This knowledge base deals with the general issue of road financing and road funds, but excludes toll roads and concessions (see main node on Toll Roads and Concessions). The knowledge base covers developing a road financing plan, restructuring road user taxes and charges, putting roads on a fee-for-service basis, restructuring an existing road fund, or setting up a new road fund. With regard to road funds, it covers problems encountered by conventional (first generation) road funds, how to win public support for the concept of commercialization, World Bank and IMF views on the fee-for-service concept, and the question of how to design a commercially managed (second generation) road fund which: (i) minimizes any adverse impacts on the budget; and (ii) strengthens financial discipline to ensure better value for money.

1. Developing a Road Financing Plan
   When the revenues available to the road sector are significantly less than the amount required to maintain the road network in a stable long-term condition - and to undertake justified improvements (i.e., projects with an EIRR of more than 15.0%) - the main road agency should prepare an explicit long-term financing plan showing the size of the financing gap and suggesting how it might be bridged.

   Among other things, the financing plan should consider the scope for:

   1. getting better use out of existing resources by, for example, contracting out more design and implementation work to the private sector (or exposing in-house work to competition from outside contractors);
   2. increasing revenue mobilization by simplifying road user taxes and charges, restructuring them and improving revenue administration to reduce avoidance, evasion and leakage and
   3. allocating additional revenues from the government's consolidated budget. In the case of (iii), the financing plan needs to identify where the additional revenues might come from and at what cost¾ whether by taking funds away from other sectors and/or raising clearly identified taxes and charges.
   
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2. Putting Roads on a Fee-for Service Basis

   Once the above options have been exhausted - including the option of bringing in the private sector to build and operate some roads under concession agreements (see main node on Toll Roads and Concessions) - it is usually time to consider off-budget financing (i.e., charging road users directly by putting roads on a fee-for-service basis and depositing the proceeds into an off-budget account). In the early 1950s, when the New Zealand Land Transport Fund (1953), Japan Road Improvement Special Account (1954) and the US Federal Highway Trust Fund (1956) were established, this procedure was referred to as the "user-pay concept". The modern version of the user pay concept is referred to as fee-for-service, or commercialization.

   Putting roads on a fee-for-service basis and depositing the proceeds into a commercially-managed road fund, is not the same as the conventional earmarking practiced during the 1960s, 70s and 80s. These conventional road funds simply did not work and the earmarking of general tax revenues - often tax revenues unrelated to road use - was bitterly opposed by the IMF and most staff in ministries of finance.

   Winning public support for fee-for-service is one of the most difficult things to do. The government needs to get all the key actors together - the road agencies, MOF, road users, the business community, farmers, etc. - so that they can seriously discuss how to establish a secure and stable flow of funds for roads. The mechanism for doing this usually involves: (i) holding a workshop; (ii) ensuring there is a representative audience; (iii) having presentations by local people stating how they see the problem; (iv) having presentations by resource persons to share experience from other countries; and (v) conducting a facilitated discussion session aimed at producing an Action Plan and timetable for establishing a commercially managed road fund. This is usually done in conjunction with the restructuring of the main road agency to make it more commercial and responsive to users. The workshop could involve 15 to 20 participants, or as many as 100. It could likewise last 1 day, 2 days, or longer. Read more on how to run a workshop and to see examples of programs, Ministerial speeches and sample conclusions and recommendations from a workshop.

   The type of earmarking associated with a commercially managed road fund is radically different from that associated with past road funds (particularly those set up in Africa and LAC during the 1970s and most of the current road funds in Eastern Europe). It differs from conventional earmarking because: (i) the arrangements are specifically designed to minimize adverse fiscal impacts on the government's budget; (ii) they form part of an agenda to manage roads along commercial lines; and (iii) the stricter financial discipline created by strong financial management produces benefits which more than offset the costs of any added fiscal inflexibility. Such road funds are no longer automatically opposed by the IMF and staff from ministry of finance. Once such staff understand what is being proposed, they generally support the concept.

   
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3. Setting up a Commercially Managed Road Fund

   The new, second generation, road funds are not simply loosely managed off-budget accounts. They are based on a set of important design principles and this is what distinguishes them from first generation road funds and makes them more acceptable to the IMF and ministry of finance. One of the first decisions to be taken, when setting up a road fund relates to the kind of road fund the country feels it needs. Will it only finance main (national) roads? Will it finance main roads and also channel some funds to support urban (municipal), regional (provincial) and rural (district) roads? Or will it finance all roads, including parts the unclassified (community) road network?

   Second, it is important to ensure that the road fund has a firm legal basis. If it is set up under existing legislation (like the Finance Act), or using simple decrees, there should be a sunset clause to determine when it should be closed down, or regularized by passing basic legislation. The legislative instrument opening the road fund should be supported by published financial regulations or procedures. These may either be published as legal regulations in the government Gazette, or published by the road fund administration itself. Examples of legislation and other legal instruments used to set up a road fund, together with other documents associated with setting up a road fund?

   If the road fund is only going to finance main roads, it could be managed through a separate division in the main road agency (as in South Africa). On the other hand, if it is going to finance a number of different road agencies, it should be managed through a separate road fund administration (to avoid any conflict of interest). The organization should be managed by an Executive Secretary appointed by the board who should, in turn, appoint the administration's staff. The road fund need not employ more than about 3-5 staff (or 10-30 if it is a large road fund) trained in planning, procurement and finance. Read more on the various options for managing a road fund?

