WORLD BANK TECHNICAL PAPER NO. 409 Work in progress for public discussion Commercial Management and Financing of Roads Iann G Heggie Piers Vickers RECENT WORLD BANK TECHNICAL PAPERS No. 334 Mosse and Sontheimer, PerformanceMonitoring Indicators Handbook No. 335 Kirmani and Le Moigne, FosteringRiparian Cooperation in InternationalRiver Basins:The World Bankat Its Best in DevelopmentDiplomacy No. 336 Francis, with Akinwumi, Ngwu, Nkom, Odihi, Olomajeye, Okunmadewa, and Shehu, State, Community, and LocalDevelopment in Nigeria No. 337 Kerf and Smith, PrivatizingAfrica's Infrastructure: Promise and Change No. 338 Young, MeasuringEconomic Benefits for WaterInvestments and Policies No. 339 Andrews and Rashid, The Financingof PensionSystems in Centraland EasternEurope: An Overviewof Major Trendsand TheirDeterminants, 1990-1993 No. 340 Rutkowski, Changesin the WageStructure during EconomicTransition in Centraland EasternEurope No. 341 Goldstein, Preker, Adeyi, and Chellaraj, Trendsin HealthStatus, Services,and Finance:The Transitionin Central and EasternEurope, Volume I No. 342 Webster and Fidler, editors, Le secteurinformel et lesinstitutions de microfinancementen Afrique de l'Ouest No. 343 Kottelat and Whitten, FreshwaterBiodiversity in Asia, with SpecialReference to Fish No. 344 Klugman and Schieber with Heleniak and Hon, A Survey of Health Reformin CentralAsia No. 345 Industry and Mining Division, Industry and Energy Department, A Mining Strategyfor LatinAmerica and the Caribbean No. 346 Psacharopoulos and Nguyen, The Roleof Governmentand the PrivateSector in Fighting Poverty No. 347 Stock and de Veen, ExpandingLabor-based Methodsfor RoadWorks in Africa No. 348 Goldstein, Preker, Adeyi, and Chellaraj, Trendsin Health Status, Services,and Finance:The Transitionin Central and EasternEurope, Volume 11, Statistical Annex No. 349 Cummings, Dinar, and Olson, New EvaluationProceduresfor a New Generationof Water-RelatedProjects No. 350 Buscaglia and Dakolias, JudicialReform in Latin AmericanCourts: The Experiencein Argentina and Ecuador No. 351 Psacharopoulos, Morley, Fiszbein, Lee, and Wood, Povertyand IncomeDistribution in Latin America:The Story of the 1980s No. 352 Allison and Ringold, LaborMarkets in Transitionin Central and EasternEurope, 1989-1995 No. 353 Ingco, Mitchell, and McCalla, GlobalFood Supply Prospects,A BackgroundPaper Preparedfor the WorldFood Summit, Rome,November 1996 No. 354 Subramanian, Jagannathan, and Meinzen-Dick, UserOrganizationsfor Sustainable Water Services No. 355 Lambert, Srivastava, and Vietmeyer, MedicinalPlants: Rescuing a GlobalHeritage No. 356 Aryeetey, Hettige, Nissanke, and Steel, FinancialMarket Fragmentationand Reformsin Sub-SaharanAfrica No. 357 Adamolekun, de Lusignan, and Atomate, editors, Civil ServiceReform in FrancophoneAfrica: Proceedings of a WorkshopAbidjan, January 23-26, 1996 No. 358 Ayres, Busia, Dinar, Hirji, Lintner, McCalla, and Robelus, IntegratedLake and ReservoirManagement: World Bank Approachand Experience No. 360 Salman, The LegalFrameworkfor Water Users'Associations: A ComparativeStudy No. 361 Laporte and Ringold, Trendsin EducationAccess and Financingduring the Transitionin Centraland EasternEurope. No. 362 Foley,Floor, Madon, Lawali, Montagne, and Tounao, The Niger HouseholdEnergy Project: Promoting Rural FuelwoodMarkets and VillageManagement of Natural Woodlands No. 364 Josling, AgriculturalTrade Policies in the Andean Group:Issues and Options No. 365 Pratt, Le Gall, and de Haan, Investingin Pastoralism:Sustainable Natural ResourceUse in Arid Africa and the Middle East No. 366 Carvalho and White, Combiningthe Quantitativeand QualitativeApproaches to PovertyMeasurement and Analysis:The Practiceand the Potential No. 367 Colletta and Reinhold, Reviewof Early ChildhoodPolicy and Programsin Sub-SaharanAfrica (List continues on the inside back cover) WORLD BANK TECHNICAL PAPER NO. 409 Commercial Management and Financing of Roads Ian G. Heggie PiersVikers TheWorld Bank Washington,D.C. Copyright © 1998 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433,U.S.A. All rights reserved Manufactured in the.United States of America First printing May 1998 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the proce- dures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data in- cluded in this publication and accepts no responsibility for any consequence of their use. 