metadata: authors: 0: author: Heggie, Ian G.
1: author: Quick, Michael
docna: 0: docna: A framework for analyzing financial
            performance of the transport sector
docty: Policy Research Working Paper
subtopic: Transport in Urban Areas,Railways Transport,Roads & Highways,Urban Transport,Transport Services
teratopic: Transport
abstracts: cdata!: This report presents a methodological
            framework for reviewing the financial performance of
            government agencies responsible for transport. The framework
            is applied in a detailed case study in Tanzania (the
            transport infrastructure of which is seriously run down) and
            on desk studies in 14 other countries. The report presents
            the following findings: (a) a weak revenue administration in
            Tanzania with only half of the airport user fees and road
            user charges collected; (b) an unduly complicated structure
            of user charges; (c) poorly controlled expenses; (d) out of
            line fuel prices compared with adjoining countries; (e)
            transport enterprises operating without clear financial
            objectives; and (f) financial affairs of enterprises being
            supervised by a ministry that lacked the expertise and
            authority to do so effectively. This paper outlines the
            steps recommended to strengthen financial performance and
            describes how their methodology can be used to prepare
            multiyear forward programs that can be linked to the net
            cash flow to/from the government.
repnme: repnme: A framework for analyzing financial
            performance of the transport sector
display_title: A framework for analyzing financial
            performance of the transport sector
listing_relative_url: /research/1990/02/700334/framework-analyzing-financial-performance-transport-sector
topicv3: Transport m1326661 135,Airports m1326667 1804,Mass Transit m1327372 1726,Railways m1327400 166,Road Maintenance m1505354 4031
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Transport
origu: Policy, Research & Ect Affairs
no_of_pages: 70
model_extractions: <!-- Start of picture text --> Policy, Rrewh, and ExfAmel AfHale|<br>Trensponallon|<br><!-- End of picture text -->

- This paper a product of the Transportation Division, Irastructure and Urban Development Department- is part of a largereffort in PRE to improve policies on pricing, cost recovery. and efficient resource use in transport. A companion report on public expenditure reviews in transport is due to be published shortly. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Wendy Wright, room S 10-055, extension 33744 (30 pages with tables plus 32 pages of an annex).

Heggie and Quick present a methodological framework for reviewing the financial performance of government agencies responsible for .ranspon.I They apply this framework in a detailed case - study in Tanzania (the transpon infrastructure particularly the road network - of which is seriously run down) and on desk studies in 14 other countries. Their findings:

* Fuel prices were out of line with those in adjoining countries, encouraging smuggling and inefficient use of fuel.

Transport enterprises were operating without clear f nancial objectives.

* The financial affairs of these enterprises were being supervised by a ministry that lacked the expertise and authority to do so effectively.

* Revenue administration in Tanzania was weak. Only half of the airport user fees and road user charges were collected.

* The structure of user charges was unduly complicated.

Heggie and Quick outline the steps recommended to strengthen financial performance and describe how their methodology can be used to prepare multiyear forward programs that can be linked to the net cash flow to/from) govemment.

* Expenses were not well contrnlled.

The PRE Working Paper Series disseminates the frudings of work wuder way in the Bank's Policy. Research. and External Affairs Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fuly polished. The findings, interpretations, and conclusions in these papers do not necessarily mpresent official policy of the Bank.

Produced at the PRE Dissemi.nation Center
# TABLI OF CONTCTS

|Introduct|Page<br>ion . . . . . . . . . . . . . . . ................|
|---|---|
|I.|**Tanzania**CaseStudy.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>**.**<br>**.**<br>**.**<br>**.**<br>.<br>. .<br>.<br>.<br>.<br>**2**|
||1. Objectives . . . . . . . . . . . . . . . . . . .<br>.<br>.<br>.<br>. .<br>. 2<br>2. MethodologicalFramework<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>..<br>..<br>.<br>.<br>.<br>. 2<br>3. Using the Framework for Diagnostic Purposes . . .<br>.<br>.<br>. .<br>. 7|
||4. Identifying Specific Problems . . .<br>.<br>.<br>.<br>.<br>.<br>. .<br>.<br>.<br>. .<br>11|
||5.Developing Potential Solutions . . .<br>.<br>.<br>.<br>.<br>.<br>. .<br>.<br>.<br>.<br>.<br>13|
||6.Multi-Year<br>Prograuuing.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>17|
||7. Conclusions for Methodology.<br>.<br>.<br>.<br>.<br>.<br>. ..<br>.<br>. .<br>.<br>.<br>.<br>18|
|II.|Other<br>Countries<br>. .<br>.<br>.<br>.<br>. .<br>.<br>.<br>.<br>.<br>. .<br>.<br>.<br>.<br>.<br>.<br>.<br>. .<br>.<br>.<br>19|
||1.Objective<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.....<br>19|
||2. Data Collection and Sources.<br>.<br>.<br>. . . . . . . . . . . .<br>20|
||3. Quality of Data<br>21|
||**_A4_**<br>ConclusionsFromthe Nubers...<br>.<br>.<br>.<br>.<br>.<br>22|
||5.Scope forImproving<br>Data Quality . . . . . . .<br>.<br>. .<br>.<br>.<br>.<br>24|
|III.|OverallConclusios<br>.................<br>26|
|Figures:||
||1. Tax Avoidancet Vehicle ImportDuty.<br>.<br>.<br>.<br>.<br>.<br>.<br>. .<br>.<br>.<br>.<br>12|
|Attachme|nts:|
||1. Draft Consultation<br>Document.<br>.<br>.<br>. .<br>.<br>.<br>.<br>.<br>.<br>. .<br>.<br>.<br>.<br>27|
|Tabless||
||1. Overall<br>Financial<br>Performance<br>of the Transport<br>Sectors 1985/86.<br>. . . . . . . . . . . .<br>. . . . . . .<br>.<br>. 4<br>2. Overall Financial<br>Performance<br>of the Transport<br>Sectors 1986/87.<br>.<br>.<br>.<br>.<br>...<br>.<br>.<br>.<br>.<br>5<br>3. Road User Revenues and Road Expenditures.<br>.<br>.<br>.<br>. . . 8|
||4. Road Sector Financing Plan.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>..<br>.<br>16|
||5.Suimary of Fiscal FlowsToand From Goverment<br>.<br>.<br>23|

