Week 1: Innovations In Road Management Day 1 - Monday 27 May Restructuring Road Management CONTENTS

Transcription

1 Week 1: Innovations In Road Management Day 1 - Monday 27 May 2002 Restructuring Road Management CONTENTS Overview of Public Sector Management Reform...1 Introduction and Context...1 Pressures for change...1 The Rise of New Public Management...1 Public choice theory...1 Principal-agent theory...2 What is New Public Management?...2 Key components of NPM...2 Selected Applications of NPM...4 Decentralised management within public services...4 Contracting out of public services...4 User fees and charges...5 Changing employment relations...5 Customer Orientation...5 NPM in the Context of Adjusting Countries...5 Bibliography...6 International Trends in Restructuring Road Administrations...8 Why Roads?...8 Context and Need for Institutional Reform...8 Growth in road network size...9 Outdated management structures...9 Human Resource Constraints...11 Weak Management Information Systems...11 Inadequate financing...12 Perception of roads as a public good...12 Response of Governments to the Need for Institutional Development...12 Designing and refining options...13 Improved Institutional Structures...13 Separation of Client and Provider Functions...15 Commercialisation of Road Agencies...19 User participation through oversight boards...21 Management Information Systems...23 Financial Accounting Systems...25 Key Implementation Issues...26 Improved Institutional Structures...26 Separating Client and Supplier Functions...26 Commercialisation of Road Agencies...26 User Participation through Roads Boards...27 Management Information Systems...27 Monitoring and Evaluation...27 References...29 Week1Day1. May/June 2002 Page i

2 Improving road management capacity...31 Introduction...31 Background and purpose...31 Effectiveness and efficiency...31 The Concept of Customers...31 The Policy Framework...32 Policy aims...32 Customer-focused policy...32 Policy as a tool for integration...32 Specificity...33 Measures to increase specificity...33 Sector and sub-sector...33 Government...34 Management...34 Service delivery procurement...34 Competition...35 Approach to Commercialisation...35 Activities to be commercialised...35 Involvement of the private sector...35 Commercialisation mechanisms...36 Benefits of Commercialisation...38 Problems with cost comparisons...38 Periodic maintenance works by contract...39 Routine maintenance works by contract...39 Commercialising in-house operations...40 Contracting out the management function...40 General conclusions on benefits...41 Conclusion...41 References...42 Institutional Development of Road Administrations...43 External and internal factors...43 Management factors...43 Technical factors...43 Internal institutional factors...43 External factors...43 Impact of factors...44 Hierarchy of management issues...44 Inter-dependence of factors...44 Sustainability...44 Change management...45 The challenge of change...45 Approach to change...45 Implementing change...45 Managing change...46 Time scale...46 Human resource needs in a changing environment...48 Importance of people...48 Skill mix...48 Importance of addressing human resources...48 Skills and motivation...48 Factors...49 Organisational autonomy...49 Compensation schemes...49 Training...49 Purpose of training...49 Skill development...49 Conditions for success...49 Week1Day1. May/June 2002 Page ii

3 Training needs analysis...50 References...50 Reforming Road Sector Policies: Making it Happen...51 Background...51 Is Policy Reform Needed?...51 Identifying Stakeholders...52 Seeking Agreement on the Need for Reform...53 The Role of Donors...53 Choosing the Correct Instruments...53 Sharing Experience Through Intermediaries...54 Sharing Experience with Those Involved...56 Hands on Assistance...58 Program Approach to Institutional Development...59 Conclusions...60 References...61 Zambia Case Study: Opportunistic Policy Reform...62 Terms of Reference for a Study Tour To Ghana and South Africa...64 Introduction...64 Focus of Visits...64 Ghana Road Fund Ghana Highway Authority (GHA) South African National Road Authority (NRA)...65 Consultant Services...65 Proposed Participants...66 Cost Estimate...66 Examples of Objectives For Road Administrations...70 Developing Improved Institutional Structures...74 Introduction...74 Basic Principles...74 Managing the Road Network...75 The Trunk Road Network...76 Regional and Rural Roads...78 Urban Roads...82 The Lowest Level of the Road Network...85 Key Conclusions and Recommendations...88 Examples of Restructuring at Central Government Level...90 SOUTH AFRICA: The National Roads Agency Ltd...90 Establishment...90 Staffing and Responsibilities...90 Maintenance Management...90 Toll Roads and Concessions...90 Lessons Learned...91 NEW ZEALAND: Transit New Zealand...91 Establishment...91 Management and Staffing...92 Contract with Government...92 Audit & Reports...92 Accounts...92 Impact on Operations...92 SWEDEN: The Swedish National Road Agency...93 Background...93 Transport...93 Week1Day1. May/June 2002 Page iii

4 The Restructuring Process...93 Present Road Management Structure...93 Personnel...98 Management of Private Roads...98 Financing...99 GHANA: The Ghana Highway Authority...99 Introduction...99 Initial Performance...99 Restructuring GHA...99 Current Status Guidelines for Improving Management of Roads: A Checklist Objective Structure Overall Scaling Detailed Checklist Week1Day1. May/June 2002 Page iv

