not always worth borrowing forroad rehabilitation and the decision to borrow should be based on a careful assessment ofalternative financing arrangements and their costs. Fuel charges are normally the prime targetfor a temporary surcharge, since they are relatively easy to administer. An alternative mightbe a temporary surcharge on the indirect taxes paid by road users (e.g., taxes and duties onvehicles, tires and spare parts), or on the inputs used by rural road users (e.g., taxes and dutieson fertilizer). These are less attractive options, since they are difficult to administer and causemore economic distortions. The temporary fuel charge is normally the preferred option.

Mobilizing Fiscal Revenues

216. Most developing countries have experienced a fiscal crisis during the past ten years andshortages of fiscal revenues are likely to persist well beyond 2000. The shortage of fiscalrevenues raises questions about domestic resource mobilization: is the road sector makingsufficient contribution to overall fiscal revenues? Most governments in industrialized countriestax road use to mobilize general fiscal revenues and do so by taxing gasoline. They do sobecause gasoline is a consumption good (diesel, on the other hand, is used by road transportwhich is an intermediate good), the tax applies to a relatively large tax base, is cheap and easyto administer, has desirable impacts on fuel efficiency and has a limited impact on welfarebecause the price elasticity of demand is relatively low. Although taxes on gasoline have aslightly larger effect on the consumer price index than taxes on industrial sales, they have a

57

BOX 5.3 Borrowing for Deferred Maintenance

The advantages of borrowing to finance deferred The desirability of borrowing is significantly affectedmaintenance are dependent on the following factors: by the expenditure profile. If the program is spread over three

years, the costs of borrowing are significantly lower than* expenditure profile PAYG for all interest rates, even with zero traffic growth. At* interest rate on the loan the other extreme, when the programn is spread over seven* rate of growth of traffic years, borrowing is always more expensive.

The relationship between these factors is illustrated in Since traffic growth rates of 3 to 5 percent p.a. areBox figures 3.2.1 to 3.2.3. The figures are based on a road fairly common, it is possible to arrive at the following roughrehabilitation program costing $500 million spread over three, rules of thumb. It is worth borrowing for deferredfive and seven years respectively. The borrowing rate on the maintenance when the program is: (i) spread over three yearsloan varies from 10 percent (series 1), through 12 percent at all reasonable interest rates; and (ii) spread over five years(series 2) to 15 percent (series 3), with a three year grace and the interest rate does not exceed 12 percent. It is notperiod and a traffic growth rate which varies from zero to 9 worth borrowing when the prograrn is spread over seven years,percent p.a. The figures compare the first year costs of unless the interest rate is less than 10 percent.borrowing with the first year costs of financing the program ona Pay-As-You-Go (PAYG) basis, i.e., by financing each year'sexpenditures directly from user charges.

First Year Cost C$, million) First Year Cost ($, million) First Year Cost (5. million)200 2C2 202,

160 -- _n 160

140 140 140

120 12D 120

80 so -C

20 L2

0 1 2 3 4 5 6 7 a g 10 0 1 2 3 4 5 6 7 8 9 10 a 1 2 3 4 5 6 7 B S 16

Traffic Growth (percent per annum) Traffic Growth (percent per annum) Traffic Growth (percent per annum)

Series I +-Sries 2 5Swfes 3 Series 1 +Series 2 -Seres 3 Sr [es1 4 Swls 2 * Serles 3

__ Swies 4 (PAW --- Series 4 (PAYi --- Series 4 (PAYG

Box Figure 3.2.1: Box Figure 3.2.2: Box Figure 3.2.3:Costs of borrowing spread over Costs of borrowing spread over Costs of borrowing spread overthree years five years seven years

58

smaller effect than import duties and general consumption taxes. Similarly, taxes on gasolinehave a smaller impact on median household incomes than sales taxes on imports, excise taxeson industrial sales, or uniform consu:mption taxes (Hughes, 1986; Hughes, 1987). Gasolinetaxes therefore offer an attractive way of mobilizing fixed revenues.

217. In developing countries, with narrow tax bases and weak tax administration, gasolinetaxes are even more attractive as a means of mobilizing fiscal revenues. There are neverthelesslimits to such taxes. Wide price differentials between gasoline and diesel fuel encouragesuneconomic substitution of diesel cars for gasoline-powered ones, while a wide differentialbetween kerosene and gasoline encourages fuel mixing to reduce tax payments. The easiest wayto prevent uneconomic substitution of diesel cars for gasoline-powered ones is by levying specialtaxes on diesel cars - as happens in Denmark, Norway, Portugal and Sweden - to ensure theypay the same net taxes as cars using gasoline. It is more difficult to control fuel mixing.Between 15 and 20 percent of gasoline can be replaced by kerosene and the only ways ofpreventing this are by: (i) avoiding large price differentials (since kerosene is used extensivelyby middle-income households, governments are reluctant to raise prices and this means largeprice differentials are often unavoidable); (ii) ensuring kerosene is only supplied in smallquantities (the disadvantage being that this increases the costs to poor households); or (iii) byissuing coupons to ensure poor households are able to purchase kerosene at concessionary rates(as is done in Sri Lanka). None of these methods are wholly satisfactory and most are difficultto administer in developing countries.

