Concessions in road sector management and operations – a contrasting view

Tirana Times
By Tirana Times May 25, 2018 07:10

Story Highlights

  • "Maintaining the status quo of the traditional public-sector service provider road department in Albania, as it exists at the present time, is not in tune with the leading European models. The existing departments carry too much historical baggage, with too many approaches that are not only not fit for purpose and as long as they remain they are facilitating a very visual and increasing deterioration of roads and road asset values across all classes of road. Many such examples are now very apparent to the road user both at national and local level," says Robert Butler, a road maintenance engineer, in an op-ed for Tirana Times

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By Robert Butler* 

The recent occurrence of the violent reactions to the payment of tolls for the A1 motorway in northern Albania brings to the forefront the whole question of who should pay for road transport infrastructure; the provision of new roads, their management, operations and maintenance.

In the past all forms of transport infrastructure was predominantly built, owned, and operated by government institutions and departments. None of them more so than road networks. Roads have always been the original form of communication and as such their development and usage has been assumed as an indubitable right of the public with no direct costs or payments. The provision and use of roads traditionally assumed to be a public service obligation that was the responsibility of governments for all their citizens.

Other forms of transport, civil aviation, maritime and rail have however, increasingly become recognised as transport for which ‘the user pays’, with commercial air and ferry services leading the way towards the privatisation of infrastructure provision, management, and operations. Correspondingly, the management and commercial operations of the supporting infrastructure of airport and port facilities has increasingly passed over to the ownership of private sector commercial companies. The case in many countries with developed economies.

Even rail services are becoming progressively commercialised and private operators more prevalent in the provision of dynamic services, initially on commercial rail transport but also for passenger traffic. Generally, for the moment at least, rail infrastructure has been leased from government but the cost of rail tickets sold by the private rail transport companies also contains charges for track and station use.

Although In the past two decades in the transport subsectors of civil aviation, maritime, and to a certain extent rail, have required the user to pay in some form for the management and operations of the supporting transport infrastructure,[1] the road sector is the last subsector in transport to move towards the ‘user pays’ concept. Given the international trend however, it is inevitable that in future road users will pay directly for road use. Payments possibly based on amount of use. Albania cannot be an exception. New high speed efficient road infrastructure has to be paid for by the users, either in the form of tolls or indirectly in the form of road funds or vignettes[2].

The concession on the A1 motorway in the north of the country may have been a step in the right direction as this section of the road network will demand very serious maintenance and upkeep expenditures in the coming years and the traditional government department approach will not be appropriate for such a modern and sophisticated road link. It is therefore arguably only fair that those who make use of this particular road facility, either commercially or for private and social reasons, should pay some direct contribution for the use of the link.

Many motorways throughout the world, with their provision of fast, direct travel and time savings, are tolled. Many of them however are increasingly built through private financing, not government, with the original constructor retaining the responsibility of maintenance under a concession arrangement. In such cases, where the builder is also the investor, the constructor has a legal right to make a profitable return on his investment over a given period of time. This return on investment and risk is generally achieved through tolling. The concessionaire undertaking the public service obligations of government and being paid for this service provision in differing arrangements, on a commercial basis, part by the direct toll receipts and part by government subsidies.

During this time however, the concessionaire/developer also accepts full responsibility under the concession agreement for maintaining the facility at an agreed level of service; the level of service to be agreed with government as the client, agreed on behalf of the travelling public to levels that support safe and reliable travel.

In the case of the A1 motorway to Kosovo it was always known that the low traffic volumes would probably never make a tolling system a self-sufficient system of financing on this link, it would always require some form of additional financing from government, the concession being based on a single road model, i.e. just the motorway.

Single road concessions however have to retain certain characteristics to make them viable as a concession; namely higher than average usage and traffic volumes. The A1 motorway to Kosovo does not approach these financially viable traffic volumes when calculated annually. This situation will not change in the foreseeable future.