5 Overview of Public Sector Management Reform Source: Larbi, G.A., United Nations Research Institute for Social development, Discussion paper 112, Introduction and Context For over two decades a set of management techniques and practices, mostly associated with market and privatefor-profit sectors, have been used to reform administration and management in government, in a variety of countries, notably the UK, New Zealand and Australia. The past decade has seen the application of some of these practices in some developing and transitional economies. These techniques and practices have been collectively referred to as the New Public Management (NPM). The NPM reform trends have been driven by a combination of factors, no one of which can be said to be responsible for driving reforms on its own. Pressures for change (a) Economic and fiscal pressures on governments, experienced in most developed countries in the 70s and early 80s, and more dramatically in developing countries in Africa and Asia and, more recently, in the Asian Tiger economies. Fiscal stress caused by massive public sector deficits, external trade imbalances and growing indebtedness, especially in developing countries, has been a major driver for restructuring the public sector, and rethinking and reshaping the role of government. Issues of downsizing, privatisation and contracting out gained prominence as methods of controlling the fiscal deficits and restructuring the public sector. (b) Public attitudes and increasing criticisms (especially by public choice theorists) of the ineffectiveness and inefficiencies of delivering public services through bureaucratic organisational arrangements and the need to search for alternatives. (c) The resurgence of new right politics in the late 70s and 80s (e.g. Reganomics and Thatcherism ) that were pro-market and pro-private sector. (d) The proliferation of management ideas generated, packaged and marketed by international management consultants, who often act as advisers on reforms to governments around the world. (e) In the case of most developing and transitional countries, an additional factor driving NPM-type reforms has been donor advocacy and lending conditions of international financial institutions, notably the IMF and the World Bank, with the adoption of a more pro-market and pro-private sector stance in structural adjustment programmes. (f) The spread of global markets, especially those related to financial integration and liberalisation and the resultant competition are forcing the public sector in most countries to reshape itself to keep pace with the emerging global economy and modern information technology. These are changing conventional ideas about the public sector. (g) The growth and use of new information technology has also provided impetus for some of the changes. Some aspects of the NPM reforms such as performance management, executive agencies and management decentralisation of public services have been facilitated by the development of information technology that allows for indirect monitoring and control of performance. The Rise of New Public Management Several theories have provided the theoretical underpinnings of NPM and have helped shape NPM ideas. The two most prominent theories are public choice and principal-agent theories. Public choice theory The rise of NPM doctrine is associated with increasing popular and intellectual disenchantment with the growth and role of government and increasing taxation and, consequently, pressures to curb the expansion of government and shift towards privatisation (Hood, 1991). In particular public choice theorists (e.g. Niskanen Week1Day1. May/June 2002 Page 1

6 1971) have criticised the Weberian bureaucratic model as lacking cost-consciousness because of the weak links between costs and outputs. The rewards system in the public sector is not oriented towards improving performance and consequently there are no incentives for politicians and bureaucrats to control costs. There is waste and over expenditure, with public managers focusing more on delivery than on productivity and efficiency. Public choice theory also agues that public bureaucracies are notoriously slow to respond to changes in the environment, as well as being unresponsive to service users. Principal-agent theory Principal-agent theory also argues that the public (as principals), on whose behalf politicians and bureaucrats (as agents) are supposed to govern, is unable to hold the latter accountable because of insufficient information (information asymmetry), the incompleteness of the contracts of employment, and the problems of monitoring behaviour (Walsh, 1995; Lane, 1995). The public sector under performs because state officials pursue their own narrow self-interests rather than the public interest. It is difficult to extract accountability and good performance from public servants (agents) because of the monopoly characteristics of public services, imperfect information about the services, and about the abilities and interests of public employees, and the huge transaction costs that would be involved in efforts to write and monitor complete contracts. One solution to the problem of the public sector is to expose the public services to greater competition. The result of the above drivers for change is that the role and institutional character of the state have been under increasing pressure to be more market-oriented and management-oriented, with emphasis on doing more with less. The traditional model of organisation and delivery of public services, based on the principles of bureaucratic hierarchy, planning, centralisation, direct control and self-sufficiency is being replaced by a new public management (NPM) model. What is New Public Management? The response to the pressures for change is that various countries are in different stages of: Rethinking and reshaping government and its role; Restructuring and repositioning organisations; Redesigning and improving service delivery; Reframing systems of performance and accountability; and Revitalising human resource capacity and organisational performance These trends capture the reform agenda under new public management (NPM). NPM has become a collective term for a bundle of particular management approaches and techniques, many of which are borrowed from the private-for-profit sector. It is a rising body of managerial thought (Ferlie et al. 1996). Some (e.g. Pollitt, 1990) have even characterised it as an ideological thought system based on ideas generated in the private sector and imported into public sector organisations. The new public management is not a homogenous whole, but consists of varieties of practices and techniques. Key components of NPM The various ideas and themes of NPM may be categorised broadly into two strands. On the one hand there are those ideas that derive from managerialism, i.e. emphasising management in government. These include management decentralisation, desegregation and downsizing of government, creating leaner and flexible organisational structures and systems, and giving managers more freedom to manage. On the other hand, there are ideas emanating from new institutional economics that emphasise markets and competition as a way of giving choice and voice to users and promoting efficiency in service delivery, i.e. the use of market mechanisms such as franchising, vouchers, contracting out, internal markets, user fees and customer orientation. The key components of NPM may be outlined as follows: Breaking up huge bureaucracies by disaggregating separable functions into separate agencies. This may involve hiving-off operational arms of ministries to form separate agencies. There is a split between the strategic policy core and operational arms of government. These agencies will them be related to the central or parent ministries not through the traditional hierarchy but by contractual agreements and on arms length basis. The best examples are executive agencies in UK. Week1Day1. May/June 2002 Page 2

