State of Roads: briefing by Southern African Bitumen Association (Sabita)

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Transport

11 October 2001
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TRANSPORT PORTFOLIO COMMITTEE

TRANSPORT PORTFOLIO COMMITTEE
12 October 2001
STATE OF ROADS: BRIEFING BY SOUTHERN AFRICAN BITUMEN ASSOCIATION (SABITA)

Chairperson: Mr J Cronin (ANC)

Documents handed out
SABITA - Fact Sheet (See Appendix 1)
SABITA Presentation (See Appendix 2)
The Under-provision and Under-capitalization of Road Maintenance, Rehabilitation and Upgrading in South Africa: Analysis and Measures toward Improvement - A study commissioned by the Southern African Bitumen Association (See Appendix 3 for Executive Summary)
SABITA - Annual Review 2000

SUMMARY
The South African Bitumen Association (Sabita) is a non-profit organisation comprised of major oil companies and road construction firms. Concerned with the deterioration of roads, it commissioned a team of academic to review the current situation which has resulted in a study document that was presented to the Committee.

Sabita's interest centres on the roads in South Africa but more so in poor communities where roads are non-existent. They believe that the prerequisite to development should first be road infrastructure and hope that this type of thinking could be encouraged and enhanced.

MINUTES
In giving a background to the Southern African Bitumen Association (Sabita), Mr P Myburgh, the CEO of Sabita, said his organisation was a non-profit organisation founded by its members who are persons active in road construction and road building and comprises of oil companies, other suppliers, contractors and consulting engineers.

Their mission is to promote best practice in the delivery of roads through research, education and training on the one hand and to promote cost effective means of delivering products and services. They regard themselves as a sector that provides road infrastructure that is a sub-sector of civil engineering.

In conjunction with the CSIR Transportek, Sabita has established Asphalt Academy (AsAc), which has wide-ranging terms of references to make people more competent within the road building industry.

They have another division that strives to improve efficiency by addressing mainly externalities ranging from scanning world literature on best practices, environmental issues and developing mutually beneficial relations with the public sector which is their main client.

Sabita's relations with government dates back to 1987 and it has been their concern that for decades there has been neglect of road transport infrastructure. It has been their policy to be constructive when dealing with government.

Sabita has invested its resources in defining the new environment, looking at prognostications for roads or road transport in the future and in particular on social development issues as it relates to roads - defining the expectations of communities and how their growth would be related to roads.

Last year as it was becoming evident to them that the neglect of roads was on-going. They commissioned an academic team to review the current situation and in terms of capitalization of roads and road maintenance to make recommendations and the terms of reference given to the report were that it should be a positive report that would promote growth and development and secondly that it would align to core government policy and obligations.

Mr Myburgh then introduced his teams which was composed of Professor Harriet Ngubane also an IFP MP who looked at the social development issues in the report, Professor Don Ross of UCT who is the main author of the report, there were other academics on the team not present like Professor Vincent Maphai, Professor Brian Kantor of UCT, Professor Peter Collins (Salford University), and Professor Tom Lodge (WITS). He also introduced former PAC MP Mr Mike Mwendani who is a social development advisor to Sabita.

Professor Ngubane reminded the committee that two years ago President Mbeki in his opening parliament speech made mention of development particularly urban renewal and integrated rural development that it was essential for the country.

Sabita's interest centres on the roads in South Africa but more so in poor communities like the countryside where roads are non-existent. They believe development should be spreading and should become a reality also in the countryside.

According to Professor Ngubane the prerequisite to development should first be road infrastructure as was the case in developed countries and believes that with the support from the portfolio committee this type of thinking could be encouraged and enhanced.

The advantage of this is self-evident. Investors would not invest where there are no roads and rural areas "where the poor of the poorest reside would remain peripheral and ignored." Services from different Ministries cannot be delivered properly where road infrastructure is non-existent.

Mr Myburgh continued that they were looking at a deteriorating asset and the current levels of expanding roads would not reverse the situation if anything it would exacerbate it. The Ministry of Finance in its submission to the NCOP referred to the R10 billion-pa backlog over five years, which is needed. South Africa is currently investing on the order of R3.5 billion-pa saying "South Africa was still on track."

South Africa is inching its way towards the "shadow-line" an academic expression that means, "We are putting recovery further and further out of reach" - where road deterioration would affect the economy negatively.

The report also refers to what is called "the longer the returns on an investments the less attractive it becomes" and they believe the decision makers have been thinking in that mode for a while.

They also acknowledge that road construction and economic growth goes hand in hand. What is less appreciated particularly in developing countries is that road construction forms an essential part of social infrastructure.

If one looks at provincial budgets one notices that roads are located somewhere in economic infrastructures and social and other services do not include roads and this is one of the key concerns Sabita has.

Government has a constitutional obligation to deliver mobility and mobility means providing access to economic and social growth, which includes employment opportunities, opportunities for vertical growth, and access to education.

In KwaZulu-Natal school children walk from dawn to dust because "no self-respecting taxi can operate in those roads." Ambulances travel in bush paths with sirens on to get to some settlements to pick up a critically ill person." Roads are part of the empowerment agenda where houses, clinics, schools and places of work "must be linked with an adequate road infrastructure."

Another issue becoming more prevalent in recent years and linked to the new constitution Clause 24 (a) states: "South Africans are entitled to a safe environment" and it seems to Sabita that the courts are saying roads are part of that environment.

Sabita has a major problem with the provinces, which are not given incentives to spend their allocations efficiently. They estimate that their overheads account for 70 percent of their allocations. Salaries absorb just under 60 percent of the allocations. They believe that if the provinces could be efficient a lot of money would be released for purposes for which it was intended.

The Chair asked for clarification on the 70 percent issue, whether that was money earmarked for infrastructure development or something else?

Mr Myburgh said 70 percent of the money transferred to the provinces for road construction and maintenance is unproductive in that it goes to overheads and salaries and what they are saying it should be the other way round.

They are aware too that when it comes to roads at provincial boundaries there is lack of coordination and the route taken by the Department of Transport in establishing a National Roads Agency to deliver and to operate roads on its behalf seems to be a far more efficient route to go.

The report suggests that there should be four provincial road agencies and not nine to function productively and the key part to the report is that they believe they have found a proposal to give incentives to provinces to work more efficiently.

Road versus Rail transportation
About eighty percent of the freight and passengers are lured by road today and whilst this can be distributed at 50-50 percent basis this would not save the roads - roads have gone too far.

Road users are increasingly becoming irritated and restive based on their scale to the contribution of the fiscus and the deal they are getting in terms of the on-going deterioration of roads, threatening their safety in many cases.

What Sabita is suggesting is that South Africa should look at "our house, bring it in order and work efficiently anyway. By doing so we could release billions of rands that could be applied for delivery of roads and services."

The report is part of a solution seeking dialogue with government. It is not confrontational and was compiled in response to invitation by Minister Omar at an industry meeting where "he acknowledged the crisis" and asked the industry what can they do to help and the report was their response.

It covers the state's liability in terms of road and surface related accidents; it links road provision to social obligation on the part of the state, proposes some models, addresses the issue of inefficiency and incentivises the provinces, and recognizes severe poverty in rural areas.

Input by Professor Ross
Prof Ross noted that if you have made the provision of the road costs unnecessarily expensive by defaulting maintenance for too long, then often the most efficient way to invest in the primary asset (hospital, housing development or school) would be first to invest in the secondary asset.

However he said, "Once you cross the shadow line, that is no longer true because priorities that technically needed to be sorted out suddenly become very difficult qualitative judgment kinds of problems. At that point you are somehow forced to fly without technical help."

In terms of providing some technical guidance prior to crossing the shadow line (the presumption is that the shadow line would not be crossed) it seems there are two primary tricks that need to be turned.

The first trick involves finding a way to pick investment priorities that do not lose track of the social goals. Most economic instruments on this matter have been designed to address the first world advanced economic context.

As a result of that little attention has been paid to the extent to which what the economists call "wealth effects". Standard cost-benefit instruments for doing that prioritization emphasize present capital value of assets including present value of human capital.

If one was to apply that tool blindly to South Africa for example in issues of prioritizing low expenditure one would discover that CBA was "always telling you to keep making central highways through Pretoria-Jo'burg-Cape Town better and better and the reason for that is because people traveling on urban roads their present capital value of their time is so high relative to the capital value to total infrastructure development."

One needs to find instruments that on the one hand "don't build in some arbitrary technician conception of social priorities but at the same time allow the prioritizing mechanism to be sensitive to the fact that the upliftment of the poor and the need to integrate rural and urban infrastructures and to make it possible for the rural poor to become less poor by remaining in the rural areas and not going to the cities."

Opportunity Value Assessment (OVA)
OVA refers to a general class of types of instruments that suppose to do the kind of things that CBA does, help to prioritize and pick and at the same time being sensitive towards the facts.

This instrument, instead of emphasizing present value of capital assets, including human capital assets, is sensitive to potential capital value assets and plugs them back into the inputs.

An OVA instrument used in South Africa needs to be developed on customized basis; it cannot be pulled off the shelf. There is not yet such a tool.

The Chair at this stage interrupted the Professor to encapsulate what he had said so far: "You are saying that if you took an American model off the shelf and if there was a half-an-hour delay between the M1 Jo'burg to Pretoria highway, what is the cost of that half-an-hour delay to the economy versus the three day delay because a bridge is washed away in Northern Province. The immediate cost of the economy on the M1 is much greater than three days delay on the Northern Province. However what one would be losing sight of is that if you put all your money into the M1 you'd simply be perpetuating the historic inequalities with long-term growth consequences for the economy"

Prof Ross agreed that this was precisely correct - and that that was trick one. Trick two is making sure that once one has assembled priorities in a technically competent way the expenditure and other efforts towards those priorities are actually efficient.

Capital Grant Transfer Skills
The second emphasis therefore on the report is what is called Capital Grant Transfer Skills (CGT). Earlier it was alluded to difficulties and concerns about the way provincial and other sub-national government levels are presently handling their allocations.

These concerns are not peculiar to South Africa; they represent a problem that has been encountered by every single "federally" organised country in the world. These problems have been severe at one time in Canada, Belgium, Australia and somewhat in America.

In all these countries there have been major efforts to have to line up the incentives of provincial and other sub-national governments so that they don't wind up both misallocating and inadvertedly competing with each other on creating efficiencies.

In South Africa there are potentially constitutional difficulties with respect to trying to increase the efficiency of provincial allocation. The national government cannot simply abrogate to itself powers to tell provinces what to do.

The technical trick is to find an instrument that allows sub-national governments to still pick the project to some extent but to be incentivised in such a way that which ever priorities they pick their own budget flexibility are depended upon capital efficiency in terms of the OVA of what ever reason they choose to spend it on.

An imaginary scenario of most sub-national governments being entirely selfish was given. What is ideally wanted is a Capital Grant Transfer occasion system, so that when this situation occurs, these governments could ask themselves how best they could get what they want, the answer could turn out to be: invest in capital efficient infrastructure which would grow the budget out of which they could buy the selfish goods.

What Needs To Be Done
CGT of the two is the big one, that is, if one wants to do something big to make a difference to the problem of approaching the shadow line, CGT would be it. CGT would need inputs, and that input would be something like the OVA. The two go together.

For CGT to work, South Africa would need full involvement from departments like DTI and Finance, Education, Health and Transport and the provinces. It would take a minimum of three years to develop and implement the CGT scheme, that is, if everybody was cooperative with everyone else.

The development of the OVA scheme is more practical and less expensive, something that one can begin to get going now. On CGT Professor Ross suggested that everyone involved should start getting the ball rolling now.

He encouraged Sabita and its partners to become active partners of SAMA. The report recognizes SAMA by far as the most efficient contributor to road infrastructure in South Africa.

They have suggested to SAMA that Sabita and SAMA working together sponsor the selection of three road sites where infrastructure priorities decisions are presently being made, mostly in consultation between SAMA and provincial authorities and that teams of economists go into the field an experiment with OVA possibilities on those sites.

Sabita has offered to sponsor this work and they have heard encouraging preliminary discussions with the Director of SAMA towards getting the project off the ground. They hope from this work they would be able to come back to the portfolio committee to say they have more than the framework of OVA.

Secondly, they are hoping to organise a national conference on CGT, which would be the first step towards CGT. Key ministries mentioned above would be invited including world experts on CGT. They are recommending a conference that has a practical mandate of coming up with a customized South African CGT. He appealed to parliament and especially the portfolio committee to "help make CGT a reality."

