ERF: Backing Road Construction

By Daniel Tirune /ABN/

Established in 1997 via a private-public partnership, the Ethiopian Road Fund /ERF/ aims to serve as a financial platform for road maintenance and road safety measures. ABN talks to Rashid Mohammed, Ethiopian Road Fund Office Director on overall activities of the office and road related issues

Rashid Mohammed earned BA Degree in History from Addis Ababa University (1995) and MA Degree in International Politics and Security Studies from the University of Bradford (UK) in 2004, MA degree in Transformational Leadership and Change from University of Greenwich (UK) in2011 and MSc Degree in Transportation Engineering from the University of Hasselt (Belgium).He has got over 25 years of professional experience in various locations in Ethiopia in various capacities. His previous experience as head of various bureaus and as Vice President of the Benishangul Gumuz Regional State entails, leading and coordinating developmental works, human resources, assets and budget management.

His current position as a Director of Ethiopian Road Fund office entails mobilization of the resource and ensuring its judicious application for the maintenance of the roan in the entire country. Coupled with these experiences, He has served as a President of the African Road Maintenance Fund Association, which has 35 member countries and Chairperson of the East African Focal Group of ARMFA at different times.

about 70% of the Road Network of the country is a relatively good condition as the result of maintenance, rehabilitations and reconstruction of different roads. ”

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Rashid Mohammed

Ethiopian Road Fund Office Director

ABN: Tell us briefly what Ethiopian Road Fund has been doing since its establishment?

Rashid Mohammed: The Ethiopian Road Fund is a government organestablished by an Act of Parliament No.66 of 1997. The organization’s principal mandate is to mobilize,administer and manage financial resources aimed at covering the cost of routine and periodic maintenance of public roads, facilitate delivery of road maintenance services and other related matters bestowed upon the Fund by proclamation that established the Road Fund.

In the light of this fact, since its establishment the Fund has collected more than 22 billion Ethiopian birr and allocated the same amount for the maintenance of Federal, Rural and Urban Roads, managed by the Ethiopian Roads Authority, Regional RuralRoads Authorities and Urban Roads Authorities respectively. The designated Agencies utilized the budget for the maintenance of more than 500 thousand KM of roads. Besides, the Road Fund has financed expenses of Road Safety Measures and different capacity building programs aimed at enhancing the performances of the Road Agencies. When it commenced operations in 1997, the annual budget of the Road Fund was not more than ETB 300 million Ethiopian Birrand by now the annual collection of the Road Fund is close to 3 billion Ethiopian Birr.

ABN:What are the objectives of the road fund, what is its legal status, where do the revenues come from, and which expenditures does the road fund finance?

Rashid Mohammed: Overall transport cost minimization is commonly stated as an economic objective of any transport development program of a country. Total transport cost includes the costs of Road construction and maintenance, vehicle-operating cost, and any other external or third party costs of transport that are associated to the society at large and the environment. Road maintenance cost, as part of total transport cost, is one major determining factor for the upkeeping of Road asset value of every country.

For many years, the Governments were spending a huge amount of resources for the construction of roads, without any attention to the maintenance of constructed roads. Consequently, due to deferred maintenance, in the 1990’s out of the existing road networks; 52% were in a poor condition while 22% were in a relatively good condition. Literally, the country lost most of its road network. This in turn has caused: a huge backlog of road maintenance works, high vehicle operation costs, long travel time, inflated transport cost and negative influences on the overall social and economic development of the country.

This circumstance dictated the necessity of a paradigm shift in the policy direction of the road sector in general and road maintenance in particular. Accordingly, the Government of the Federal Democratic Republic of Ethiopia, in collaboration with developmental partners, initiated a reform program in the Road Sector with the intention of overcoming the overall challenges encountering the road sector.To this end,starting from 1996 through the involvement of the concerned stakeholders, the Road Sector Reform Program was initiated.