218. The final question is how high should the tax be? There is no simple answer and itcannot be decided on a sectoral basis. TIhe tax level must be decided as part of the government'soverall fiscal strategy and this will depend on: (i) the government's revenue needs; (ii) thebreadth and heterogeneity of the tax base; and (iii) the efficiency of tax administration. Incountries like Bangladesh, Ethiopia, Nepal and Tanzania - which have narrow tax bases (fewcorporate profits, few formal wage earners and low industrial sales) and weak taxadministrations - gasoline taxes should play a major part the government's overall fiscalstrategy. On the other hand, counties with well-developed tax systems can afford to place lessemphasis on taxing gasoline since they have other ways of mobilizing fiscal revenues (in practicethe U.S.A. is one of the only industrialized countries which does not tax gasoline for fiscalpurposes). What is clear, is that most developing countries do not make sufficient use ofgasoline taxes to mobilize general fiscal revenues.

219. The prices of gasoline, diesel fuel and kerosene in selected countries are summarized inTable 5. 1. This shows that industrialized countries regularly charge 80 to 90 cents per liter forgasoline without any obvious adverse effects on car use. Instead, high prices have increased fuelefficiency and reduced vehicle exhaust emissions. In developing countries, on the other hand,gasoline prices are generally much lower. Only in countries like Burundi, Uganda, Uruguay andMorocco are governments achieving a reasonable revenue potential from gasoline taxes. In mostother countries, gasoline prices could be doubled to mobilize additional fiscal revenues withoutadverse economic consequences.

59

Table 5.1: Relative Fuel Prices in Selected Countries. Januarv 1988(U.S. $ per liter)

Fuel PricesGasoline Diesel Kerosene Difference in Price

Actual Border Actual Border Actual Border Gas - Gas -Price Price Price Price Price Price Diesel Kerosene

Africa:Burundi (b) 0.81 0.32 0.75 0.28 1.00 0.30 0.06 (0.19)Ghana 0.29 0.19 0.28 0.17 0.21 0.19 0.01 0.08Kenya 0.53 0.22 0.33 0.18 0.22 0.20 0.20 0.31Tanzania 0.48 0.22 0.21 0.19 0.18 0.20 0.27 0.30Uganda (b) 0.63 0.32 0.45 0.28 0.27 0.30 0.18 0.36Zambia (b) 0.42 0.32 0.27 0.28 0.21 0.30 0.15 0.21

Asia:Bangladesh 0.42 0.19 0.22 0.16 0.22 0.18 0.20 0.20India 0.57 0.19 0.27 0.16 0.17 0.18 0.30 0.40Indonesia (a) 0.26 0.19 0.12 0.16 0.10 0.18 0.14 0.16Pakistan 0.44 0.21 0.22 0.18 0.17 0.20 0.22 0.27Philippines 0.37 0.19 0.26 0.16 0.26 0.18 0.11 0.11Sri Lanka 0.44 0.19 0.26 0.16 0.21 0.18 0.18 0.23Thailand 0.35 0.19 0.25 0.16 0.24 0.18 0.10 0.11

Latin America & Caribbean:Argentina 0.33 0.19 0.15 0.17 0.14 0.19 0.18 0.19Bolivia (b) 0.31 0.29 0.24 0.27 0.20 0.29 0.07 0.11Brazil 0.58 0.19 0.25 0.17 0.25 0.19 0.33 0.33Jamaica 0.43 0.18 0.31 0.15 0.17 0.18 0.12 0.26Mexico (a) 0.26 0.19 0.20 0.17 0.14 0.19 0.06 0.12Uruguay 0.68 0.19 0.39 0.17 0.36 0.19 0.29 0.32Venezuela (a) 0.10 0.19 0.02 0.17 0.03 0.19 0.08 0.07

burone. Middle East & N. Africa:Hungary (b) 0.50 0.33 0.24 0.30 0.14 0.32 0.26 0.36Morocco 0.78 0.19 0.44 0.17 0.40 0.19 0.34 0.38Romnania (a) 0.43 0.22 0.34 0.20 - - 0.09 -Turkey 0.36 0.23 0.27 0.20 0.27 0.22 0.09 0.09Yugoslavia 0.54 0.23 0.44 0.20 0.20 0.22 0.10 0.34

Industrialized Countries:Austria 0.76 0.19 0.56 0.17 - - 0.20 -Denmark 0.98 0.19 0.28 0.17 0.47 0.19 0.70 0.52France 0.81 0.19 0.51 0.17 0.59 0.19 0.30 0.22Italy 1.08 0.19 0.47 0.17 - - 0.61 -W. Germany 0.58 0.19 0.46 0.17 - - 0.12Netherlands 0.80 0.19 0.36 0.17 - - 0.44 -Japan 0.92 0.19 0.55 0.16 0.30 0.18 0.37 0.62U.S.A. 0.24 0.19 0.25 0.17 0.22 0.19 (0.01) 0.02

Source: Department of Energy, 1988; Energy Detente, 1988; World Bank, 1989 (a).World Bank Files.

Notes: (a) Border price based on c.i.f. prices in the closest neighboring country.(b) Border price based on c.i.f. prices in the closest neighboring country, plus anallowance of 10 cents per hter to cover port charges and inland transport.

60

VI. CONCLUSIONS AND RECOMMIENDATIONS

220. The previous chapters concludled that roads are important economic assets and need tobe managed in a business-like way. lhis usually means moving away from managing roads asgovernment departments and treating them more like public enterprises subject to hard budgetconstraints and some form of market discipline. This new paradigm has important consequencesfor management of roads and for selection of appropriate user charging policies. Implementationof the new paradigm will involve major policy reforms. The agenda for reform, at least fromthe point of view of the Bank, will contain three key elements. First, the general approach tomanaging and charging for roads neecds to be reformed. Second, the Bank's operational workneeds to be refocussed to give more emphasis to strengthening overall management of roads and,within that context, developing appropriate charging policies. Third, there are still some gapsin knowledge requiring further research.