7 Replacing traditional tall hierarchies with flatter, flexible and more responsive structures formed and reformed around specific processes (e.g. issuing licences, paying benefits) rather than the traditional functions (e.g. finance and personnel). Separation between funding, purchasing and provision of services. Making a clearer separation (organisational and financial) between defining the need for and paying for public services on one hand and, on the other hand, actually providing those services. This means that governments can provide finance for services, but do not necessarily have to provide the service by themselves. Service provision may be contracted-out to the private sector. Decentralising management authority within public agencies - giving top management freedom to manage with clear responsibility, and reducing the management role of the centre. Devolving budgets and financial control to decentralised units; creating budget centres/spending units. Delegation of financial responsibility gives managers some leeway to consider alternative methods of ensuring the provision of required services. Capping budgets and making them more transparent in accounting terms. This usually involves some combination of output oriented budgeting and devising ways of making managers more aware not merely of current costs of operations but also of capital employed (e.g. by means of accrual accounting. Shift to output-orientation. Greater emphasis on output controls in resource allocation and rewards linked to measured performance; use of performance agreements and performance-related pay. There is a shift from inputs and process to outputs in control and accountability mechanisms. This requires managers to work to performance targets, indicators and output objectives. Devolved budgets and financial control and output orientation allow for entrepreneurial flexibility in meeting targets by offering managers greater control over the purchase, use and sale of assets necessary to produce the required outputs. The above changes may be categorised mainly as managerial and structural. The NPM elements and practices that emphasise markets and competition include: Introducing market and quasi-market type mechanisms (MTMs) to stimulate competition between service providing agencies, in the belief that this will promote cost savings and responsiveness. The common instruments mentioned in current discussion of MTMs include: Contracting out service provision or management responsibility to private providers. Service providers competitively bid to provide services. Internal markets - splitting providers into feasible sized agencies in order to allow for competition among alternative providers; this will allow users more scope to exit from one provider to another. Perhaps the most advanced application of internal markets is in UK s National Health Service, where hospitals have been given trust status and some General Practitioners manage budgets on behalf of patients. GPs can shop around hospitals to buy the best value for money service for their patients. Vouchers or their equivalents used to purchase services by service users, instead of providing direct funding to service providers. The best service providers will attract more service users and thus receive more vouchers and claim the money from government. User charges or a fee, e.g. in health and education services where partial of full cost recovery may be applied. The idea is to put a price on public services, though this need not be a market price. Apart from providing needed funding for the provision of services, it is thought that sharing the cost of service provision with users may encourage more responsible use of such public services. The above arrangements for producing goods and delivering services are replacing the traditional way of delivering public services through the bureaucracy. It should be noted that each MTM could take different forms and thus encompass clusters of arrangements rather than specific mode of application whose outcomes are perfectly predictable. Week1Day1. May/June 2002 Page 3

8 Emphasis on quality in the sense of making public services more responsive to the wishes of their users. This involves a re-conceptualisation of service users as customers or clients. Customer views and demands are increasingly being used to shape service provision e.g. UK s Citizens Charter and NHS Patients Charter. Changing employment relations: Preference for limited term contracts employment for senior staff over traditional career tenure. Use of wholly monetised incentives Performance-related pay Locally determined pay rather than uniform fixed salaries Selected Applications of NPM Decentralised management within public services One of the exemplars in management decentralisation is the UK, where executive agencies have been created out of parent ministries since the launch of the Next Step initiative in1988. As at 1997 there were 125 agencies with about 72 percent of civil servants working in them. Singapore has, since the 1970s, organised its civil service around the concept of statutory boards. A process of devolution of financial management has started as a prelude to creating autonomous agencies. From 1996, ministries and departments were assigned operating budgets, based on target outputs that are quantifiable and measurable (Lim, 1997). Korea has also introduced executive agencies through the Agency Act in January Ghana s Ministry of Health (MOH) has been a focus of reorganisation since the early 1990s. This has involved granting of autonomous status to Teaching Hospitals with their own independent management boards, the establishment of regional and district health management teams for hospitals and, recently, the establishment by law of a Ghana Health Service (GHS) as an executive agency. The GHS will be separated from the central MOH and hence from the civil service. Whilst the MOH is to concentrate on policy and strategic issues, the GHS will be concerned with implementation of health policies. Also Customs and Excise and Internal Revenue departments were hived-off from the civil service (Ministry of Finance) to constitute autonomous agencies in the 1980s. Uganda, Kenya and Tanzania are at difference stages of management decentralisation, including the creation of executive agencies out of existing ministries. For example, Tanzania s Organisation and Efficiency Reviews initiated in the mid-1990s aims at separating core policy-making and regulatory functions of ministries from those of implementation, with the latter handled by executive agencies. The result has been a 25% reduction in the number of ministries. Capacity Implications of decentralised management: Capacity to develop monitoring and inspection procedures Capacity to develop performance indicators, measures and budgetary control systems Capacity to co-ordinate the activities of decentralised units Contracting out of public services Contracting out is increasingly being applied as a management tool, especially where a complete market solution or outright privatisation cannot be employed. In Britain and New Zealand, contracting out has been used extensively in the provision of public services, including white and blue-collar jobs at both central and local government levels. In Zimbabwe non-clinical services such as cleaning, laundry, security and catering have been contracted out in the health sector. As part of Ghana s Civil Service Performance Improvement Programme various activities performed by the bureaucracy are expected to be subjected to market testing. In the water sector some customer management functions such as billing and collection have been contracted to the private sector on pilot basis. In both health Week1Day1. May/June 2002 Page 4

