CONTENTS PROCEDURES FOR DIVIDING FUNDS BETWEEN DIFFERENT ROAD AGENCIES (Prepared by Ian G. Heggie, revised March 1999) Procedures for Dividing Funds Between Different Road Agencies...2 Introduction...2 Formula-Based Systems...2 Dividing Funds Between the Road Agencies Within Each Group...3 The Needs-Based Approach...3 Selected Examples Showing How Revenues are Divided on the Basis of Network and Traffic Characteristics...4 Dividing Funds on the Basis of Estimated Needs Using Simple Unit Costs: South Africa...5 Dividing Funds on the Basis of Estimated Needs Using a Road Management System: New Zealand...7 Page 1 of 7
PROCEDURES FOR DIVIDING FUNDS BETWEEN DIFFERENT ROAD AGENCIES Introduction A simple and consistent procedure is needed to divide funds between the different agencies entitled to receive money from the road fund. The procedures must be transparent, fair, related to need, and, where feasible, related to the road agency s ability to generate funds from other sources. There are two basic approaches. The road fund can either allocate the funds using formulas or base the allocations on a direct assessment of need. Formula-Based Systems A formula-based system usually starts by allocating the funds among the main, urban, and rural road agencies and then goes on to subdivide each allocation among the individual road agencies within each group. The road fund will therefore allocate a certain percentage of its revenues to urban roads and a certain percentage to rural roads, with the remainder going to the main road network. For example: Latvia allocates 27 percent of the annual vehicle tax and 30 percent of the fuel levy to municipalities (both urban and rural); Mozambique allocates 20 percent to urban municipalities; Romania allocates 35 percent to county and communal (village) roads; Zambia allocates 40 percent for rural roads and 20 percent for urban roads. Initially dividing the funds between the different types of road agencies ensures that each gets a fair share of the revenues available, provided the proportions are regularly amended in light of experience. This is an important consideration when strong urban councils bid against weak rural councils for the same share of the road fund. For example, in Tanzania 20 percent of the road fund was initially set aside to finance road works managed by 17 urban and 84 rural district councils. But the urban councils were generally able to prepare better road programs and had more political influence. Thus three-quarters of the funds went to them, mainly to the capital city, Dar-es-Salaam. Another reason for initially dividing funds at the source is that different types of road agencies may use different criteria to establish priorities, reflecting their differing technical capacities. Finally, initially allocating funds gives each group of road agencies an indicative guideline upon which to base their spending plans. Page 2 of 7
Dividing Funds Between the Road Agencies Within Each Group The next step is to separate each allocation among the road agencies in each group. There are two main ways of doing this: (i) each road agency must compete for the available resources; or (ii) the resources are allocated on the basis of network and traffic characteristics. Under the first system the road agencies bid for the funds, a panel evaluates the bids, and then decides which road agency should get what. The bids cover both maintenance and investment programs, with investment priorities usually set via benefit-cost analysis. Hungary and Zambia use this system. It is not a particularly good way of meting out funds (some road agencies end up being fully funded, while others get little or nothing), although it does encourage road agencies to put a lot of effort into planning and justifying their road programs. Under the second system revenues for investment are usually allocated using benefit-cost analysis, as under the first system. The road fund usually issues guidelines on how the investment programs are to be prepared, offers advice on how to compute the benefit-cost ratios, may specify the minimum acceptable benefit-cost ratio, and audits the calculations to ensure they have been carried out correctly. Transfund New Zealand currently has a cut-off ratio of 4.0. Staff from Transfund audit a sample of all benefit-cost calculations, including those for all schemes over $700,000. Revenues for maintenance, are allocated on the basis of network and traffic characteristics. The road fund generally does so using formulas based on parameters like: length of the road network; volume of traffic; and ability to pay. The formulas generally include road length (or lane-km), which may be weighted to reflect estimated maintenance costs on different types of roads (as in Latvia). They may also