Decentralization of the Croatian Roads sector.
Should Cities Take Over the Roads?
Saša Drezgić
University of Rijeka
Faculty of Economics
I.Filipovića 4
51000 Rijeka
Croatia
Abstract
The paper deals with decentralization of the roads sector in the Republic of Croatia which is one of the priority issues for representatives of Croatian local public sector. The reason for considering changes in the system of administering and financing public roads is not only in the efforts to expand the role of local government in delivering public goods and services. There are also numerous problems that characterize present road system in Croatia such as inappropriate financing mechanism, unbalanced maintenance and construction of roads within particular counties, imbalance in financing certain types of public roads, inappropriate financing of unclassified roads, lack of an appropriate information management system and other.
An important feature of the present management of the road sector in Croatia is the centralized structure of management. Local governments are responsible only for maintenance and construction of unclassified roads. There is also a problem of coordination between agencies that manage classified and unclassified roads within the teritory of cities. This leads to serious problems in spatial planning and traffic management, resulting in unbalanced maintenance. Therefore, representatives of large and middle-sized cities argue that classified roads on their territories should be transferred under ownership and management of local authorities. Financial sources for these functional tasks could come from share in motor vehicles registration fees and fuel tax.
First part of the paper shows theoretical justifications for more decentralized management in the roads sector. Effects of increased decentralization are in greater satisfaction of local road users both through better quality of road maintenance and cost reduction. Second part of the paper describes features of the road sector management in Croatia. On the bases of empirical evidence numerous sources of inefficiencies are determined. Analysis of fiscal and administrative aspects of roads sector management decentralization is important for answering the question on necessity of more decentralized provision.
Paper shows that there are significant inefficiencies in the roads sector that have to be resolved regardless of the decentralization process. In terms of decentralization, there are possible efficiency gains. However, decentralization should not go beyond the extent of the large cities. High fragmentation in the roads sector management would jeopardize economies of scale and would lead to increase of provision costs. Additional financial resources for the new functions of large cities can be obtained through the redistribution within the roads sector. Administrative constraints do not impose significant obstacle for further decentralization.
1. Introduction
Roads sector management in Croatia is highly centralized. Even though roads within the cities and municipalities comprise most of the road network in Croatia, local governments are not responsible for the significant share of roads on their teritory. On the other side, they even do not have sufficient financial resources for construction and maintenance of unclassified roads.
Until now decentralization of the public roads sector in Croatia has undergone several stages. The first stage started at the end of 1996, when the Law on Public Roads was adopted which provided opportunity for regional government to be in charge of county and local roads through County Road Authorities. The second stage of decentralization is related to the Constitutional Amendments from 2000, when local government was given its place in the Constitution, while another important stage of decentralization was marked by the Amendments to the Law on Public Roads from 2001, when Croatian Roads Administration was transformed into two companies - Croatian Roads Ltd. and Croatian Motorways Ltd.. The last stage of decentralization was in 2005, when the Amendments to the Law on Local and Regional Government defined the concept of 'large cities' and provided opportunity for them to maintain roads in their jurisdiction. Large cities as units of local government are defined as economic, financial, cultural, health-care, transport and research centers of development in a broader setting, with a population of over 35,000. However, in spite of the Law Amendments, local administration is still responsible only for the management of unclassified roads.
Regarding the further step of the decentralization process in the roads sector, two general principles should be respected. The first one is the subsidiarity principle. In the case of the roads sector, it can be defined in increased efficiency under presumptions that local governments have more information on needs of their voters for building and maintenance of roads. Therefore, better and more efficient decisions are made. Second principle is “benefit” principle that denotes notion that it is fair that taxpayers who bear the burden of financing the roads enjoy more benefits in form of increased quantity and quality of roads.
Decentralization of the roads sector in Croatia has been one of the priority issues for the representatives of the local sector. Reason for such interests are not just in increasing of the role of local governments in provision of local goods and services but in numerous other issues that feature roads sector in Croatia, as well. Management of the roads sector is inefficient and demands improvements in the system of financing, more balanced construction and maintenance of roads, fight against corruption and installment of the appropriate management information system.
One of the most sensitive issues regarding the urban roads is in lack of coordination between management of classified and unclassified roads in cities, which then leads to serious problems in spatial planning and traffic management, resulting in unbalanced maintenance. Local representatives strongly argue in favor of decentralization because citizens always blame the local government in case of inadequate maintenance of these roads, even though this functional task is not their responsibility. Therefore, representatives of large and middle-sized cities recommend that classified roads on their territories should be transferred under ownership and management of local authorities. Financial sources for these functional tasks could come from share in motor vehicles registration fees and fuel tax.
The goal of this research is to determine mechanism of fiscal and administraive decentralization in the roads sector in Croatia. After the introduction, theoretical rationales for the road sector decentralization are shortly elaborated. In the third part of the paper, features of the Croatian road sector are presented. That section provides some answers on fiscal and administrative aspects of potential reform. Conclusion offers some recommendations.
2. Rationale for the roads sector decentralization
Theory and practice of roads sector management lead to creation of varoious models of roads sector administrative decentralization. These are, for example, deconcenrated model; delegated model; devolved model; top-down principal agency; bottom-up principle agency, develved and delegated, joint services comitee, road fund (Robinson, 2006, pp. 272). However, regardless of the particular model used efficiency effects of various decentralization models are usually analysed in the light of following criteria (Robinson, 2006, pp 271, Malmberg, 1998):
· ability to reflect local priorities in policy formulation and decision making;
· achievement of market discipline (competition) trhough their management and procurement arrangements;
· scale of operations in terms of having sufficient critical mass for operations to be effective and efficient;
· simplicity of administration in terms of decision-making chains and other linkages.