9 and water some activities have traditionally been contracted out, including construction, feasibility studies and management training. In Brazil road maintenance is contracted out to private contractors and this has led to 25 percent savings over the use of government employees (World Bank, 1997). Also port management in Malaysia, plantations in Sri Lanka, the management of airports in Philippines, hotels in Egypt and Bulgaria have been contracted out. There is evidence of the application of contracting out. Introducing contracting out, however, assumes that the capacity exists within the private sector to take on the provision of contracted out services. This is not always the case in some developing countries, and in the case of some services. In some instances, the private sector was found to be ill equipped to take over the provision of non-clinical services. It is also the case that the capacity to manage and monitor contracts with a large variety of providers is usually lacking in government organisations. Also the prevalence of patronage systems, corruption and other institutional weaknesses undermine the successful application of contracting out policies. In such circumstances contracting out may be economically inefficient and wasteful, if there are no mechanisms to mitigate the constraints. User fees and charges These have been introduced (and/or increased) in some developing countries especially in health, water and education, as part of attempts to share cost with users of public services, and to improve the quality of services and accountability. User fees reforms have been widespread in sub-saharan Africa where the influence of international donors seems to be greatest. In some cases, however, user fees have been introduced without adequate safety nets for the poor who cannot afford to pay. In Ghana for example the introduction of full cost recovery for drugs and increases in hospital fees initially led to a drop in hospital attendance. Also the weaknesses in monitoring and accountability mechanisms have led to abuses in some cases and loss of revenue to hospitals. Changing employment relations Performance related pay is increasingly being applied in some developing countries. This requires that fairness and objectivity is upheld, that performance targets and criteria are clearly stated, and that performance measurements and rewards are based on actual work performed throughout the performance period. Malaysia has made good progress in implementing a new performance appraisal system, the key features of which include setting annual work targets and standards of performance between manager and subordinate, review of work performance in relation to targets, a co-ordination panel in each ministry or agency to ensure fair, transparent and objective appraisal, and the selection of excellent employees for reward and recognition (Shafie, 1996). Ghana has also replaced annual confidential reports with a new performance appraisal system and is trying to introduce performance-related pay for senior managers as part of its civil service reforms. The limited experience in performance management, however, suggests that there are problems in defining and measuring performance targets for employees. In some countries, the system is also undermined by political patronage in employment and promotions processes and lack of enthusiasm in the system by those responsible for implementation. Customer Orientation Customer surveys have been used in Ghana and, a Public Complaints Unit has been established in the civil service. Malaysia has established consultative panels that have customer representatives. The use of report cards in some parts of India allows service users to evaluate service providers; Singapore has established a Service Improvement Unit to investigate and respond to complaints from service users. A number of countries are also following the example of the UK Citizens Charter by establishing charters or guarantees of standards of service that clients can expect. For example Malaysia introduced a national Clients Charter in NPM in the Context of Adjusting Countries As noted above, some elements of NPM are being applied in developing countries usually in the context of structural adjustment. One can identify three forms of risks in introducing institutional reforms embodied in NPM in the context of adjustment: Week1Day1. May/June 2002 Page 5

10 1. The timing may be too strongly influenced by external agencies. This may lead to lack of support and preparedness on the part of government and the reforming public organisations. 2. External agencies and experts who rarely have detailed knowledge or long-term commitment for reforms may heavily influence the design and content of the reform. 3. In view of 1 & 2, local involvement, understanding and commitment known to be required for the successful institutional reform may be lacking or weak. The few illustrations of the applications of NPM-type reforms in the context of developing countries have highlighted the following: The application of NPM reforms sometimes prompted by donor advocacy, needs to take context into account. The lack of mature public services in some developing countries and the relative lack of required preconditions call for the need to adapt NPM creatively and realistically and not to blindly follow blueprints that are not implementable. Perhaps some NPM practices are more implementable in a developing country context than others. The test has to be capacity and state of preparedness of governments and reforming organisations. There is need to sequence reforms in such a way that initial reform measures focus on ensuring that the preconditions for a particular element of NPM are in place before introducing others. This calls for an incremental approach to implementation. For instance it may be advisable to have a good management information system in place before introducing performance agreements and performance-related pay. Also some education and publicity of new systems may enhance understanding and acceptance by key stakeholders. As the World Bank itself admits, in its review of ten years of structural adjustment in Africa, greater recognition needs to be given to the time and attention needed for changes, especially institutional reforms, to take effect. Bibliography Batley, Richard (1999) The New Public Management in Developing Countries: Implications for Policy and Organizational Reform, Journal of International Development, 11: A good summary of the attempts to apply some aspects of NPM to developing countries and the implications Dunleavy, Patrick, and Hood, Christopher (1994) From Old Public Administration to New Public Management, Public Money and Management, July-September. Farnham, David and Horton, Sylvia (eds.) (1996). Managing the New Public Services. 2nd edition London: Macmillan. (see especially pp ). Ferlie, E., Pettigrew, A., Ashburner, L. & and Fittzgerald, L. (1996). The New Public Management in Action Oxford: Oxford University Press. Chapter 1. Hood, Christopher (1991) A Public Management for All Seasons. Public Administration, 69(1): 3-9. Hood, Christopher (1995) Contemporary Public Management: a new global paradigm? Public Policy and Administration, 10(2): Hughes, Owen, E. (1998) Public Management and Administration: An Introduction, 2 nd edn. Basingstoke: Macmillan. Kaul, Mohan (1997) The New Public Administration: management innovations in government. Public Administration and Development, 17 (1), See other articles in this volume of PAD. Kernaghan, Kenneth (2000) The post-bureaucratic organization and public service values, International Review of Administrative Sciences, 66 (1): Week1Day1. May/June 2002 Page 6