This paper was prepared as part of a project on Pricing, Cost Recovery and Efficient Resource Use in Transport. It was prepared by Ian G. Heggie, INUTD, and Michael QuLck, consultant.
# Annex 1

|||||||||||||||||||||||||||||||||||||||||||||||||||||A|nn|e|x||**Page**|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Source Note|s and Dat|aQuality||.|||.|||.||.|||.||.|||.|.|||.||.|||.||.|||.|||.|||||||||||||||||||..|I|
|ESthiopia|.. ..<br>|.. ..|||.|.||||.|.||||.|.||||..||||.||.|||.||.|||.||.||||.|.||||.|.||||.|.|||.|.|.|.I.<br>|
||Sources|. . . ....|....|..|..|..||||||..|..|..|.|||||.....|..|..|.||||||..||||..||||||..|..|..|..|..||||||.|..|..|..|.||||1|
||Quality|of Data|.||.||.|||.||||||||||..|||||||||||||.|||.|.|.|.|.|.|.|.|.|.||||||||||||.<br>1|
||Conclusi|ons.<br>.|.||.||.|||.||.|||.||.|||.||.||.|||.||.|||.||.|||.|||.||.|||.||.|||.||.||.||.|.<br>1|
|**Ghana**||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
||.<br>.<br>.|..||||||||||||||||||.|.|||.|||.||.|||.||.|.||||||||||||||||.|||||||
||Sources|.<br>.<br>.<br>.|.||.||.|||.|||||||.|||.||.|||||||||||||||||.|||.||.|||.||.|||.||||.|**2**|
||Quality|of Data.|.||||||||||||||||||||||||||||||||||.||.||||.||.|.|||||||||||3<br>|
||Conclusi|ons..|||||||||||||||||||||||||||||||||||||||||||||||||||||||3|
||||.||||||||||||||||||||||||||||||||||||.|||.||.|||.|||||.||.||.|.|
|Zaire|.. ..<br>|.. ..<br>|||.|.||||.||.|||.||.|||.|.|||.||.|||.||.||||.|.||||.|.||||.|.||||.|.|||.|.||. ...<br>4<br>**4**|
||sour|es<br>. .<br>.<br>.|.||.|||.||.|||||||||.|.||||||||||||||.|||.||.||||||.||.|||.||.||||.|.|
||Quality|of Data|.||.||.|||.||.|||.||||||||||||||.|||.||.|||..||||||||||||||||||||**4**|
||Conclusi|ons..|||.||.|||.||.|.|.|||.||.||.||.|||.||.|||.||||||||||..||||||||||||||||. 5|
|Indonesia||..<br>.<br>.<br>.<br>.. .|<br>.|||.|||.||.|||.||.|||.|.|||.||.|||.||.|||.|||.|5|||||||||||||||||||||
||Sources|.<br>.<br>.<br>.|||||||||||||||||||||||||||||||||||||||||||||||||||||||5|
||Quality<br>|of Data.<br>|.|.||||||||||||||||||.|||.|.|||||||||||||||||||||||||||||||6<br>|
||Conclusion|s<br>. .|.||.|||.||.|||.||.|||.||.||.|||.||.|||.||.|||.||.|||.||.|||.||.|||.||.||.||.|.<br>6|
|Philippines|...<br>|||||||||||||||||.||..|.|.||.|.|.||.|.|.|.||.|.|.||.|.|.|.||.|.|.||.|.|.|.||.||||||. 6<br>|
||Sources<br>|. . . . <br>|.||.|||.||.|||.||.|||.||.||.|||.||.|||.||.|||.||.|||.||.|||.||.|||.||.||.||.|.<br>6<br>|
||Quality|of Data|.|.|.||.|.|.|.||.|.|.||.|.|.||..|.|||||||.|||||||.||||||||.|||||||.||.|..||.||7|
||Conclusion|s<br>. .|.||.|||.||.|||.||.|||.||.||.|.|||||||||||||||||||||||||||.8||||||||
|Sri<br>**Lanka**|||||||||||||||||||||||||||||||||||||||||||||||||||||||||8|
|<br>|...||||||||||||||||||||||||||||||||||||||||||||||||..|||||||||
||Sources<br>.<br>|.|||||||||||||||||||||||||||||||||||||||||||||||||||.|.|||.<br>8<br>|
||Quality|of Data|..|||||||||||||||||||||||||||||||||||||||.|||.||.||||.|||.|||.<br>8|
||Conclusion|s<br>|||||||||||*||||||||||||||||||||||||||||||||||||||||||||9|
|||<br>..|.||.|||.||.||||.||||.||.|.|||||.|||||.|||||.|||.||.|||.||.|||.||||.||||.<br>|
|Thailand<br>|.........<br>||||||||||||||||||||||||||.|..||||||||.||||||||||||.||.|.|.|.||||.<br>9<br>|
||Sources...|||||||||||||||||||||||||||||||.|..||||||||||||||||||.||||.||. .<br>9|
||Quality|of Data|.||.|..|..|..|..|.|..|..|..|.|||||||||||||||||||||||||||||||||||||||||||10|
||<br>Conclusi|<br>ons . .|<br> .||.|||.||.|||.||.|||.||.||.|||.||.|||.||.|||.||.|||.|||.||.|||.||.|||.|.|||.<br>10|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||10|
|Argentina|.<br>...|||||||||.|||||||||||..||||||||||||||||||||||||||||||.||.||.|||
||Sources||||||.|||.|||.||.|||.||..||||||||||||||||||||||||||||||.|||||||10|
||Quality|of Data.||||||||||||||||..|..|..|||||||||||||||||||||||||||||||||||||10|
||Conclusion|s<br>. .|.||.|||.||.|||.||.|||.||.||.|||.||.|||.||.|||.||.|||.|||.||.|||.||.||.||.|||.<br>11|
|Colombia|.|.<br>.<br>.||||||||||||.|||||||||||||||||||||||||||||||||||||||||||11|
||Sources....|||||||||||||||||||||||||||||||||.|||||||||||||||||||||||11|
||<br>Quality|ofData||||||||.|||.|||.|||.|.|||.||||||||||..||||||||||||||||||.||||||12|
||<br>Conclusion|s..|||||||||||||||||.||||||||..|||||||||||||||||||.||.|||.||||||12|
|Costa**Rica**|.. ..|.......|..|.||.|.|.||||||||||||||||.|||.||.|||.||.|||.|||.||.|||.||.|||.||.||.|||.<br>13|
||Sources||||||||||||||.|.|.|.||..|.||.||||||||||||||||||||||||||||||||||.<br>13|
||Caalit|y<br>of Data.|.|||||||||||||.|||.|.|||.|||.||.|||.||||||||||||||||||||||||||13|
||Conclusions.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>13|
|---|---|
||Sou.rces<br>. . . . . . . . . . .<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>14|
||Quality of Data . . . . . . . . . . .<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>14|
||Conclusions<br>. . . . . . . . . . . . . . .<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>14|
|Algeria|. . . . . . . . .... . . . .... . . . .... . . . . .... . . ..<br>14|
||Sources ...<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>..<br>.<br>14|
||Quality of Data ....<br>. . . .<br>.<br>.<br>.<br>. .<br>.<br>.<br>.. .<br>. . . .<br>.<br>15|
||Conclusions<br>.<br>.<br>.<br>. . . . . . . . . . . . . .<br>.<br>.<br>.<br>15|
|PakistaS|n<br>.<br>.<br>.<br>.<br>.<br>. .. . . . . . . . . . . . . . . .<br>.<br>.<br>.<br>.<br>15<br>Sources.<br>**.**..<br>.<br>.<br>.<br>15|
||Quality of Data.<br>.<br>.<br>.<br>.<br>.<br>16|
||Conclusions<br>....<br>. .<br>. .<br>. .<br>. .<br>. .<br>.<br>. .<br>.<br>.......<br>17|
|**Tunisia.......**|*<br>.<br>.<br>17|
||Sources..<br>.<br>.<br>17|
||Quality of Data.<br>.<br>17|
||Conclusions<br>.<br>.<br>.<br>.<br>.<br>.<br>. . . . . . . . . . . . . . . . . . .<br>17|

