Commercializing Roads.doc

commercializing roadsian g. heggie41 west streetstratford-upon-avonwarwickshire cv37 6dnu.k.tel: 44 1789 299 891email: i.heggiebham.ac.ukcommercializing roadsby ian g. heggievisiting professor, university of birmingham, u.k.introductionthis chapter describes the process of road sector management reform which has been taking place during the past 20 years. when the process of reinventing government started in the early 1980s, it started with the “easiest” infrastructure sectors telecommunications, power and water. roads were considered more difficult. they were thought of as public goods, were administered within each country by a large number of road authorities, and it was unclear how a public enterprise style road organisation could find a practical way of “charging” for roads. the pace of reform was therefore slow, as governments struggled to develop new institutional structures to manage and finance their road networks. however, since 1990 the road sector has been in the middle of an unprecedented period of restructuring, comparable to what happened to the other infrastructure sectors during the 1980s and early 1990s.the reforms are being driven by four main factors: (i) the rapid growth in motorization; (ii) the corresponding growth of road networks; (iii) the large demands these road networks impose on the governments budget; and (iv) the acute shortage of fiscal revenues worldwide. motorization has grown rapidly since the second world war, with the result that road transport is now the dominant form of transport in most countries. it typically carries 60 to 80 percent of all inland passenger and freight transport and provides the only form of access to most rural communities. countries have come to rely on an efficient and effective road network to support ongoing economic development. traffic likewise continues to grow, usually faster than gdp. to accommodate this traffic, and to reduce congestion and road accidents, countries have expanded their road networks considerably. growth of road networks has been especially fast in asia. in 1998, it was estimated that there were nearly 2.6 million km of roads in asia (excluding china and india), 1.5 million km in africa, 3 million km in central and south america, just under 1 million km in the former soviet union, and 0.5 million km in the middle east (heggie and vickers, 1998). large sums of money were invested to build these roads and significant sums continue to be spent on maintaining and improving them.the rapid growth in the worlds road networks is the second factor driving the reforms. there is growing recognition that the large sums of money invested in the road network have created large and valuable assets road agencies have become “big businesses”. for example, the japan highway public corporation manages assets about the same size as general motors, while the uk highways agency, which is a relatively small road authority responsible for just over 10,000 km of national roads, manages assets the same size as ibm and at&t. if these road agencies were publicly listed companies, they would feature in fortune magazines list of the worlds 500 largest companies. likewise, in countries as diverse as chile, ghana, hungary and indonesia, the asset value of the national and provincial road networks exceeds that of the railways and national airlines combined (heggie and vickers, 1989). it is this recognition which has encouraged countries to argue that, if roads are big business, they need to be managed like a business.the third factor driving the reforms also has to do with size. the road sector now places large demands on the governments budget and there is growing concern to ensure that road spending produces value-for-money. although numerous countries have introduced private road concessions, most road financing still comes from the governments budget. the scale of this spending has caused many countries to raise questions about its effectiveness. does it produce value for money? ministries of finance generally say no. they view road agencies (particularly the national road agency under the ministry of works) as a big spending department which wastes resources. they employ inefficient work methods (doing too much work in-house), responsibility for different parts of the road network is often unclear, priorities are often politicized, politicians and senior officials regularly interfere in day-to-day management decisions, and there is a lack of customer focus. added to that, inflexible civil service terms and conditions of employment make it difficult to recruit and retain technically qualified staff.the fourth and final driving force behind the reforms has been shortage of finance. part of the reason for this is political. roads have to compete for funds against other more visible (and popular) sectors like health, education and law and order. when that is combined with the view that road agencies are large and inefficient spending departments, it places them at a considerable disadvantage in the annual budget debate. however, the most important reason for the shortage of finance, is that the needs of the road sector have been growing faster than gdp and hence faster than the governments tax revenues. this is a structural problem which cannot be solved as long as road agencies continue to be financed through general budget allocations. roads have simply outgrown the government budget. this is the main driving force which has encouraged countries to look for alternative sources of “off-budget” finance.against the above background, the growing consensus is that governments should, “bring roads into the market place, put them on a fee-for-service basis, and manage them like a business” (heggie and vickers, 1998). in other words, road agencies do not need to be managed and financed in the same way that governments manage and finance their health and education sectors. roads are perfectly capable of standing on their own feet. they should be commercialized and systematically subjected to the discipline of the market place.commercializing road managementcommercialisation leads to a number of changes in the way in which roads are managed. the general direction of the reforms can be grouped under four main headings:(i) separating the planning and management of roads from implementation of road works and contracting out implementation to the private sector.