11 Larbi, George A. (1999) The New Public Management Approach and Crisis States. Paper 112, Geneva: United Nations Research Institute for Social Development. UNRISD Discussion Minogue, Martin, Polidano, Charles, and Hulme, David (eds.) (1998) Beyond the New Public Management: Changing Ideas and Practices in Governance. Cheltenham, UK: Edward Elgar. Chapters 1, 2 & 4. Minogue, Martin, and McCourt, Willy (2001) (eds.) Internationalization of Public Management. Cheltenham, UK: Edward Elgar. Polidano, Charles and Hulme, David (1999) Public Management Reform in Developing Countries: Issues and Outcomes, Public Management, 1 (1): Pollitt, Christopher (1990) Managerialism and the Public Services: The Anglo-American Experience. Oxford: Blackwell. Shafie (1996) Malayasia s experience in implementing the new performance appraisal system, Public Administration and Development, vol.16, no. 4, pp Walsh, Kieron (1995) Public Services and Market Mechanisms: Competition, Contracting and the New Public Management, London: Macmillan. World Bank (1997) World Development Report, Washington, D.C.: World Bank. Week1Day1. May/June 2002 Page 7

12 International Trends in Restructuring Road Administrations Source: Heggie, Ian G. and H. Kerali, Chapter 3 in PricewaterhouseCoopers Sourcebook on Institutional Development for Utilities and Infrastructure. Consultant report prepared for U.K. Department for International Development (DfID), London. Why Roads? The roads sector in many developed and developing countries has undergone significant institutional reform. There are two reasons for this: Roads have traditionally been administered through government departments, while water and power authorities have typically been managed through public utilities and, in some cases, have also been privatised. Road management and finance is in the middle of an unprecedented period of restructuring, comparable to what happened to water and power authorities during the 1980s and early 1990s. When the process of reinventing government started during the early 1980s, it started with the easiest sectors airlines, trucking companies, telecommunications, power and water. Roads were considered more difficult. They were thought of as public goods, were administered by a large number of local authorities (e.g., rural roads in Tanzania are administered by 84 separate highway authorities), and it was not clear how a public utility style organisation could charge for roads. The pace of reform was therefore slower, as governments struggled to develop new institutional structures to manage and finance their road networks. Even in the UK, with its strong emphasis on commercialising and privatising government service delivery, it was only in 1994 that a Highways Agency was established to manage England s trunk road network. Likewise, it was only in 1996 that local governments were required to apply the compulsory competitive tendering process to most construction related services which then led to externalisation of road management at the local government level. The issue of road financing has still not been addressed in the UK, although the private finance initiative has been improving government procurement procedures (i.e., DBFOs are not a financing mechanism, but a better form of procuring road services). Restructuring road management: the best examples of good practice include the South African National Roads Authority (probably the best example), Transit New Zealand, VicRoads in Australia, Swedish National Road Administration (which effectively operates as a holding company with subsidiaries) and FinnRA. Road financing: the best examples include Transfund New Zealand (the best example), US Federal Highway Trust Fund (with some reservations) and several road funds in developing and transition countries (including Latvia, Ghana, Namibia and Zambia). [Note: The issue of road financing is dealt with in Week 2 of this course] Context and Need for Institutional Reform Recent publications by the World Bank and others have highlighted the problems faced by many countries in maintaining their road networks. Many countries have seen the large investments in their road infrastructure eroded due to lack of adequate maintenance and are now faced with a choice of reconstructing large proportions of their networks, or downgrading parts of the network to receive minimal maintenance. Reports prepared by the World Bank in the mid 1980s showed that reconstruction would cost between $40 - $45 billion world-wide but could have been avoided by spending $12 billion on timely maintenance. If the trend continued, the eventual costs of reconstruction would increase by two to three times with a consequent increase in vehicle operating costs (VOC) several times more. There are several reasons for this poor state of affairs. Road authorities are not directly affected by road deterioration and therefore do not come under direct or immediate pressure. Road users have traditionally been slow to see the link between poor road conditions and higher VOC, and were not sufficiently Week1Day1. May/June 2002 Page 8

13 organised to apply public pressure on road authorities. The root causes of the problem are lack of adequate funding and institutional weaknesses. In many countries, additional resources alone could not solve the problems of the road sector institutional reform is a pre-requisite. The organisation, staffing, and the performance of the institutions responsible for roads have to be improved. The main institutional problems facing the roads sector in developing and transition countries are as follows: Growth in road network size in a context where road traffic was growing faster than the economy as a whole (measured in terms of GDP). This has led to an acute shortage of funds for maintenance and improvement of the road network. Outdated management structures buried within several layers of government bureaucracy that are not responsive to user needs and not commensurate with the value of the assets being managed. Lack of clearly defined responsibilities between central and local government departments for managing different parts of the road network. Human resource constraints manifested in terms of shortage of qualified technical and managerial staff with low salaries and few incentives to improve performance and productivity. Weak management information systems leading to poor planning, costing and financial control. Inadequate financing for maintenance, preservation and development. Perception of roads as a public good providing a social service paid for through general taxation irrespective of use. Growth in road network size Most developing countries expanded their road networks considerably in the decades between coinciding with the post independence era in Africa and Asia. This was deemed to be necessary in order to cater for the rapid increase in traffic volumes, to open up remote regions within newly independent countries, and this was also politically more rewarding. By the end of the 1980s, there were approximately 11 million kilometres of roads in developing and transition countries. This is compounded by the rapid growth in traffic levels particularly in Asia and Latin America. However, there is now growing awareness that nearly all countries which finance their roads through the consolidated fund are seriously short of revenues to maintain and improve their road networks. Shortage of revenues for maintenance is leading to a growing backlog of deferred maintenance, while shortage of revenues for investment is leading to high levels of congestion, poor road safety, high vehicle operating costs and poor environmental conditions (particularly in built-up areas where major new roads cannot easily be built). Outdated management structures Most countries have traditionally managed their road networks through Roads Departments that are embedded within several layers of administrative bureaucracy inside a large Public Works Department (PWD), or Ministry of Works (MoW) (see Figure 3.1). These arrangements date back to the time when roads accounted for a small proportion of the ministry s total spending program. Road spending has grown enormously since then. It now typically absorbs 5 ~ 10% of the government s recurrent budget and 10 ~ 20% of the development budget, while the road budget within the ministry often accounts for 70% or more of the ministry s total spending program. However, the dominance of the road sector budget is often still not always reflected in the status of the Roads Department within the PWD or MoW. Despite their large assets and high annual turnover (particularly with maintenance fully funded), roads are usually still administered like a small government department, rather than as a large public enterprise. In many countries, the national road agency operates at a scale (in terms of assets, turnover and staff) comparable to the national airline and national railway (see Table 3.1). Yet the Director of Roads is appointed at a level several rungs below the CEO of these other enterprises. This results in three structural weaknesses. There are too many layers of administration, over centralisation of administrative functions, and reduced authority of the director of roads who does not report directly to the Permanent Secretary. Week1Day1. May/June 2002 Page 9