The Road Sector Reform Program adopted the four basic building blocks of the Road Management Initiative (RMI) that defined the basic issues dealing with the Ownership, Management,

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Financing and Responsibility of the Roads. Within thepremise of these Initiatives, the Road Fund came into picture as Financial Platform aimed at managing the road users’ charge which would be collected as a fee for services that the road users pay for using the roads. As such Ethiopian Road Fund was established by Proclamation N0. 66. 1997, to serve as an adequate, reliable and timely source of funding for road maintenance and road safety measures of Ethiopia.

Stated sources of road Fund revenue, as per to the proclamation, are Government budget, Fuel levy, Axle weight based vehicle license renewal fee, overloading fines and any other Road Tariff as may be fixed and approved by necessity. The Road Fund finances the routine and periodic

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maintenance expenditures for roads under maintainable conditions and Road Safety measures. The Road Fund, is not mandated to execute the maintenance works by itself, but rather through the Road Agencies that are established to manage different types of Roads, namely Ethiopian Roads Authority for Federal Roads, Regional Roads Authority for Rural Roads, Municipal Roads Authorityfor Urban Roads for maintenance of roads and National Road Safety Council for Road Safety Measures.

ABN: What revenue-raising mechanisms are used, how is the tariff adjusted, what sort of tariff structure is used, are there any exemptions, and how is the revenue collected?

Rashid Mohammed: As a kick of step of revenue collection, fuel levies on a pre-determined rates on petrol and diesel, was effectively collected since September 1996. Fuel levy rates at which collection is made are 9.5 cents/liter of gasoline and 8.0 cents/liter for diesel. The proclamation (66/97) in its article states that fuel based revenue to Road Fund shall be collected by Ethiopian Petroleum Enterprise and directly deposited to the specially maintained Central Account of Road Fund. Besides, the fuel levy, the government has decided to allow the Value Added Taxes and Municipal Taxes levied on fuel to be part of the Road Fund to serve as the top up of the fuel levy.

This decision was initially meant to serve as a proxy to the Government Budget support to the Road Fund

and a subsidy to cover the gap between need based maintenance expenditures to that of availed Road Fund budget. However, sometimes, the practice proved otherwise as the Ministry of Finance withdraws some portion of this revenue, whenever, there is a felt need to do so. The other source of revenue is the Axle weight based vehicle license renewal fee, which makes about 10% of thetotal collection of the Road Fund. The collection of this revenue source has been delegated to the Ethiopian Postal Service, and it is collecting this revenue through its more than 700 branches located throughout the country. There are some categories of vehicles such as those owned by the military and those which are providing Ambulance services are among the few which are exempted from the payments of this fee.

ABN:How is the road fund managed, what is the structure of the road fund board, and how are funds divided between main, urban and rural roads?

Rashid Mohammed: The Road Fund is managed by a board comprising both private and public sector representatives. Currently the Road Fund board is composed of Federal and private sector members having equal voting power with a two year ex-office round term bases. Membership to the board is either by appointment or election from the public or private sectors respectively. As clearly stated on articles of the proclamation, the composition and size of the board is to be fixed

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by the government. Regular board meetings are taking place at fixed intervals on quarterly bases, unless and otherwise there is a need to call for an extra-ordinary meeting.

The day-to-day activity of the fund is administered by a small secretariat office, which operates as a legal entity as determined by articles of the proclamation. Powers and duties as well as responsibilities of the board and the office are clearly stated and demarcated onto the proclamation. The board mainly deals on policy matters, program review, budget Road Fund in Ethiopia: From Inception to Realization approval, performance report evaluation and budget allocation agenda points. Board discussion and decision is basically referring to technical reports of the office with due reference to performance reports of Road agencies.

It is a normal practice for reports to be accompanied by physical and financial performance of Road agencies. The office, in general, is in charge of follow-up actions on day-to-day bases for routine matters to effect the implementation of the Board decisions and directives. The office liaises with beneficiary Road Agencies regularly with regard to physical and financial performance reports. This will be followed by follow-up action on implementation of set programs and extend support to resolve problems that are found to be obstacles on progress of work. Proportional distribution of allocated fund is based on study recommendations of the maintenance action plan of the Road Sector Development Program and as per the subsequent endorsement by the board. Currently the proportional allocation is in order of 65% for Federal, 25% for Regional and 10% for Municipal roads.

