Government
of Armenia
The World
Bank
Armenia Lifeline Roads
Network Improvement Project
(LRNIP)
Consulting Services for Roads
Financing Study
Final Report
July 2015
international ltd
ARMENIA LIFELINE ROADS NETWORK IMPROVEMENT PROJECT
CONSULTING SERVICES FOR ROADS FINANCING STUDY
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ARMENIA LIFELINE ROADS NETWORK IMPROVEMENT PROJECT
CONSULTING SERVICES FOR ROADS FINANCING STUDY
# FS-LRNIP-2014
FINAL REPORT
JUNE 2015
Notice
This report was produced by Roughton International Limited for TRANSPORT PROJECTS
IMPLEMENTATION UNIT STATE INSTITUTION OF THE MINISTRY OF TRANSPORT AND
COMMUNICATION OF REPUBLIC OF ARMENIA for the specific purpose of ARMENIA
LIFELINE ROADS NETWORK IMPROVEMENT PROJECT - ROADS FINANCING STUDY x.
This report may not be used by any person other than the TRANSPORT PROJECTS
IMPLEMENTATION UNIT STATE INSTITUTION OF THE MINISTRY OF TRANSPORT AND
COMMUNICATION OF REPUBLIC OF ARMENIA express permission. In any event Roughton
International Limited accepts no liability for any costs, liabilities or losses arising as a result
of the use of or reliance up the contents of this report by any person other than
TRANSPORT PROJECTS IMPLEMENTATION UNIT STATE INSTITUTION OF THE MINISTRY OF
TRANSPORT AND COMMUNICATION OF REPUBLIC OF ARMENIA.
Document History
JOB NUMBER: ARM003 DOCUMENT REF: TR1
01 Final Report J Standingford
D L Anderson
L Etherington
Checked E Begović 04/07/15
Revision Purpose Description Originated Checked Reviewed Authorised Date
Roughton International Limited T A B L E O F C O N T E N T S
ARMENIA LIFELINE ROADS NETWORK IMPROVEMENT PROJECT
CONSULTING SERVICES FOR ROADS FINANCING STUDY II
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ARMENIA LIFELINE ROADS NETWORK IMPROVEMENT PROJECT
CONSULTING SERVICES FOR ROADS FINANCING STUDY
TABLE OF CONTENTS
E1. EXECUTIVE SUMMARY..................................................................................................... 1-1
1. INTRODUCTION ............................................................................................................... 1-1
The Consultancy ......................................................................................................... 1-1
Approach and Method ............................................................................................... 1-1
Terminology and Units ............................................................................................... 1-2
Report Structure, Content and Purpose ..................................................................... 1-3
2. FINDINGS......................................................................................................................... 2-1
Actual , Budgeted and Projected Expenditure............................................................ 2-1
Budget Process........................................................................................................... 2-4
Needed Expenditure .................................................................................................. 2-5
Existing Revenues from Road Users ........................................................................... 2-8
3. CONCLUSIONS ................................................................................................................. 3-1
Levels of Financing ..................................................................................................... 3-1
Strategic Options........................................................................................................ 3-2
Revenue ..................................................................................................................... 3-7
4. RECOMMENDATIONS...................................................................................................... 4-1
Expenditure................................................................................................................ 4-1
Revenue ..................................................................................................................... 4-1
Efficiency Improvements............................................................................................ 4-4
5. IMPLEMENTATION .......................................................................................................... 5-1
Expenditure................................................................................................................ 5-1
Revenue ..................................................................................................................... 5-1
Reducing Costs and Improving Efficiency ................................................................... 5-3
Transferring Responsibility......................................................................................... 5-4
Priorities..................................................................................................................... 5-5
6. SOCIAL AND ECONOMIC CONSEQUENCES ....................................................................... 6-1
‘Bad Roads Tax’ .......................................................................................................... 6-1