General Policy Directions

221. The agenda for reforming management and user charging policies should rest on a two-pronged approach. On the one hand, it should attempt to improve managerial incentives bystrengthening market discipline. On the other hand, and in the context of this incentive system,it should develop charging policies which do not weaken financial management, promote bestuse of the road network and generate sufficient revenues to ensure roads are operated andmaintained to a reasonable standard. Improved management should concentrate on the followingreforms:

* Every reasonable opportunity should be taken to commercialize roads bydecentralizing management responsibility, establishing autonomous road agencies(to operate toll roads), involving the private sector in provision and managementof roads and seeking opportunities to corporatize parts of the road network.

* Initial efforts should focus on improving performance of existing institutions.Financial systems should be made more transparent, they should account forcapital assets and include an explicit financing plan.

* User charges should be clearly separated from general tax revenues and the usercharges - the road agency's tariff - should be collected by them (or collectedby others on a contractual basis) and credited directly to the road agency.

* Every effort should be made to set clear management objectives, monitorperformance against these objectives and hold management accountable for theresults. User groups should be encouraged to take an active interest in themanagement of roads and to dialogue with the road agency on the appropriatelevel of road spending and how it should be financed.

61

222. User charging policies must be determined in the context of the above arrangements formanaging the road network and should concentrate on the following reforms:

* There must be a clear price for roads. Users need to know what they are payingto encourage them to demand value-for-money. The voice of an informed publiccan play an important part in promoting market discipline and discouragingmonopolistic behavior. The price will usually consist of a periodic license fee,together with a fuel charge. In some countries, it may be possible to chargediesel vehicles using weight-distance charges.

* User charges should never be set lower than variable costs. These should includeroad maintenance costs, the public costs of road accidents and an element tofinance a contingency fund to cover the costs of uninsured road accidents. Whenroads are seriously congested, and the congestion cannot be reduced by improvingtraffic management and raising (or extending) parking charges, attempts shouldbe made to introduce explicit congestion charges. They will normally be confinedto large urban areas and, given the current state of technology, will usuallyinvolve cordon pricing.

* Although it is not currently feasible to use charging instruments to internalize theexternal costs of environmental damage and road accidents, indirect market-basedincentives can play an important role in helping to reduce such impacts. Theywill usually consist of differential sales taxes and periodic license fees, and willpromote road safety by strengthening motor insurance.

* User charges set on the above basis will leave some expenditures unfunded.These expenditures have to be financed, either by road users, those who benefitfrom road access, or from general tax revenues. In the case of local roads, theseexpenditures should generally be financed by taxing beneficiaries (for investment),or from general revenues (for operation and maintenance). On the main roadnetwork, they must mearly always be financed by road users. They can eitherbe financed by applying a uniform mark-up to the variable costs and congestioncharges (particularly when weight-distance charges are used to charge dieselvehicles), or by using a quasi two-part tariff consisting of a periodic license feeand a fuel charge (when the charging instruments are confined to fuel charges andlicense fees).

* The above charging system involves a great deal of averaging. Since the scopefor having different user charges on different parts of the road network is limited(other than on toll roads), it follows that collector and distributor roads will eitherincur large losses (which have to be financed from general revenues), or therewill have to be a uniform road tariff (with minor regional variations) and fundswill have to be transferred between the various institutions responsible fordifferent parts of the road network.

* Road users should also make some contribution to the government's overall fiscalrevenues. A tax on gasoline is the preferred fiscal instrument, since diesel isused outside the transport sector and road transport (the main user of diesel fuel)is an intermediate good. The precise level of the tax should be decided as part

62

of the government's overall fiscal strategy. A final pump price of 80 to 90 centsper liter at 1988 prices (including the border price, general tax, road user chargeand the fiscal tax) does not appear unreasonable.

Implications for Bank Operations

223. The above agenda has significant implications for the Bank's economic and sector workand for its lending operations. Past policy dialogue and associated loan conditionality sufferedfrom confused objectives. The emphasis was on ensuring that trucks paid for the damage theydid to the road pavement (i.e., were covering short-run marginal costs) and, althoughgovernments were urged to allocate more revenues for road mainenance, the question of wherethese revenues would come from and at what costs were hardly ever addressed. The above usercharging paradigm requires a different approach and the Bank should in future help governmentsto address the following issues:

* Govemments should be encouraged to commercialize their road agencies. Tostrengthen market discipline, user groups should be encouraged to take an activeinterest in the management of roads and to dialogue on the appropriate level ofroad spending and how it might be financed. More attention should be paid tointroduction of management information systems (including better financialaccounting systems) and introduction of improved auditing procedures. Thegovernment should also be encouraged to set clear management objectives for theroad agency (possibly in the form of a contract plan) and to monitor performanceagainst these objectives.

D User charges should be clearly distinguished from general tax revenues beforethey are compared with expenditures on roads. Otherwise, the specific paymentsfor use of the road network will be over-estimated and the financial discipline -which ensures that increased expenditures automatically raise questions about howthey are going to be financed - will tend to get ignored.

* The Bank should help borrowers prepare sector financing plans showing how roadexpenditures are financed, by whom and at what cost. The financing plan shouldidentify the role of borrowing and make all financial flows transparent.

* Urban transport projects in large cities should include an assessment of the extentof road congestion, the scope for using traffic management and minor roadimprovements to reduce it and, beyond that, the feasibility of introducing cordonpricing to ration scarce road space and reduce motor vehicle exhaust emissions.