 

Possible alternative road sector concession arrangements better suited to Albania

In past studies in the country alternative forms of commercialised maintenance were considered a better option for the road networks of Albania. Successive governments were developing new roads as international transport routes and these were being constructed to the latest design and construction standards in line with international models. The study specialists were of the opinion therefore that the traditional maintenance service provision, as supplied by the General Roads Department[3], was not appropriate to fulfil the needs required from the new modern highways being built or existing roads that were being improved; the recently completed 1500 kms of rural roads is subject to a non-standardised maintenance approach and unknown management future. Modern road networks demand the application of sophisticated business systems to maintain them safely, the traditional maintenance approaches in the country were considered to be non-responsive to the needs of such networks.

Although the original GRD is now the Albanian Road Authority, the modus operandi of the department has not ostensibly changed, the authority still retains a public-sector approach to road management. Business systems and market driven innovations for better quality outcomes are not the core qualities of the authority. Going forward the authority has to see itself solely as a client-based organisation and no longer the service provider.

As with much infrastructure, whether transport related or not, the modern trend is for build operate and transfer under commercially viable business management models. A significant amount of modern town centre infrastructure in developed cities is maintained on behalf of the owner by the original constructor. The logic is self-evident, the builder knows the building and its peculiarities and special considerations better than anyone else. It is also considered a value-added approach to the provision and management of quality i.e. if the constructor is to take on the additional risks associated with maintenance of the facility over a given lengthy period, he will take extra care with the quality of construction of that facility at the time of construction, wishing to avoid the risk of costly and untimely and un-envisaged repairs or interventions at his own cost under his maintenance contract. It is generally acknowledged that this same principle applies to new roads.

The best models emerging world-wide for road management therefore are aimed at harnessing the inherent knowledge and experience of the road construction industry, contractor and knowledge-based companies, for the maintenance of the built facility. Modern roads and bridge stocks require the most modern approaches; a combination of innovative solutions and business management systems that are cost-effective. Only market driven enterprises can supply such business-like outcomes. Managing modern road networks is a business activity.

In the case of the A1 motorway to Kosovo however, the investor was the Albanian government; the road was built under contract by international contractors and the constructor did not have a long-term maintenance contract.

The newly released maintenance concession therefore is based on a clear commitment to operate and maintain a facility that has been financed and built ‘by others’. The risks of any inadequacies of quality are therefore transferred to the maintenance concessionaire. It can be assumed that the concessionaire would have a clear understanding concerning the ‘as built’ condition of the road and therefore the envisaged maintenance interventions and the risks associated with his projected financial planning and programming. The concessionaires setting of the toll tariffs for the road link would have to have include risk mitigation elements in the tolling targets and forecasts. And may to a certain extent point to the setting of higher than expected tolls, as it occurred. The concessionaire will have calculated the corresponding returns that would result as a result of different toll pricing scenarios to fund the needs of different levels of maintenance interventions.

The whole toll tariff pricing process would be based on varying levels of financial risk and this is something that both government and the concessionaire have to calculate. The government invariably having to provide some assurances for subsidising any shortfalls in available finance for maintenance in the case where the traffic volumes do not generate the required funding. The Government’s wish to keep their contribution to a minimum may also have influenced the toll pricing for the A1 to be fixed on the higher side; the higher the acceptable toll, acceptable to the road user that is, the less is the subsidy that the government budget has to contribute.

Concessions let on single road links, unless the roads concerned have significant average traffic volumes, when calculated over an annual period, are usually not the best concession option for the road owner. In such circumstances the government concerned may have to commit themselves to significant levels of subsidisation to make up the shortfall that is calculated as necessary to fulfil both the required level of service (to provide the public service obligation) and the agreed profitable returns for the concessionaire to take responsibility for the risks. The concession has to be profitable in order for concessionaire to undertake the considerable risks involved.