# Appendix Tables:

|A.l. Overall<br>Sector:<br>A.2. Overall|Financial Performance of the Public Transport<br>Ethiopia......<br>.<br>.<br>..<br>Financial Performance of the Public Transport|.<br>19|
|---|---|---|
|Sector:|Ghana<br>...|20|
|A.3. Overall<br>Sector:|Financial Performance of the Public Transport<br>Zaire . . . . . . . . . . . . . . . . . . . .|.<br>21|
|A.4. Overall<br>Sectors|Financial Performance of the Public Transport<br>Indonesia . . . . . . . . . . .<br>. . . . . . .|.<br>22|
|A.5. Overall<br>Sector:|Financial Performance of the Public Transport<br>Philippines<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.|23|
|A.6. Overall|Financial Performance of the Public Transport||
|Sector:|Sri Lanka<br>..|24|
|A.7. Overall|Financial Performance of the Public Transport||
|Sector:|Thailand . . . . . . . . . . . . . . . . . . .|.<br>25|
|A.8. Overall<br>Sector:|Financial Performance of the Public Transport<br>Argentina ... . . . . . .<br>.....<br>. . . .|.<br>26|
|A.9. Overall<br>Sectors|Financial Performance of the Public Transport<br>Colombia . . . . . . . . . . . . . . . . . . .|.<br>27|
|A.10. Overal|l Financial Performance of the Public Transport||
|Sector:|Costa Rica.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>. . .<br>... . . .|.<br>28|
|A.11. Overal|l Financial Performance of the Public Transport||
|Sectors|Jamaica<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.<br>.|29|
|A.12. Overal<br>Sector:|l Financial Performance of the Public Transport<br>Algeria<br>.<br>.<br>.<br>.<br>.<br>.<br>..<br>.<br>.<br>.<br>.<br>.<br>.<br>.|.<br>30|
|A.13. Overal|l Financial Performance of the Public Transport||
|Sectors|Pakistan.<br>.<br>.<br>........<br>...<br>. . . . .|.<br>31|
|A.14. Overal<br>Sector:|l Financial Performance of the Public Transport<br>Tunisia..<br>.<br>.<br>.<br>.<br>.<br>. ...|.<br>32|
# **INTROTJCTION**

1. This paper attempts to develop a methodological framework for reviewing the financial performance of government transport agencies. The framework might be used to undertake a free-standing review of sector performance, to supplement the analyses included in regular sector reviews, or to provide the basis for the sectoral chapter of a Public Expenditure Review.

2. The paper is divided into three parts. The first describes the methodological framework developed during the course of a financial review of the transport sector in Tanzania, **and** explains the kinds of issues **and** proposed solutions identified during this review 1/, the second extends the framework - - on the basis of desk studies -- to fourteen other countries; while the final section draws conclusions regarding the general applicability of the framework.

1 Tanzanias Financial Performance of the Public Transport Sector, Rpt. No. 7610-TA, January 1989.
2

# I. TANZANIA CASE STUDY

# 1. Obiectives

3. This review was undertaken to address the seriously run-down state of the transport sector in Tanzania and, in particular, the poor condition of the road network. In 1987, over 60 percent of the paved main road network and 75 percent of the unpaved network were classified as being in Opoor' condition; this not only increased transport costs, but was also beginning to hamper the movement of agricultural products in the countryside. In response to this state of affairs, the government prepared a National Transport Policy Document which listed amongst its policy goals: (i) improving financial performance and cost recovery in the transport sector; and (ii) increasing the allocation of resources for road maintenance and rehabilitation. In a further document prepared for the Transport Sector Donor's Conference held in December, 1987, the government estimated that about $210 million would need to be spent over the next five years on road maintenance and rehabilitation to raise to 70 percent the length of the main road network classified as being in good condition. Following detailed studies, this estimate was later raised to $850 million. Once the network had been rehabilitated, there would furthermore be an on-going requirement for funds to maintain the road network in a stable long-term condition.

4. The main questions posed for the review were thus: (i) what was the current financial state of the government transport sector; (ii) where did the problems lie and how serious were they; and (iii) what could be done to improve financial performance and, in particular, to mobilize sufficient revenues to maintain the main road network in a stable long-term condition (accepting that the overall question of "affordability' might require that some parts of the main road netws,^- ba abandoned, or transferred to local government).

# 2. Methodological Framework

5. The first task was to devise some way of assembling and summarizing the financial performance of the various public agencies comprising the government transport sector. This was not an easy task, since the sector
**3**

includes roads **and** airports (operated as government departments as part of the Ministry of Com-unications and Works [MCW]), ports, railways and an airline (all operated as free-standing parastatalse2 supervised by MCW) and a group of regional trucking companies, a shipping line, an urban bus company and an interurban bus company (operated as parastatals under the umbrella of the National Transport Corporation, a holding company also ;upervised by MCW). The task was accomplished by assembling annual financial statements for government departments (roads and airports) and collecting annual statements -- containing Profit and Loss statements and Balance Sheets -- for the remaining agencies operated as -- parastatals. Figures were generally assembled for at least six years including the most recent unaudited accounts -- and were checked, converted into a standard format and entered into a Lotus spread-sheet.

6. The second task was to compress this information into annual summary tables ro illustrate the overall financial performance of the sector and show what impact it had on the government's overall fiscal balance. The format used is illustrated in Tables 1 and 2. Table 1 refers to 1985/86 (when the rate of - exchange was $1.00 Tsh 19), while Table 2 refers to 1986/87 (after the rate of exchange had fallen to $1.00 - Tsh 52). The tables thus show what happened to the sector during the course of a major currency devaluation. Among other things, the tables were designed to illustrate the following features of the sector's financial performance:

- (i) Towards the bottom of the Profit & Loss summary is an item entitled 'Shortfall of Regular Maintenance. This is not a cash item, but represents the notional shortfall between the amount which should have been budgeted for maintenance and the amount actually allocated for it by the government. The figure aesumes that assets are adequately maintained at the start of the year and only refers to shortfalls in *regular' maintenance and not to any needs for rehabilitation, or deferred maintenance.

2 In Tanzania, public util;,ties are referred to as parastatals.
4

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6

- (ii) Shortfall of regular maintenance is only shown foi roads and airports. No comparable item is shown for parastatals, although the main body of the report did present an estimate suggesting that the overall deficit of these enterprises would have increased by roughly 7 and 13 percent respectively in 1°85/86 and 1986/87, had an estimate for "shortfall of maintenance" been included for parastatals. In principle, the estimates could have been included explicitly in the tables.