Directions for Research

224. Previous chapters have identified a number of areas where more research andinvestigative work is needed. The main gaps in current knowledge are how the institutionalframework (and associated managerial incentive system) affects the operational performance ofthe road agency and how indirect market-based incentives can be used to internalize the externalcosts of road use. Specifically, we need to learn more about the following topics:

63

* Different institutional arrangements are being introduced to improve theperformance of road agencies. They vary from commercialization of the roadagency, decentralization of responsibility and creation of autonomous roadagencies, to full-scale corporatization. Few studies have evaluated the impact ofthese arrangements and established what it takes to encourage improvedperformance. Further work is needed to explore these issues.

* The importance of urban road congestion in about twenty major cities in theBank's main borrowing counties means the Bank should pay more attention tothe incidence of such congestion, its causes, economic costs and ways of reducingit. Two important issues are in need of attention. First, more work is needed onthe technical and administrative requirements of cordon pricing. Second, thetechnology used for electronic road pricing is changing rapidly and the Bankshould remain informed on developments which might eventually make it feasibleto apply these methods in developing countries.

* Growing concern with the environmental impacts of road use and the paucity ofinformation on ways of dealing with it, suggest the Bank should encourage furtherresearch on this subject. The main concern is to establish what steps might betaken - by way of indirect market-based incentives and regulatory interventions- to minimize environmental impacts. In particular, the potential for usingdifferential taxation warrants further study.

* rThe potential importance of motor insurance as a means of internalizing the costsof road accidents suggests the Bank should review the current state of motorinsurance in developing countries and ways in which it might be strengthened toimprove road safety.

64

Annex I. Separating Road User Charges from General Revenue Taxes

1. Recent studies of the tax systeims in several countries provided an opportunity to examinethe general tax structure and the role of road user taxes within that structure. The analysis madeuse of the IMF classification system for government financial information. The tax codes werefirst examined to see whether they exempted transport services. When they were not exempted,prior information was used to categorize all items which were clearly either general taxes, oruser charges. The analysis then proceeded as follows.

2. The taxes paid on each group of items were compared with the taxes actually paid onroad vehicles and components in that group to identify the surcharge (if any) over the rateapplicable to that group. The general principle used in the study was to credit the user chargeelement with any taxes which were higher than similar groups of items in the tax structure; fueltaxes were ignored unless fuel prices were higher than border prices. When the applicable ratein the tax schedule was unclear, the rnean for the group of items similar to road vehicles andcomponents were compared with the taxes actually paid on such items.

3. The analysis proved difficult in federal countries, since there was usually littleinformation available on the revenues and expenditures of lower levels of government.Indonesia was the only country in the sample where a detailed provincial tax study wasavailable. The figures for Argentina and Mexico are therefore incomplete. The results of thesecalculations are set out in Tables A. 1. 1 and A. 1.2.

4. The most important general conclusion of the study is that, contrary to previousexpectations, import duties, sales taxes and excise taxes rarely include any user charge element,other than in exceptional circumstances. The taxes levied are nearly always general revenuetaxes and play no role as a means of maobilizing revenues to support spending on roads. Themain numerical conclusion was that the total taxes paid by road users in these eight countriesaccount for between 4.5 percent and 28.9 percent of all tax receipts, before adjustment. Afteradjustment for the general revenue elements, the road user charges element only accounted forbetween 0.5 percent and 6.0 percent of all tax revenues. Note that this represents the maximumrevenue which can be regarded as the user charge; the taxes on road users may have beendeliberately set higher than those on other goods and services for other fiscal reasons (e.g., toconserve fuel or foreign exchange).

5. In three quarters of the countries studied, the user charge element estimated in the aboveway was significantly less than total expenditures on roads and in some cases was less even thanrecurrent expenditures on roads. Roads in these countries are still being financed from generalrevenues and are making little or no contribution to the government's overall fiscal revenues.It was only in China and Turkey that the user charge element exceeded expenditures on roads;the figures for Turkey are furthermore thought to overstate the user charges element by includinga luxury tax component.

Table Al.1 Analysis of Government Tax Revenues, Sub-Divided into General Revenue Taxes and Specific Charges for Usage of Roads

(Local currencies at current prices)

Tanzania, 1985/86 (Shilling, millions) Bangladesh, 1984/85 (rake, millions) Turkey, 1983 (Lire, billions) Bolivia, 1987 (Bolivisnos, milions)

Road User Taxes/Charges Road User Taxes/Charges Road User Taxes/Charges Road User Taxes/Charges

ment Tax Revenues Overall Overall Overall Overall

Tax Total Gcneral Rd Uaer Tax Total General Rd User Tax Total General Rd User Tax Total General Rd User

Revenues Taxes Tax Charge Revenues Taxes Tax Charge Revenuea Taxes Tax Charge Revenues Taxes Tax Charge

Taxes on Income, Profits & Capital 6,372 3,800 1,110 17

of which:Transport tax (31) 31 31 0

Taxes on Property 63 800 42 37

Domestic Taxes onOoods& Services 11,791 (a) 11,200 337 336

of which:General sales, turnover and VAT n.a. (4,100) (98) (150)

on motor vehs, parts & lubs (584) 584 584 0 (400) 400 100 300 (d) 5 (e) (f) 16 16 0

on motor fuel (679) 679 679 0 0 (c) (g)

Excise taxes n.a. (6,900) n.a. (185)

on motor vehs, parts & lubs 0 (c)

on motor fuel (200) 200 200 0 (93) 93 0 93 (g)

Other taxes n.a. (200) n.a. (1)

on motor vehs (358) (b) 358 122 236 (100) 100 0 100 (11) 11 0 11

prodn tax on imported goods (89) (d) 4 (e) (f)