Economic Effects ........................................................................................................ 6-3
Social Implications...................................................................................................... 6-4
Roughton International Limited T A B L E O F C O N T E N T S
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APPENDICES
Appendix 1A Data Supplied by MoTC
Appendix 2A Technical Details of HDM-4 Analysis of Needed Expenditure
Appendix 2B Revenue Estimation (from the First Technical Report)
Appendix 3A Report on Workshop 1
Appendix 3B Report on Workshop 2
Appendix 3C Case Study: Output and Performance Based Road Maintenance Contracting
(OPBRMC) in the Republic of Serbia
LIST OF TABLES
Table 1 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (1).....................................2-1
Table 2 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (2).....................................2-2
Table 3 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (3).....................................2-3
Table 4 Budgeted and Actual Expenditures in the Transport Sector, 2009-13 (AMD billion).............2-3
Table 5 Needed Expenditure on Interstate and Republican Roads (AMD billion) ..............................2-6
Table 6 Needed Expenditure on All Common Roads (AMD billion) ....................................................2-6
Table 7 Needed Expenditure on Interstate and Republican Roads (US$ million)...............................2-7
Table 8 Needed Expenditure on All Common Roads (US$ million).....................................................2-7
Table 9 Summary of Existing Identifiable Revenues from Road Users ...............................................2-8
Table 10 Incidence of Fuel Taxation by Class of Vehicle and Type of Tax...........................................2-9
Table 11 Total Fuel Tax Per Litre of Fuel ...........................................................................................2-10
Table 12 Comparative Retail Fuel Prices in Nine Countries (US$/litre) ..............................................3-8
Table 13 Proposed Rationalization of Fuel Taxation ...........................................................................4-2
Table 14 Vignettes Compared to Tolls ................................................................................................4-3
Table 15 Benefits to Road Users Compared With Proposed Tax Impact ............................................6-2
LIST OF FIGURES
Figure 1 Armenian Program Budgeting System ..................................................................................2-4
Figure 2 Summary of Strategic Options and Arguments (2 pages) .....................................................3-6
Figure 3 Projected Average Roughness (IRI): Interstate Road Network .............................................6-2
Figure 4 Projected Average Roughness (IRI): Republican Road Network ...........................................6-2
ACRONYMS AND ABBREVIATIONS
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ACRONYMS AND ABBREVIATIONS
AC Asphaltic Concrete
ADB Asian Development Bank
ADS Armenian Development Strategy (issued as an annex to RA Government Decree No.442-N on 27 March 2014)
AMD Armenian Dram [Approximate current exchange rate US$1 = AMD475]
ARD Armenian Roads Directorate SNCO
CCP Cement Concrete Pavement
CNG Compressed Natural Gas
CPI Consumer Price Index
DBST Double Bituminous Surface Treatment
EBRD European Bank for Reconstruction and Development
EDB Eurasian Development Bank
ESAL Equivalent Standard Axle Load
GoA Government of Armenia
GDP Gross Domestic Product
GFC Global Financial Crisis (which started in 2008)
GVW Gross Vehicle Weight
HDM-4 Highway Development and Management software (4th generation)
HGV Heavy Goods Vehicle
IFI International Financial Institution
IRI International Roughness Index (approximating the vertical distance in metres that a vehicle travels in a horizontal distance of 1km, due to road surface unevenness.
IRN Interstate Road Network
KPI Key Performance Indicator
LNG Liquified Natural Gas
LRN Local Road Network
LRNIP Lifeline Road Network Improvement Program
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Marz One of 10 administrative regions of Armenia, each administered by a Governor.
Marzpetaran Administrative body responsible for a Marz.
MoF Ministry of Finance
MoTC Ministry of Transport and Communication
MTEF Medium Term Public Expenditure Framework
PBMC Performance Based Maintenance Contract
OPBRMC Output and Performance Based Road Maintenance Contracting
RA Republic of Armenia
RAMS Road Asset Management System
RIL Roughton International Limited
RRN Republican Road Network
RUC Road User Cost, including the value of time
SBST Single Bituminous Surface Treatment
SNCO State Non-Commercial Organization
TOR Terms of Reference
TPIU Transport Project Implementation Unit
TR1 / TR2 First / Second Technical Report (of the consultants)
USD / US$ United States Dollar [Approximate current exchange rate US$1 = AMD475]
VAT Value Added Tax
VOC Vehicle Operating Cost
WB World Bank
Note ISO abbreviations are used in this report, for example: kg (kilograms), km (kilometres),
km/h (kilometres per hour), M (millions), Ml (megalitres), Mt (megatonnes), t (tonnes).