include vehicle-km or the vehicle population and will often include resident population. Some countries include a term to reflect ability to pay (like Korea, which includes an adverse financial ability index). The U.S. Federal Highway Trust Fund includes a predetermined minimum maintenance allocation. The Needs-Based Approach The direct needs-based approach allocates maintenance funds according to a more careful assessment of network needs (funds for investment are again evaluated using benefit-cost analysis). The methods can be more or less complicated, depending on the technical capacity of the road agencies involved. The simplest way to estimate needs is by using standard unit rates for each routine and periodic maintenance activity according to type of road surface. Each rate is multiplied by each road agency s length of maintainable road in each road class to arrive at the total required maintenance budget. Adjustments may then be made for climatic variations and other factors. South Africa uses this method to estimate multiyear allocations for rural roads in the nine provinces. A better way to assess maintenance needs is by basing requirements on the output of a standardized road management system. Staff from the road fund will usually have to advise the Page 3 of 7
road agencies on how to operate the systems and then carry out regular audits to ensure that each authority is applying the procedures correctly. The audit should also ensure that the funds are actually spent on maintenance and that the maintenance is carried out to agreed standards. This method requires that road agencies be technically competent, which may not always be the case, particularly at the local government level. Selected Examples Showing How Revenues are Divided on the Basis of Network and Traffic Characteristics United States: Maintenance funds from the Highway Trust Fund are divided between the various states according to the following formula: 0.55*(interstate lane miles/total interstate miles) + 0.45*(vehicle miles on interstate roads/total interstate vehicle miles). These weights were derived from a correlation analysis of actual maintenance spending versus lane miles, vehicle miles, population, etc. The average allocation per state is about 2 percent of total maintenance allocations, subject to each state receiving a minimum allocation of 0.5 percent. Allocations for maintenance cover 90 percent of costs. The General Accounting Office has recently suggested two alternative allocation formulas: (i) distribution of funds to be based equally on total lane miles and total vehicle miles traveled; and (ii) distribution to be based equally on total lane miles, interstate vehicle miles traveled, and state population. Korea: Funds allocated to provinces from the national road fund are divided up on the basis of a formula which takes into account the road length, demand for road space and provincial ability to pay. The formula is similar to that used in the US and consists of: 0.5*(length of provincial road/total provincial roads) + 0.15*(provincial population/total provincial population) + 0.15*(provincial vehicle population/total provincial vehicle population) + 0.2*(adverse financial ability index for province/total adverse financial ability index for all provinces). The adverse financial ability index = 1/(local provincial tax revenues + government grants)/local provincial expenditures). Latvia: Funds allocated to municipalities from the national road fund are divided up between 7 city municipalities and 26 regional municipalities (27 percent of the vehicle tax and 30 percent of the fuel levy) on the following basis. Half of the vehicle tax is allocated to the city municipalities and is divided between them on the basis of vehicle registrations. The balance of the vehicle tax is divided between the regional municipalities on the basis of weighted (maintainable) road length. The weights crudely reflect maintenance costs in relation to traffic levels. The weights currently used are : urban roads of district cities and rural communes = 5; asphalt paved roads = 2; other roads = 1. The fuel levy is divided between all municipalities on the basis of weighted road length. Tanzania: Funds from the local government road fund are divided between 84 rural and 17 urban district councils on the following basis. The method was designed to balance lack of accurate data with the need for a formula which was: (i) based on needs, (ii) simple, (iii) transparent, and (iv) fair. It uses an index in which districts score between three and nine points on a scale, entitling them to receive either 1.3 (8-9 points), 1.0 (5-7 points), or 0.7 (3-4 points) percent of the revenues allocated for district roads. The formula contains three elements: population density, road density and PMO rank, which are added. Population density measures trip generation rates, while road density is primarily a separation parameter to differentiate between urban and rural districts. The PMO rank is a grading system developed by the Prime Minister s Office to grade districts according to their stage of development Each variable receives either 1,2 or 3 points making the highest possible score 9 (a commercially active district with high population and road densities), while the lowest is 3 (a commercially inactive district with low population and road densities). Page 4 of 7