Presentation by Mr Mike Mwendani
Mr Mwendani told the committee that his involvement with Sabita dates back long before "re-joining" politics in this country and was especially active in Soweto where they created "developmental fora" focusing on the township's infrastructure.

They started from the paradigm that "if a human body requires arteries and veins to survive" then any country would require roads for "connectivity". The more roads deteriorate the worse off the country was.

If there are no roads, he asked, how do people access essential services such as schools, clinics, and so on? He said that was the paradigm they started from when connecting with the people about this issue.

He said maybe the issue of road was not "so sexy" as education, welfare and health was in this country. He said the issue of HIV/AIDS was not sexy too but now that there was awareness of Aids people are beginning to talk about it.

He suggested that there was a need to be "vocal" about roads as the country was about AIDS. He said roads in Soweto were built much to the "enchantment" of the people in Soweto because there are few entrances and exists in that township "for accessing amenities available to them."

In most cases people do not see roads as important until such time that the problem becomes big. At the present moment they may see the seed and not realise that "the seed would develop into a forest. The seedbed of road destruction was in front of us and is busy growing into a forest," he said.

Mr Mwendani mentioned the Moloto Road between Kwa-Mhlanga and Pretoria, which claimed many lives until people decided to go on strike which resulted in people not going to work. It was only then that it was realised that the road needs broadening.

He said there are many Moloto Roads in the country especially in the townships where exits are one road, or two roads but not more than three like in Soweto where there were three not long ago and now there are four. The M1 North in Johannesburg has more than twenty off-rumps with a lesser population than Soweto.

Mr Mwendani said that was not acceptable in the sense that this creates instability in the country due to this contrast and can be prevented by bringing the issue of roads on the national agenda. People on the ground must not trigger the national awareness and the role of Sabita is to raise this awareness.

Professor Ngubane added that by being with Sabita they were motivated in this by the keen interest to see poverty alleviated and development taking firm approaches and hoped the oversight role of the portfolio committee would be heightened by this presentation.

Discussion
Mr JH Slabbert (IFP) asked what provincial governments are doing with their money for roads since those roads are not fixed while the national roads are, although they get ruined by lots of traffic and what can be done about that?

Professor Ross replied that South Africa has got to get work going to make the CGT an instrument of reality. It is designed to deal with inefficiency mostly at sub-national levels. He said as an economist he knows no other method that works well in addressing those kinds of problems than the CGT.

Ms SK Mnumzana (ANC) wondered whether toll roads could be a better alternative.

Toll roads are an essential part for any efficient road to be maintained but the problem was they are not economical. It won't be possible to solve the road problem in this country through toll roads unless they have a minimum threshold of usage.

Mr A Ainslie (ANC) noted that potholes that are filled do not last long and wondered whether there was the a way of rectifying that adding that in countries like Ireland and England there were no potholes on their roads. The models that are being suggested, are they mostly from developing or developed countries?

There has been some preliminary work done in Brazil and in India with respect to CGT and the kind of conference he was suggesting was practical as step one to pick up on expertise. The reality of the conference would be when parliament co-sponsors this conference with Sabita and other partners. It should not be an academic exercise other than bringing together decision makers so that everybody hears the same story told at the same place at the same time instead of independent plans being developed.

Mr T Abrahams (UDM) posed a question to Sabita about when they say South African roads are in poor state whether they had a breakdown of which roads needed urgent attention - are they referring to roads in general or specific roads such as provincial or national? And how did Sabita arrive at four and not nine decision making regional structures?

The present statistical profile of South Africa's roads is poor. It is very hard to come by with a unified statistical report. Whenever they have a figure in their report they try to be conservative.

On how Sabita came with the figure of four Professor Ross said that the Minister suggested that the four agencies would be an uncomplicated system.

Mr G D Schneemann (ANC) asked whether they were working with the Integrated Rural Development programme.

On integrated rural development programme Professor Ross said Sabita would suggest that such projects be fed into the process that Sabita was developing through consultation with people on the ground and through SAMA

Ms P de Lille (PAC) asked whether Sabita had had any discussion with the private sector on road intervention since "government won't be able to do it alone?"

The response was that there are things being done right now at national level to get more of the risk associated with those projects held by the private sector. One thing they find with the number of their associated schemes was that contracts are not all well designed from the point of view of making sure that the risk is being held for long by the party that is helping to develop the project. One party would make the profits while another incurs the risks.

Appendix
SABITA FACT SHEET
The Road Network
South Africa has one of the most extensive road networks in Africa, totalling over 500 000 km. National government, through the South African National Roads Agency, manages an estimated 7 200 km. Provincial authorities manage approximately 223 128 km, whilst local government manages 269 672

All national roads are paved. 25 percent of provincial roads are paved, and the balance is gravel. Paved roads carry about 91 % of daily traffic. A significant portion of gravel roads is concentrated largely in rural areas, and utilised on a daily basis.
Number of motor vehicles in South Africa
Light vehicles - 5 882 000

Heavy vehicles - 491 000
Other - 489 000
Significantly, Gauteng has the greatest concentration, at 37,4% with only 18,1% of the population, whilst the Eastern Cape, with 15,5% of the population, has only 6,8% of the country's vehicles.
Expenditure on road infrastructure
A breakdown of spending on national and provincial roads in the 1999/2000 fiscal year is thus:

Province

Actual spend

Percentage of total prov. expenditure

Eastern Cape

154 000 000

0.9 %

Free State

186 000 000

2.8 %

Gauteng

405 000 000

2.4%

KwaZulu-Natal

505 000 000

2.6%

Mpumalanga

182 000 000

2.8%

Northern Cape

96 000 000

3.9%

Northern Province

325 000 000

2.6%

North West

227 000 000

2.8%

Western Cape

347 000 000

3.2%

National spending for the relevant period stands at R923-million.

Road backlogs
The estimated cost, according to provinces, to meet backlogs in road infrastructure development is R23 billion. 53% of the backlog is identified as maintenance and rehabilitation spending; with 28% associated with upgrading, and 19 percent for new roads.

Over R10-billion per annum is required to address the backlog over 5 years. Of this, over R4-billion and R5,8-billion per annum is needed, respectively, to eradicate maintenance and rehabilitation backlogs over 5 years.
The backlog estimate is highest in the Eastern Cape, at R6-billion, and is on average R3-billion in each of the Free State, KwaZulu-Natal, Mpumalanga and Northern Province.
Allocations for 2001/02 will not meet the backlog. Provinces where backlogs are higher seem to allocate relatively less funds to road development than provinces where backlogs are lower.
Socio-economic ramifications of current road environment
In 1999, there were 520 000 accidents amounting to 10 000 deaths, 40 000 serious injuries and 86 000 minor injuries. The cost of these accidents to the economy was R12 billion. The road environment contributed to 20% of these accidents while 10% occur as a direct result of road condition.

According to the Minister of Transport, Dullah Omar, overloading costs South Africa R600-million annually, but the amount allocated to overloading law enforcement is only one tenth of this figure.
It has been argued that the Road Traffic Act must be amended to lower maximum payloads, however, South Africa recently signed the SADC protocols which encourage higher tonnages on single axles and gross combination masses.

Appendix 2:
CONTEXT OF SABITA REPORT
- Social development
- The rural social fabric

THE SOUTH AFRICAN ROAD CRISIS
- Under-investment in road infrastructure since the 1970's evident in a road
deterioration
- Current expenditure levels and inefficiencies will not reverse the situation
- South Africa inching its way over the "Shadow Line"

ROADS AND THE ECONOMY
- Road construction stimulates economic growth and assists in job creation
- Roads a key part of economic and social infrastructure
- Roads now an issue of fundamental, social obligations of the State

ROADS AND SOCIAL OBLIGATIONS OF THE STATE
Government has a constitutional obligation to deliver mobility and access to:
- economic and social growth
- education
- health services
- emergency services
- employment and empowerment
Houses, clinics and schools and places of work must be linked by adequate road network

ROADS AND A SAFE ENVIRONMENT
- State's obligations w.r.t. public safety on roads arising from negligent
administration have been emphasised in recent court judgements
- Wrongfulness now applies to omissions by a public authority
- A duty of care now rests with public authorities

THE STATE'S OBLIGATION
- In 1999, there were 520 000 road accidents in South Africa with a cost of R12
billion to the economy
- CSIR found that in 20% of incidents the road environment played a major role
- The State could be exposed to major litigation and settlement costs to further
erode scarce resources if it elects to continue current levels of road financing

PROBLEMS WITH THE PROVINCES
- Spending incentives at provincial and local levels promote inefficiency -
a world-wide phenomenon
- Total provincial road budget stand at R2.6-billion.2
- Overheads account for 70% of allocations
- This leaves a paltry R0.7-billion for delivery
- Unacceptably inefficient
- Lack of a co-ordinated national approach to roads
- NRA efficiency is significantly better
- Provincial and local government need to be incentivised.

UNDER-SPENDING AND UNDER-FUNDING
- 80% of freight and passengers moved by road
- Road users annually contribute R26-billion or 12% of total government revenue
- Government allocates about R3.5-billion to roads
- Both Minister Omar and the President acknowledged the under-funding crisis in
their budget vote speeches, although no firm action taken to date
- "Over R10-billion per annum required to address backlog over five years" Min.
Finance Oct. 2001
- Government departments consistently under-spending
- In the 1999/2000 financial year - this under-spending topped R1,5-billion
- The transport department under-spent by R54-million
- Welfare under-spent by R127-million
- Properly managed, the budget does exist to address the backlog

THE SABITA REPORT
- Part of a solution-seeking dialogue with government
- Compiled in response to an invitation by minister Omar
- Outlines the State's liability in road-surface related accidents
- Links road provision to social obligations of State
- Takes cognisance of severe poverty in rural areas
- Outlines the need to incentivise 2nd and 3rd tier levels of government
- Offers a way of evaluating the "value in use" of roads supporting primary
infrastructure - Opportunity Value Assessment (OVA)
- Rights-related issues can't be picked up by standard cost-benefit-analysis
- OVA can replace standard Cost-Benefit Analysis - more appropriate to poverty
relief priorities.3
- Ultimately, a national, incentive compatible Capital Grant Transfer scheme is the
only general permanent solution

ALONG THE HIGH ROAD
- Report completed in April 2001
- Handed to Minister Omar in May
- Well received by the minister
- Copies to various government departments and political parties
- No official government response to date
- South Africa continues to approach the Shadow Line every day
- Inter-departmental interaction
- Relationship/influence over provinces
- Capital Grants Transfer (CGT) is the right route
- Omar pledges consultation with industry in June Budget Vote speech

CAPACITY BUILDING & EMPOWERMENT
- Urban context
- Education and training
- Skills transfer

THE ROAD FORWARD
- Practical examples of our proposition in three provinces shortly
- Better collaboration between Transport and: Housing, Health, Education,
Labour, Safety & Security and Finance ministries
- Incentive for better delivery by provinces
- A conference of expert pragmatists to evaluate CGT in SA
Appendix 3:
The Under-provision and Under-capitalization of Road Maintenance, Rehabilitation
and Upgrading in South Africa: Analysis and Measures toward Improvement.
A study commissioned by the Southern African Bitumen Association.
2


EXECUTIVE OVERVIEW

This paper sets out to show that for at least some spending on roads,

the present way of looking at matters is mistaken in terms of the

government's own stated priorities and its commitment (dating back

to the Freedom Charter) to deliver on "second generation" rights such

as housing, healthcare and education. In particular, it demonstrates

that far from expenditure on roads being in competition with

expenditure on other basic needs, it is in some crucial cases

essential for the most efficient securing of precisely those basic

needs. In other words, efficient delivery on housing, schools, clinics

etc requires, in some clearly identifiable circumstances, that some

new money be spent now on roads which service these items of

essential infrastructure, rather than being added to the budgets for

the provision of more housing etc. This is because such expenditure

will save government from having to spend more than is necessary in

the future on the provision of housing, schools, clinics etc and to

ensure that the beneficiaries of expenditure on these items get the

best value now in terms of delivery on their basic welfare needs.

Professor Don Ross (UCT) Professor Peter Collins (UCT)

Professor Vincent Maphai Professor Tom Lodge (WITS)

Professor Brian Kantor (UCT) Professor Harriet Ngubane (UND).3

The starting point for any discussion of roads policy in South Africa must be the

well-known fact that funding for the construction, maintenance and rehabilitation

of roads in the country has been inadequate for at least the past decade.

Some of the cost to the country of inadequate and inefficient expenditure on

roads is to be measured in terms of lost investment and other damage to the

much-needed process of wealth creation. It is also clear that the lives of the poor

are made worse by inadequate roads and the consequent absence of a safe,

convenient and cheap form of travel.