The non-standard abbreviation ‘bn’ is used for billion (109), for example in ‘AMDbn’.
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E1. EXECUTIVE SUMMARY
E1.1 The Consultancy
The consulting firm Roughton International Limited (the Consultant) was engaged by the Govern-
ment of the Republic of Armenia to make a study of current and needed expenditure in the roads
sector, and recommend means of ensuring adequate future funding and the efficient application
thereof. The study is funded under the Armenia Lifeline Roads Network Improvement Project
(LRNIP), supported by the World Bank.
Attention has focused on the maintenance and rehabilitation of interstate, republican and local
roads, while taking into account the ongoing program of upgrading of the North-South Corridor.
Funding for upgrading purposes is considered capital in nature, qualitatively different from the
ongoing funding required to keep the road network in a stable condition.
The consultancy was designed to maximize engagement with interested parties, in particular the
ministries responsible for transport, the economy, finance, and territorial administration; the Marz-
petarans; the international financial institutions (IFIs) involved in supporting the Armenian roads
sector; and the commercial transport sector. Two technical reports were produced, each followed by
a workshop to consider the Consultant’s conclusions and proposals. This report draws on data
supplied in the course of the study, the Consultant’s analysis and feedback from those workshops.
E1.2 Expenditure
Average annual expenditure on road maintenance and rehabilitation during 2010-14 (actual), 2015
(budgeted) and 2016-17 (planned) is estimated at AMD20 billion (US$44M) at constant 2015 prices.
Of this amount, 43% has been financed by borrowing from IFIs on highly concessional terms.
In real terms, after adjustment for inflation, budgeted expenditure in 2015 is the lowest since 2010 in
terms of both the State Budget and the total expenditure on maintenance and rehabilitation incl-
uding loan disbursements.
The local road network has suffered particularly severe underfunding over a long period, resulting in
57% of the network being classified as ‘poor’ or ‘bad’ in 2014. Most of the LRN receives no routine
summer maintenance because of the funding shortfall.
Three estimates of needed expenditure have been made since 2011, by the World Bank, the
consulting firm AARC (for ADB) and now Roughton. The World Bank’s estimate was for interstate
and republican roads only, but at a time when much of the present local road network was classified
as republican. AARC’s assumed much more rapid continuation of concreting the North-South
Corridor than in the present analysis.
After adjustment for these differences, there is little difference between the conclusions reach by the
three sets of analysts. In order to keep the interstate and republican road networks at or near their
present average condition, annual expenditure of AMD28 billion (US$58M) is required up to 2020,
and AMD22 billion (US$47M) thereafter.
The present Consultant does not consider the local road network to be in a state that makes stabiliz-
ation a realistic option immediately. The recommendation is for annual expenditure of AMD14
billion (US$30M) to 2020 and AMD8 billion (US$18M) thereafter.
The Consultant recommends that in the longer term the cost of road maintenance and rehabilitation
should be met entirely from the State Budget, with loan financing only for upgrading projects. This
could be achieved as early as 2020 if the recommendations contained in this report are fully
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implemented. However, extended borrowing on concessional terms for rehabilitation projects
would be preferable to continued underfunding.
E1.3 Revenue
Road users contribute an estimated AMD 143 billion (US$301M) per year through taxes on imported
vehicles, parts, tyres, fuel etc; VAT; and a range of taxes and fees that apply exclusively to road users.
Some apply to foreign-registered vehicles using Armenian roads, but the majority are born by the
owners of Armenian-registered vehicles.