Dividing Funds on the Basis of Estimated Needs Using Simple Unit Costs: South Africa South Africa: The Department of State Expenditure introduced a system for the multi-year planning of public expenditures in 1991. The arrangements were implemented through a Function Committee, chaired by the Department of Transport, which developed procedures for equitable allocation of funds for rural roads. To estimate maintenance needs, maintenance was divided into: (i) routine maintenance (patching and sealing cracks, maintaining gravel shoulders, maintaining drainage, attending to the road reserve, and maintaining road signs and markings); and (ii) periodic maintenance (maintenance of bridges, resealing, and minor road safety improvements). A matrix of unit maintenance rates for each type of road, traffic condition, and activity group is then applied to all the roads under the jurisdiction of each road authority to arrive at the total target maintenance requirements. Roads are classified by type and traffic volume. In the case of local access roads, where no traffic figures are available and very low maintenance standards are applied, a flat figure of $70 per km is used. These figures are then adjusted to account for environmental conditions (e.g., heavy rainfall areas). These figures are then used as part of a structured negotiation process in which the members of the Function Committee had to agree on: (i) the allocation models to be used for each expenditure category; and (ii) the total allocation for each expenditure category. Page 5 of 7
Maintenance Unit Rates Per Carriageway km, 1992 (dollars) Surfaced roads Gravel Activity Freewy 4- Lane Primry Other Other Activity (ADT> 4,000) (ADT >4,00 0) (ADT <4,00 0) ADT> 500 ADT< 500 Routine maintenance: Routine maint: Patching and crack sealing 300 260 525 420 350 Blading 35 + 1.75 ADT Gravel shoulders 35 52 210 315 160 Drainage 123 88 Drainage 160 140 195 175 160 Road reserve 877 420 Road reserve 890 420 525 350 195 Signs and markings 456 350 Road signs and markings 455 350 350 315 280 Sub-Total 1,840 1,222 1,805 1,575 1,145 Sub-Total n.a. n.a. Periodic maintenance: Periodic maint: Bridges 122 88 105 88 70 Bridges 26 18 Resealing 6,030 2,495 2,495 2,495 2,495 Regraveling 525 + 2.8 ADT Road safety improvements - 425 170 496 63 Sub-Total 6,152 3,008 2,705 3,079 2,628 Sub-Total n.a. n.a. Grand Total 8,384 4,492 4,957 4,987 4,016 Grand Total n.a. n.a. Source: Planning Committee for Road Financing, 1992. A revised version of the above methodology has now been prepared, but has been somewhat overtaken by the decision to turn the Roads Department into an agency along the same lines as in UK. Discussions are taking place to reinstate the fuel levy and the road fund will then be developing new procedures to divide funds between the main road agency and the nine provincial authorities. Page 6 of 7
Dividing Funds on the Basis of Estimated Needs Using a Road Management System: New Zealand New Zealand: New Zealand has one of the best needs systems for dividing funds between the main road agency and the various regional transport authorities. All are required to prepare their road programs on the basis of a standardized road management system and benefit-cost analysis using a current cut-off benefit-cost ratio of 4 (the latter for new investments). Staff from Transfund advise the transport authorities on how to operate the road management system and how to compute the benefit-cost ratios, and they carry out regular audits to ensure that each authority is applying the procedures correctly and is also achieving minimum maintenance standards and service levels (i.e., the audit checks to ensure that the allocated funds are actually spent on maintenance and that the maintenance is carried out to agreed standards). In the case of investments, staff from Transfund audit a sample of benefit-cost calculations, including those for all schemes over $700,000. The method used by Transfund is one of the best ways of dividing funds between different road authorities. It nevertheless requires a technically strong road agency and this may not always be the case, particularly at the local government level. Page 7 of 7