ABN: What kind of financial accounting systems are used, how are funds withdrawn from the road fund, how are revenues disbursed to end users, and what kind of auditing is carried out?

Rashid Mohammed: Transfer of payments, effected basedon payment certificates approved by the consultants hired by the Road Agencies to certify payments and control the quality of road maintenance works as well as adherence of the Road Agencies to the annual plan of road maintenance activities. Designated Road agencies receive their annual budget share from Road fund

provided that they produce the annual Road maintenance works program for review and following approval by Road Fund board. Redistribution of budget by Road segments, within the sealed ceiling budget, and operational expenses is to be worked out in detail by each Road agency. In this regard, it is the responsibility of the Road agency to prioritize, allocate budget by Road segment or Road safety activity. The plan of action has to be accompanied by detailed physical works program and financial cash flow requirement to each activity. Once the annual physical works program and financial plan is approved, the road Fund Office effects transfer of payments to the respective agencies based on the payment certificates approved by consultants. . For transfer of payments, the major pre-requisite or requirement, being production of physical and financial performance reports as per to developed format. This is to be followed by an assessment for satisfactory progress and report based performance evaluation within the framework of approved annual program of the Road Agency. More to the point to ensure, value for money all the beneficiaries of the Road Fund and the Central Account of the Fund are subject to annual financial and technical audit conducted by external auditor on a regular basis.

ABN: What are the greatest achievements of the Fund?

Rashid Mohammed: Since its establishment the Road Fund has made tremendouscontribution to the improvement of the Road Conditions of Ethiopia. To cite some of the

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achievements, the Road Fund the came into picture as part of the package of reform programs within Road Sector Development Program, augmented by comprehensive approach followed in program execution, the Road Fund establishment gets sufficient towards effecting and hence of the Road financing reform process.

Following the establishment of the Road Fund and implementation of other reform programs identified in the Road Sector Development Program, about 70% of the Road Network of the country is a relatively good condition as the result of maintenance, rehabilitations and reconstruction of different roads. In this context, the Road Fund contributed more than 20% of the Road Sector disbursements in the last 2 decades.

Moreover, when the Road Fund started functioning in 1997, the annual revenue of the Fund was 300 million birr whereas now the annual revenue of the Road Fund is about 3 billion Ethiopian Birr. On the other hand the annual coverage of maintenance works during the establishment of the fund was about 3000 Kilometers whereas today the Road Fund Finance maintenance works of more than 40 thousand Kilometers. In a nutshell, the Road Fund has contributed a lot in making most of the roads that were impassable to be passable, and as the result of maintenance works the vehicle operating costs decreased besides reducing the travel time on many roads of the country. The Road Fund also contributed a lot in enhancing the material and human resource capacities of the Road Sector.

ABN: What about the challenges?

Rashid Mohammed: The challenges are the imbalance between the required maintenance Fund and available budget as some of the trunk roads and most of the rural roads are at the end of their life span & need rehabilitation. Therefore this shortage of budget as the existing amount does not stretch beyond covering 60% of required budget amount will continue to be a challenge to the Road Fund. Furthermore, the capacity problems of the road sector in general is affecting the quality of works, ensuring value for money as well as realizing the efficiency and effectiveness of the Road maintenance works.

ABN: The rehabilitation of road networks and the buildup of institutional and financial capacity for their maintenance are the single most important challenges confronting transport planners and policy-makers in Africa. What about the case in Ethiopia?