(ii) establishing a more autonomous road agency which operates at arms length from government.(iii) formalising the relationship between the more autonomous road agency and the parent ministry by writing it into a contract plan (or equivalent).(iv) streamlining the structure of the road agency and improving terms and conditions of employment for road agency staff.box 1 gives a general indication of progress achieved to date. most progress has been made in africa, mainly due to the strong impetus provided both by the road maintenance initiative (heggie, 1995, chapter 4) and the southern africa transport and communications commission (satcc). satcc covers 12 southern and east african countries and they have been encouraging the reforms under a 1998 ministerial protocol. the protocol stresses the need to commercialise the management and financing of roads to enable them to become self-sustaining, to protect the investments already made and to reduce dependence on outside assistance. significant progress has also been made in other regions supported by smaller reform programs, including the provial program in latin america (schliessler and bull, 1993, chapter 8) and the less formal programs which operated in asiasponsored by un escap and the world bank, with support from the swiss agency for development and cooperation and the german agency for technical assistance. and eastern europe sponsored by the world bank with support from the swiss agency for development and cooperation. country progress varies widely and, although a country might be shown in box 1 to have established an autonomous or semiautonomous national road agency, this does not necessarily mean that it is either fully operational, or fully autonomous. the key elements of the reforms are summarised below.separating planning and management from implementation of worksmost countries are now actively trying to separate the planning and management of roads from implementation of works. there are two main reasons for wanting to do this. first, road agencies have too many conflicting responsibilities, which often include planning, managing, and executing road works. in such cases, they act both as the customer (or client) for the services provided, as well as the provider of those services. this creates an obvious conflict of interest which weakens financial discipline and compromises efforts to control costs and maintain quality. second, road agencies are usually public monopolies and are not subject to market discipline. as a result, the costs of road works are typically 20 to 30 percent higher than work subjected to competition.countries have tackled this problem in three main ways. some road agencies have maintained their integrated structure, but assigned the planning & management of roads to one department and have assigned the implementation of civil works to a separate department within the same road agency (as in norway). others have divided the road agency up into two separate organisations. one deals with planning & management of roads while the other handles implementation of works (as in finland, sweden and new zealand). finally, some have kept the planning & management of roads within the road agency and have contracted out implementation to the private sector (as in south africa and uk). although new zealand assigned planning & management of roads to transit new zealand in 1989, it kept the implementation of civil works with the ministry of works until 1991 when it was corporatised (i.e., design and civil works were made into separate subsidiary companies) and the corporatised entities were subsequently privatised.the above reforms have produced spectacular results. some of the most startling evidence comes from new south wales in australia. in 1991 their roads and traffic authority decided to start contracting work out to the private sector and to expose their own in-house work to more outside competition. four years later the costs of in-house work had fallen by approximately 25 percent, while the costs of work done by contractors had fallen by approximately 37 percent (frost and lithgow, 1995). sweden likewise has subjected an increasing share of in-house maintenance work to competition from the private sector and this has increased productivity by about 25 percent. the general message seems to be that exposing in-house staff to competition from the private sector can reduce costs by about 20 percent, whilst contracting the work out to the private sector can reduce them by a further 5 percent.one of the major constraints hampering contracting outeven for relatively simple road worksis the underdeveloped nature of the local consulting and construction industries in many countries. the road agency cannot invite competitive bids unless the country already has consultants and contractors with road work experience. furthermore, the road agency cannot be expected to prepare bid documents, award contracts, and supervise implementation of civil works using staff accustomed only to doing work in-house. staff in the road agency must know something about the preparation of bid documents, contracting procedures, contract law, and arbitration procedures before the road agency can effectively contract road works out to private firms and hire consultants to design and supervise implementation. most efforts to contract work out to the private