Fuel taxes were studied especially closely, as required by the Consultant’s terms of reference. It was
found that the mix of taxes and their incidence vary greatly between the three type of fuel used by
the Armenian vehicle fleet: petrol, diesel fuel and compressed natural gas (CNG). Armenia is unique
in that CNG provides two-thirds of the energy consumed for road transport. Diesel fuel, although it is
the only fuel used by heavy vehicles, provides no more than 8%.
According to the Consultant’s estimates the total tax burden, comprising customs duty, excise tax,
environmental tax and VAT, amounts to AMD95/litre of petrol, AMD38/litre of diesel fuel and
AMD36/litre equivalent of CNG (1m3 of natural gas contains the calorific value of 1 litre of petrol).
This is clearly irrational, inequitable and inefficient. Some disparity might be justified on environ-
mental grounds, especially in the case of CNG whose CO2 emissions are some 26% lower then those
from petrol combustion and 36% lower than those from diesel fuel combustion. But the scale of the
existing disparity and the low level of taxation of diesel fuel and CNG require to be addressed.
A review of the Tax Code is under way at present. The Consultant recommends that the review
should specifically address the need to rationalize fuel taxes, and has proposed a 2-stage strategy
whereby:
• VAT would be restored to diesel fuel, which was exempted in 2010 as a way to reduce
costs born by farmers, miners and other operators of off-road diesel-powered equip-
ment. The restoration would apply only at the point of sale to road vehicles, to preserve
that policy objective.
• An ‘equalization levy’ would be applied to petrol and CNG, also at the point of sale to
road vehicles, at levels that resulted in equal taxation of all three fuel types, factored by
their relative contributions to CO2 emissions.
This recommendation would increase annual revenue from fuel taxes by an estimated AMD27.4
billion. This would be enough to close the gap completely between the present level of expenditure
and the recommended level. The 2-stage strategy is clumsy and is designed to minimize changes to
the existing untidy structure of fuel taxation. The Consultant would support a more fundamental
rationalization within the context of the ongoing review of the Tax Code, achieving approximately the
same result in terms if equity and incremental revenue.
Hypothecation was explicitly rejected at the First Workshop associated with this consultancy, but this
would not preclude adoption of a policy to ensure a relationship between this additional revenue
from road users and the level of expenditure on the roads.
It is also recommended that ARD review the road fee schedules with a view to rationalizing them and
perhaps increasing the revenue yield. As far as possible fees related to vehicle weight and axle loads
should reflect but not exceed the incremental costs attributable to the passage of heavy vehicles.
The Consultant offers an indicative schedule of rates for Armenian-registered heavy vehicles.
If rationalization of fuel taxes and road fees fails to raise enough money to allow the recommended
level of expenditure on road maintenance and rehabilitation, it is further recommended that a
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special tax on vehicle insurance premiums be introduced. An ad valorem rate in the range 2.5–5.0%
would raise AMD0.5–1.0 billion per year.
For the longer term, it is recommended that the necessary legal steps be taken to allow tolling of
roads, bridges and tunnels without the present requirement that an alternative toll-free must be
available.
E1.4 Efficiency Improvements
Participants at the First Workshop emphasized the need to improve the efficiency with which funds
for road maintenance and rehabilitation are spent. MoTC has adopted several measures to reduce
costs and improve cost-effectiveness, including some proposed by the World Bank in 2011. Others
are recommended in this report:
• Adoption of periodic maintenance as integral to the maintenance cycle.
• Inclusion in rehabilitation contracts of routine maintenance for at least 5 years.
• A 2-stage procedure for taking over projects, on completion of rehabilitation and on
completion of the period of routine maintenance.
• Revision of pavement standards and use of cheaper methods on low traffic volume
roads, and for periodic maintenance on all roads.
• Amendment of Government Decree No.1419-N to add roughness (as measured by the
International Roughness Index, IRI) as a criterion for assessing road condition.
• Use of the Road Asset management Systems (RAMS) that is now being acquired by ARD
to produce economically optimal works programs within the prevailing resource limit-
ations.