14 Figure 3.1: Outdated management structures Minister Permanent Secretary Regional Offices Roads Water Buildings One or two deputy permanent secretaries Planning & Research Accounts Personnel & Training Programming & Evaluation ROADS Civil Aviation Meteorogical Services Buildings Mechanical and electrical serv. Water Administration Table 3.1: Assets and turnover of the transport sectors Roads (1) Railways Airlines Country Assets Staff Turnover Assets Staff Turnover Assets Staff Turnover Chile 4,144 4, , , Ghana 1,665 3, , ,164 Hungary 4,238 5, ,868 72, , Indonesia 11,148 20,100 1, , ,503 1,466 Jordan 820 8, , , Korea (South) 4,870 1,450 1,498 8,062 37,068 1,493 6,296 16,518 3,342 South Africa 21, ,334 64,682 1, ,056 1,166 Uruguay 1,080 3, , Notes: (1) Replacement costs, with allowance for road condition. Source: Heggie and Vickers (1998). The management of roads requires skills equivalent to managing a large business with assets and turnover similar to those of the largest private sector companies, both national and international (see Table 3.2). The road management structure in many countries does not reflect the importance of roads to the economy, and does not conform to modern management practices when compared to private sector management arrangements. Restructuring and modernising the road administration is therefore one key element to achieving better management of roads. Lack of Clear Responsibilities Responsibility for roads is often diffused among several central government ministries and local government administrations. The management of the main road network (or trunk roads) is often assigned to the roads department within the PWD or MoW. The responsibility for the management of these roads is clearly designated and the road network itself is gazetted (or proclaimed) through a Roads Act or other legislative instrument. Despite this, many roads departments do not have a full record of their road network (i.e., an up to date inventory) and will often rely on estimates of the total network size under their responsibility. Urban and rural roads are mostly the responsibility of local government administrations. However, due to their relatively small size, most will not have a dedicated roads department. A more serious problem is often encountered in rural areas where many, if not most roads, are non-gazetted (or unproclaimed) and hence it is not clear who is the responsible authority for a significant number of rural roads. Even when they are proclaimed, the responsibility for rural roads if often not clearly assigned to the local government administrations. In addition, roads are often constructed by other agencies (e.g. NGOs, forestry Week1Day1. May/June 2002 Page 10

15 departments, agriculture departments, game parks, etc.) without plans to transfer responsibility for maintenance to a designated roads authority. Table 3.2: Comparison of asset values and turnover, 1996 Road Agency Asset Value/Revenue $, billion Comparable Fortune 500 Company Asset Values (total): Japan Highway Public Corporation General Motors, Sumitomo Life Insurance United Kingdom Highways Agency 80.0 IBM, AT&T 7.3 Northwest Airlines, Fuji Electric South Africa Roads Department, Indonesia Bina Marga, Transit New Zealand, Chile 5.0 Safeway, ITT Industries Revenue (per year): Japan Road Improvement Special Account 30.0 Nippon Steel, Pepsico US Federal Highway Trust Fund 21.0 Dow Chemicals, Lyonnaise des Eau Japan Highway Public Corporation 17.0 Coca Cola, Bridgestone Human Resource Constraints Most roads departments within government suffer from severe human resource constraints brought about by acute shortage of qualified and experienced technical and managerial staff, whilst at the same time they are saddled with too many unskilled workers. Morale is generally low, primarily because of low salaries that compare poorly with the private sector (see Table 3.3). The take home pay of engineers working for government roads departments is generally less than half that paid to engineers employed within the private sector. Table 3.3: Staff salaries out of line with jobs in the private sector Country Public Salary Private Salary Private/Public (US$) (US$) Argentina 1,800 5, Chile 750 1, Ghana Hungary 625 1, Jordan Korea (Republic of) 1,650 2, Pakistan South Africa 2,500 2, Source: Heggie and Vickers (1998). In many countries, this is compounded by over employment of unskilled labour, often as part of government policy towards mass employment. With large numbers of the labour force and a diminishing total budget allocation from the consolidated fund, the payroll takes up a growing share of the total expenditure with little left for actual road maintenance and preservation. Weak Management Information Systems Effective management requires timely collection and analysis of both physical and financial information. Several countries have attempted to introduce road management systems, but with little success. The reasons for this have been attributed to external, institutional, and technical factors. The overriding cause appears to be lack of commitment on the part of the road agency concerned, as well as the introduction of systems that are unsustainable and/or are not central to the day-to-day management needs of the road agency. Financial accounting systems often provide little information to support management decisions. Government accounting practices are not compatible with revenue accounting, asset depreciation, job Week1Day1. May/June 2002 Page 11