Rashid Mohammed: As you have rightly pointed it out, the institutional setup of fully fledged road maintenance system and availing adequate financial resources for road maintenance works, have not been the characteristics of many African Countries. And this problem continued to challenge transport planners and policy makers. The major causes of this problem emanated from the perception of these countries towards the road maintenance works. Many countries do not have a culture of maintenance. Countries that lack a culture of maintenance repair roads when they fail. They do not perceive the advantage of preventive maintenance undertaken before there is a need for repairs. Sometimes, preventive maintenance is even thought to be a waste of resources. The belief is that pavements are designed to be rehabilitated after a certain time, irrespective of whether maintenance is done. It is not understood that pavement design assumes ongoing maintenance, and that neglect of maintenance leads to a premature need for expensive rehabilitation.

On the other spectrum in many countries of Africa, Politicians want to build new roads. For them Capital expenditure and ribbon cutting win more votes than keeping roads in good condition. In fact, letting pavements collapse wins votes when they are rebuilt. And the public mistakenly thinks the remedy for bad roads is renewal, not maintenance. Accordingly, even when the road budget is adequate for proper maintenance, maintenance can still be inadequate, because of capital bias.

I think a solution to the problems of long term sustainable funding of road maintenance is to introduce a genuine user charges and to establish a robust Road Maintenance Funds to manage the collection and expenditure of the revenues. Despite

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some of the differences in the levels of success in the Road Sector Development Programs between Ethiopia and other African countries, Ethiopia can still learn from success and failures of other countries and realize the efficiency and effectiveness of its road sector in general and that of road maintenance in particular.

ABN: Economists generally criticize road funds on the grounds that they constitute earmarking and hence introduce fiscal inflexibility and undermine the principle of unified budget management, what’s your view on this?

Rashid Mohammed: I think some of the criticisms on the Road Fund, emanates from misconception about the Road Fund and what it does. In this context some argue that the Road Maintenance Fund’s revenues should remain within the national accounts, as a ring-fenced corner of the Consolidated Revenue Fund (CRF) in the Ministry of Finance, because this makes the national accounts look healthier. However, Experience (from first generation road funds that used to be part of the Ministry of Finance) shows three potential problems with this approach of making the Road Fund part of the Ministry of Finance. First, the Road Maintenance Fund’s revenues are vulnerable to being raided and used for other purposes.

Second, while ring fencing may be respected, the funds may not be released, and may accumulate, starving maintenance, while adjustments are made by rebalancing the apportionment between road user charges and taxes. Third, the Road Maintenance Fund may not receive all the revenues due to it: intra-government cross-debts during economic downturns have resulted in state-owned petroleum companies retaining revenues collected on behalf of the Road Maintenance Funds of many countries.

To put things in its proper context, those who criticize the Road Fund should understand that it is More than a bank account to hold revenues from user charges; the Road Fund is also an institutional arrangement for administration of the revenues and promotion of efficient road network maintenance, to a standard that road users want and are willing to pay for, by collecting the road tariff and allocating funds to road agencies that comply with Road Fund standards for sound planning and execution of works. I think the Chinese proverb which says "No matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat." May be a good response to those who have a negative view about the Road Funding system.

ABN: Many complain that Ethiopian road network coverage and standard are of poor quality. What’s the reason behind?

Rashid Mohammed: Being an optimist one can appreciate the milestones achieved in the Road Sector. In 1997, the country had a road network amounting to about 30 thousand kilometer which shows the overwhelming majority of the Ethiopian Population did not get access to roads until that time. Currently, the country’s network is more than 130, thousand Kilometers. In this regard, in the last two decades besides improving the conditions of the road network, the center of gravity was creating access to the majority of the people, who have been isolated from the rest of the world due to lack of accessible roads. This move has helped many to bring their produces to the market besides getting access to the social services and economic development that changed their lives.

ABN: What should the country do to meet the demand of both regional and federal road access?

Rashid Mohammed: The Ethiopian Government has come a long way in implementing the Road Sector Development Programs. However, the efforts gave more emphasis to capital intensive new construction and rehabilitation of roads. On the other side, maintenance of existing roads did not get the attention it deserves. Accordingly, the Road Fund should exist not only in format but also in substance. In other words, the Road Fund should be empowered to the extent that will enable it to serve as a sustainable source of adequate financial resources for the maintenance of all categories of roads in Ethiopia.