The Shadow Line

It is highly relevant that failure to spend money efficiently on roads maintenance

in the short term has the consequence of making it more expensive to retrieve

the situation in the medium term by spending on rehabilitation. In the long term,

as is sadly evidenced in other parts of the world, a point of no return is reached

and it becomes impossibly expensive to rehabilitate the roads infrastructure.

This, consequently, declines to the point of disintegration. In turn, this means that

the now enormous amounts of money cannot be found to rehabilitate the roads

because the roads are too bad to attract the necessary investment and facilitate

the necessary wealth creation. There is thus a "shadow line" in respect of

inadequate expenditure on roads, which South Africa has been moving towards

for some time. Once crossed, this shadow line makes recovery well nigh

impossible. Obviously, it is imperative to avoid crossing this shadow line

altogether.

Even so, it is tempting for government to think that, while sub-optimal provision of

roads for the purposes of wealth creation and meeting the basic transport needs

of the poor is indeed regrettable, both these things are inevitable for the time

being, given the scarcity of public funds. Priority must therefore unfortunately be

given to the more urgent demands made by the need to improve housing, health

care and education for South Africa's previously disadvantaged communities.

Only when these other and more pressing welfare needs, or economic rights,

have been adequately secured, can attention and resources be directed to

provide adequate roads infrastructure. It is this prioritisation which needs to be

urgently addressed.

A central point made in the paper is that "Even someone who takes the very

extreme view that all investment should be foregone in favour of immediate

transfers for the upliftment of the disadvantaged, should approve of efficient

maintenance of roads" (p 25). No-one in government, we believe, does take the

extreme view..4

In fact government does not believe that investment in infrastructure should

wholly ignore such concerns as wealth creation in favour of an exclusive concern

with providing basic goods and services to the poor. Consequently, the case for

more expenditure on roads is even stronger.

We have, however, concentrated only on what needs to be done in order to

deliver on the second-generation rights of all South Africans. In practice, this

means ensuring delivery, to the least advantaged communities, of the most basic

goods and services or a minimum standard of living.

Pending more detailed field research, it is reasonable to estimate the amount of

additional spending needed to meet only these clear and most basic needs of the

least advantaged members of society as being in the neighbourhood of R6-billion

per annum over ten years.

This is the shortfall in expenditure on roads as calculated by the DBSA in 1998

(p 10). It will serve as a guideline figure pending establishment of a more exact

and up-to-date estimate. However, it is recognised that before any government

could commit to such expenditure they would need to know where the money

was coming from. Here, there are three possibilities:

Raising new taxes;

Reallocating existing taxes away from other budgets to budgets for

roads;

More efficient use of existing resources.

Fortunately, it can be shown that the more efficient use of existing resources by

both the private sector and by government departments would result in savings

sufficient to pay for the entire proposed increase in roads expenditure. We

explain why this should be so.

In addition to our central economic argument for thinking that additional

expenditure on roads is necessary for meeting the government's commitment to

delivery on basic welfare needs for the poor, it is useful to mention two other

considerations which are relevant to the discussion of roads policy.

Constitutional obligations

Given the legal obligation of public authorities now established in South African

courts to ensure that roads are safe, government cannot afford not to invest in

roads at least to the point where they minimise their exposure to being found

culpably negligent by the courts..5

If they are found to be negligent they will have to meet claims for damages with

all the collateral expenditure involved in litigation and this may well cost more

than spending the money on making the roads safe.

We estimate that in 1999, there were 700 000 road accidents in South Africa,

with road surface conditions contributing to up to 20% of these accidents.

If the roads situation is left unattended, the State could find itself "as a potentially

unsuccessful defendant in between 70 000 and 140 000 accidents per annum"

(p 14). We assume, of course, that the state is motivated to observe its

obligations for the provision of safe public goods even in the absence of the

economic argument. However, this argument can help to bring on board those

sectors of society whose commitment to second-generation rights is more

doubtful.

Congestion

While there is undoubtedly a role to be played by toll roads and other "user-pays"

strategies in financing expenditure on roads, this is mainly appropriate where the

value of the road is not connected with enhancing the value of other forms of

infrastructure such as hospitals and schools etc.

Where the value of roads is so connected, this means in effect that there needs

to be public provision of an integrated and efficient urban roads infrastructure.

(Without an efficient overall system of urban roads, the result will be congestion

and - worse - "ghettoisation" around the good roads, which service the

hospitals, schools etc.) South Africa can ill afford this phenomenon.

Opportunity Value

We do not work here with standard cost-benefit analysis, since, for reasons

explained in the paper, this technique undervalues the interests of the poor and

so is not appropriate for evaluating commitment to public goods in developing

countries. Instead, we use `opportunity value' as our core concept, and show

with it that investment in roads may be the best way of efficiently delivering the

assets needed for meeting both second generation rights and basic welfare

needs.

"Opportunity value" measures the costs saved on maintaining a primary non-roads

asset by investing in good roads and the contribution to the value of the

primary asset as a result of its being serviced by good roads.

Consider a hospital, which is poorly serviced by roads. First, additional demands

will be made on the hospital budget by the fact that difficulty of access makes it

more costly to supply goods and services to the hospital. It will be more time-consuming

and therefore more expensive than necessary to deliver to the.6

hospital the staff and workers, building materials and all the goods that hospitals

need for their day to day running. Secondly and perhaps more obviously, since

the ability of hospitals to deliver the best possible kind of health services will

depend on the ability of both patients and health care staff to get to the hospital

quickly and easily, it follows that roads which facilitate this are promoting not just

safer and more congenial travel but better health care.

For these reasons, we are able to identify situations in which "if the (responsible

public) authority is currently not investing in the road ( i.e. the network of roads

which service the hospital), then the most efficient thing to do for the hospital …

is … to bring the road maintenance schedule closer to its efficient optimum."

(italics original.)

The Next Step

We have supplied formulae for calculating when such investment decisions

favour roads and when they favour other assets. In order for these formulae to

serve the needs of political decision-makers by providing accurate and objective

calculations of how best to secure the interests of the least well off, further

research should be done to establish the basic economic data.

Whatever number finally emerges, however, it is desirable to ensure that

additional expenditures on roads come, as far as possible, from the more

efficient use of existing resources.

At present an excessive proportion of the money allocated for expenditure on the

actual maintenance and improvement of roads infrastructure is actually spent on

administrative costs such as salaries, overheads and expenses by local and

regional authorities. This is so for structural reasons, which do not give these

authorities adequate incentives to allocate their resources efficiently in respect to

roads expenditure.

The private sector has been markedly more efficient in this regard, although its

performance could be improved also through the use of better contracts which

prevent private contractors from offloading risk they ought to bear onto the public

authority. We show how such optimally efficient contracts ought to be designed.

Hyperbolic Discounting and the infinitesimal margin

Two problems are endemic to provincial and municipal government funding of

roads. First, the benefits of funding roads and the social damage caused by not

funding them only gets to be noticed by the voting public at a point comparatively

distant in time from the moment when the funding decision has to be made..7

This remoteness in time reduces the pressure on both politicians and the public

stakeholders they serve to make the right choices now in terms of what is in the

long-term interests of society, and inclines them to accord much greater weight to

achieving smaller but more immediately recognisable public gains. Technically,

this is called the problem of hyperbolic discounting.

Smokers, for example, hyperbolically discount when they evaluate the benefits of

quitting differently depending on whether they have or haven't recently satisfied

their craving. This tendency - which arises in all people - is often compounded

by the so-called "problem of the infinitesimal margin."

For example, our smoker might sincerely want to quit, but can never settle on

any particular cigarette to be the last one because, after all, "What is one more

cigarette going to hurt?" It is this which best describes the second problem

endemic to the public funding of roads.

The evil which follows from every decision not to spend what ought to be spent

on roads now is always very small in comparison with both the pain of doing it

now and the evil of making the same decision tomorrow. Consequently decision-makers

always seem to have good reason for postponing doing the right thing

when other obligations weigh heavily. It is this tendency - again, common to all

people - which is taking South Africa closer to the shadow line every year.

Rational people take steps to get around these problems just as Ulysses did

when he bound himself to the mast before sailing past the sirens he knew would

otherwise tempt him to his doom. That is, they find ways of "pre-committing"

themselves. We discuss strategies by which public authorities in South Africa can

manifest the wisdom of Ulysses, and ensure that provincial and local

governments are motivated to spend existing budgets much more efficiently.

Taking the High Road

Such strategies will need to include mechanisms, most notably capital grant

transfers tied to service to the national good, which will reward decision-makers

who are efficient over the long term and penalise those who pursue inefficiently

short-term policies, or alternatively promote their own local political interests at

the expense of the national public interest. In this way, decision-makers could be

prevented in advance from yielding to the temptations of the sirens.

Some progress in this direction may be made by extending the jurisdiction of

SANRA and reducing the centres of decision-making from nine to four, based on

SANRA's regional offices. More generally, ways have to be found consistent with

the constitution for transferring capital to local and regional authorities on a

conditional basis, i.e. one that ensures that local authorities forfeit revenues if

they don't spend what they are allocated for roads efficiently..8

A model could be fairly easily developed for enabling government to incentivise

role-players throughout the system to invest in roads with maximum efficiency. It

is worth noting that such a model would be worth developing in any case, since it

would enable government to maximise efficiency in public expenditure generally

and not just in relation to roads.

Such a model would uniquely take account of the special economic and political

circumstances of South Africa and the public spending decisions, which are

consequently appropriate. The adoption of this model will prove vital in ensuring

adequate funding for the provision and maintenance of South Africa's roads, less

the country move across the shadow line, beyond which the restoration of the

country's road network becomes unattainable..9

The Under-provision and Under-capitalisation of Road

Maintenance, Rehabilitation and Upgrading in South

Africa: Analysis and Measures toward Improvement

Don Ross

School of Economics

University of Cape Town

A 21-point summary of the following survey begins on p. 36.

1. Motivating remarks

Among the most visible and distressing symptoms of a collapsed infrastructure is

a network of ruined roads. The visitor to a number of large African cities, such as

Nairobi, is immediately struck by the sight of broad roads, of clearly superior

design, engineering and capacity in their origins and intended steady states, that

are now covered with potholes, large areas of stripped surface, wholly degraded

shoulders, and puddles of standing water resulting from the deterioration of

drainage systems.

Untutored common sense expects that an environment characterized by such

vivid signs of decay in its transport infrastructure will be a poor attractor of

investment in whatever other assets it might have, and in this respect common

sense is right. Any business contemplating location in such an environment will

have to factor into its expectations higher delivery costs, greater risk of failure to

maintain efficient inventory, and reduced customer flow due to inconvenience of

access. Difficult to quantify, but perhaps most costly of all, is the effect of such

highly salient urban blight on community confidence and morale, which are the

fundamental prerequisites of economic and social flourishing.

Potential investors base their decisions more on broad consilience of perceptions

than on over-subtle economic analyses that may exaggerate particular variables

of evaluation through forced commitment to precise weightings within degrees of

modeling discretion. There is no doubt that such investors will be heavily

discouraged by the sight of Nairobi's roads. Discouragement is deepened by the

sheer evident magnitude of the problem; substantial recovery of the system is

quite obviously beyond the resource capacity of the Kenyan public sector in the

absence of international assistance, and it is unlikely to grow a private sector

capable of fixing the problem as long as its transport web is so strikingly

inadequate. Similarly bleak prospects confront travellers to Haiti, Zambia,

Azerbaijan and many other countries..10

South Africa is not in this situation at present. Many of its roads, both in quality

and extent, are above the average African standard, and its network in the inner

cores of its two large cities is superior to those in some of the less developed

parts of Europe (though in many rural areas roads are as inadequate as

anywhere else in Africa). However, the point at which deterioration rates exceed

the growth of capacity to recover typically comes well before advanced general

blight reveals itself to casual observation. South Africa has been allowing this

point to get closer for some time.

Three years prior to the change in South Africa's fundamental political

dispensation, Mirrilees (1991), writing on behalf of the Department of Transport,

noted that "funds for road provision have already fallen to a level where they

would have to be utilised exclusively on maintenance, were the network to be

maintained at the levels of service and safety generally accepted in developed

countries." He warned then that "a continuation of the recent trend of increasing

government expenditures on services at the expense of capital investment will

inevitably be detrimental to future economic growth," and that "the unavailability

of funds for road provision … is likely to have detrimental consequences for

future income distribution and the economic development of backward

communities, by limiting opportunities for participation in the formal economy."