- (iii) The upper half of the tables show the Profit and Loss statements of public transport enterprises and the ensuing aggregate net profit/(loss;. However, it does not show how these losses were financed. This is shown in the lower part of the tables which present a summarized financing statement.

- (iv) The summarized finanm. sig statement -- and the associated changes in working capital -- show how the ensuing deficits were financed. The changes in working capital, the decrease being almost entirely due to an overall fall in current assets and/or an increase in current liabilities (the enterprises insisting on settlement of accounts receivable, while deferring payment of their own bills) illustrate how the overall size of the profit/(loss) carried forward from the Profit and Loss statement can be reduced by forcing suppliers to finance part of the enterprise's current operations. The financing statement then shows how much of the deficit was financed by government (in the form of equity and loans) and how much by other financing instruments. By looking at the loan schedule in the annual report of each enterprise, it is also possible to establish how much is being financed through instruments which carry government guarantees (e.g. foreign loans and lines of credit) which represent off-balance sheet commitments for the ge-srnment.

- (v) The final line in the tables shows the link between sector performance and the governments' overall fiscal balance. It consists
7 ofs the net surplus of government departments, plus taxes paid, **less** subsidies and the shortfall of regular maintenance, less government grants and loans to transport enterprises.

The tables thus summarize the overall financial performance of the sector and link it -- via the cash flow To/ (From) Government -- to the government's overall fiscal balance.

# 3. seina the Framework For Diagnostic Purposes

7. In tne case of Tanzania, the framework was used to examine the following three features of sector financial performance:

# (i) Performance of Government Departments

The performance of the roads and civil aviation departments can be summarized in terms of the following figures extracted from the tables (in Tsh, million):

||198518|6|1986/8|7|
|---|---|---|---|---|
|Revenue|2,090|(10Z)|4,032|(121)|
|Expenditure|1,504|(6X)|2,484|(61)|
|Contribution to General Revenues|586|(3Z)|1,548|(5Z)|

Note: Figures in brackets show the amounts as a percentage of total government current revenues/expenditures.

8. The figures show that user charges -- particularly road user charges -- accounted for about 10-12 percent of government current revenues in 1985/86 and 1986/87 and were thus a major source of government current revenues. This is not unusual, as is illustrated by the figures presented in Table 3 for 14 other countries; road user charges as a percentage of government current revenues vary from a low of 3.8 percent in Ethiopia and Tunisia, to hights of 15.9 percent in Costa Rica and 25.3 percent in Argentina. On the other "land, road expenditures in Tanzania are lower than revenues and only account for about 6 percent of total current expenditures. As a result, there is a significant surplus of revenues over expenditures amounting to about 3-5 percent of
8

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9 government current revenues (equlvalent to about $30 million). The overall conclusLon Ls thus that user charges in Tanzania, particularly road user charges, are a significant source of government current revenues and also of general tax revenues.

# (ii) Performance of Transport Enterprises

The corresponding performance of transport enterprises can be snmmarized in terms of the following figures (in Tsh, million)t

||1985/86|1986/87|
|---|---|---|
|Net Profit/(Loss)|(2,752)|(1,889)|
|Net Taxes/(Current<br>Subsidies) paid|||
|to goveranent|37|867|
|Changes in Working Capital|(2,653)|1,653|
|Government Capital grants/Loans|164|4,820|

9. This presents an interesting picture. In 1985/86, these enterprises incurred a net loss of Tsh 2,752 million (equivalent to about $145 million) which improved slgnificantly in 1986/87 to a loss of Tsh 1.889 million (about $37 million). The substantial loss in 1985/86 nevertheless had little impact on the government's overall fiscal balance. The government received Tsh 37 million in taxes and paid out Tsh 164 million in capital grans;/loans; the net outflow from government was thus a mere Tsh 127 million (less than $7 million). The enterprises financed their deficits during the year by not paying their bills and running down uorking capital to the extent of Tsh 2,653 million (nearly $140 million); accounts payable, and arrears in payments due on long term loans, increased significantly during the year. Such action can have a serious impact on the financial performance of other enterprises and on the banking sector.

10. However, working capital cannot be used to finance current operations indefinitely and in 1986/87 the government had to step in with a major infusion of equity capital, grants and loans to pay off the short term debts of these enterprises. This shows up clearly in the figures for 1986/87:
10 working capital was rebuilt and the government supplied Tsh 4,820 million (nearly $100 million) in new capital.

11. The tables therefore illustrate the importance of examining changes in the balance sheets of transport enterprises to understand how they finance their net losses. It also shows how, via changes in working capital, their initial financial difficulties can result in a reduction of working capital and hence in indirect impacts on the financial performance of other economic sectors.

# (iii) Overall Financial Balance

12. The final four lines of the tables show the sector's impact on the government's overall fiscal balance. It has been presented "with* and 'without' the estimated shortfall of regular maintenance. When this shortfall is included, the overall drain on the government's fiscal revenues rose from 2.5 percent of total current revenues in 1985/86 to a staggering 17.4 percent in 1986/87; the deficit in this latter year amounted to Tsh 5,755 million (over $110 million). When the shortfall of maintenance is excluded (i.e. when the figures relate onl3 to the cash obligations of government), the overall balance shows a positive figure of 2.1 percent of total current revenues in 1985/86, but still shows a deficit of 7.3 percent in 1986/87 (equivalent to a cash outflow from government of Tsh 2,405 million, or over $46 million).

13. The above figures illustrate two important points. First, governments frequently cut maintenance expenditures -- particularly road maintenance -- to help balance the budget during periods of fiscal stringency; in Tanzania, road maintenance was cut in both nominal terms as well as in real dollar terms and the shortfall in regular maintenance went up from Tsh 950 million (about $50 million) in 1985/86 to Tsh 3,300 million (about $63 million) in 1986/87. Second, even when road expenditures are cut back, the poor financial performance of the transport sector can still represent a serious drain on the government's overall fiscal revenues.
11 4. Identifying Specific Problems 14. Preparation of the above tables focussed attention on a number of issues which were adversely affecting financial performance. Although many were specific to Tanzania, a number were of a generic nature and appeared likely to affect financial performance in other countries as well. The general issues included the following:

- 4.1 Government Departments

- ti) Revenue administration was weak. The civil aviation department and the Treasury were only collecting about half the airport user fees payable during 1985/86. The former department only collected about 30 percent of air navigation charges and 63 percent of landing and parking charges; the latter agency was only collecting about 51 percent of the passenger service departure fees. The balance of the user fees were being avoided, evaded, or were disappearing into other people's pockets. The same applied to road user charges; apart from fuel taxes (collected as an excise tax from the oil companies), collections rarely exceeded 50 percent of the amounts payable. An analysis of the marginal tax rates for imported vehicles, likewise showed a consistent (linear) increase in evasion as marginal tax rates were raised (see Fig. 1).

