Generally, local maintena ...

September 1996 Generally, local maintenance of roads is more efficient than centrally controlled maintenance. For road construction, contracting procedures and competitive bidding are more important than issues of decentralization. Central governments should regulate safety and other network externalities. Humplick and Moini-Araghi empirically investigate how decentralization affects the efficiency of road provision from the viewpoint of the local goods provider and the road user. The theoretical model: a double-cost hidden level of effort. For accurate estimates, they found it important to include both user and provider concerns in determining the optimal level of decentralization. Using four different model specifications and three data sets, they find that 100-percent decentralization of maintenance functions (where there is no central regulation on quality standards) produces the most efficiency gains, as quality roads are provided at lower unit costs. There is little justification for central government to be involved in road maintenance. In fact, as Germany's example shows, uniform standards combined with decentralized maintenance remove the incentive to reduce costs and erode most of the efficiency gains from local maintenance. Maintenance is by definition a local activity and should reflect user preferences. Central governments should regulate safety and other network externalities by having a stake in the financing of road administration and in such functions as planning, policy setting, and regulation of safety and other network externalities. Central governments should finance no more than 10 percent of administrative costs. As for construction, it depends on the country. It may be better to ensure that contracting procedures in a country are efficient before suggesting the decentralized provision of roads. It is easier for local governments than for central governments to incorporate user preferences in their spending decisions. Similarly, determining where to make investments, deciding how to procure works, and monitoring the quality of construction and maintenance is often done more efficiently locally - except when local capacity to carry out road works is limited. The results point to the benefits of decentralized provision of roads, but many countries contract out maintenance and provision. In that case, it may not matter whether local competitive bidding is carried out by a central or local agency. This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger study in the Agriculture and Natural Resources Department to develop a strategy for rural development. The study is funded jointly by the Norwegian and Swiss Special Studies Trust Funds and by the Bank's Research Support Budget, under research project Decentralization, Fiscal Systems, and Rural Development (RPO 679-68).

September 1996 Decentralizing the responsibility for roads costs more at first, mostly through losses in economies of scale. But those losses may be outweighed by increases in efficiency when the locus of roadwork is closer to the people. Minimizing costs is often cited as essential for optimizing service delivery. Roads are the oldest, most important infrastructure services provided by governments. They require construction, rehabilitation, maintenance, and administration (planning, selection, and management). Various institutional arrangements - including the structure of decentralization - affect the degree to which costs can be minimized. Drawing on analyses of experiences with decentralized road provision in eight countries, a longitudinal analysis (over 25 years) of change in the Republic of Korea, and vertical and horizontal analysis across states and local governments in Germany, Humplick and Moini-Araghi found that the impact of decentralization varies depending on which aspect one is considering: the efficiency of producing road services or the impact on road users. Resource costs - the cost of providing roads ($/km) - are concave, increasing first and decreasing at later stages of decentralization. Preference costs - the costs to road users as a result of bad roads - are downward sloping, suggesting that road conditions improve as decentralization advances. In short, decentralization entails initial costs, mostly as losses in economies of scale. But those losses can be outweighed by increases in efficiency when the locus of roadwork is closer to the people. The advantages or limitations of decentralization are function-specific: * Maintenance functions are best provided locally. If both resource and preference costs are considered, local government should have more than 40 but less than 70 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 50 percent but less than 80 percent local fiscal responsibility. Exceptions to these results include the United States, where nearly all road functions are decentralized and operate efficiently. This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger study in the Agriculture and Natural Resources Department to develop a strategy for rural development. The study is funded jointly by the Norwegian and Swiss Special Studies Trust Funds and by the Bank's Research Support Budget, under research project Decentralization, Fiscal Systems, and Rural Development (RPO 679-68).