Updated February 1998

Food and Agriculture Organization of the United Nations

United Nations Capital Development Fund

International Fund for Agricultural Development

German Agency for Technical Cooperation

Swiss Agency for Development and Cooperation

World Bank

Rome
16-18 December 1997
Technical Consultation on Decentralization
Documentation

Decentralized Structures for Provision of Roads - A Cross-Country Comparison: Summary

THIS PAPER aims at investigating through a set of case studies, whether an optimal structure for provision of roads exists. The analysis is based on a two-dimensional provision structure, mainly a combination of fiscal and functional forms and degrees of decentralization. The study is unique in its attempt to develop a conceptual framework for understanding both the influencing factors (institutional and economic) of the structure of decentralization for the road sector and for evaluating empirically the impact of decentralization on road service delivery. The study is also interesting in that it makes a distinction between the three types of road activities--construction, maintenance and administrative works--and the desirability of decentralizing their provision.

The paper is organized as follows. Section two introduces the general and extended theoretical frameworks of the study. Section three provides a framework for the analysis of the optimal structure of road service provision. Section four presents the data set that will be used for the analysis. Section five studies the relationship between decentralization and road service delivery and discusses the impact of decentralization on road performance for various activities. Further, it looks at the dynamics of decentralization for eight countries that have varying degrees of fiscal and functional decentralization for road works. This provides an understanding of the forces that derive decentralization and the potential tradeoffs that governments can make to reach optimal road service levels. The sixth section is a longitudinal analysis of the road provision experience of Korea, which has been selected because of its rich experience with decentralization in the road sector. Section seven presents the findings from a case study conducted for Germany. The analysis in this section is different in that it develops both vertical and horizontal measures of decentralization. Finally, based on the analysis conducted in sections three to seven, section eight will attempt to develop guidelines for optimal provision of road services for various road activities.

Summary and policy conclusions

• Maintenance functions are best provided locally. If both resource and preference costs are considered, local government should have more than forty but less than seventy percent of fiscal responsibility. If only resource cost efficiencies are considered, there should be complete decentralization.
• To minimize resource costs, construction should be either completely centralized or completely decentralized. The efficiency of construction is more sensitive to the degree of competition in award contracts than to the degree of decentralization.
• Administrative activities are more efficiently provided by local units similar to local maintenance units. At early stages of decentralization, it is more costly to administer a growing number of road agents, making the optimal level more than fifty percent but less than eighty percent local fiscal responsibility.

There are a number of exceptions to these general results. The USA is a case in point; highly decentralized in all road functions and operating efficiently. In fact there is evidence that when decentralization was deepened, the level of cost efficiency improved even further (Walzer et al, 1989). This result supports the classical fiscal federalism argument that local governments are closer to the point of demand and are, therefore, more efficient providers of road services. Similarly, consistent with public choice theory, decentralization of administrative functions is considered desirable because it leads to larger efficiency gains in terms of resource cost savings. For all three road functions, but especially for construction, the analysis results suggest two solution points: fiscal centralization or complete decentralization. Economies of scale and technological effects make the central government a good provider of road construction services (in terms of financing and not necessarily producing the works through force account), while ability to match supply to demand makes decentralized units more efficient. These results indicate that there are definite benefits to decentralization for activities that are more localized in nature such as road maintenance, and lesser benefits from decentralized construction and administration of roads which do have the potential for large externalities.

A number of examples in developing countries show that the existence of competition can make a real difference. Real efficiency gains can be made when contractors are allowed to implement the actual maintenance works, leaving the central government agency to focus exclusively on planning and monitoring maintenance. Likewise, private contractors may have greater flexibility in responding to seasonal fluctuations in the demand for maintenance than the central government. Harral and Faiz (1988) note, as well, that where maintenance has been a largely ignored activity, contractors can form an effective lobby for increased or continued funding of routine maintenance activities. But it is important to bear in mind that efficiency gains from contracting will occur only if there is adequate supply of contractors and real competition among those vying for the right to conduct the maintenance activity. In some cases, such as the experience of France in contracting out, it is evident that at the central government level collusion is not as problematic as at the local level.

There is some evidence that services are decentralized to pass on the costs of provision to local governments. The case study in Germany showed that while state governments benefited from increased levels of decentralization in terms of lower unit costs of providing roads, local governments initially picked up (at low levels of decentralization) the difference in cost since they showed, at the same time, higher unit costs. This transfer of costly functions does have a long term benefit; at high levels of decentralization both state and local governments show low unit costs indicating that there may be efficiency gains at higher levels of decentralization that override the initial increase in costs.

Finally, in the countries studied, earmarking of intergovernmental transfers characterized much of fiscal decentralization: this feature was found in Argentina, Brazil, Colombia, Germany, and the Philippines. Whether ear-marking improves performance or not is not quite clear. Consistent with evidence, we find revenues ear-marked in developing countries more often disappear probably because they are connected in ways that are not actually desirable locally. In Germany, ear-marking has proven useful for keeping uniform road quality standards across the country but it has also brought about large cost inefficiencies. Whether ear-marking accompanied with fiscal decentralization is desirable or not depends again on the specific country objectives. In Germany we see that the equity objective overrides the efficiency objective.

This paper has provided empirical evidence and guidance in the selection of optimal structures for providing road services. A companion paper examines the same issues econometrically with a larger data set (cross-country panel, time series, and state and local data) and qualifies some of the findings in this paper.

Bibliography

Walzer, N. and R T. McWilliams, 'Financing Low-Volume Roads and Bridges: Results from a National Survey', "Transportation Research Record" 1291, 1989.