- (ii) The review of user charges showed that their structure was unduly complicated and that there were numerous ambiguities and inconsistencies in the published tariffs (this clearly contributed to avoidance, evasion and leakage).

- (iii) It became clear that expenditures were not well controlled. For example, maintenance of trunk roads (costing roughly $30 million p.a.) was controlled by MCW's Control Unit; the unit only had four Controllers, with one part-time vehicle, to control spending in 20 regions.
# TAX AVOIDANCE: VEHICLE IMPORT DUTIES a/

<!-- Start of picture text --> Amount 01 Duty Collected (%)<br>60<br>50<br>40-<br>30 _<br>-<br>20<br>10,<br>'<br>0 . * *<br>0 20 40 60 80 100 120<br>Rate Of Duty Pay lble (%)<br><!-- End of picture text -->

- _!I_ Each point reP5esuinls tbe duty ijayable (as I of ve:hicle value) and tbe duty collec:ted (as I of duty payable) for Individual vehicle categoiries.
13

- (iv) Fuel prices were significantly out of line with those in adjoining countries, both at the official as well as at the parallel exchange rates. The price of diesel fuel was only two-thirds of the price in Kenya at the official exchange rate and only one-third at the parallel rate. This was causing inefficient use of fuel and encouraging smuggling.

# 4.2 Transport Enterprises

15. These enterprises suffered from many of :.he same problems affecting all public enterprises in developing countries: poor record keeping, shortage of accountants, poor expenditure controls, accounts subject to large ex post adjustments, etc. These are nevertheless facts of life in a developing country and the Government was working actively with the local accounting community to improve matters. There were, however, two further factors which appeared to adversely affect financial performance. First, the Boards of Directors of these enterprises, with some notable exceptions, contained too few people with a commercial background and a sound knowledge of finance, while second, the enterprises lacked clear financial objectives and this was compounded by being nominally supervised in their financial affairs by MCW. This ministry was essentially a construction agency and lacked the expertise and authority to effectively supervise the financial performance of these enterprises.

# 5. Developing Potential Solutions

16. Identification of the problems outlined in section 4 was followed by development of potential solutions as follows:

# 5.1 Government Departments

# It was suggested that:

- (i) Revenue administration by the civil aviation department might be improved by collecting the passenger service departure charge from the airlines (a common practice in N. America and Europe) and by turning the operation of airports into a separate operating unit accounting for its activities along regular commercial lines. Among other things, a commercial accounting framework would introduce the
14 concept of *accounts payable" into the financial statements of airports which would enable the government to monitor how effectively user fees were collected. It was estimated that the above changes could raise the revenues collected from the passenger departure service charge from the current level of 51 per cent to nearly 100 per cent and raise revenue collections from other airport charges from 30 and 63 per cent respectively to about 90 per cent. In the longer term, it was also suggested that airports might be reconstituted as a free-standing parastatal.

- (ii) In the case of road user charges, MCW should be required to prepare an annual report on revenue collections for submission to the Ministry of Finance. The report should identify revenues collected/collectable, costs of collecting the revenue and provide recommendations for strengthening revenue administration. The aim was to provide MCW with an incentive to press for more effective revenue collection.

- (iii) Road user taxes could be improved by simplifying the tax structure, abolishing unenforceable taxes (for example, on the sale of second hand vehicles) and lowering marginal tax rates (the latter, to improve overall collection rates).

- Uiv) Fuel prices should be equalized with those in Kenya, initially at the official exchange rate (over 5 years), and eventually at the parallel exchange rate (over 10 years). However, since it is difficult politically to simply raise fuel prices, the review urged the government to initiate consultations with interested parties to help reach a consensus on the need for such action. To assist with this process, the review included a suggested Draft Consultation Document (the draft is attached to this paper as Attachment 1).
15 The potential impacts of these, and other suggestions, were summarized in a series of financing plans. The financing plan for roads is included for illustrative purposes as Table 4.

# 5.2 Transport Enterprises

17. In the case of transport enterprises, the solutions were more complex and it was consequently suggested that the government should initiate consultations with interested parties -- mainly public transport enterprises and the chambers of commerce -- with a view to issuing a White Paper: (i) clearly setting out government policy towards these enterprises; (ii) defining financial objectives; (iii) setting agreed financial targets; and (iv) establishing procedures for strengthening financial discipline and monitoring performance. In this connection, it was suggested that the consultations should, among other things, address the following issues:

- ti) What degree of financial and management authority should the enterprises enjoy?

- (ii) What should be the role of their Boards and what authority should they exercise?

- (iii) How should the Boards be appointed and which interests should be represented on them ex officio?

- (v) Is there a need to revise the capital structure of these enterprises after devaluation (the port authority had no properly approved capital structure)?

- (vi) How should assets be depreciated to ensure the enterprises generated sufficient cash flow to replace assets?

- (vii) Should any controls be exercised over borrowing arrangements, including use of involuntary supplier credit?

- (viii) Which indices of performance should be set for these enterprises (rate of return on assets, operating ratios, etc.), how should they be monitored and what sanctions/inducements might be attached to facilitate compliance?

- (ix) What role should MCW (or Ministry of Finance) perform regarding the management and monitoring of these enterprises?
16

# Table 4. Road Sector Financing Plan

(TSh million)

|**Revenues**|1985/86|<br>1986/87|Budget<br>1987|Proposed<br>Financing<br>Plan||
|---|---|---|---|---|---|
|H.V.Taxes and Licenses|72.11|<br>99.56|<br>94.74|<br>150.00|(a)|
|M.V. registration tax|8.04|<br>8.54|<br>12.66|<br>13.00|(b)|
|H.V.transfer tax<br>|36.20|<br>38.15|<br>55.28|<br>10.00|(c)|
|M.V.road license|55.74|<br>55.74|<br>105.58|<br>150.00|(d)|
|Road toll**tax**|122.88|<br>137.63|<br>156.08|<br>-|(e)|
|Transport licensing fees|15.83|<br>17.34|<br>30.13|<br>6.00|(f)|
|Import Duties**&**Sales Taxes<br>________________________________||||||
|Gasoline (premium)<br>|C|C<br>|C<br>|C||
|Gasoline (regular)<br>|(<br>684.30|(<br>|C|C 7,809.00|(g)|
|Diesel fuel|20.63|C<br>|C|(||
|Motor Vehicles|555.42|C 3,500.00|C 6,000.00|<br>2,100.00|(h)|
|M.V. spare parts|214.56|(<br>|C|700.00|(j)|
|Other items|211.28|5<br>|C|<br>750.00|<br>(b)|
|||...__________<br>-----------|-----------|-----------||
|Total Revenue|1,996.99|<br>3,856.96|<br>6,454.47|<br>11,688.00||
|Expenditure:||||||
|Expenditure on roads<br>|1,337.09|<br>2,191.81|<br>2,652.71|<br>7,953.00||
|Contribution to General||||||
|Taxation|659.90|<br>1,665.15|<br>3,801.76|<br>3,735.00||
|||...__________<br>-----------|-----------|-----------||
|Total Expenditure|1,996.99<br> <br> <br>|<br>3,856.96<br> <br> <br>|<br>6,454.47|11,688.00||
|Shortfall of Regular|**nmmama**<br>_UUWWWW<br>**.f**|=fi<br>**nmmnmm**<br>**_ m **||**mam--**||
|Maintenance|(950.00<br>**_inMMWWUUi_**|) (3,300.00<br>WWWW**ammm**|) (5,300.00<br>**mina_**|)<br>-<br>**_aM**||

- Notess (a) Collection efficiency improved through better monitoring and revised tax structure.