Since recognition, within government and society generally, of the extent of the

shortfalls in fundamental public services such as housing and education, along

with the degree of commitment to make up these shortfalls, has increased very

substantially over the decade since Mirrilees's remarks above, no one should find

it surprising that disinvestment in capital assets involving substantial positive

externalities, such as roads, has accelerated. The Development Bank of SA

estimated in 1998 that R15.2 billion would be needed per year, for 10 years, to

erase backlogs in general national road provision and to correct for accumulated

deterioration in the existing network. However, it calculated that only 60% of this

figure was then being spent. The same source estimated that the proportion of

roads deemed to be in good condition fell from 25% to 5% between 1993 and

1996, representing R100 - R150 billion in lost capital assets. However, the

standard of measurement against which this calibration was made is not

reported.

More informative figures are given in AA RSA (2000). The scale used in this

report categorises roads not against an arbitrary evaluative standard, but in

terms of the extent to which regular or extraordinary maintenance investment

would be required to prevent the road from becoming unserviceable. Since this

measure is less demanding than that used by the DBSA appears to have been -

while being more relevant because it is defined in terms of investment

requirements - it finds a higher proportion of roads to be in good or very good

condition. However, what is directly significant here is the question as to whether

the total expected cost of standards preservation is or is not rising as a result of

under-maintenance.
The answer, unfortunately, appears to be `yes'..11

AA RSA (2000) partially reports a procedure for calculating the dynamic state of

South African road investment. Define `very good' roads as those that will remain

serviceable for 15 years without further maintenance, and `good' roads as those

that will remain serviceable for 8 years without further maintenance. Roads in all

other grades either require immediate intervention if they are to be salvaged, or

cannot be made serviceable except through outright reconstruction. The

threshold between `good' and `fair' is therefore the salient one, since this

represents the point at which we know that the capital reinvestment strategy

applied to a road has not been efficient if there is no intention to abandon the

road.1 Of course, this does not imply that reinvestment has necessarily been

efficient for all `good' or `very good' roads.

AA RSA (2000) uses a procedure to compare the current investment strategies

for the national (SANRA jurisdiction) roads and in five out of nine provincial

networks with ideal (efficient) values. Unfortunately, a crucial variable is missing

from the description of the procedure, so we cannot verify its adequacy.

With this caveat in mind, the situation as reported may be summarised as

follows. In the national network, the proportion of `very good' roads has

increased since 1993. This appears to reflect the impact of outsourced tolling on

some roads. However, for the national network as a whole the proportion below

the efficiency threshold increased from 34% in 1993 to 54% in 1999. In the

Northern Cape, 74% of paved roads were above the efficiency threshold in 1993;

the 1999 figure is 64%. Free State figures are 41% (1993) and 21% (1999). In

Kwazulu-Natal, site of a decline that is hard not to describe as `catastrophic', the

figures are 39% (1993) and 6% (1999). In Gauteng the figures are 57% (1993)

and 43% (1999). In Mpumalanga the figures are 50% (1993) and 26% (1999).

Data for the remaining four provinces are either missing, or are insufficient to

permit clear comparison. These numbers indicate a quite serious under-investment

problem across the country, and a virtual collapse of the network in

Kwazulu-Natal.

South African public authorities, along with road industry participants, journalists

and many members of the general public, are aware of the general problem, and

the risks, of under-resourced roads. The present Minister of Transport, Dullah

Omar, recently acknowledged in a speech that "one of the primary problems

hindering both economic and social development in our country is the steadily

deteriorating condition of our rural road network." Nor should it be supposed that

authorities and stakeholders have been idle in the face of the threat. Measures

aimed at alleviating the current shortfalls in capitalisation have included

privatisation, outsourcing, road pricing, reincentivization of discretionary

authority, and private-public partnerships aimed at maximising efficiency in the

sourcing of capital. Section 3 below will review some of the problems and

1 AA RSA (2000) allows that on an efficient reinvestment strategy 20% of roads intended to be kept will be

in `fair' condition. From the sketch of the report's analytical framework that is provided, this does not

appear to make sense. However, as noted, crucial components of the evaluation procedure are not given..12

advantages associated with these approaches in the specifically South African

context. A variety of special difficulties encountered in this environment make it

impossible for South Africa to simply borrow schemes from more developed

economies off the shelf and copy them.

2. Rights to safe roads and public responsibility

Prior to the adoption of the present Constitution, government commitments to

allocations for road investment were essentially political in character. They could

thus be reduced in favour of other priorities without this raising direct legal

issues. By no later than 1989, it is clear that the pre-Constitutional government

had given housing, education, health care and other aspects of social

infrastructure priority over investment in economic infrastructure such as roads.

This policy was the source of the alarms raised by Mirrilees in his 1991 report

noted above.

It is not clear to what extent the administrators of the Constitutional state have

maintained the former view that roads and other major aspects of economic

infrastructure are in `competition' with the leading components of social

infrastructure. However, what is certain is that the demands on public resources

have very substantially increased over the past decade, and that constraints on

the availability of public funds resulting from enhanced recognition of social

obligations have interfered with the availability of the capital required for efficient

investment in public assets. It will figure among the main contentions of this

report that placing politically salient social infrastructure in `competition'

with basic economic infrastructure such as roads, either deliberately or

accidentally, is fundamentally irrational.2

Whether or not administrative views of the relationship between public spending

and public investment have changed since the last years of the pre-Constitutional

regime, what is certain is that approaches to basic infrastructure provisioning can

no longer be regarded as purely political. The Constitution of 1996 commits the

State to obligations of respect and protection and, arguably, economic

maintenance of a number of so-called `second-generation' rights. That is, South

Africans are no longer merely legally protected from interference in non-criminal

pursuit of their private welfare; in addition, they are now beneficiaries of

2 It must be noted here that the distinction between `economic' and `social' infrastructures, though common

in some of the development literature, doesn't really make sense. We can make a clean distinction between

public goods - those whose consumption involves ineliminable externalities - and private goods - those

which yield utility that can be entirely enjoyed by their owners. But is a factory, for example, not social

infrastructure? Its activity pays the salary that buys the linen and food brought into the hospital for a patient

by her relatives. Without this input, the public purse would have to pick up these costs. The intended line

between the `economic' and the `social' is entirely arbitrary. And if even factories are part of the social

infrastructure, it should be patently obvious that roads must be too. However, we will use the distinction

here because no point made here requires that we argue with it; and our argument is that much stronger to

the extent that we allow such hostages to potential opponents who are suspicious of economists' way of

conceptualizing the world..13

obligations on the part of the State to ensure access to housing, medical care,

education, basic security of their persons and property, and a level of economic

well-being consistent with fundamental dignity.

The exact practical force of these Constitutional obligations on the part of the

State remains incompletely resolved by legal precedent. The strongest possible

interpretation of them would imply that the State bears a prima facie obligation for

provision of all second-generation rights regardless of their cost. We would then

need to confront the question (to be discussed below) as to whether access to

safe and adequate transport facilities constitutes a second-generation right. If this

question were answered in the affirmative, then it would follow from the strong

interpretation of second-generation rights that the economist's task with respect

to road maintenance and adequate provision becomes a purely technical one of

assembling the variables and considerations necessary for evaluating the relative

efficiencies of different possible provisioning schemes and of their financing.

This being said, it would be seriously misleading to imagine that the question of

State responsibility for road investment is therefore to be left hanging in

suspension while legal verdicts and precedents accumulate. On no plausible

interpretation of second-generation rights would government be required to

provide optimal transport access to all citizens regardless of overall efficiencies in

the broad provision of the package of second-generation rights. For example, the

State would not be obligated to build an isolated community a new road to a

hospital if it were more efficient to build that community its own hospital instead.

However, this implies only a very weak conclusion, namely, that the State will not

be legally required to indulge in a binge of construction of new rural and other

low-use roads. Of much greater practical importance is the fact that recent court

decisions have considerably expanded the State's obligations with respect to

roads through emphasis on a standard second-generation right, namely, public

safety from consequences of negligent administration of public assets and

services.

In a recent decision (Graham versus Cape Town Metropolitan Council)

concerning the sensational, and (so far) twice-fatal, deterioration of Chapman's

Peak Drive, the High Court of South Africa declared, inter alia, that

… the defendant was under a duty to exercise such due care and

to take such reasonable precautions as circumstances, particularly

weather conditions, might require in order to avoid or minimize the

risk of injury to road users…

… Wrongfulness of in terms of the sense of justice and legal

convictions of the community now applies to omissions by a public

authority…

… A duty of care towards road users should now apply to the

controlling public authority unless there is a valid basis for its

exclusion ….14

Differently put: The norm to be applied in cases such as this is

whether the sense of justice of the community should view the

failure of the local authority to take positive action is wrongfu
l,

subject to the qualification that the local authority is not required to

do more than may be reasonably expected. [Emphasis added.]

This and other recent verdicts strongly suggest that an expectation of safety in

the use of publicly provisioned goods and services is a second-generation right,

which it is therefore the State's obligation to establish, maintain and protect.

The implications of this where road maintenance is concerned are quite far-reaching.

Myburgh (1998) colligates national survey data to conclude that the

road environment contributes to 20% of all accidents in South Africa, and that

specific road condition contributes to half of this 20%. `Road environment'

incorporates a number of factors - road surface, but also sign visibility, markings,

lighting, adequate dilemma zones at robots - which are clear responsibilities of

the local authority. It also includes factors such as weather conditions that may

interact with gradients and other alterable features to contribute to accidents.

There were nearly 700,000 road accidents in South Africa in 1999. Therefore, if a

justicible public obligation is found to obtain in only a narrow sense - that is, only

with respect to provision and maintenance of safety with respect to specifiable

accident-contributing factors, then the State could find itself as a potentially

unsuccessful defendant in between 70,000 and 140,000 accidents per annum.

To the extent that interpretations of responsibility for the right to safe use are

interpreted more broadly (so that, for example, standards of justicible adequacy

with respect to gradients, angles of curves and general skid resistance vary with

the severity of local weather conditions) then the figure is likely to fall near the top

of this range.

Myburgh (1998) uses these data to support cost/benefit estimates of road

resealing and other standard maintenance measures, which yield highly positive

benefit: cost ratios, sometimes in excess of 9:1. Here, issues related to

cost/benefit calculation will be deferred to Section 3. For the moment, we will

instead consider the data in the light of the potential liability to the national,

provincial and local authorities arising from the establishment of a second-generation

right to expectations of reasonably safe use.

The average damages awarded to successful plaintiffs in tort cases related to

road accidents in South Africa in 1999 were approximately R450,000. (This

average includes a large number of R10,000 - R15,000 settlements to poorer

South Africans, but is pulled up very substantially by a non-negligible incidence

of spectacular bus and truck crashes in which awards run into the millions of

rands.) Of course, this figure is not representative of the actual expected average

award, since accidents involving death and serious injury have traditionally been

much more likely to come to court, whereas if general knowledge of the public.15

authority's liability with respect to safety rights spread as a result of reportage of

successful suits then a higher proportion of less serious accidents would find

incentive to be brought forward. On the other hand, the average award figure

does not factor in any legal or employee person-hour costs associated with

unsuccessful defence against suits, and very rough averaging over incomplete

data suggest that these add about 40% to expected liability.

The present survey does not have access to enough data on the present net

value of the South African road system, relative to areas in which accidents are

concentrated, to try to generate a quantified relationship between the cost to the

public authority of liability for a second-generation right to expectations of safety,

on the one hand, and the revenue disbursement associated with standard and

regular road maintenance, on the other. However, a procedure for performing

informative and policy-relevant calculations can be suggested:

1. For a given road r, apply Wright's formula (see Section 3

below) to calculate its present opportunity value.

2. Find the recurrent investment rate (maintenance costs per

annum, expressed as a proportion of opportunity value in the initial

period, i.e., subtracting sunk costs incurred in earlier periods) that

maximises r's lifetime opportunity value.

3. Given data on expected accident rates (including a measure

of expected accident severity, if possible) and assuming a recurrent

investment rate of 0 (i.e., no maintenance) over r's lifetime,

calculate the per annum expected cost to the public authority of

damages awarded as a result of accidents on r. This establishes a

baseline.

4. Recalculate expected accident rates for various candidate

rates of recurrent investment in r, and repeat calculation (3) for

these values.

5. Compare the results of the calculations in (4) with the output

of (2).

This procedure is intended to be sensitive to the philosophical foundations of the

concept of a right, and so very deliberately avoids implications of cost-benefit

analysis. (General issues relevant to CBAs will be taken up in Section 3 below.)