Furthermore, Talvitie (1997) states that there is a need for periodic restructuring of a road administration due to the improvements in technology, information use, associated gains in efficiency, and the public’s desire for participation in decisions determining the quality, manner of service delivery, and prices of services received are among the most important reasons. These complex interrelations lead to higher level of decentralization of the roads sector and pressures for the greater autonomy for its management. In addition, according to Talvitie, decentralization in programming the outputs can increase efficiency by 10 to 15 percent and optimal timing and secheduling of works reduce the total road transportation costs by 5 to 30 percent.
Humplick and Moini-Araghi (1996) empirically estimate how decentralization affects the efficiency of road provision from the perspective of road user and local goods provider. According to them, 100-percent decentralization of maintenance function produces the highest efficiency gains, as quality roads are provided at lower unit costs. However, that effect is neutralized if central government exerts regulation on uniform maintenance standards. In addition, there is a little justification for central government to be involved in road maintenance because central government standardization removes incentive to reduce costs. Central government should regulate safety and have a stake in the financing of road administration and functions of planning, policy setting, and regulation of safety and other network externalities with no more of 10 percent of total costs.
In terms of constrution, the results are ambiguous. It is advices to ensure that contracting procedures are efficient before suggesting the decentralized provision of roads. In terms of theory it is easier for local governments to incorporate local preferences. In addition, local governments have more information and are more efficient in determining where to make investments, procurement procedure and monitoring the quality of construction and maintenance. However, central governments have advantage of economies of scale and, therefore, possibility to be cost efficient.
Humplick and Estache (1995) provided an analysis of the impact of decentralization on roads with a focus on maintenance. Their results indicate that the decentralization of road maintenance leads to an improvement in the general condition of roads, more paved roads and a reduction in maintenance backlogs. They also find, however, that decentralization leads to higher unit costs and expenditure on maintenance. Moreover, it leads to greater differences in quality across regions.
Even though it seems that the scale of decentralization benefits in practice varies, empirical evidence shows that provision of urban roads is mainly at the local government level. Shah (2004, pp. 16) shows that in the sample size of 29 transition economies, urban roads are in 7 cases purely central government function, in 5 shared responsibility between central and local government and in 17 case purely local function.
There are also new and important changes that have to be considered when analysing the roads sector issues. Ingram and Liu (1999) analyse national and urban motor vehicle ownership and find interesting dynamics. According to them, both national and urban motor vehicle ownership increase at about the same rate as income. They also find that income is a major determinant of the length of roads at the national level. Because national paved road networks are expanding at about the same rate as national motor vehicle fleets, congestion on them is unlikely to be worsening. However, at the urban level, road length is growing much more slowly than income and much more slowly than the number of motor vehicles. Urban congestion is therefore rising with income over time, and the increase in urban congestion is stimulating decentralized urban growth. Breaking the link between income growth, rising congestion, and decentralization at the urban level will be very difficult. That process is related with imposition of very high tax rates due to the fact that increasing the supply of roads in urban areas is very costly, and increasing the supply of transit alternatives is costly and has little effect on congestion in the few cases where it has been studied.
3. Road sector system in Croatia
3.1. Roads classification and management
Legal entities that have responsibility regarding the administration, construction, maintenance and management of roads are as follows:
· Croatian Roads Ltd.(CR) - for management of a network of state roads and a coordinating role with regard to county and local roads and for preparing documentation for motorways until obtaining location permits;
· Croatian Motorways Ltd. (CM) - for management of a network of motorways and other toll charge structures;
· Concessionaires - for construction and management of motorways and structures:
Rijeka-Zagreb Motorway Inc. (ARZ);
Zagreb-Macelj Motorway Ltd. (AZM);
BINA ISTRA d.d. (BI).
· County Road Authorities (CRA) for management of a network of county and local roads;
· Local government units, cities and municipalities (LGU) for management, maintenance and construction of unclassified roads in their areas.
Croatian Motorways began operating on April 11, 2001 as one of the two legal successors of the Croatian Road Authority. The company is in a 100% state ownership, which controls company operations through its representatives in the assembly and supervisory board. The situation is similar with the Croatian Roads company. It too was founded by the Croatian Government as one of the successors of the Croatian Road Authority, and it is in a 100% state ownership. The Government as the founder of the company exercises control through the supervisory board and assembly.
County Road Authorities began operating on January 1, 1998, which was regulated by the Government Regulation on the launch of operations of County Road Authorities and equity companies in the Law on Public Roads. County Road Authority is a legal person founded by the county. County Road Authority is managed by a director, who is appointed and dismissed by the county assembly at the proposal of the Governing Board of the County Road Authority.
Regarding the responsibility for construction and maintenance of unclassified roads, the manner of performing communal activities, including those related to traffic, is defined by the Law on Communal Activities[1]. They can be performed by the following: a stock company established by the unit of local government, a public institution established by the unit of local government, a service - own department established by the unit of local government, a legal or physical person, based on a contract on concession, or a legal or physical person, based on a contract on transferring communal activities.
3.2. System of financing in the roads sector
The system of financing of public roads in Croatia is primarily related to the key technical and economic characteristics of the total road network, which can be divided into the main network and commercial roads. In that sense we can differentiate between:
· motorways, financed through road fees obtained from charges on fuel, toll paid when using roads directly, and through long-term loans;
· state roads, financed mainly through road fees obtained from charges on fuel;
· county and local roads, mostly financed from road fee charged when registering motor vehicles;