The alternative approach proposed during a capacity building project in the Ministry of Transport circa 2007 was for the use of a Management Agency Contract (MAC) form of concession. This is a more modern and holistic type of concession that is best suited to the case where a supporting feeder network that was historically provided by government, is gradually declining in service level due to the lack of applied investment strategies. Investment strategies that could benefit through the use of commercial business management processes and systems. The management of constrained budgets by traditional road departments lack policies that support innovation and asset management strategies to optimise available funding. Only the application of commercial business models can provide value for money in the management of the built environment.

The MAC type of concession involves the government letting the concessionaire manage and operate all the roads within a region or agreed area. The government correspondingly aggregating all the maintenance budgets that it provides for this complete network and making this aggregated funding available for the maintenance concession.

The MAC contractor takes responsibility not only for delivering an agreed service level of maintenance across the whole network but also undertakes the added responsibility for modelling and forecasting the future annual programmes of period maintenance interventions and minor improvements. Something that it can be argued is not carried out at the present time. The improvements to include the identification of improvements to safety as the concessionaire is also responsible for improvements associated with road safety programmes.

The programmes of continuous improvements provide an inbuilt profitability to help offset any losses or lack of financial returns from routine maintenance, helping the MAC to provide a full set of maintenance provisions.

The MAC model is increasingly becoming the model of choice by governments that require a guaranteed level of service across the complete public road network for their constituents and enables the policy makers to highlight the measurable improvements in road network provisions that the government provides.

The same consultant that recommended the MAC, made a recommendation to divide the country into three separate road network zones and consider letting three separate MAC concessions, one for each zone.

Whilst the government of the day accepted the recommendation of the consultant for dividing the country into 3 zones – they were created – the concessions that were contracted out only took in some of the network in each of the zones. This has limited the effectiveness of modelling of the overall network in terms of obtaining value for money from the overall road maintenance budgets that are available; benefits on all roads, local and national.

This part adoption of the recommendations, made a decade ago, left significant budgets available for road maintenance outside of a transparent system of road sector business management. A regularised and accountable system that could provide creditable returns for all road users no matter which class of road they used most or was beneficial to them. It could also, as this article mentions above, balance out the need for unacceptable toll levels on single road links.

 

The advantages of the MAC form of concession;

– The government obtains a given level of service across the whole network that is contract guaranteed;

– The concessionaire is customer focussed, the level of service confirmed in customer satisfaction surveys;

– The profit margins for the concessionaire are network based and do not depend from a profit for a single road;

Network management through concession uses the latest models in order to be competitive and market based;

– The concession provides a programme of continual improvements for the road user that is market driven;

– The concession agreement provides for public consultation between concessionaire and local communities;

– The customer feels an integral part of the concession arrangement with his views reflected in outcomes;

– The Government can deliver their public service obligations without the overheads of larger public departments;

The system is cost effective as it reduces the wastages in funding that are associated with government services;

The whole programme is transparent as the concessionaire has to publish the annual network programme;

– Government overheads and direct involvement and commitments are reduced to a minimum.

 

The MAC form of contract, if applied to the northern region of the three regions that the government have adopted, would mean that through considerations on the profitability of the whole northern MAC economies of scale could underpin the costs of maintaining the motorway. The concession could evaluate and apply the lowest of profit margins on the motorway when balancing the returns on this road link against the overall business model and profitability of the complete MAC network.

A non-optimal profit target on the motorway link, when placed inside the whole profitability of the MAC, could still provide the required profit to set against the risks of the concessionaire, but importantly, for the Government, it would allow significant flexibility when agreeing to and setting the toll charges on the motorway.

Perhaps allowing the setting of what could almost be a ‘token toll’ with a break-even scenario. It could be significantly lower than the original toll that caused the upset for road users.

 

Going forward

There is a need to get the concessions in the road sector right, future BOT investors will be put off by a vision of toll booths in Albania being set on fire and destroyed. They will stay away and the country’s development aspirations will be set back. Viable road networks provide major contributions to any country’s development.

Additionally, the public will have to accept that the ‘user pays’ concept will inevitably have to come to the road sector as it has to the civil aviation and the maritime sector.