This is important because, whereas CBAs must assign costs to particular

expected injuries resulting from accidents, the assignment of a right implies an

obligation that trumps any costs incurred in protecting it. (Of course, a legal

standard of `reasonableness' is always assumed in reality to prevent

commitment to practical absurdity; but the value of this standard cannot be

costed in advance without undermining the idea of a right!) The suggested

procedure is designed to avoid weighting the costs of accidents differently for

poor people (i.e., as pedestrians and users of more dangerous rural roads)

whose economic productivity-value is lower, which is also inconsistent with the.16

idea of a right. Steps 3 and 4 respect the concept of a right by, in effect, ignoring

the economic values of either roads or lives and treating public investment in

roads for the sake of safety as an imposed expenditure on rights. But, of course,

what we would like to compare with this `cost' for purposes of political argument

is a `cost' of road maintenance given an optimal investment strategy; and this is

the point of the procedure in Step 2. Where the value of the output of iterations of

(4) exceeds the value of (2), one has in effect shown that even if issues related to

the opportunity cost of political capital, or simple institutional inefficiencies, cause

investment expenditure to be treated as if it was a deficit, public revenues will

nevertheless be maximised by regular maintenance. One can then add, in the

course of a more general policy argument, that the revenue expenditure

recommended by (2) is not really a cost. But at no point in this exercise has one

implied that a right can be traded off as though it carried some particular

maximum relative cost. This matters if economic advocacy is to avoid talking past

principles of jurisprudence.

It is sometimes implied that when rights are at issue, economists should leave

the conversation, since the value of a right to its holder may not, like an

entitlement to damages or use of property, vary with personal productivity

weights. But this goes too far, and does no favour to the maintenance of rights in

implying that expenditure for their sake should be literally infinite. The procedure

suggested here reflects concern with efficiency as between different means of

achieving the end
mandated by the public authority's constitutional obligation, but

avoids making the end itself hostage to efficiency considerations.

Of course, what is of crucial importance in the present context is the question of

whether outputs of iterations of (4) really will be higher than outputs of (2) for

many or most South African roads. Given the presently escalating sizes of torts

and of legal costs, and the fact that optimal investment rates on roads with

expected life spans of 20 years are only +/- 2% of initial capital value, this seems

overwhelmingly likely in almost all cases except where a given road has very low

use or has such exogenously favourable use-conditions (i.e., straightness, width,

absence of rainfall) that it remains safe even under considerably deteriorated

conditions. It will always be true in the cases of urban roads and roads along

major transport routes.

We have so far considered the implications of a second-generation right to

expectations of safety only for maintenance of existing roads as they are. We

must also consider the possibility that this right could be invoked to require the

upgrading of some roads, from, say, gravel to paved.

There seems to be little question that pavement improves safety relative to

gravel: collision rates in South Africa in 1988 were approximately 2.3 times

higher on gravel roads than on two-lane paved roads (SABITA 1989). Accident

severity is also reduced by paving, with the probability of fatality resulting from a

collision being 3% higher on gravel. Now, it seems unlikely that the standard of.17

reasonableness would permit courts to find that the State's obligation to provision

of safety would require all gravel roads to be paved on merely general and prima

facie grounds such as are provided by these figures. However, the prevailing

interpretation of the Constitution very clearly supports second-generation rights

to basic housing, medical care, education and gainful employment. Where rural

people can access the facilities necessary for effective provision of these rights

only by means of demonstrably unsafe gravel or dirt roads, there is probably a

Constitutional obligation to upgrade, and the occurrence of a suit that will test this

claim is a statistical certainty.

Summary of Section 2

Recent court decisions suggest that a right to expectations of safety in use of

publicly administered goods and services is among the second-generation rights

guaranteed by the Constitution. State obligations to maintain roads so as to

preserve safety are therefore likely to be enforced through torts. This yields an

argument for increasing maintenance expenditure on roads that is strictly

independent of the investment value of such expenditure.

Comparisons of opportunity values with expected liabilities from torts should be

made, on a road-by-road basis, using the procedure outlined above. This would

almost certainly indicate that, for a majority of South African roads, the existence

of the right to safety makes increased maintenance rational even where the

political opportunity cost of such investment does not make it rational
as

investment.

Of course, this conclusion in no way implies a concession to the effect that

greater investment in roads is politically or economically irrational but for the

impact of Constitutional rights. This issue is now taken up in Section 3.

3. The political economy of South African road maintenance

The present survey opened with general considerations suggesting that failure to

adequately maintain roads is economically irrational. We now return to that issue

in greater specificity, concentrating on the special circumstances and problems

prevailing in South Africa.

There is no shortage of sophisticated models designed for calculating

economically rational approaches to road-building and maintenance. The most

complete of these is the Highway Design and Maintenance Standards Model

(HDM-IV), developed and regularly updated by the Transportation Department of

the World Bank. (World Bank 2000). Because this instrument has been designed

specifically for application in developing countries, its design is sensitive to two

crucial respects in which the utility functions of the governments and planners in

such countries typically differ from those of their first-world counterparts:.18

1. Conventional cost-benefit analysis of roadwork is highly sensitive

to parameters measuring the expected costs in vehicle wear-and-tear,

loss in human productivity from accidents and congestion, and the value

of productivity gains (losses) due to increased (decreased) transport

efficiency. All of these parameters tend to favour construction and

maintenance of roads that move larger numbers of wealthier, and

therefore more productive, urban residents than roads in rural areas. In

first-world countries, whose governments often wish to incentivize rural

dwellers to relocate to more productive areas, or at least to areas

peripheral to national roads, this may be thought entirely appropriate. In a

country such as South Africa, however, where urban centers have

already attracted higher and faster rates of in-migration than their

infrastructures can immediately accommodate, this may be economically

inappropriate. Furthermore, and in general, CBA techniques that have the

effect of giving lower weight to the utilities of poorer citizens than to those

of wealthier citizens may be regarded as politically impractical, or ethically

improper, or both. Finally, standard CBA in effect rules out redistributional

aims through a technical assumption, which confuses value with

measurement.

2. Developing countries, South Africa in particular, may conceive of

themselves as facing threshold effects with respect to provision of certain

basic goods and services that cause their national utility functions to take

forms fundamentally different from those prevailing in the developed

world. That is, a government may be of the view that until substantially

increased levels of housing, educational, medical, electrical and security

infrastructure have been provided, no marginal improvements or even

maintenance of other assets is justified. Mirrilees (1991) claims that this

sort of reasoning had a significant impact on road-servicing provision

even during the final years of the pre-Constitutional government, and it

has clearly influenced the Constitutional government's policies a good

deal (though it is very far from being unequivocally accepted by this

government, either in word or action). Often, this is reflected in policies

that emphasize direct-taxation and self-financing through user-payment

schemes of utilities deemed to be above threshold in their availability, and

cross-subsidization of those deemed to be below threshold. It may be

represented in a consistent utility function by invoking the concept of

political capital: there may be large numbers of citizens who will be

incentivized to disrupt political and economic stability and plunder assets,

either through crime, neglect or political activity, if subsidies are not used

to increase their stake in these goods. In other words, some resources

may build political capital in one use to an extent that outweighs losses

through opportunity cost against alternative uses that would more

efficiently maintain or build financial capital.

Both of these issues will be revisited at various points throughout this section.

For the moment, we simply note that they argue against attempts to copy CBA

approaches from the developed world..19

The Ministry of Transport in Kwazulu-Natal - the province noted above as the

site of the most acute under-investment in roads in South Africa - has developed

an instrument of its own, Community Access Road Construction and

Maintenance (CARCAM) 2000. This mechanism has some important democratic

virtues, gathering the preferences of local stakeholders to a degree that is

seldom achieved in conventional CBA approaches. However, CARCAM seeks to

maximize a very complex objective function, since it aims at finding the mix of

labour-intensive and machine-capital-intensive maintenance strategies that will

expand regional employment opportunities.

It is not clear, from the standpoint of efficiency, whether this should be regarded

as a social benefit that carries an economic cost, or as an economic benefit from

the perspective of a wider social utility function. Technical issues of this sort

would need to be clarified before CARCAM could be integrated with conventional

economic analysis of the sort reflected in HDM-IV. Since CARCAM has been

developed with sensitivity to local variables that could strengthen the viability of

delivery on schemes it recommends, achieving such clarification and integration

would be a worthwhile exercise.

As noted above, HDM-IV incorporates techniques that allow standard CBA

parameters to be adjusted to the demands of non-standard utility functions. It

may be used to study single roads, groups of roads with similar characteristics,

or entire networks of roads. In all of these contexts, the model may be applied to

the following questions (inter alia):

Is a proposed construction or maintenance project economically

justified?

What is the construction or maintenance alternative that yields the

highest benefits to society?

What is the economic benefit of spending another rand on

maintenance, compared with spending it on new roads or

improvements to existing alignments?

Is it more economical to construct a strong, expensive pavement

initially, thereby permitting the use of larger, more economical vehicles

and reducing future road maintenance outlays, or to follow a staged

construction strategy economizing on initial costs, restricting vehicle

axle loads, and paying more for maintenance, with the intent of

upgrading the road later on when traffic growth warrants it?

How should priorities be defined among roads to be included in a

proposed work program?

How much should be spent to maintain paved roads, and how much to

maintain and upgrade earth and gravel roads?

How much does it matter if certain road maintenance expenditures are

deferred during years of financial stringency?

What combination of maintenance strategies yield the lowest overall

economic costs for a specified level of maintenance funding?.20

HDM-IV can, in addition, be used as a modular component in a more generic

decision-making system, such as the AGRIPPA model described in Mirrilees

(1991). This allows a planner some discretion over whether to treat a nationally

idiosyncratic goal - say, inter- population group equity - as something to be

captured by finding proxy parameters endogenous within HDM-IV, or as a

consideration best modeled explicitly in the wider decision-making framework.

The very power and flexibility of these tools for questions that have already been

isolated, however, can create problems in contexts where wide strategic issues

are at stake. While HDM-IV should surely be used to analyze particular projects

within relatively settled strategic parameters, neither it nor any tool allowing even

wider modeling discretion (e.g., HDM-IV as a module in AGRIPPA) will tell us

how to make trade-offs between, e.g., subsidizing hospitals and investing in

roads if revenues are limited and access to capital is constrained. This sort of

question is fundamentally political in nature - but it can and should be

economically informed. It is highly likely that in South Africa at the present time

some politically intended strategic aims are being subverted by less than optimal

economics governing their implementation. We will therefore turn to

considerations that suggest this.

3.1 Privatization, road pricing and direct taxation of use

The South African National Road Agency (SANRA) has heavily emphasized

user-payment and outsourcing schemes as the leading solution to under-capitalization

of the system. These initiatives include several measures: Build-Operate-

Transfer (BOT) arrangements for new construction, Fund-Rehabilitate-Operate-

Maintain (FROM) contracts for maintenance, public-private development

partnerships such as that created for development of the Maputo Corridor road,

and various forms of increased direct taxation of road users through increased

fuel levies and vehicle licensing fees.

Congestion charging is another mechanism of this type that has been used

elsewhere and could be implemented on certain South African roads, such as

metropolitan highways. In pursuing these initiatives, South Africa is

unquestionably following the world model, and the principal focus and

recommendation of the international transport economics literature. This has

been generally successful: SANRA's maintenance of the major national roads

under its administration emerges as the only unqualified bright spot in the survey

of South Africa's road system.

It will be argued here that while the idea that roads should in one way or another

pay for themselves is often valuable and, indeed, essential, it is not a panacea in

this country at this time. The general considerations relevant to this point are

quite familiar to most participants in the South African debate; certain specific

ones, related to incentivization of both public and private actors, are less so..21

First, on privatization strategies. These have already been used to considerable

extent with respect to national and trunk roads. As of 1999, 1 in every 7km of

national roads was tolled. Virtually all new construction at this level is carried out

via BOT arrangements. Government has recently been encouraging unsolicited

bids for participation in FROM schemes at an accelerating rate. In the Maputo

Corridor project, a private consortium began by assuming responsibility for road

capitalization, construction and cost-of-use recovery, but ended by taking on

responsibility for a range of other related project components, including provision

of slip-offs to hard areas in which local traders can merchandise to road-users,

education of local public opinion, and even rehabilitation of the Port of Maputo!

(Taylor 2000).

There can be no serious doubt that without this commitment to privatization and

outsourcing, the situation of under-capitalization of both construction and

maintenance would be very much worse, perhaps absolutely intractable.