- (b) No change.

- (c) Present tax replaced by requirement to re-register the vehicle at half the standard registration fee.

- (d) Collection efficiency improved through better monitoring.

- (e) Proposed to be eliminated due to poor collection performance.

- (f) Present tax replaced by nominal licensing fee to cover collection costs only.

- (g) Tax increased by TSh 5,300 million.

- (h) Revenue increased by lowering **tax** rates to reduce discretionary exemptions and avoidance.

- (j) Revenue increased by reducing sales tax levels to discourage avoidance.
17

- --

- (x) What institutional strengthening might be needed to ensure MCW or any other designated ministry -- could discharge the above duties effectively?

It is not easy to conduct such contsultations. The process involves: preparation of an initial consultation document (outlining the scale of the problem being addressed in the consultations, summarizing the options available, setting down what the government is willing to do to improve matters, and then setting out the substantive issues to be discussed during the consultation process), orchestrating the consultations themselves and, based on the results of the consultations, drafting the ensuing White Paper summarizing the government's policy and clearing the way for the changes in laws and legislation -- and reform of the institutions -- needed to implement the new policy. In view of this complexity, it was suggested that the government might request technical assistance to finance a secretariat to help it to undertake the consultations.

# 6. Multi-Year Programming

18. The work in Tanzania stopped short of the extended analysis normally undertaken as part of a fully-fledged public expenditure review. The methodological framework nevertheless lends itself to such an analysis and provides an ideal way of examining the inter-action between sector level strategies/expenditures and the impact these have on the overall macro-economic resource envelope. For example, Table 4, the Road Sector Financing Plan, shows actual revenues and expenditures for 1985/86 and 1986/87, budgeted figures for 1987/88 and a generalized one year Proposed Financing Plan. In a public expenditure review, the latter figure would generally be replaced by a three to five year forward plan, showing the likely consequences -- in more specific temporal terms -- of the recommended changes in proposed expenditure levels and revenue mobilization.

19. The same format could also have been applied to airports and transport enterprises; the latter might have been treated separately. or could have been dealt with by treating separately the large, problematical enterprises (for which specific improvements had been recommended) and combining the
18

- remaining enterprises into a broad residual. The individual financing plans - or forward plans -- can then be fed back into the main framework tables to produce forward estimates of the net cash flow to/from government. Through an iterative process, the sectoral level strategies can then be revised/adapted to meet the macro level constraints associated with the overall resource envelope.

7. Conclusions for Methodoloay 20. In the case of Tanzania the above methoaological framework proved quite helpful. It: (i) captured the government's attention by showing -- in quantitative terms -- the size of the financial problems affecting the government transport sector; (ii) focussed attention on the causes of poor financial performance; (iii) provided a framework within which to examine options; (iv) emphasized the importance of identifying clearly the financial implications of expenditure plans; and (v) showed the linkage between sectoral level expenditure decisions and the macro-economic fiscal balance. One aspect of the review was nevertheless not satisfactory; too much time was spent in the field assembling financial data and preparing the summary tables. As a result, too little time was spent developing options, exploring their consequences and discussing them with the government. The following section examines this question in more detail.
19

# II. OTHER COUNTRIES

1.

# Obiective

21. The question posed by the Tanzania sector study was whether it was possible to prepare the above summary tables on the basis of a desk study before undertaking any fieldwork. If this was feasible, it would enable the sector mission to: (i) develop a broad understanding of the financial performance of the sector before starting any fieldwork; and (ii) spend more time in the field examining options and discussing their implications with government officials. It was therefore decided to attempt to assemble summary tables for fourteen additional countries as follows: Africa:

- Ethiopia

- - Ghana - Zaire

- Asia: - Indonesia - Philippines

- - Sri Lanka - Thailand

- Latin America & Caribbean:

Asia:

- Argentina

- - Colombia - Costa Rica - Jamaica

# Europe, Middle East & W. Africat

- Algeria

- - Pakistan - Tunisia

Source notes and comments on data quality are attached as Annex 1.
20 2. Data Collection **and** Sources 22.

22. The initial work consisted of collating relevant information available from Bank files in Washington, reviewing this and extracting from it the required road revenues and expenditures, profit and loss, balance sheet and funds flow data, and pertinent points on their compilation. In the main, the infonmation sources were secondary (Bank reports which included summaries of road revenues and expenditures, and trading and balance sheet analyses) rather than primary sources (government accounts, annual reports and audited accounts).

23. This initial tranche of work yielded about half the data required. Obtaining the remainder, so that the gaps could be filled, proved to be a slow process that took about a year. Some of the data were obtained direct from the head offices of transport enterprises, although most was collected by bank personnel on mission and staff from the Bank's field offices. In one case, a consultant was used to collect the necessary financial data in the field.

24. Naturally enough, the sources of data regarded as the most reliable were annual accounts, complete with notes on accounting policies and the compilation of specific items, audited by an international firm of public accountants. Unfortunately, only a small minority of the figures presented in this report have been extracted from such ideal sources. Other sources used consisted of:

- (i) Audited annual accounts without explanatory notes.

- (ii) Annual accounts audited by the local auditor-general's departments.

- (iii) Draft and unaudited accounts.

- (iv) Incomplete accounts, usually consisting of a profit and loss account only.

- (v) Financial planning and budgeting documents.

- (vi) Complete or summarized annual accounts quoted in Bank or consultants' reports.
21

**S. Quality** of Data

25. The varied and often doubtful sources of data described above must impc'se severe reservations concerning the reliability and quality of much of the data. Study of the individual reports, accounts and other documents confirmed this and revealed particular deficiencies and difficulties in interpretation. The main ones weres

- (i) It was not always possible in the time available to collect complete data for the same financial year.

- (ii) Statements of road revenues and expenditures were often ambiguous and it was not always possible to identify whether, for example, all taxes and user charges were included, or had been adjusted on the grounds that part of the user charge represented a general revenue tax.

- (iii) There were many cases where the bases of depreciation were either not defined or appeared not to reflect asset values. There were few references to obsolescence or replacement costs.

- (iv) The accounting treatment of foreign exchange movements varied widely and in some cases was ignored.

- (v) Some of the Latin American accounts were compiled more on a cash than on an accruals basis and made no clear distinction between capital and operational expenditures.

