First Generation Road Funds: What Went Wrong?



First Generation Road Funds: What Went Wrong?

Authors

HEGGIE I G, Visiting Professor, University of Birmingham, UK

Description

Ask anyone from the Ministry of Finance what they think about road funds and you will get two kinds of answer Either they will lecture you on the evils of earmarking, fiscal inflexibility and the need for unified budget management or, if they have direct

Abstract

Ask anyone from the Ministry of Finance what they think about road funds and you will get two kinds of answer Either they will lecture you on the evils of earmarking, fiscal inflexibility and the need for unified budget management or, if they have direct experience of road funds, they will roll their eyes and ask if you've read the latest audit report. These audit reports typically reveal poor financial management, misappropriation of funds, financial skullduggery and worse. Unfortunately, most first generation road funds did not provide a secure and stable flow of funds for roads. The early analytical work on road funds showed only a weak positive correlation between earmarking and the proportion of investment devoted to roads (Eklund, 1967). Hardly an encouraging result in countries where the road sector was already grossly under-funded.

The term "first generation road fund" generally refers to road funds which:

* Have no oversight board..."

* Rely on earmarked revenues, not always related to road use;

* Are typically managed by the national road agency;

* Have a weak legal basis;

* Do not have published financial rules and regulations;

* Are not subject to independent technical and financial audits.

Most were set up during the 1960s and 1970s in Africa, Asia, and Latin America, while a new batch were set up in Eastern Europe during the early 1990s.~ Recant reviews have highlighted the main weaknesses of these road funds (de Richecour and Heggie, 19957 and unpublished work by Talvite and Sikow)

There were five main weaknesses. The first, was lack of effective oversight. Even those road funds which had boards often did not meet and they were filled with appointees of the Minister or Permanent Secretary. This lead to unauthorized borrowing from the road fund - in one case, to finance civil service salades and, in another, to support other public programs. Where there were effective, broad-based boards, the road fund would generally function quite well in spite of other problems. Second, most of these road funds relied on earmarked revenues which invariably took revenues away from other sectors.

Not the best way to win friends in Cabinet! Furthermore, the earmarked revenues often included taxes which had nothing to do with road use. They sometimes included taxes on kerosene and home heating oil and, in Eastern Europe, typically included industrial turnover taxes. Third, day-to-day management was often unsatisfactory. Some boards employed a large number of staff (i.e., they became an employment agency for friends and relatives of the Minister and Permanent Secretary), or had no staff at all. In Ghana, the road fund was simply a bank account and the staff from the responsible ministry did not even keep a ledger account to check whether all the revenues attributable to the road fund had been paid into the account (which they had not).

Publisher

Association for European Transport