16 costing, etc., which is standard practice in the private sector. Hence it is often difficult to accurately estimate costs of various activities such as routine maintenance, periodic maintenance, etc. Few countries have performance budgeting systems. Consequently, it is difficult to achieve efficient road management without appropriate management information systems to assist managers in setting priorities and monitoring performance of past expenditures. Inadequate financing All countries suffer from a shortage of funds for maintenance and improvement of roads. This is manifested in the form of rapidly eroding asset values, increase in traffic congestion (particularly in Asia), increased numbers of accidents, and worsening environmental pollution. In particular, expenditure on road maintenance is well below the level required to stop the steady decline in asset values and keep road networks in a stable, long-term condition. In 1995, the World Bank estimated that about $43 billion, amounting to about one-third of the investment in roads in Sub-Saharan Africa, had been eroded due to lack of maintenance. Many countries built new roads without accepting the need to set aside funds to maintain them in future. This was a short sighted policy, since it is commonly accepted that $1 saved in maintenance costs road users $2 ~ $3 in additional vehicle operating costs. Table 3.4: Road expenditures are well below requirements Road Source of finance Maintenance expenditure Country spending (1) Road users Govt grants Donors Total need Actual Shortfall Argentina (1995) Chile (1995) Ghana (1996) Hungary (1995) Jordan (1996) Kazakhstan (1995) Korea, Republic (1995) 5,768 5, Pakistan (1995) South Africa (1995) Notes: (1) Actual spending, which is generally below requirements. Source: Heggie and Vickers (1998). Perception of roads as a public good Roads have traditionally been managed as a social service for the good of the public. Whilst some rural access roads may be constructed to provide this service, the main road network supports development of the economy as a whole. Whilst sectors like water and electricity find it relatively easy to charge for their services, roads are often viewed as a free good. This is mainly a problem of perception there is no clear price for roads and road agencies are not subjected to rigorous market discipline. Roads are primarily financed through taxes allocated as part of the annual budgetary process. Furthermore, although the road transport sector in most countries pays more in taxes than it receives back from the government in the form of annual budget allocations, there is little scope for increasing these budget allocations. Nearly all governments are under pressure to cut public spending and there is strong competition for the available funds from other sectors such as health, education, security, etc. As a result, there is a need to reform the financing of roads and to change the perception that roads are public goods which can only be financed alongside other public services through the government s budget. Response of Governments to the Need for Institutional Development International studies of road maintenance 1 and its financing have highlighted the need to commercialise road management and financing, i.e. use market concepts in their management and introduce a fee-forservice element in their financing. However, since the vast majority of roads are a public monopoly, commercialisation requires complementary institutional reforms in four areas referred to as the four basic building blocks (see Figure 3.2): Actual/ Need 1 The Road Maintenance Initiative (RMI) in Sub-Saharan Africa, PROVIAL in Latin America and similar programmes in Asia and Eastern Europe, sponsored by the World Bank and others. Week1Day1. May/June 2002 Page 12

17 Figure 3.2 : The four building blocks of road institutional development Clear responsibilities Assigning responsibility by clearly establishing the role of government and creating organisational structures for managing the different parts of a road network. Improved Management Strengthening management of roads by creating commercially oriented road agencies to promote sound business practices in the management of roads. Stakeholder Ownership Creating ownership by involving stakeholders in the management of roads in order to win public support for more funding, to control potential monopoly power and to constrain spending to what is affordable. Secure Financing Ensuring secure and stable financing for road maintenance and preservation by persuading road users to pay additional charges that will be dedicated to road maintenance. The institutional reforms associated with commercialisation of road management and finance can be grouped under the following headings: Improved institutional structures Separation of the client and provider functions Contracting out the client function Contracting out the supplier function Commercialisation of road agencies Involving users in road management Improving management information systems Identifying alternative sources of finance Designing and refining options The following sections describe what different countries have learned whilst implementing these institutional reforms. The results comprise a set of emerging lessons which can be used to inform programs to promote similar reforms in other countries. Improved Institutional Structures Responsibility for managing different parts of a road network is normally dealt with by publishing a formal government notice in the government gazette or other official publication. This specifies the responsible authority for various roads within the network Responsibility for Proclaimed Roads. In some countries, a central government road agency is designated as the highway authority for all proclaimed roads. However, the designated central government agency may delegate some of these responsibilities to local government agencies, or to other competent bodies (as in Ghana, where responsibility for managing roads under the jurisdiction of Rural District Councils has been delegated to a Department of Feeder Roads see Box 3.1). It is usual for central government to only take responsibility for the main road network, except in Federal countries where the State or Provincial governments may be the designated road authorities. Week1Day1. May/June 2002 Page 13