Taxes on Internt'l Trade & Transacs 1,550 16,800 166 180

of which:Inport duties n.a. (10,400) (150) (136) 32 14 Oh) 18

on motor vehs, parts & lubs (338) 338 338 0 (700) 700 700 0 (d) 8 (e) (I)

on fuel (26) 26 26 0 (200) 200 200 0 (6) 6 0 6

Miscellaneous Taxes n.a. 300 83 43

of which:taxes related to roads (I) 1 0 1 (19) 19 0 19

Balance not elsewhere accounted for 157 (d) 17 140 (f) 110 (g) 110 (g) 0

Total Revenues 19,776 2,016 1,780 236 32,900 1,600 1,200 400 1,938 268 34 251 613 177 140 37

Total Expenditures on Roads 1,267 2,088 115 141

Cost Coverage, percent 19 19 217 26

Recurrent Expends on Roads 672 416 43 23

Cost Coverage, percent 35 96 584 161

Notes: (a) Includes miscellaneous taxes and road tolls.

(b) Includes road toll amounting to about Sh 122 million, which is a general revenue tax.

(c) Negligiblo.(d) Total of all indirect taxes on vehicles and parts was TLI57 billion.

(e) Based on assumption that taxes on motor vehicles and parts represented the same percentage of these general taxes as does motor transport in GDP (about 5 percent).

(f) Total of all indirect taxes on vehicles and parts, less the general tax element, or TLI40 billion.

(g) Combined revenues from all indirect taxes on motor fuels was Bsl 10 million. Ol

(h) Based on the estimate that motor vehicle uialpons were about 10 percent of the value of all imports.

Table Al .2 Analysis of Government Tax Revenues, Sub-Divided into General Revenue Taxes and Specific Charges for Usage of Roads(Local currencies at current prices)

Argentina, 1987 (Australes, millions) China, 1986 (Yuan, billions) lIdouesia, 1987/88 (Rupiah, billions) Mexico, 1988 (Pesos, bilUosa)

Road User Taxea/Charges (a) Road Uscr Taxea/Charges Road Uaer Taxes/Charges (b) Road Uacr Taxsa/Charges (a)

ment Tax Revenises Overall Overall Overall OveraU

Tax Total General Rd Uaer Tax Total Otneral Rd User Tax Total General Rd User Tax Total GCneral Rd User

Revenues Taxes Tax Charge Revenues Taxes Tax Charge Revenuea Taxes Tax Charge Revenues Taxes Tax Charge

Taxes on Income, Profits & Capital 2,762 227 227 82 11,788 20,103of which:

Transport tax 20 20

Taxes on Property 2,176 506 3

Domrstic Taxes on Goods & Serviccs 11,343 110 4,783 38,646of which:

Gcneral sales, tumover and VAT (4,765) (3,390) (13,574)on motor vehs, parts & lubs ( 373 373 ( 488 ( 488on motor fuel

Excise taxes (6,229) (10,254)on motor vehs, pairs & lubs 852 461 391on inotox f'ucl 1,398 1,265 133 (c) 6,812 2,792 0 (d)

Other taxes (349) (14,818)on motor vehs 346 0 346prodn tax on imported goods

Taxes on lntemt'l Trade & Transacs 3,351 15 2,045 2,230of which:

Import duties (2,207) (2,194)on motor vehs, parts & lubs 72 27 45 144 144 0on fuel

Miscellaneous Taxes 18 116of which:

taxes related to roads

Balance not elsewherc accounted for 9,952 20 11 0 11 6,070 843 - 843 8,232

Total Revenues 29,584 2,922 2,353 569 244 11 0 11 25,308 1,495 652 843 69,214 7,158 2,792 346Total Expenditures on Roads 1,209 (a) 9 1,707 831 (a)

Cost Coverage, percent 47 119 49 42Recurrent Expends on Roads - 2 1,128 307

Cost Coverage, percent 470 75 113

Notes: (a) Central government only.(b) Central, provincial and local government.(c) Most fuel taxes are earmarked as a general revenue tax for use by provincial governments and only a small part of th is further earmarked for roads.(d) The retail price is only slightly higher than the intemational border price; there Is thus a small general revenue tax, but no user charge.

oh

67

Annex II. Pricing and Cost Recovery: A Worked Example

1. The following example is based on a typical developing country with a predominantly dryclimate. The characteristics of the road network and overall vehicle utilization are summarizedin Table A.2.1, while total annual expenditures on roads are set out in Table A.2.2. Totalannual expenditures have been sub-divided into the variable and non-variable (fixed) costs ofoperating and maintaining the road network, and the fixed costs of improving and extending it,using the methodology outlined in Paterson and Archondo-Callao, 1991. Variable costs havebeen further sub-divided according to the vehicle characteristics causing them. The roads in thisexample are assumed to be uncongested, or that it is not technically feasible to internalizecongestion costs. Table A.2.2 shows that most of the costs of policing, administration androutine maintenance are fixed, while most periodic maintenance costs are variable. In tropicalclimates, variable costs account for about half the costs of operating and maintaining the roadnetwork; it is lower when traffic densities are low and higher when traffic volumes exceed 1,000to 2,000 vehicles per day. In cold climates, variable costs usually account for less than half thecosts of operating and maintaining the road network.

2. The following example divides these costs into their variable and fixed components anddeals with them in terms of the general principles set out in chapter V.

Charging for Variable Costs

3. Table A.2.2 identifies two types of variable costs: those attributable to vehicle use(measured in terms of veh-km) and those attributable to axle loads (measured in terms of ESAL-km). To calculate the level of the user charge required to cover variable costs requires aknowledge of road usage, by each type of traffic, and axle loads. This then enables the twocost-auses to be quantified in terms of veh-kmn and ESAL-km.