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Cover photos clockwise from top left: "Road construction in Ghana," Ministry of Roads & Highways; "Labor-based road rehabilitation in Lesotho," Labor Construction Unity, Ministry of Works; "Periodic maintenance in Colombia," Ian G. Heggie; and "Microenterprise road maintenance unit in Colombia," Ian G. Heggie. ISSN: 0253-7494 Ian G. Heggie is a roads adviser and Piers Vickersis a rural transport specialist in the transport division of the World Bank's Transportation, Water, and Urban Development Department. Libraryof Congress Cataloging-in-PublicationData Heggie, Ian Graeme. Commercial management and financing of roads / Ian G. Heggie, Piers Vickers. p. cm. - (World Bank technical paper; ISSN0253-7494; no. 409) Includes bibliographical references (p.). ISBN 0-8213-4237-1 1. Roads-Finance. 2. Roads-Maintenance and repair-Economic aspects. I. Vickers, Piers, 1967- . II. Title. III. Series. HE336.E3H43 1998 388.1'14-dc2l 98-19383 CIP Contents Foreword v Abstract vi Abbreviations vii Acknowledgments viii Overview 1 Part I. Background 5 1. Introduction 7 2. The State of the Road Sector 9 The Importance of Roads and Road Transport 9 The Impact of Poor Road Maintenance 11 Past Efforts at Reform 14 Regional Programs 15 Part II. The Basic Issues 17 3. A Diagnosis 19 The Institutional Framework 19 Human Resource Constraints 19 Inadequate Financing Arrangements 22 Lack of Clear Responsibilities 24 Ineffective Management Structures 27 Weak Management Systems 28 Inefficient Work Methods 29 4. Commercializing Roads: The Four Basic Building Blocks 32 Assigning Responsibility 32 Creating Ownership 32 Ensuring Secure and Stable Financing 33 Introducing SoundiBusiness Practices 33 iv CommercialManagement and Financing of Roads Part III. An Agenda for Reform 35 5. Assigning Management Responsibility 37 Basic Principles 37 Managing the Road Network 38 Managing Road Traffic 49 Key Conclusions and Recommendations 51 6. Creating Ownership 53 The Concept of Ownership 53 Organizations Representing Road Users 54 Ways of Involving Road Users 55 Setting Up a Road Board 57 Key Recommendations and Conclusions 62 7. Ensuring an Adequate and Stable Flow of Funds 65 Setting Clear Market Signals 65 Pricing and Cost Recovery Policies 72 Key Recommendations and Conclusions 77 8. Managing the Revenues 80 Linking Revenues and Expenditures 80 Types of Road Funds 80 Characteristics of Existing Road Funds 83 Problems with Conventional Road Funds 86 Setting Up a Commercially Managed Road Fund 88 Key Recommendations and Conclusions 101 9. Introducing Sound Business Practices 103 Defining the Corporate Mission 103 Separating Planning and Management from Implementation of Road Works 104 Identifying EffectiveWays to Contract Out 106 Staffing Requirements 108 Management Structure 111 Management Information Systems 112 Financial Accounting Systems 114 Controlling the Quality of Road Works 118 ManagerialAutonomy and Accountability 122 Key Conclusions and Recommendations 123 Part IV. Annexes 127 Annex 1. Length of Road and Estimated Asset Values in Selected Countries 129 Annex 2. The Inverse Elasticity Rule 130 Annex 3. Estimating Road-User Charges: A Worked Example 132 Annex 4. Review of Selected Road Funds 139 Annex 5. Draft Road Fund Administration Bill 145 Annex 6. Standard Format for Setting Up a Road Fund Under Existing Legislation 153 References 157 Foreword Theroad sector is big business. If main road agen- and put on a fee-for-service basis. In other words, the cies were publicly listed companies, they would road sector should be commercialized. This involves rank among the Fortune Global 500. The Japan creating an arm's-length agency to manage at least the Highway Public Corporation manages