18 Box 3.1: Designated Responsibility for Proclaimed Roads: Ghana In Ghana, the Department of Feeder Roads (DFR), which forms part of the Ministry of Roads & Highways, has been designated as the highway authority for the country s feeder road network of about 22,000 km. The network is administered through a fairly decentralised structure comprising ten regions, with ten districts per region. Funds are allocated centrally and come from the road fund (25 percent is allocated to the DFR) and the central government budget. District requests are balanced centrally and matched with the available funds. District assemblies are advised of approved work programmes and play an active role in ensuring that work is carried out effectively. Under the government's decentralisation policy, DFR is now trying to work out how to delegate more powers to District Assemblies, without compromising quality. The districts would then become the designated highway authority for these roads. The main trunk road network in many countries is now managed by autonomous or semi-autonomous road agencies that operate along commercial lines (e.g., as in Ghana, New Zealand, South Africa and Sweden). In countries that have roads with very high volumes of traffic, toll-roads have been introduced managed by the central road agency, by an autonomous toll road agency (e.g. Jasa Marga in Indonesia) or by the private sector under various forms of concession agreements. Roads in urban areas are typically managed by municipal or urban authorities while roads in rural areas are managed by local government authorities. When new development takes place in an urban area, the required new roads may be built initially by the developer and then proclaimed and taken over by a designated road authority. For example in Lesotho, roads built by the Highlands Development Authority are taken over by the Ministry of Works on completion. Responsibility for Unproclaimed Roads. The remaining roads which have not been proclaimed and assigned to a legally constituted road authority, are regarded as private roads and generally receive no public support for construction or maintenance. These roads may belong to private companies, commercial farmers (cocoa roads in Ghana, cotton roads in Tanzania, tea roads in Kenya), and local villages. Since the roads are unproclaimed, it is more difficult to establish who owns these roads, and who should be responsible for maintaining them. Some countries have introduced procedures that encourage the owners of unproclaimed roads to register their interest in a specific road in return for support with construction and/or maintenance. For example, in Finland, adjoining land owners are encouraged to form road cooperatives for the purposes of managing private roads (see Box 3.2). In such cases, there are usually financial incentives to encourage participation in the schemes. Box3.2 : Management of Unproclaimed Roads in Finland Finland has 83,000 km of proclaimed roads. About 77,000 are under the jurisdiction of the National Road Administration (Finnra), while another 6,000 km of city streets and municipal roads are maintained by local governments. There are also about 280,000 km of private roads which are maintained by the adjoining land owners or people living alongside the road. Private roads with more than one owner can be managed as road co-operatives. These roads carry an average of 45 vehicles per day and 99 percent have gravel and earth surfaces. Roads which are not the responsibility of government and where there is more than one owner can be managed as road co-operatives under the Private Roads Act and are then entitled to receive funds for maintenance from government and/or municipalities. Government funds are channelled through Finnra. The notice establishing a road co-operative stipulates the right-of-way, which roads the cooperative owns, and the formula for distributing maintenance costs between road users and adjoining property owners. Similar arrangements prevail in Lesotho, where unproclaimed roads are looked after by Village Development Councils, while Zambia is attempting to establish road cooperatives for purposes of maintaining the unproclaimed rural road network. Week1Day1. May/June 2002 Page 14

19 Separation of Client and Provider Functions Most countries are now actively trying to separate the planning and management of roads from implementation of road 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. Second, road agencies are usually public monopolies and are not subject to much market discipline. As a result, the costs of road works are typically 20 ~ 30% higher than work subject to competition. Industrialised countries have tackled this problem in three main ways; maintaining an integrated structure, but assigning the client function to separate divisions or departments within that structure (e.g., Norway); dividing the road agency into separate client and producer organisations (e.g., as in Finland and Sweden); or keeping the road agency as the client and contracting out all supplier functions to the private sector. The functions of a road administration can be split conveniently into: The client function: activities related to the planning and management of road operations. The client role is concerned with specifying the activities to be carried out, determining appropriate standards, commissioning works, supervising implementation, controlling works and monitoring activities; and The supplier function: activities related to execution of works. The supplier role is concerned with delivering the defined product to an agreed quality standard, as well as to time and within budget. Arrangements between the client and the supplier are normally defined in some form of contract. Such separation clarifies roles, and increases the focus and specificity of action, both of the management and the works execution functions. Both parties have incentives to increase operational performance. Greater benefits in effectiveness and efficiency have been achieved as a result of such separation than from virtually any other type of organisational reform. Contracting Out the Supplier Function. Most government organisations find it difficult to operate commercially within the traditional departmental structure. Management is less proactive, staff incentives rarely encourage optimum use of resources, and priorities are subject to political interference. To promote better use of resources, many countries have therefore attempted to apply some form of market discipline to the supplier function. The three main ways of doing this by: exposing in-house staff to competition from outside suppliers; contracting out the supplier function to a state owned enterprise (i.e., a public sector contractor); or contracting out the supplier function to a private sector contractor. These are not always exclusive options and many countries use (i) and (ii) as part of the transition towards full contracting out to the private sector. Each of these options improves operational efficiency and encourages better quality work. The costs of road works subjected to the above type of competition typically fall by 20 to 30 percent. As the example from New South Wales shows (see Figure 3.3) exposing in-house staff to competition from outsiders has almost the same impact on costs as full contracting out to the private sector (in this example in-house costs fell 25 percent, compared to contract costs which fell by 37 percent). Interestingly, in-house costs in Sweden fell by about 25 percent after the routine and periodic maintenance carried out by their commercialised works unit was subjected to competitive bidding. Week1Day1. May/June 2002 Page 15

20 Figure 3.3: Impact of market Discipline on Unit Costs of Road Works Some of the most startling evidence of the impact of market discipline on the costs of road works comes from the Road Transport Authority (RTA) in New South Wales, Australia. In 1991, the RTA decided to start contracting work out to the private sector and to expose their own in-house staff to more outside competition. Four years later, the costs of in-house work had fallen by approximately 25 percent compared to the original 1991 in-house unit costs, while the work done by contractors (SOR) had fallen over successive bidding cycles by approximately 37 percent. In 1995, the RTA then went ahead and let their first 10 year performance specified maintenance contract to a private company (Transfield). The costs of this work came in at 48 percent of their 1991 in-hose costs, representing a saving of over 50 percent % of 1991 Rates RTA SOR Transfield Time (months from June 1991) Source: Frost, M. (1996). One of the major constraints hampering contracting out to the private sector even for relatively simple road works is the underdeveloped nature of the local consulting and construction industries in many developing and transition economies. The road agency cannot invite competitive bids unless the country already has consultants and contractors with roadwork 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 maintaining roads. 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 promote market discipline are therefore usually accompanied by parallel efforts to develop the local construction and consulting industries (see Box 3.3). Week1Day1. May/June 2002 Page 16