Road Funds, User Charges, and Taxes

Abstract

Insufficient or uncertain budgetary allocations to road maintenance have resulted in road deterioration that has significantly increased production and transport costs in many countries. To avoid this problem, highway proferssionals advocate the establishment of dedicated road funds, managed by independent road boards made up of user representatives. The road boards would have the power to determine both the level of charges for road use and the level of expenditure on road maintenance. By contrast, macroeconomists and public finance specialists have tended to resist the establishment of dedicated road funds. They argue that road funds reduce fiscal flexibility, do not adequatedly address problems associated with the provision of public goods or the internalization of externalities, and often are not well managed. In general, there are two long-term institutional options for reconciling fiscal prudence with asset maintenance; a road agency that is operated commercially (subject to the normal oversight of behavior accorded to privatized monopolies), or a reformed and well-functioning budget process. This article argues that road funds must be viewed as a provisional, case-specific intermediate step in the direction of one of the long-term solutions. The role and nature of road funds should be assessed not on general principles but on a case-by-case basis through the analysis of likely micro-and macroeconomic effects. The article recommends indicatiors for use in specific cases to determine whether a road fund should be introduced, continued, or abolished.