- (vi) Only in a few cases was there a split between interest on government and foreign loans. Similarly, the source of additional loan capital was often not stated. Some foreign loans are in effect concealed in the accounts in that the borrower is the government which in time lends to the enterprise in local currency.

- (vii) Sometimes there was reference to government subsidies, but these were not quantified in the accounts. Their rationale was not always clear. Many enterprises are required by government to charge uneconomic rates to certain categories
22 of users, including the government itself. Such subsidies by the enterprises were virtually never quantified.

4.

# Conclusions From the Numbers

26. Comments on the sources and quality of data indicate that there are major limitations on the conclusions that can be drawn from the summarized Financial Statements, Profit and Loss Accounts and Balance sheets collected during this study. In particular, the difficulty experienced in assembling figures for similar years, the widespread gaps in the information obtained on subsidies, the breakdown of interest payments and the sourceslrecipients of current year additions to, or repayments of, loan capital means that no meaningful attempt can usually be made on the basis of a desk study only to quantify monetary flows between enterprises and their governments.

27. Subject to the above qualifications, the figures nevertheless show that ten of the fourteen highways departments examined earned a surplus and made a net contribution to general government revenues (nine still did so after the shortfall of road maintenance had been taken in account) and in some cases the contributions were significant. Of the 75 transport enterprises or groups of enterprises examined, 26 recorded profits in the years' accounts analyzed, while 49 recorded losses. The financial years analyzed ranged from 82/83 to 87/88. The overall financial impact of the transport sector in these countries on the government's overall fiscal balance is summarized in Table 5.

28. If realistic depreciation had been provided in all accounts, it seems probable that some of the profits would have become losses. Hardly surprisingly, none of the railways were profitable. On the other hand airlines, airports and ports showed a roughly even split between profit makers and loss makers. In only six of the fourteen countries, did the aggregate results of the public transport sector show a profit. These countries were Philippines, Thailand, Argentina, Colombia, Costa Rica and Tunisia.
23 Table S. Su_mary ot Fiscal Flows To and From Governmnt (a)

|<br>|-<br>---------<br>|-------------<br>(U.S.<br>**S,**<br>|million<br>(<br> <br>|**flnl**<br> <br>b))<br>|**-----**<br><br>|||
|---|---|---|---|---|---|---|---|
|I<br>Country<br>____<br>**...**<br>IFRCA:<br>blopio<br>hana<br>Tenzana<br>jZaire|Road.(e)I <br>**..._**I_____...____<br>----------<br>--<br>I<br>I<br>1<br>(28.3)1<br>I<br>(9.7)1<br>1<br>(S1.4)<br>1<br>(49.7)1<br>I|liportsI<br>I<br>--<br> <br>(4.4)1<br> <br>(2.2)1<br>(9.2)<br> <br>_f(0.4)_<br>|Port<br>I <br> <br>15.41<br> <br>1 21<br>117.1<br>_1_(0.7)<br> <br>|RailwayI <br>(34)<br>t7 7)1<br>(92.3)1<br>1<br>960<br> <br>|Airilnos<br>I <br>...I<br>(")1<br> <br>**.4**<br>(1.)1<br>e.**I-.**|hippingb<br>0.0<br>(14.E)1<br>**01**<br>|uslRdTpti<br>**-**<br> <br>0.0<br>(1.S)1|
|IASIA:<br>Tlndoneloa<br>lPhilippines<br>Sri Lanka<br>Thallnd|4<br>4(".4<br>**64.8**1<br>n.<br>1<br>|1<br>)1(12.2)1<br>(17.7)1<br>1l t<br>|<br>1<br> <br>(5 4)<br> <br>**0.**<br>9.<br>6<br>66|<br>I<br>(.09)<br>t4<br>(41|(2906.)<br> <br>0.°I<br>I<br>1U.2.<br>*1.7 1<br>|1(112.0)1<br> <br>**-**<br> <br>(<br>' 7'<br>1<br> <br>0I|(6.)I<br>_<br>**(290.)1**<br>_<br>|
|ILAC:<br>|Argentinn<br>IColombla<br>IC.t. RIco<br>IJamaca'<br> <br>|I<br>I1,641.7<br>I<br>(2.)1<br>|<br>252 1<br>23.6I<br> <br> <br>|**-**<br>|<br> <br>(40.2)1<br> <br>(0t1)1<br>(5.1)1<br>|<br>(9.6)<br>(360<br> <br>a09<br>(0.3<br>|1(423.7)1<br>(24.4)1<br>(2.5)1<br>)1(3.0)<br>|1<br>56.2 |<br> <br>**-** I<br>**.0**I<br>1(4.1)1|<br>(14.0)1<br>.II<br>-l<br>**'.1**<br>'<br>|~~~~~~<br>**-**<br>**-**<br>I<br>|
|IE-<br>IEMEM<br>Algeria<br>Pakietan<br>iTuninin|I<br>I<br>:IIII<br>1<br>".?<br>1<br>311<br>I<br>26.9 1|I<br>96)1<br>**_0_**<br>1.6I|I<br>0<br>1<br>**_._**<br>00I<br>1.9I|I<br>(112.t<br>(<br>I<br>(15.3)1|I<br> <br>1<br>1<br>0<br>.t9.6I<br>26.0I|<br>I<br>I<br>12-8<br>(10.3)1<br>0.6I|I<br>I<br><br>0.6<br> <br>I|

Notes: (a) Figures eneorily retor to different yors.

(b) Local currency amounts converted into U.S. I at the prevailing exchange rates. (e) Including horth ll o regular mlantennce.
24 Scope for improving Data Quality

**5.**

29.

29. Clearly, if all the data had been extracted from audited annual accounts with full explanatory notes, the reliability which could be attached to the figures would be greatly enhanced. However, this would not have eliminated such grounds for reservation as:

- (i) Badly controlled accounting systems.

- (ii) Accounts qualified by the auditors.

- (iii) Inadequate policies for treatment of depreciation, loan amortization, foreign exchange movements and the impact of hyper inflation.

- (iv) The concealment of subsidies.

- (v) The lack of breakdown of interest paid as between government and other lenders.

30. Even in developed Western countries, accounts-based comparisons between different enterprises in the same industry pose many awkward problems. Where the comparisons are across public sector enterprises from a broad mix of developing nations, the difficulties are magnified appreciably. These could no doubt be eased somewhat through examination of accounting systems and discussions with chief accountants and auditors. This could be a lengthy and costly procedure.

31. Provided a reasonable degree of cooperation was assured, perhaps chief financial officers could be requested to complete a return designed to elicit cash flow data central to the objectives of the exercise. In the case of roads, this would include the usual information on road revenues and expenditures (exclusive of any general revenue adjustments), together with an estimate (if feasible) of the shortfall in regular road maintenance. For transport enterprises, it would include:

- (i) total revenue (showing clearly any current government subsidies)
25

- (ii) estimated revenue lost due to government imposed "social obligations" (e.g. concessionary fares)

- (iii) total working expenses (excluding depreciation and other items which do not involve cash movements);

- (iv) net interest paid or received (showing clearly how much is paid to, or received from, government);

- (v) local taxes paid (e.g. corporate tax, import duty on equipment, etc.);

- (vi) surpluses transferred to government;

- (vii) equity capital or non repayable grants subscribed by government during the financial year;

- (viii) increase/decrease in overdraft or short term loans, provided, or guaranteed by government;

- (ix) increase/decrease in long term loans from/to:

- government

- other domestic lenders

- - foreign institutions.