   So where do we have commercially managed road funds? At present, there is New Zealand (where the road fund was recently restructured to create an independent road fund administration¾ previously the road fund had been managed by the main road agency), while both Japan and USA have national road funds which include some attractive features (the road improvement special account in Japan even has an oversight board). The oldest road fund is in South Africa which was established in 1935. It has had its ups and downs. The fuel levy was suspended in 1988, but was re-instated in March 1998. Ghana has had a road fund for 14 years (restructured in 1996), Mozambique has had one for 10 years (currently being restructured), and Zambia has had one for 6 years (managed by the national Roads Board for four). In addition, several new road funds have been set up during the past 2 to 5 years in Lesotho, Malawi, Guatemala, Nicaragua, Jordan and Yemen. A number of countries are also well advanced in preparing to set up a commercially managed road fund, including, India, Laos and Pakistan, or are restructuring their first generation road funds along commercial lines, including Nepal and Romania. See summaries of existing road funds in Ghana, Zambia, and Yemen and the road fund in Malawi?

   
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4. Managing the Road Fund

   The road fund should be overseen by a representative board which could either be a separate board, or a sub-committee of the board which oversees management of the road network. Members should ideally be nominated by the constituencies they represent and there should be an independent chairperson.

   The road fund revenues should be collected using a simple two-part tariff consisting primarily of an access fee (vehicle license fees and a supplementary heavy vehicle fee) and a user fee (a fuel levy, international transit fees and fines for overloading). The tariff should be designed to ensure it does not abstract revenues away from other sectors. Extra spending on roads should be financed through extra payments by road users, i.e., the extra revenues must be in addition to all pre-existing taxes going into the consolidated fund. The road tariff should ideally be collected under a contractual agreement, even when they are collected by government agencies. This helps to maximize revenues by discouraging evasion, avoidance and leakage. The fuel levy is particularly prone to this problem. Whenever possible, the levy should be collected as the fuel leaves bonded storage (i.e., while it is still under the jurisdiction of the customs department), or at the at the point of removal from bulk (wholesale) storage.

   There should be a consistent procedure for regularly raising and lowering the road tariff. If the tariff is collected under the government's tax-making powers, the usual procedure is for the oversight board to consult with the organizations represented on the board (to ensure the changes are acceptable and will not result in a public outcry) and then to recommend the changes to the Minister of Finance. The Minister then includes them in the budget. When the tariff is set under legislation (as a road public enterprise), the board normally decides on the revised tariff, submits it to the Minister (of Works or Transport) and, provided they make sense and are consistent with the government's macro targets, the new tariff is published in the new government Gazette. Since there will often be concerns that tariff increases - particularly increases in the fuel levy - may have adverse repercussions on the consumer price index and hence on the economy. The board may need to examine the impact of proposed increases in the fuel levy on the economy. See an example of how an increase in the fuel levy affects inflation and an MS-Excel spreadsheet illustrating how to finance RoadSIP through the fuel levy.

   Half or more of diesel fuel is often consumed outside the road sector. Once the fuel levy reaches about $0.05 per liter it thus often becomes necessary to introduce arrangements to ensure that non-road users do not have to pay the diesel levy. This problem rarely arises with gasoline which is almost entirely used for road transport (some is used for chemical manufacture).

   There should be a transparent mechanism for dividing funds between the different road agencies entitled to receive money from the road fund. For maintenance, this is normally done in terms of "needs" which are either measured indirectly using formulas, or the needs are measured directly using a road management system or equivalent. Formula-based systems usually start by dividing funds between the main, urban and regional/rural roads (using agreed proportions of the road fund revenues which are revised from time to time) and the amount allocated to each group is then divided between the individual road agencies using formulas based on network and traffic characteristics, and the local authority's ability to pay from its own revenues. The direct needs-based approach uses a more careful assessment of needs, either using standard unit costs, or a standardized road management system. Allocations for investment are typically based on benefit/cost analysis, or other rigorous methods of setting priorities. See some examples of procedures used to divide funds between different road agencies?

   There should also be well-thought out cost-sharing arrangements for local government and community roads. This helps to "stretch" the road fund resources and also helps to ensure that recipients only choose schemes to which they attach high priority. Cost-sharing is typically at 50 percent for both capital works and maintenance, often adjusted to reflect ability to pay from local revenues. At the community level, the arrangements should permit local contributions to be made in the form of contributions in kind, e.g., through volunteer labor, supply of materials, use of farm equipment, etc.

   The procedures used to disburse funds to the various road agencies entitled to draw from the road fund, should be designed to strengthen financial discipline. There are three broad options. The road fund can: (a) operate a revolving fund and certify ex post that withdrawals were in accordance with agreed regulations; (b) reimburse the road agency after the work has been done and payment has been certified; or (c) pay contractors directly after certification that the work has been done according to specification. See some examples of ways to disburse funds to road agencies.

   The road fund should be subject to regular technical and financial audits. The audit may either be done by independent auditors, by the Auditor General's Office, or by auditors appointed by the Auditor General.

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Terms of Reference for setting up a road fund, restructuring an existing one, auditing a road fund, technical assistance to set up or strengthen a road fund, dividing funds between different road agencies, improving administration of the road tariff, and a standard format for studies of road user charges.

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An example of a consultant's report summarizing what is involved in setting up a commercially managed road fund? Operating Modalities for the Proposed Road Fund in the Hashemite Kingdom of Jordan.

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