4. Since the total costs attributable to each cause have already been identified in TableA.2.2, it is a simple matter to calculate the variable costs per veh-km and hence the minimumuser charge required to cover these costs. This calculation is illustrated in Table A.2.3. Notethat the revenues from these user charges, $29.81 million, are equal to the sum of the variablecost components in Table A.2.2 ($9.13 million + $20.68 milion = $29.81 million).

Mobilzing Revenues to Cover Fixed Costs

5. The fixed costs of operating and maintaining the road network are also shown in TableA.2.2 and amount to $27.28 million. The fixed costs of improving and extending the roadnetwork comprise three separate components: (i) the costs of strengthening the road pavementto carry heavy vehicles ($1.60 million); (ii) the costs of designing the roads and structures to

68

Table A2.1 Characteristics of the Road Networkand Overall Vehicle Utilization(km and niillion veh-kn/year)

Length of Road (ba) Amo1nt of TraveL (milt veh-km/yr)Nominal ------------- - - - - - - - - - - -

ADT Yon-urban Urban Unpaved Total Non-urban Urban Unpaved TotatType of Road (veh/day) Paved Paved

Major arterial > 6,001 145 336 - 481 707 1,025 - 1,731

Minor arterial 751 - 6,000 2,778 1,470 - 4,248 2,842 1,402 - 4,243

Collector/ 300 - 750 3,480 - 3,480 1,048 - - 1,048distributor

Local c 300 1,229 - 8,618 9,847 147 - 140 287

Total 7,632 1,806 8,618 18,056 4,744 2,426 140 7.310Percent 42 10 48 100 65 33 2 100

Motes: (a) This excludes 14,000 km of unclassified roads which are estimated to carry about one percentof VKT and which wouLd normally be financed from general revenues, or by charging beneficiaries.

69

Table A2.2 Annual Expenditures on Roads Sub-dividedinto Main Cost Components

($, million)

Total Costs Caused by. Non-Variable/Item Annual Fixed

Expenditure (veh-km) (ESAL-km) (GVM-km) Costs

Costs of Operating and Maintaining Roads:

Policing (a) 0.70 0.21 - - 0.49

'Administration (b) 2.44 0.49 - - 1.95

Routine Maintenance (c) 22.48Maintenance Shortfall (d) 5.62

28.10 8.43 - - 19.67

Periodic Maintenance (e) 20.68Maintenance Shortfall (d) 5.17

25.85 - 20.68 - 5.17

Total 0 & M Costs 57.09 9.13 20.68 0.00 27.28

Costs of Improving and Extending Roads:

Extension 2.50 - 0.13 0.25 2.12Improvement 5.50 - 0.28 0.55 4.67Expansion 23.90 - 1.20 2.39 20.32

Sub-Total 31.90 0.00 1.60 3.19 27.11

Financing Charges: (f)

Debt Service/Repayment 5.83 - - - 5.83

Sub-Total 5.83 - - - 5.83

Total Investment Costs 37.73 0.00 1.60 3.19 32.93

-Notes: (a) An estimated 70 per cent of these costs do not vary with traffic (i.e., are fixed).(b) Fixed costs of administration include all expenditures on buildings and 70 percent

of salary costs. The remaining expenditures vary with traffic.(c) Variable and non-variable costs were estimated using the method outlined in

Paterson and Archondo-Callao, 1991, applied to the weighted average traffic over the whole network.(d) It was estimated that allocations for routine and periodic maintenance were about

20 percent lower than needed to maintain the road network in a stable long term condition.(e) Periodic maintenance costs are assigned using the method outlined in Paterson and

Archando-Callao, 1991, applied to a country with "dry non-freezing' conditions.(f) An estimated 15 percent of these costs are incurred to cater for larger, heavier

vehicles. About 213rds of this is due to heavy vehicles; the remainder is due to large vehicles.(g) This item appears elsewhere in the government's accounts and is usually omitted

from financial statements of road revenues and expenditures.

70

Table A2.3 Estimating the User Charges Required to CoverVariable Road Maintenance Costs

(LIS cents per vehicle km)

Traffic Variable Costs

VehicleCharacts. Veh-km ESAL-km All vehs Axle Total

Vehicle Type (ESALs) (mill) (mill) Related(1) (2) (3) (4) (5) (6)

Car Gasoline 0.0001 2284 0.2 0.125 0.000 0.12Car Diesel 0.0001 755 0.1 0.125 0.000 0.12Utility Vehicle 0.0080 2572 20.6 0.125 0.008 0.13Light Truck 0.0920 659 60.6 0.125 0.094 0.22Medium Truck 0.5800 177 102.7 0.125 0.592 0.72Heavy Single Truck 2.6000 224 582.4 0.125 2.653 2.78Heavy Tandem Truck 5.3800 13 69.9 0.125 5.490 5.61Articulated Truck 6.8000 140 952.0 0.125 6.939 7.06Bus 0.4900 188 92.1 0.125 0.500 0.62Special Vehicle 0.4900 298 146.0 0.125 0.500 0.62

Totals 7310 2,026.6 Total Revenue = 29.81

Notes on calculations:Column 3 = Column 1 multiplied by Column 2.Column 4 = $9.13 million (from Table A.2.2), divided by total veh kmand all multiplied by 100 (to convert $s to cents).

Column 5 = $20.68 million (from Table A.2.2), divided by total ESAL kmand all multiplied by 100 and the ESALs applicable to each type ofvehicle.

71

carry large, heavy vehicles ($3.19 million); and (iii) the fixed costs of extending, improving andexpanding the road network ($27.11 million). These costs are shown in the lower part of tableA.2.2. Finally, there are the fixed financing charges associated with past borrowing to financeroad investments ($5.83 million). These costs are also shown in the lower part of the table.