However, some clear limits to the reach of these policies can be identified:

1. Few provincial or local roads carry sufficient traffic volume to

be profitable as toll roads unless alternative avenues of transport

were restricted; but

2. the negative externalities that would be involved in such

restriction, including loss of productivity due to reduced flexibility

and dislocated congestion patterns and inestimable redistribution of

inconveniences, make tolling these roads impractical and

uneconomical.

3. Positive externalities associated with the road system (as

made vivid in Section 1) make it impossible for the public authority

to fully transfer risk to the operators of BOT schemes and,

especially, FROM arrangements. That is, if maintenance costs rise,

private operators can readily blackmail authorities into providing

compensation. As a result, private operators may have insufficient

incentives to perform maintenance efficiently or to practice

adequate quality assurance. In any case, inability of government to

fully off-load risk is a major aspect of the under-capitalization

problem in the first place, since the carrying of this risk contributes

to the relative capital-starvation of provincial and municipal

authorities (see below). These problems can be alleviated to some

extent, but not eliminated, by paying operators of FROM schemes

on a for-work-completed basis, subject to predetermined ceilings on

recoverable costs, and by reducing total risk through awarding

FROM tenders only to well-capitalized consortia rather than single,

vulnerable, operators. The possible efficiencies that could be

recouped through these measures cannot be estimated without

access to the specific private contracts presently in force between

authorities and operators of FROM schemes. However, Australia

has begun implementing contracts of this sort on a substantial.22

scale. Emery (1999) has modeled their impact on several industry

parameters, and discovers two shifts that are dramatic (if not

surprising): the share of the market going to large contractors is

predicted to increase by 13-18%, and efficiencies in industrial plant

utilization are predicted to double over what prevails in the absence

of the contracts. The second measure is a particularly good proxy

for general efficiency, and thus provides a partial benchmark

against which the success of a particular contract scheme could be

tested.

4. While the operators of FROM or BOT schemes may be

insufficiently incentivized because of non-transferable commercial

risk as just explained, the public authorities may simultaneously be

under-incentivized to respect agreements because of

inappropriately transferable political risk. This problem clearly

seems to have undermined the efficiency of the Maputo Corridor

road project. A key contribution of (provincial) government to that

project was to have been management of local education in the

justification of the project, and buy-in to distribution of costs (tolls)

and benefits (job creation and new business opportunities for local

traders). Taylor (2000) documents the series of lapses by which

government reneged on these commitments, effectively transferring

them to the private consortium. Since the price of buying local

political support even came to include construction of new facilities,

the costs incurred by the consortium were allowed to escalate well

beyond expectations. At one point a provincial minister even told

local residents that the consortium would supply them with housing!

Simultaneously, politicians did not assist their private partners in

resisting local pressure groups drawn from among the more

affluent, which successfully lobbied for lower toll rates than had

been agreed in the original concession. Finally, failure by national

governments (of both South Africa and Mozambique) to carry out

complementary development programs to which they had

committed themselves resulted in lower traffic volume than the

original business plan had anticipated, substantially increasing

capital costs and threatening profitability. A major source of these

problems appears to have been misalignment of incentives. The

national government's concern for the credibility of private/public

partnership arrangements was apparently not shared by provincial

authorities, who preferred to invest instead in opportunities for rent-seeking

by their constituents. The costs of the resulting loss of

government credibility, not only in Mpumalanga but in South Africa

generally, cannot be quantified but, given the scale and visibility of

the project, are likely to be considerable..23

The implication of these considerations, taken together, is that a national strategy

for optimizing investment in roads must acknowledge that some level of

responsibility for capitalization out of public revenues will continue to be

necessary. (Encouragingly, this fact has been unequivocally noted by the present

Minister of Transport.) However, the extent of this responsibility can be reduced

to the extent that incentive compatibility issues as identified in (3) and (4) above

are addressed. This point will be incorporated in later recommendations.

We now turn to issues related to road pricing. As noted above, the economics of

these measures have been thoroughly studied in a large literature. (See

Johansson and Mattsson [1995] for a particularly useful compendium.) Tolling is

and has been an effective measure in South Africa where national and trunk

roads are concerned. Here, what is crucial is the fact that transport alternatives

are limited, so potential externalities can be controlled and endogenously costed.

This does not apply to most provincial roads, or to any urban roads. In these

cases, existence of widespread alternatives turns pricing strategy into a general

equilibrium problem that is almost certainly administratively intractable under

even the most optimistic assumptions concerning organizational efficiency.

Furthermore, road pricing in these areas potentially conflicts with equity

considerations and redistributional aims, since it amounts to a flat tax on assets

that have a significant public good component.

The interaction of road-use costs and incentives with those governing public

transport systems also tends to put welfare optima out of reach, creating

relevance of other prices to road prices that cannot be equalized to marginal

social costs. This is a common phenomenon in urban markets throughout the

world. Thus, for example, de Borger et al (1993), studying road pricing strategies

in Belgium, report that if public transport systems there were required to cover

their private financial costs, then peak period bus fares would have to be

increased by 141%, which would force road prices over their social optimum to

partly offset welfare losses.

In general, then, even if the general equilibrium problem represented by urban

transport networks could be given a policy-relevant solution, the surrounding web

of externalities leaves little confidence that the result would be a social optimum.

This consideration militates only against trying to gain efficiencies through over-precise

calibration of pricing. It certainly does not imply that charging road users

for both their purely private and (some of) their external costs is an unsound

practice. But here we encounter another problem in the South African context.

Stander and Pienaar (2000) show that road users in South Africa are already

over-paying for the social costs they impose, and that, relative to this context, car

owners - the principal contributors to urban traffic volume - are subsidizing truck

operators. Their analysis indicates that, through fuel taxes and other direct levies,

road users contribute +/- 70% in excess of the costs they cause to general State

revenues (and account for about 12% of total budgeted State revenues)..24

We estimate licensing fees to be the source of about 50% of total provincial

revenue in all nine provinces; and since no province devotes close to that

proportion of expenditure on roads, it is clear that road-users are providing

further cross-subsidization of other goods and services through this channel as

well. To the extent, therefore, that efficient mobility is a major contributor to

national economic factor-productivity (see Section 1), `user-pays' approaches to

road financing already constitute a productivity ta
x. Since it is utterly implausible

to suppose that productivity taxes are efficient relative to announced

macroeconomic priorities and principles emphasizing growth, the limits to

additional taxing of use, with or without more incentive-sensitive pricing

arrangements, as a mechanism for financing maintenance and construction,

should be clear.

It is therefore generally concluded that an efficient mechanism for the financing of

road maintenance in South Africa requires increased direct contributions of public

capital.

3.2 The political economy of South African public capital investment in

roads

So far, it has been emphasized that road maintenance (and, often though not

always, road construction) constitutes investment rather than simple cost. To this

point, in order to give full weight to complex political utilities and social welfare

functions, the import of this has not featured centrally in arguments. However, it

has just been argued that insofar as it constitutes investment, the capital

financing efficient road maintenance must be generated from public resources to

some extent. For reasons discussed in Section 3.1, this is mainly and particularly

true of provincial and urban roads.

As discussed in Section 1, the claim that South Africa presently suffers from

under-investment in maintenance of its road network from the point of view of

efficient use of capital already invested in the network itself
is not controversial.

This point is so generally conceded that a defense of the continued under-investment

would have to, at least implicitly, proceed as follows. It would have to

be argued that, relative to the opportunity costs of finite political capital (as

defined earlier), some portion of the financial capital already embodied in the

road network represents a sunk cost that is to be written off. As will be argued

later, it is unlikely that belief in this proposition is the only reason for present

under-investment. However, to the extent that it is a reason, we can ask whether

the belief makes sense.

Let us assume that the public utility function seeks to maximize, along some

trade-off frontier, a bundle mainly consisting of goods associated with the basic

second-generation rights to housing, educational, medical security and

opportunities for gainful employment. These are the goods against which a

defender of under-investment in road-maintenance would have to treat existing.25

roads as sites of sunk costs. Investment in all of these goods must consist to a

considerable extent in creation of various physical assets, especially buildings

and equipment concentrated in buildings. The value of these assets lies in

expectations of their continuing efficient use in the future.

We can determine whether financing of these assets is efficient by asking

whether, given a particular investment strategy, they would attract freely chosen

investment by an investor able to deploy capital in any use, but who shares the

public authority's utility function. An asset will attract such investment to the

extent that the stream of investment in it over its lifetime minimizes deadweight

losses due to depreciation of the original capital stock.

In this context, the following idea will be made explicit: houses, schools and

hospitals that cannot be safely and reliably accessed by residents and service

providers, or sites of economic activity that cannot be safely and efficiently

reached by customers and employees, will bear avoidable deadweight losses.

Put most succinctly: a housing development, hospital, school, business park or

commercial center serviced by inadequate roads is an economically silly thing to

build. It will therefore be shown that even someone who takes the very extreme

view that all investment should be foregone in favour of immediate transfers for

upliftment of the disadvantaged should approve of efficient maintenance of

roads.
Obviously, then, anyone whose opinion on social priorities is less radical -

that is to say, almost all public and private authorities in South Africa - should be

that much more fully persuaded.

Since we are now investigating the investment value in roads as a function of the

investment value of other primary assets, we must use a model of `value in use',

or opportunity value. This concept was introduced in Section 2 above, but will

now be made explicit. (The presentation here follows that of Wright [1964].) We

will first present the argument mathematically, so as establish its authority. It will

then be summarized in more generally accessible terms.

The opportunity value of a secondary capital asset (e.g., a road) is the cost, loss

or sacrifice which would have to be incurred if the primary infrastructure did not

have the secondary asset. Replacement cost of the secondary asset is found by

solving for R in the following equation:

r

C = [RQ(n) - E(n)](1 + i) -n + S(T)(1 + i) -T

n=1

where;

C is the capital cost of the substitute road or alternative transport mechanism;

Q(n) is the contribution to the value of the network of primary assets provided by

the road during the nth period of its life;

E(n) is the operating expense of the road during that period;.26

i is the rate of interest, expressed as a fraction per period;

S(n) is the salvage value of the road at the end of the nth period;

and

T is the economic life of the road; that is, that life which leads to a minimum

value of the average unit cost of R. Hence the value of the existing road at the

end of the tth period of its life is given by

T

V(t)
= [RQ(n) - E(n)](1 + i)t-n + S(T)(1 + i)t-T

n = t
+ 1

and depreciation during the tth period is given by

D(t) = V(t - 1) - V(t)

= RQ(t) - E(t) - i(V(t -
1)

This formulation permits us to make a general qualitative comparison of

depreciation values on primary assets and on secondary assets that influence

the former.

Suppose that n1 denotes the primary asset (a school, hospital, etc.), which itself

contributes to maximisation of the value of the favoured bundle of primary goods,

while n2 denotes our secondary asset, the road. Now suppose, in keeping with

the reasoning above, that D(t)n1 is partially a function of D(t)n2. What will this

function be like, given certain plausible assumptions?

First, for simplicity, set S(n) to 0, since the salvage values of both roads and

major public assets fall so far beyond typical government planning horizons that

their political-capital value is generally ignored. Second, in calling some assets

`primary', we mean that their political capital value is perceived to dominate the

utility function (i.e., their opportunity cost in financial terms is perceived to be

low). We may therefore assume that Q(n1) > Q(n2).

Now, for every primary asset relevant to the trade-off under consideration, E(n1)

will be substantially higher than E(n2). Suppose that if, for some reason, E(n2) is

not paid (i.e., the road is not maintained), then Q(n2) falls. In that case, Q(n1)

must fall also. Then, assuming that i is uniform and independent of the use to

which borrowing is put, C1 must rise faster than C2 if R1 > R2.

Therefore, if the opportunity value of the road contributes to the opportunity value

of something regarded in the political utility calculus as a primary asset; and if the

marginal cost on initial capital of maintaining the road is less than the marginal

cost on initial capital of maintaining the primary asset; and if the interest rate on

funds used to build roads is the same as the interest rate on funds used to build

primary assets, then failing to minimise the capital cost efficiency of the road (i.e.,

failing to pay E(n2) to maintain it, thus making d(t1) and d(t2) larger than.27

necessary) must always produce an avoidable dead-weight loss on return to total

capital [C(n1) + C(n2)].

What have we just shown, in plain terms? For every road, there exists an optimal

rate of investment in maintenance (which can be calculated using HDM-IV) that

minimises the overall cost of the road relative to the initial capital outlay in

building it (assuming that this cost is not written off as sunk). The argument

above shows us (given some very plausible empirical assumptions) that if a road

is contributing to the opportunity value of another asset (a `primary' asset), but

investment in the maintenance of the road is presently below the efficient

threshold, then the most efficient way of investing in the primary asset is to bring

investment in the road up to the efficient threshold.