sector are therefore accompanied by parallel efforts to develop the local construction and consulting industriesmore autonomymore autonomy is one of the cornerstones of a more commercial approach to road management. road agency managers cannot behave commercially until they are able to operate without interference in day-to-day management. the first step to achieve this is usually to amend the road sector legislation to enable the road agency to operate at arms length from government. typically, they are established as a wholly-owned government corporation (as in new zealand) transit new zealand is owned by government, there are no shares and its management reports directly to an independent board which operates much like a company board. the board is appointed by the government and directs both overall policy and funding allocations., or as a semi-autonomous agency (like the ghana highway authority, invias in colombia and the uk highways agency), but are sometimes incorporated under the companies act with all shares held in the name of the minister (as in south africa), or formed into non-profit joint stock companies (as in latvia). sweden has turned its road authority into a holding company with subsidiaries which deal with training, traffic data, ferries, etc. each subsidiary has a director, advisory board and a target return on equity. the subsidiaries are being progressively privatized.the new road authorities are mainly managed by a representative board under an independent chairperson of standing. although some of these boards remain weak, others have turned out to be examples of emerging good practice. the best have executive powers, a broad-based, representative membership defined in terms of clearly defined constituencies (e.g., key ministries, chamber of commerce, road transport associations, the professions, farmers, etc.). members are typically nominated by the constituencies they represented (i.e., they are not simply appointed by the minister or senior officials, as happens with so many other public enterprise boards) and the private sector members are usually in the majority. in the satcc region, half the boards already have a majority of private sector members and the remainder are expected to follow shortly (pinard and kaombwe, 2000). an added feature is that the chairperson is usually independent. sometimes they are elected by the board (as in zambia), appointed by the minister from the existing members of the board (as in new zealand and malawi), or appointed by the president or minister (hopefully) after consultation with the board (as in namibia and ghana). the board generally appoints the chief executive officer (ceo), under terms and conditions determined by the board, and delegates day-to-day management of the road network to the ceo.these roads boards have had several impacts on the way the road agency is managed. first, they protect the road agency from unwelcome interference in day-to-day management matters by ministers and senior government officials. however, the boards cannot simply ignore the wishes of politicians. as one chairman put it, “we had to find ways of turning political interference into political input which could be weighed alongside the other technical considerations.” second, the non-governmental members on the board enable the road agency to draw on a wider range of skills and contacts. for example, the south african national roads authority attributes its highly successful toll road program to the important contribution made by its oversight board. finally, the private sector members on the board helps the road agency to recognise that it is in the business of delivering services to clearly defined customers and that they need to pay attention to the needs of these customers. this is particularly important when the road agency is trying to seek public support for more road spending.contract plansthe third reform recognizes that, once responsibility for managing the road network is delegated to a roads board, there needs to be a formal way for the minister, as de facto owner and shareholder of the road business, to define the boards objectives and performance targets. this is typically spelled out in the form of a contract plan (or equivalent). the normal procedure is for the road authority to prepare a multi-year rolling business plan which is then used as the basis for negotiating an annual performance agreement with the parent ministry.the objectives often take the form of a vision statement from which the agency can derive its principal or statutory objectives. for example, transit new zealands mission is, “to operate a safe and efficient state highway system.” within the context of this vision statement, the minister then sets a series of clearly specified performance targets which the board is expected to meet. they cover issues like the number of road accidents, level of service provided to road users, condition of the road network, administrative efficiency of the road agency, level of administrative costs and, increasingly, financial return on investment. these performance targets, together with the annual road program, are usually spelled out in an annual performance agreement signed with the minister.commercialized staffing structurethere is no point in creating an autonomous road agency with commercial management, unless it is supported by an organization which can respond to market discipline. that primarily means having stable staff, selected on a competitive basis and paid market-based wages. the uk procedure under which staff who are senior civil servants can be moved anywhere across government within the senior civil service is incompatible with a commercially managed organization. staff likewise need to be paid market-based wages. after all, they are employing and supervising the work of consultants and contractors and, if you pay them significantly