6. These fixed costs can be dealt with in one of two ways, either by: (i) using a quasi two-part tariff; or (ii) using a uniform mark-up over base costs (base costs, in this example, consistof VOCs, plus the road agency's variable costs). Both methods are described below.

Quasi Two-Part Taniff

7. A two-part tariff would normally be used when the available charging instruments consistof a periodic license fee and a fuel charge. The periodic license is comparable to as an accessfee, while the fuel charge acts as the use-related charge. The periodic license could involve anannual payment (quarterly and monthly payments may also be permitted when fees are high),combined with an initial vehicle purchase fee. For simplicity, the present example uses anannual license. The first task is to decide on the structure of the annual license and its level.Ideally, the license should: (i) be easy to administer (i.e., it should neither be too high, nor toocomplex, to discourage evasion); and (ii) attempt to generate sufficient revenues to cover mostfixed costs.

8. These two objectives unfortunately conflict. The fee must usually be set at a fairlymodest level (and have a simple structure) to encourage compliance and facilitate enforcement.In this example it has been decided to have nominal rates for cars ($100 p.a.), buses ($1,000p.a.) and special vehicles ($50 p.a.), and to base payments for all other vehicles on payloadcapacity as a rough proxy for ability to p. The rate has been set at $100 per tonne. A lighttruck would thus pay $200 p.a., a medium truck $500 p.a. and an articulated truck $2,500 p.a.Higher rates would increase evasion, cost more to administer and reduce net revenues. Theselicense fees will generate $18.98 million from diesel vehicles and $10.37 million from the103,726 cars which use gasoline. The total will thus be $29.35 million compared to the $65.00million in fixed costs ($27.28 + $1.60 + $3.19 + $27.11 + $5.83) million.1

9. The second task is to set fuel charges to cover variable costs, plus the balance of thefixed costs not covered by license fees, i.e.,($29.81 + $35.65) = $65.46 million. The variablecosts attributable to gasoline-powered cars are $2.74 million (0.12 cents per km multiplied by2,284 million veh-km). A gasoline charge of 3.5 cents per liter will generate $6.40 millionwhich covers the variable costs and makes some contribution to the remaining fixed costs(average gasoline consumption is 80 liters per 1,000 km). The diesel charge must thus be setto generate $59.06 million ($65.46 - $6.40) million. This calculation is shown in Table A.2.4,column (6). The required diesel charge is just less than 7.9 cents per liter and the resulting fuelcosts vary from 0.51 cents per lkm for cars to 3.84 cents per km for articulated trucks. In

' There are some small discrepancies due to rounding.

Table A.2.4 Estimating the User Charges Required to Cover Fixed Costs: Quasi Two-Part Tariff

(US cents per vehicle km and $, million)

Vehicle Characteristics & Traffic User ChargeTotal Total

Variable Fuel License UserNumber of Payload Fuel Use Veh-km Costs Charge Fee Charge

Vehicle Type Vehicles (tonnes) (Il km) (mill) (c/km) (a) (c/km) ($ p.a.) (c/km)(1) (2) (3) (4) (5) (6) (7) (8)

Car Diesel 15,352 - 0.07 755 0.12 0,51 100 0.72Utility 38,074 0.8 0.09 2572 0.13 0.71 75 0.82Light Truck 5,000 2.0 0.15 659 0.22 1.18 200 1.33Medium Truck 1,710 5.0 0.20 177 0.72 1.58 500 2.06Hvy Sgle Truck 1,790 12.0 0.39 224 2.78 3.07 1200 4.03Hvy Tandem Truck 100 15.0 0.45 13 5.61 3.51 1500 4.66Articulated Truck 1,400 25.0 0.49 140 7.06 3.84 2500 6.34Bus 2,940 - 0.36 188 0.62 2.81 1000 4.38Special Vehicle 80,000 - 0.36 298 0.62 2.81 50 4.16

Totals 5026 $26.95 59.06 18.98

Notes: (a) From Table A.2.3.Average distance per vehicle from column (4) divided by column (1).

73

general, light vehicles and buses pay significantly higher fuel charges than the variable costs theyimpose on the road agency, while heavy trucks pay less than these costs. However, once annuallicense fees are added to fuel charges, the differences for heavy and articulated trucks becomemuch smaller. In the end, they pay an aggregate charge which is only 10 to 20 percent less thanthe required minimum charge.

10. The final question is to see whether the above fuel price differentials are likely to causeany particular problems. The fuel charge for gasoline is 3.5 cents per liter and for diesel is 7.9cents per liter. Even though the border price of gasoline is usually about 2 cents per liter higherthan diesel (see Table 5.1), the difference in prices - together with the differences in fuelconsumption (80 liters per 1,000 km for gasoline and 65 liters per 1,000 km for diesel) - is notsufficient to encourage uneconomic switching from gasoline to diesel cars. The differencebetween diesel and kerosene prices is more serious. Since the border price of kerosene isusually about 2 cents per liter higher than that of diesel (see Table 5.1), the net difference inprice will be about 6 cents per liter. Truckers are tempted to substitute kerosene for diesel whenthe price differential exceeds about 15 percent of the diesel price, which is about 4 cents per liter(Heggie, 1991 (b)). Kerosene will thus need to bear a tax of about 2 cents per liter, oradministrative measures will have to be used to discourage substitution (e.g., coloring keroseneand inspecting vehicles for signs of mixing). In this example, the difference is so small that itmay be worth tolerating the small amount of fuel mixing it might cause.