So, for example, suppose that a given road provides access to a hospital. We

consider the allocation of an additional marginal rand to the capital budget of the

hospital. This could be invested directly in the hospital's maintenance, or in the

maintenance of the road. Then the point of the argument is this: given relative

costs of flattening depreciation in things that are typically regarded as primary

social assets - such as hospitals - and such costs as associated with roads, if

the authority is currently not investing efficiently in the road, then the most

efficient thing to do for the hospital with that marginal rand is to use it to bring the

road-maintenance schedule closer to its efficient optimum.

The implication of this argument is that even given a utility function and an

estimation of the value of political capital such that immediate social

infrastructure demands are lexicographically favoured over investment in

economic infrastructure, inefficient maintenance of roads that service the social

infrastructure hubs is irrational.

It might be supposed that this shows only that some roads, namely those directly

carrying people and goods to and from sites of public asset concentration, should

be efficiently capitalised in the short term. However, this would be inconsistent

with the key assumption on which the need for provision of public capital to

maintain urban and provincial roads rested in the first place. Roads that have

their value in isolation are appropriate sites for self-financing. It was argued,

however, that pieces of the urban road network cannot be so isolated. Were one

to attempt to adequately maintain only those roads needed by the users of public

services, the result would influence locational and route preferences amongst all

urban citizens.

It is not likely that less affluent citizens would be well served by the

encouragement of high congestion on those routes that are, by hypothesis,

deemed most important as contributors to social welfare. A more alarming

possibility is that such a strategy would incentivize users of public assets to

concentrate closer to them. It is highly unlikely that many South Africans would

regard incentives to further ghettoization of the less affluent as a happy.28

consequence of a public policy. In any case, we can appeal to a family of general

theoretical results here to the effect that attempting to selectively `pick winners'

amongst components of an interconnected urban transport network destroys the

inference basis needed to try to compute any economic optima at all (Holden

1989, Takeuchi 1999).

The argument of this section seems sufficiently important to be worth re-stating in

the clearest possible terms. Someone might believe, on political-economic

grounds, that there are some public assets such as schools and hospitals that

are worth so much in themselves that no marginal dollar should be invested in

anything else until they are fully and efficiently capitalised. Nevertheless, the

most efficient way of capitalising these assets, given certain restrictions that are

highly unlikely not to apply in any realistic case, requires efficient investment in

the road network that services them.

3.2.1 Incentives of public authorities

The argument just given has force in a context where the public authority

operates with an unusually categorical utility function that values bricks-and-mortar

social infrastructure over all else at almost any cost. It is very unlikely,

however, that the actual preferences of South African national, provincial or

municipal authorities are nearly so categorical. Officials are probably as good as

their word when they say that they attach considerable value to economic

infrastructure for its own sake (that is, for the contribution it makes to general

productivity and growth); but their sincere preferences are then subverted to

some extent by inefficiencies resulting from the institutional incentives landscape.

In this section, we will first review two leading probable subverters, and then

discuss mechanisms by which their influence can partly or wholly be overcome.

Ulysses and the sirens

Elster (1979) drew attention to a widespread phenomenon that undermines

rational planning in many instances. This is the tendency to fail to bring

knowledge about one's own discount function to bear in planning. In the Homeric

myth, Ulysses does not make this mistake; realising that he will value the sirens'

song at t+1 so highly while hearing it at t that its utility will outweigh everything

else in his future, but recognising at t-1, when it hasn't yet started, that while it

still lies in the future he doesn't so value it, he defends himself against his own

hyperbolic discounting by binding himself to his mast, and survives.

Put less technically, Ulysses realises prior to hearing the sirens that once he

does hear them he'll value their charms so highly that he'll throw away his

concern for everything else and steer his ship onto the rocks, so at that point he

takes steps to make it impossible for himself to give in to temptation when the

singing starts..29

His commitment measures at t-1 thus prevent his anticipated preferences at t

from subverting his rational planning at t-1. People are often less wise than

Ulysses; many smokers genuinely attach high utility to quitting at t-1 when their

urges for nicotine have recently been satisfied, but never do so because at every

t they attach enough value to the next cigarette to swamp their earlier evaluation.

This hyperbolic discounting effect is typically (though not in Ulysses' case)

compounded by the problem of the infinitesimal margin: the cost to the smoker's

expected longevity of just one more cigarette is trivial in comparison to the pain

he will endure by declining it. As this applies to every cigarette, he can rationally

believe both that he should quit smoking, and that he should never stop at any

particular point. In many cases, such as that of the typical smoker, these two

problems compound each other to create a difficulty greater than the sum of its

two parts.

Politicians and public planners are often beset by one or both of these problems.

It is, for example, notoriously difficult for environmental advocates to shake loose

what they regard as adequate curbs on pollution. First they encounter the

problem of hyperbolic discounting: the cost of anti-pollution measures, both direct

and in terms of lower present returns on productive activity and capital, must be

borne now, while the benefits lie well in the future; but politicians are elected for

short terms relative to the environmental time-scale, and the (by hypothesis,

greater) costs of present inaction will be someone else's problem. (Of course, the

politician only has this incentive structure because her constituents are

hyperbolically discounting; if they weren't, they'd reward the politician for present

decisiveness. So blaming politicians in the case of this phenomenon is

hypocritical.)

Then the problem of the infinitesimal margin compounds the difficulty. One more

year of, say, carbon emissions, won't make any measurable difference to the

global environment, so in any given year it seems reasonable to squeeze out one

last increment of uncontrolled productivity and start cutting back next year. But in

the compound grip of the two problems, next year never comes. This sort of

conundrum is sufficiently widely appreciated and significant that Elster, during the

1990s, found himself hired by the new governments of ex-communist countries in

Eastern Europe to design mechanisms for their constitutions that will enable

them to follow Ulysses's example and commit themselves in areas where

hyperbolic discounting and infinitesimal margins threaten.

Often, this mechanism takes the form of constitutionally ring-fencing a proportion

of the annual budget to pay for identified long-term goals. Elster's native Norway,

for example, has constitutionally committed itself to setting aside 12% of each

year's budget for foreign aid, something which is regularly victimised by the two

problems in other democracies. (Since this figure was fixed prior to Norway's

discovery of offshore oil, it has provided some African countries with an

unexpected windfall!).30

The twin problems are especially likely to arise with respect to regular

maintenance of assets that depreciate relatively invisibly while the marginal cost

of restoring them to efficient functioning rises with every period. Roads are

perfect examples of such assets. Users are unlikely to feel inconvenienced while

they deteriorate, until their decay is so far advanced that the expenditure required

to restore them has become significant. Meanwhile, competing calls on public

funds have immediate urgency, and political capital can be swiftly recouped if

road maintenance is deferred for one more year, or inefficient patches are

applied in lieu of genuine investment, until the result is crisis of ruined roads for

which the repair budget is insufficient. To this point, the problem of the

infinitesimal margin is at work. The fact that politicians, facing limited terms of

office and inattentive publics, are incentivized to have foreshortened planning

horizons, brings hyperbolic discounting to bear as well; and then the two

influences compound one another.

To acquire direct evidence that these phenomena are contributing to under-investment

in South African roads would require an ability to peer into the minds

of planners and politicians. However, we have enough honest testimony by

former politicians from around the world, and the logic behind the effects are so

compelling, that it would be literally astonishing if South African road authorities

are not subject to them.

Moral hazard in decentralised political structures

The logic urging decentralisation of control in complex allocation networks such

as bureaucracies is at the very heart of economic reasoning. The inefficiencies in

information processing and coordination caused by centralisation are both so

massive and so reliable that no one since Stalin has supposed it sensible to try to

run a large country from a single site of control. Thus all countries are

decentralised to a degree, and some are federations.

South Africa, with its weak provincial governments, is not quite a federation, but a

good deal of policy-making and fiscal authority is devolved to provinces and,

especially, to the new metropolitan councils. Under the 1996 Constitution, both

provinces and municipalities are guaranteed authority over a range of local

matters, and are assigned a degree of protected budgetary autonomy. The

sphere of municipal power incorporates, inter alia,

The construction and maintenance of arterial roads that transcend

more than one metropolitan local council boundary, including

(a) roads with significant traffic volumes;

(b) roads forming major public transport corridors;

(c) roads used extensively by traffic from outside the metropolitan

local council within which such roads are situated;

(d) roads in respect of which access and egress have been limited

in accordance with a law;.31

(e) roads of a major nature linking significant urban growth points or

potential growth points;

(f) the construction and maintenance of storm-water drainage

systems and infrastructure that transcends more than one

metropolitan local council boundary;

but excluding national roads, provincial freeways and provincial

arterial roads

[Cameron 1999].

For reasons discussed in Section 3.1, the most acute part of the national problem

of under-investment in road maintenance and construction concerns these roads

falling under metropolitan responsibility. This is not because of peculiar

weaknesses in municipal government incentives - as has been argued, tolling,

the easiest though not necessarily the most efficient response to budgetary

pressures concerning roads, is not available to municipal authorities in the way it

is to national ones - but its correction is compounded by incentive problems

typical of decentralized governance.

South Africa's municipalities are heavily dependent on provincial revenues. The

provinces are in turn subject to national fiscal discipline. This encourages

manifestations of the basic problem of moral hazard in decentralized

government: recipients of funds raised and controlled (at least as to level)

elsewhere have incentives to overspend on relatively invisible sources of their

own utility, and to under-spend in more visible areas.

The logic behind this pervasive effect has been explored in a large literature,

some of whose recent highlights are Cremer et al (1996), Raff and Wilson

(1997), and Wildasin (2000). Boadway et al (1999) prove some robust results in

a highly general setting; we can colligate these by saying that if costs of service-provision

by a recipient of public funds on a public good are partly unobservable

to the funds-provider, the marginal benefit from the spending will not equal the

marginal cost multiplied by the marginal cost of public funds. This happens in

part because the funds-provider will be uncertain as to whether it is providing

more or less than the optimally efficient funding rate. Observation of a higher

level of the good than would be produced at the transparent equilibrium leads the

funds-provider to assume over-generosity. The recipient, knowing this, has an

incentive to inflate costs and under-produce the good. Funds recipients also have

incentives to increase their discretionary scope for spending by over-recovering

costs, which can then be used to cross-subsidize their own preferred activities.

(These may sometimes, of course, include salaries.)

In the case of goods, such as roads, which have externalities outside the

jurisdiction of the individual spending agencies, this possibility encourages

attempts at free riding by agencies on one another, and can manifest itself as

prisoner's dilemmas (d'Aspremont and Gérard-Varet 1997). In particular, given

mobile taxpayers municipalities will be reluctant to raise their own revenues for.32

public-goods expenditures involving positive externalities, out of fear of inducing

income effects and reducing their own tax-bases.

A number of structural features of the South African political economy make

these effects likely. Municipalities can raise capital funding for roads and other

public infrastructure on shared funding schemes with provinces in which the latter

provide 60% of outlay. This encourages cost inflation; indeed, given the generally

poor credit ratings of South African municipalities, it practically compels it.

Political pressures on both municipal and provincial governments to provide

direct social infrastructure and secure employee and agency cooperation through

salary augmentation are frequently considerable, and encourage attempts to free

ride, to divert funds and to enhance spending discretion through cost inflation.

Estimating the quantitative scope of these problems would be an extremely

complex exercise, since relevant data on developing world practices in this area

are sparse, and developed world structures are inappropriate models. Anecdote

in the road-maintenance industry and within government itself, however,

suggests widespread awareness of the relevant incentives; and it is unlikely that

this awareness stems from a local passion for abstract problems in game theory.

Strategies for improved alignment of incentives

The compound effect of hyperbolic discounting and the problem of the

infinitesimal margin can be controlled by one or a combination of two devices.

One of these, following Ulysses's approach, is commitment. In the case of a

government or public agency, this would require placing revenues in pre-allocated

baskets that cannot be opened in the face of later temptation. Virtually

the only device that can genuinely place a government's revenues out of its own

subsequent reach is a legal contract.

Where South African municipal and provincial road maintenance is concerned,

the only obvious second parties to binding contracts are private companies with

both the incentives and the resources to credibly threaten action in response to

breach. This point connects interestingly with one raised in Section 3.1. There, it

was noted that private participants in FROM arrangements can be most

efficiently incentivized by payment on a for-work-completed basis with pre-stipulated

ceilings on allowable cost-recovery claims, since they will otherwise be

encouraged to seek rents on non-transferable risk held by the public authority.