This return would supplement, rather than replace, the annual accounts.
26

# III. OVERALL CONCLUSIONS

32. Use of the above framework in Tanzania proved helpful and resulted in a sector review which went well beyond the financial issues normally considered in sector reports. In particular, it focused attention on revenue enhancement, the fiscal consequences of expenditure plans and the sector's impact on the government's overall fiscal balance. In this connection, the framework explicitly recognized the important link between transport sector activities and the overall macro-economic resource constraints within which they must operate. It thus emphasized the need in public expenditure analysis to formulate recommendations on the level and composition of transport sector expenditures in the content of overall resource constraints. In doing so, it furthermore looked at both sides of the balances the setting of priorities for expenditures on the one hand, while being mindful of the need to enhance overall revenue mobilization on the other.

33. The subsequent review of 14 other countries showed that a usable - - though highly imperfect -- framework can be developed on the basis of a desk study before any fieldwork begins. Host of the documents required are already available in Bank files, can be fairly easily collected during the course of regular mission work, or collected by staff in the Bank's field offices. Ideally, this framework should be prepared by staff with accounting qualifications (perhaps by a Technical Assistant) and must then be clarified and elaborated on during the initial phases of any subsequent fieldwork. Clarification would include identifying sources of equity/loan capital, making subsidies more explicit, sorting out inconsistencies in accounting practices and establishing how many accounts receivable were really bad debts. This generally involves quite a lot of initial detective work. However, once this data has been assembled and the qualifications explained, future updating is easier and should take less time.
27 Attachment 1.

# Draft Consultation Document ImProving and Maintaining Trunk Roads

# Introduction

1. During the past few years the government has faced a severe fiscal crisis and this has meant, among other things, that the annual budget has left llttle room to meet the growing need for road maintenance and even less to deal with the enormous back-log of required rehabilitation work. A recent estimate suggests that the main trunk road network has deteriorated to the point where over 60 per cent of the paved main road network, and _75_ per cent of the unpaved network, are now in poor condition. This has resulted in higher vehicle costs -- mainly through increased use of fuel and damage to the vehicle and tires -- and has also hampered the efficieLv movement of agricultural products in rural areas.

2. Failure to maintain roads to an adequate standard does not save money. It not only increases vehicle operating costs, but simply postpones the required - expenditure to a future date. What is not done today has to be done tomorrow - generally at a higher cost -- unless the roads are abandoned and allowed to deteriorate into earth tracks. With this concern in mind, the government has approached the World Bank and the rest of the Donor community and asked for help in bringing the road network back to a satisfactory condition. These agencies have agreed to do thls, but have also pointed out that it makes no sense to rehabilitate a road when there are no financial resources available to maintain it. With this in mind the World Bank invited the government to put forward proposals for mobilizing the additional resources needed to maintain the rehabilitated trunk and essential rural road network in a stable long-term condition. This document outlines possible ways in which that might be achieved.

# Scale of the Problem

3. The Hlnistry of Communications & Works has been working with World Bank staff and consultants to prepare a realistic road maintenance program. In
28 1987/88 the government budgeted to spend about T Sh 2,700 million on roads. Of this, about T Sh 2,380 was proposed to be spent on routine and periodic maintenance. It is our understanding that this figure would need to be increased to about T Sh 8,000 million to ensure maintenance was carried out to a satisfactory standard. This gives a measure of the scale of the crisis we are facing in the road sector. The challenge facing us is therefore that of finding ways to mobilize these resources in a manner that is acceptable to all the interested parties cor.cerned and does not damage the country's long-term economic prospects.

# Options Available

4. The options available fo. mobilizing additional revenue for road maintenance and rehabilitation are limited. Current revenues are principally derived from import duties and sales taxes on motor vehicles and spare parts, sales taxes on fuel, road toll taxes and motor vehicle taxes. One way of raising the needed revenue would be to raise all these taxes by a uniform amount. However, the government does not believe this would be the best solution. Some taxes are already high, particularly those on new vehicles, and increasing them still further would merely encourage tax avoidance and, worse still, tax evasion.

5. At the same time the government is mindful of the fact that fuel imports are not subject to import duties and that diesel fuel is also exempted from sales taxes. As a result, the price of fuel in Tanzania is significantly lower than in most other countries in the region. For example,the price of premium gasoline is nearly 5/- per liter lower than in Kenya, regular gasoline is 8/- lower, while the price of diesel fuel is over 11/- lower. Differences of this magnitude lead to fuel smuggling and do little to encourage fuel conservation. An alternative way of mobilizing the necessary revenue would therefore be to raise fuel prices, perhaps even to equalize them with those in Kenya at the current official exchange rate.
29

# Government Intentions

6. Raisang tax rates to generate more revenue for road maintenance and rehabilitation is only one part of the solution. Equally important is the need to ensure that tax revenues are raised efficiently, that the money voted for roads during the annual budgeting process is actually spent on roads and that the required maintenance and rehabilitation work is carried out in a costeffective manner. With this in mind the government is therefore prepared to consider the following actionst

- (i) Simplification of the present tax structure to remove anomalies and inconsistencies, reduction of the 50 per cent sales tax on motor vehicle spare parts as part of the government's action plan to reform the tariff and sales tax structure, and abolition of the road toll tax.

- (ii) Thoroughly overhauling present procedures for controlling expenditures on roads, including an examination of the way the financial controllers in the Ministry of Works, Communications and Transport verify and certify that the work paid for by the Ministry has been carried out and completed to a satisfactory standard.

- (iii) Introducing contracting of road resealing, regravelling and maintenance to ensure that such work is carried out on time, to a satisfactory standard and within agreed budgetary allocations.

# Consultations

7. The government is now inviting comments from interested parties on the above proposals. At this stage the government has an open mind about how to proceed. The only fixed point is the urgent need to mobilize additional revenue to support a greatly expanded program of road maintenance and rehabilitation. With this as the starting point, the goverrment would therefore value your views on the following questions:

- how can additional revenue be mobilized to finance a realistic level of road maintenance and rehabilitation

- would it be better to raise this revenue by raising all road user taxes, or by equalizing fuel prices with those in Kenya

- - is it worth simplifying the present structure of road user taxes
30

- would anything be gained by reducing the present 50 per cent sales taz on spare parts

- what would be gained from abolishing the present road toll tax

- should the government review and strengthen control over road expenditures

- would it be desirable to undertake more road maintenance work by contract

- are there any other matters relating to the taxation of road vehicles, or the financing of roads, that need to be brought to the government's attention