This correspondent does not believe that the government have considered enough the options that were presented for the road sector when concessions were just entering the diction of government policy. A re-visit to more suitably and internationally favoured models for road network management and operations is necessary. The experience of others can be adopted directly without the need for the present road administration to set out on a programme of ‘experimentation’ under the existing management status quo. Experimenting with the reduced budgets that are available is not an option given the less than best results from the past and current administrative set up; i.e. non-sustainable outcomes when external technical assistance is withdrawn. The ultimate loser has been and continues to be, the road user.

The use of MAC contracts across the whole network as the concession option, one applied separately in each of the three zones originally recommended and accepted by government, should be seriously re-considered as the most suitable model for a small country like Albania.

This concession option can be accomplished through concessions awarded to local contractors and without the need, initially at least, to majorly increase road maintenance budgets or use outside funding or loans. The aggregated road maintenance budgets available through the various funding mechanisms for roads, are sufficient to hold the serious deterioration of road asset values if they are placed in a transparent and accountable system. Concessions are always subject to publication and scrutiny in the public interest and transparent accountability. Where there are considered loopholes, these can be soon highlighted.

There is a general opinion in the profession that over the past two decades the overall performance of road maintenance budgets has been far less than optimal under the public-sector administration systems that exist; approaches and structure that have been bought forward from the past. The delay in real reform is hurting the country and its economic development, poorly maintained roads are a considerable hurdle to development.

The days of big government road departments are a thing of the past[4]; they cannot compete in a market-based environment and in many countries with developed economies have been re-structured as small, client-based units. Traditional road sector departments are too inefficient and expensive in terms of productivity and are not capable of introducing competitive environments as ‘the service provider’. In advanced countries the roles and responsibilities of previous road department is constrained to that of service manager. All road products and services being provided by commercial companies that utilise financially efficient business management systems.

Maintaining the status quo of the traditional public-sector service provider road department in Albania, as it exists at the present time, is not in tune with the leading European models; the existing departments carry too much historical baggage, with too many approaches that are not only not fit for purpose and as long as they remain they are facilitating a very visual and increasing deterioration of roads and road asset values across all classes of road. Many such examples are now very apparent to the road user both at national and local level.

The main problem in the road sector does not revolve around the setting of the correct tolls on the A1 motorway, the systemic problem is the lack of much needed and overdue major reforms of the whole sector.

The country will be a contributor to the overall European road network and European standards of both management and operations are therefore required as part of this transition.

The current overall depleted condition of the national and local road networks, especially the newly constructed roads and highways that have been built over the past 10-15 years, reflects the non-responsiveness of the current administrative setup for the management of the sector.

It is not question of ‘why’ were the toll booths on the A1 motorway trashed that should be debated in the press and televised media, the problem runs much deeper. The debate should be asking what model of road administration is best suited to Albania’s development needs and to provide efficient and effective use of available human, technical and financial resources and turn road round the current deteriorating condition of the network?

Adopting modern commercial and technically advanced international road management models, as continually recommended by the government’s lending partners, will again prove to be unsustainable and ineffective if government policy and the country’s road sector institutions are not re-orientated and restructured respectively.

 

*Robert Butler is a British-Albanian who has over 40 years of civil and municipal engineering experience of which over 38 years have been spent in developing/transitional countries.

Mr Butler is also an international athlete, representing Great Britain and Albania in Triathlon [Age Group] at World and European level for the past several years.

 

[1] Included within the cost of an airline or ferry ticket are taxes or charges for the airport or port services.

[2] Vignette is a form of road pricing imposed on vehicles, usually in addition to the compulsory road tax, based on a period of time instead of road tolls that are based on distance travelled. Vignettes are currently used in several European countries.

[3] Now the Albanian Road Authority (ARA)

[4] A generally accepted yardstick for modern public-sector management staff levels is 1 or 2 staff per 100 kms of road in the network.

Tirana Times
By Tirana Times May 25, 2018 07:10