This mechanism would clearly require that binding contracts be concluded in

advance between governments and companies. Three specific features of these

sorts of contracts, originally motivated by the need to incentivize private

contractors, can simultaneously discourage myopic government planning.

First, the need to pre-specify cost-recovery grounds would require that particular

road-maintenance projects be prioritized, announced and budgeted, and this

would make subsequent deferral more difficult. Second, contractors forced to

bear risks of cost-overruns that could not be charged back to government would.33

offer the most efficient rates only if they could spread these risks by concluding

contracts in batches. This would incentivize governments to budget for road

maintenance and to commit to particular projects less incrementally, and this

would in turn reduce the extent of problems of infinitesimal margins. Third,

governments could only credibly transfer risk by contracting with consortia or

large firms rather than with vulnerable individual companies. This in turn

increases the credibility of threats of legal action against public authorities that

practice undue deferral or fail to provide promised capital on time. (It is noted that

contracting with consortia might also be thought by some to have favourable

implications for `empowerment' initiatives in South Africa, since it would

encourage the involvement of younger companies with more restricted access to

capital.)

This mechanism, then - the contracting of road maintenance in pay-for-completed-

work contracts with pre-stipulated ceilings on cost-recovery

claims
- has attractive equilibrium properties. Governments using such

mechanisms would effectively trade risk for reduction of their own discretion. To

the extent, however, that discretion encourages Elster-type myopia, and that this

is recognized by public authorities themselves to be problematic, the trade-off is

only apparent; in the longer view, it has more in common with having and eating

one's cake.

It is particularly interesting, in this regard, that the present Minister of Transport,

Dullah Omar, recently hinted in a speech to road industry representatives that

SANRA's authority might be extendable from its current 7,000 km. of road to

20,000. The point of this, of course, would be to take a structure that has proven

its effectiveness and widen the scope of its application. The recommendation just

broached for dealing with hyperbolic discount rates and infinitesimal margins,

however, suggests that the Minister's idea has even more going for it than the

obvious. Use of FROM and BOT schemes has a major component of SANRA's

success. We have just seen that extending such devices more widely across the

road system, with the right sorts of contract mechanisms, could help to offset

some built-in diseconomies associated with the present dispensation. Any

extension of SANRA's mandate consistent with the Constitutional division of

powers is therefore to be encouraged.

The contract mechanism, however, would be effective only where governments

already recognized the desirability of greater levels of investment in roads, such

that they could then also recognize the desirability of committing themselves

against political temptations. This then raises the issue of finding ways of dealing

with the misaligned incentives arising from South Africa's governance structure.

The large economic literature on the principal-agent problems associated with

fiscal decentralization referred to above tends to favour only one stone for killing

all birds, namely, transfer schemes. (Indeed, Wellisch [2000] shows that given

incomplete tax instruments in the hands of regional governments, as in South.34

Africa, no taxation policy can solve the problem of temptations to free ride.)

Under the transfer-scheme arrangements advocated in the literature, the funds-provider

- here, the national government to provincial governments, or provincial

governments to municipal ones - announces a fixed budget to all potential

recipients, which must balance. (This need not, of course, balance at 0, but could

balance at a threshold over some guaranteed minimum.) Recipients are then

rewarded or punished at each round of allocation based on their performance

against visible, measurable and pre-announced targets set in the previous round.

d'Agremont and Gérard-Varet (1997) show that, contrary to intuitive assumptions

in much of the previous literature, in a restricted setting with risk-neutrality and

complete information about preferences, a transfer-scheme mechanism exists

which can induce regional authorities to `tell the truth' about their spending

preferences and allows the funds-provider to allocate in accordance with the

social optimum. The general (practical) problem then consists in finding fully

visible and measurable targets in a particular case. Where road maintenance is

concerned, this might simply be the delivery of successful contracts of the

incentive-compatible sort described immediately above, under an overall

investment strategy amongst roads developed using HDM-IV.

Unfortunately, it is not clear that this sort of mechanism is constitutionally legal in

South Africa. Provincial budgetary autonomy is protected through a provision that

prohibits the national Finance and Fiscal Commission from attaching conditions

to operating transfers. This restriction does not, however, apply to capital grants.

Since current economic science seems to know of no other general mechanism

for aligning regional incentives with respect to spending on public goods, it would

seem to be worth pursuing the possibility of a capital grant scheme, based on a

fixed and balanced budget, that implemented a transfer-scheme incentive system

such as that identified above.

It is possible to be more specific about the form of capital-grant scheme that

would be necessary to do the trick. The formulation here follows Wellisch (2000).

Suppose that each municipality i contributes a lump-sum tax Ti to central

revenues. Suppose that the grant rate Si is proportional to the capital tax

prevalent in i, so that if ki is the fraction of the exogenously given capital stock K

of the country, and ti K is the source-based tax on capital levied in i, then the grant

is Si t K i . If the central government's grant scheme then satisfies the constraint

I I

Siti K = 3 Ti

i=1 i =1

then there exists a matching capital grant scheme that will incentivize the regions

to produce investment in a public good - e.g., maintenance of roads - at

whatever the central government's utility function deems to be the (constrained)

nationally efficient rate..35

So much for theoretical possibility. The procedure for calculating actual grants

given in Wellisch (2000) is probably not applicable in South Africa, because it

depends on approximate similarity of both population sizes and capital stocks

across regions, conditions from which SA massively departs. Even more

problematically, it assumes that the government measures utility by maximisation

of the utility function of the median taxpayer, which in South Africa would likely be

viewed as incompatible with equity-related goals.

The logic of the idea, however, can be stated straightforwardly: regions can be

discouraged from free-riding by a system of capital grants that rewards them for

the positive externalities their provisioning activities bestow on other regions.

Calculating a particular such scheme that would approximately accord with South

Africa's complex interregional political-economic dynamics would require an

immense econometric exercise, and a fraught selection of proxy variables for the

sorts of simple private-utility maximands used in theoretical demonstrations; but

no economic impossibility stands in the way of such an enterprise.

Whether or not there is an easier way of aligning regional incentives depends

mainly on how the problem is understood. If the goal of increasing investment in

roads is perceived mainly as a matter of convincing public officials that present

rates of investment are irrationally low within very broad bands of measurement,

then concentration on simple qualitative arguments and policy measures as

described in this survey is recommended as being most immediately plausible. If,

in addition, an advocate sought to offer government a recipe for most efficiently

investing in roads through properly incentivizing public actors throughout the

system, then a modelling exercise would have to be funded that would require (i)

access to HDM-IV, (ii) full and detailed collaboration from Ministry of Transport

officials and other central government authorities, so that proxy variables for key

components of the national utility function were not chosen arbitrarily, and (iii) an

adaptation of existing models built for first-world use to the South African

political-economic context. Given the sophistication of these models and their

present conceptual distance from developing-country (particularly South African)

circumstances, it is estimated that this would involve an effort roughly on the

scale of a doctoral thesis.

In the meantime, however, there is another measure, also anticipated by the

Minister, which could help. Aligning incentives amongst regional governments

can be thought of, for purposes of economic modelling, as inducing them to form

a cartel. A classic result in game theory, owing to Selten, shows us that cartels

become inherently unstable - because rewards from free-riding begin growing

exponentially - at more than four members. South Africa has nine provinces. It is

thus very interesting - and striking to the economist, given his professional

appreciation of four-member cartels - that the Minister has suggested, in the

same speech cited elsewhere in this survey, that the present nine provincial

roads agencies might be collapsed into four, "distributed into zones of

comparable road provision conditions … which to an extent approximates the.36

subdivision of regional offices of SANRA [and] cuts across provincial boundaries"

(Minister Omar, speech to the Road Pavements Forum, 2000). The Minister's

idea is that the executive responsibilities of provincial authorities could be

accommodated to this structure by having them serve as members of the Boards

of Control of the new concentrated agencies. For reasons that have been made

clear in this survey, such a restructuring should be warmly welcomed and

encouraged by anyone concerned for the state of South Africa's roads.

Summary

The preceding survey emphasised the following points:

1. There is an overwhelming, prima facie and common sense argument for

the claim that under-investment in roads in a country, especially a developing

one, undermines that country's general economic prospects (pp. 9-10).

2. There has been significant under-investment in roads in South Africa since

at least 1989 (pp. 10-11).

3. Recent court decisions suggest that the South African State bears a

constitutional obligation in act in accordance with a second-generation right of all

citizens to expectations of safety in the use of goods and services regulated

under public jurisdiction. This explicitly includes roads (pp. 11-12).

4. It is philosophically and legally inappropriate to cost obligations to rights

using CBA. A procedure is given that enables the expense to the State of failures

of duty to be entered into economic calculations without prejudice to this

philosophical fact (pp. 13-15).

5. Failure to maintain safe roads through under-maintenance has a higher

expected cost to the State, through anticipated successful suits for damages,

than does adequate maintenance of the road network (pp. 14-15).

6. The World Bank's HDM-IV model can and should be used to assess the

economic merits of road maintenance, rehabilitation, upgrade and construction

possibilities (pp. 16-18).

7. Developing countries, such as South Africa, face special problems that

make first-world utility functions on road maintenance and construction

inappropriate. However, HDM-IV can incorporate these special elements of utility

(pp. 16-17).

8. Privatisation and outsourcing have been important measures for

capitalising South African roads, but are not panaceas, particularly as regards

urban and low-use provincial roads (pp. 19-20)..37

9. BOT and (especially) FROM schemes encounter problems associated

with the fact that government cannot fully off-load risk onto private contractors.

This undermines the incentives of such contractors. It is recommended that

FROM schemes pay on a for-work-completed basis, with predetermined ceilings

on recoverable costs, and that consortia be preferred, ceteris paribus, to single

companies (p. 19).

10. Government has damaged the credibility of its commitment to its end of

public-private partnerships through highly visible abdications of contractual

obligations, as in the case of the Maputo Corridor road project (pp. 19-20).

11. Road pricing is not a generally viable solution to South Africa's under-maintenance

problem, though it may often be useful for national and trunk roads

where convenient alternatives can be blocked without upsetting general transport

equilibrium (pp. 20-21).

12. Extension of `user-pays' approaches to road financing are limited in the

extent to which they alone represent a solution by the fact that charges levied on

road-users, through fuel taxes and license fees, are already heavily cross-subsidising

other public goods and services. This amounts to a productivity tax

that is almost certainly inefficient already. Were revenues stemming from levies

on users to be dedicated to road maintenance, this would not represent an

increase in such a tax beyond its current levels. However, since provinces would

presumably see the need to replace the resulting diverted revenue in such a

case, this approach will not substantially solve the under-maintenance problem

by itself unless greater efficiencies in general expenditure could be achieved

(p 21).

13. Even if government believes that the capital investment embodied in

existing roads constitutes a dead-weight sunk cost that should be written off until

various primary social goods are provided above some threshold, under-investment

in roads serving these primary assets is economically irrational. This

is demonstrated algebraically (pp. 21-24).

14. The above argument cannot be used to justify the maintenance of some

roads and the neglect of others. Determination of efficient road-investment levels

is a general equilibrium problem (p. 24).

15. Roads are likely to be under-maintained due to the compounding effects

of hyperbolic discounting and the problem of the infinitesimal margin (pp. 25-26).

16. In federal and semi-federal systems, adequate investment in roads tends

to be undermined by moral hazard and regional free-riding problems. These are

exacerbated in South Africa by the problems of capital-access faced by provincial

and (especially) municipal governments (pp. 26-28)..38

17. The mechanism identified in (8) above can help to offset the problems

identified in (13) above (pp. 24-25).

18. The measure identified in (17) would be particularly well-complemented by

action on a recent hint by the present Minister of Transport that an extension of

SANRA's mandate from its current 7,000 km. of road to 20,000 km. might be

possible (p. 29).

19. Transfer schemes are necessary to offset the problem identified in (16)

above. In South Africa this is impeded by constitutional restrictions on conditional

transfers. However, it is a provable result that a system of matching capital

grants exists that would promote efficiency with incentive-compatibility (pp. 29-

31).

20. Existing models for calculating capital grant systems as in (16) above are

ill suited to the South African context. The development of such a model would

likely be a tractable task on the scale of a doctoral thesis (pp. 30-31).

21. The Minister has suggested that the present nine provincial road agencies

be collapsed into four, and has proposed a mechanism that could make this

compatible with the constitutional division of powers. Game-theoretic principles

indicate that this would also help to alleviate the problems identified in (16) above

(p. 31).

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