Using a Mark-Up Over Base Costs

11. The fixed costs can also be financed by adding a uniform mark-up to base costs (i.e.,applying the inverse elasticity rule with all price elasticities set equal to 1.0). This wouldnormally be done in countries using weight-distance charges for diesel vehicles. Base costs inthis example consist of VOCs plus the road agency's variable costs. The calculation proceedsin the manner illustrated in Table A.2.5. The VOCs (column 1) are added to the road agency'svariable costs (column 7) to arrive at the base costs for purposes of calculating the requiredmark-up. The percentage mark-up of price over costs (column 9) is calculated by taking aninitial value for the mark-up, call it AP, and setting each cell in column 9 equal to Al. Theactual mark-ups (column 10) are equal to column 8 divided by [((/column 9) - 1].2

12. The amount of revenue generated by this mark-up, the sum of each item in column 10multiplied by column 4, gives the total revenue generated by this particular value of Ar. Theinitial value of A" is then adjusted by trial and error until the total revenue generated by themark-up is just equal to the total revenues required to cover fixed costs. In this example, themark-up has been calculated to cover the fixed costs of operating and maintaining the roadnetwork ($27.28 million), the fixed costs of investment ($27. 11 million), and the fixed financingcharges ($5.83 million), giving a total of $60.21 million. The value of A" required to mobilize

2 The expression PI[(P'/AP) - 1] = P/[(P' - AP)/AP] = (PAP)f(P' - AP). SinceP' - AP = P, this is simply equal to AP.

Table A.2.5 Estimating the User Charges Required to Cover Fixed Costs: Uniform Mark-Up Over Base Costs(US cents per vehicle km and $, million)

Vehicle Characteristics Traffic (million)Total Total Mark-up Mark-up Axle Weight Total

Over OverEconomic GVW ESALs Veh-km ESAL-km GVW-km Variable Base Base Costs Base Costs Related Related Costs

Vehicle Type VOCs (tonnes) (no.) Costs (a) Costs (9) (b) (actual) Costs Costs(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Car Gasoline 8.79 - 0.00 2284 0 0 0.12 8.91 0.09 0.93 0.00 0.00 1.06Car Diesel 6.44 - 0.00 755 0 0 0.12 6.56 0.09 0.69 0.00 0.00 0.81Utility 12.44 2.5 0.01 2572 21 6,430 0.13 12.57 0.03 0.37 0.00 0.03 0.53Light Truck 30.37 6.8 0.09 659 61 4.481 0.22 30.59 0.03 0.89 0.01 0.07 1.19Medium Truck 32.37 15.0 0.58 177 103 2,655 0.72 33.09 0.03 0.97 0.05 0.16 1.88Hvy SgleTruck 39.13 19.0 2.60 224 582 4,256 2.78 41.91 0.03 1.22 0.21 0.20 4.40Hvy Tandem Truck 39.13 20.0 5.38 13 70 260 5.61 44.74 0.03 1.31 0.42 0.21 7.55Articulated Truck 75.78 38.0 6.80 140 952 5,320 7.06 82.84 0.03 2.42 0.54 0.39 10.41Bus 62.38 15.3 0.49 188 92 2,876 0.62 63.00 0.04 2.61 0.04 0.16 3.43Special Vehicle 62.38 15.3 0.49 298 146 4,559 0.62 63.00 0.03 1.84 0.04 0.16 2.66

Totals 7310 2,027 30,838 $29.81 $60.21 $1.60 $3.19 $94.81

Notes: (a) From Table A.2.3.

(b) The mark-up Is calculated by setting column 9 equal to a single cell in the spread-sheet and setting It equal to anInitial value of M. Column 10 Is equal to Column 8 multiplied by Column 9 divided by one minus column 9. The sum ofColumn 10 (each figure multiplied by the respective veh-km of travel) should be equal to the revenue required to coverfixed costs. The Initial value of M Is varied until the sum of Column 10 equals the required revenue.

75

this revenue is 0.042. The average welfare costs of generating this revenue (i.e., the value ofS in chapter V, Box 5.3, was thus equal to 4.2 percent of the net revenue raised).

13. The final two fixed costs - the costs of strengthening the road pavement, increasinggeometric standards and strengthening structures to carry large, heavy vehicles - have beendealt with in this example by assigning them to vehicles according to axle weights (pavementstrengthening) and vehicle weights (geometrics and structures). Pavement strengthening costshave been assigned to vehicles according to ESAL-km and the geometrics and structures costsaccording to GVW-km. This assignment process is illustrated in columns 11 and 12 of TableA.2.5 and generates revenues of $1.60 million and $3.19 million respectively. The final columnadds these individual items together to give the final costs (variable, plus mark-up, plus assignedcosts).

14. The final step is to set the gasoline and weight-distance charges. The total costsattributable to gasoline-powered cars is 1.06 cents per km. This requires a gasoline charge ofabout 13 cents per liter (note that there is no license fee under this scenario; vehicles will beregistered, but not licensed). Diesel vehicles pay weight-distance charges per 1,000 km whichwould vary from $8.10 for cars, through $18.80 for medium trucks, $34.30 for buses and$104.10 for articulated trucks. There would be no difference between the prices of diesel andkerosene (other than that due to differences in border prices and general taxes) and no incentiveto substitute to avoid paying the diesel charge. On the other hand, there would be a pricedifferential between gasoline and both diesel and kerosene. Since all road costs (other thancongestion costs) are internalized, there should be no uneconomic substitution between gasolineand diesel cars. However, there would be a temptation to mix kerosene with gasoline and stepswill have to be taken to discourage this.

76

SELECTED BIBLIOGRAPHY

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1. Published Papers and Reports

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77

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