• Pilot projects to test the efficacy of performance-based maintenance contracts (PBMCs)
with fixed payments over at least 5 years in return for meeting agreed performance
criteria, which should include maximum roughness defined as an IRI.
E1.5 Implementation
A policy decision should be taken as soon as possible to effect a substantial, enduring increase in the
State Budget allocation to road maintenance and rehabilitation. This should taken and announced
together with a decision to increase revenue collection from road users, with a firm commitment to
use the extra revenue to support the increase in expenditure. The Consultant recommends formal
hypothecation of revenue.
The Tax Code is currently under review, providing an opportunity to implement the Consultant’s
recommendations with respect to revenue. The primary recommendation is fuel tax rationalization
with a substantial increase in the average tax per litre. Secondary recommendations are the rational-
ization of road fees and creation of a new tax on vehicle insurance premiums.
Legal provision should be made now for the future imposition of road, bridge and tunnel tolls, with
the possibility of franchised toll collection and sale of vignettes.
Various proposals have been made to reduce costs and improve efficiency, some of which have been
introduced or are being tried. High priority should now be given to reviewing contractual arrange-
ments with a view to a) combining medium-term routine maintenance contracts with rehabilitation
contracts; and b) piloting performance-based maintenance contracts (PBMCs) as an alternative to
the present unit price based contracts.
The Consultant does not recommend devolution of responsibility for road maintenance, other than
through toll franchising arrangements. But if this is preferred to increasing the State Budget alloc-
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ation to roads, legal steps should be initiated to give both responsibility and commensurate revenue-
raising powers to communities.
E1.6 Social and Economic Consequences
Participants at the First Workshop expressed concern that higher transport costs, caused by new or
increased taxes and charges paid by road users, would have a depressive effect on the economy. The
Consultant offers the counter-argument that bad roads impose much higher costs on road users,
therefore if the proceeds of higher taxes or charges were devoted road maintenance and rehab-
ilitation there would be a significant net reduction in transport costs.
If the Consultant’s recommended level of expenditure on road maintenance and rehabilitation were
adopted, then the measurable improvement in road quality would be an average reduction of 4 IRI
points (from about 11 to about 7 in the case if interstate roads, and from about 12 to 8 in the case of
republican roads). This would result in a reduction of about 15% in vehicle operating costs and a 16%
reduction in road user costs (including time savings). The recommended rationalization of fuel taxes
would add between 2% and 4% to vehicle operating costs.
A notional example indicates that the cost of goods transported by medium-sized truck to a typical
village would be reduced by 0.2% because of the net reduction in transport costs. Bus fares should
be reduced by about 8%.
It is possible, but unprovable, that the high proportion of uncropped arable land and the rapid
growth of food imports might be impacted positively by the improvement in local roads that would
result from the recommended level of expenditure. It is also probable that the improvement would
enhance employment opportunities, especially in rural areas and among the poor, and make Arm-
enian exports more competitive.
A policy of selective depopulation to reduce the cost of providing access and essential services to
remote areas is not recommended.
E1.7 Summary of Recommendations
The Consultant has considered several possible ways to bridge the gap between a) the existing
budgetary allocation to road maintenance and rehabilitation and b) the level of expenditure needed
to keep the road network in a stable condition. But only a few of those possibilities are recom-
mended. They are:
• A high-level policy decision to increase the level of annual expenditure from about
AMD19 billion now to AMD42 billion until 2020 and AMD31 billion thereafter.
• Loan financing of rehabilitation until 2020, after which all road maintenance (including
rehabilitation) would be financed from the State Budget.
• Rationalization of fuel taxation with an increase of AMD38 (US$0.08) in the average tax
per litre, yielding sufficient additional revenue to cover the recommended increase in
expenditure and ameliorating the present inequity between users or the three fuel
types.
• Rationalization of road fees, to ensure that they accurately reflect the relative road
construction and maintenance costs imposed by different classes of vehicle.
• Legal facilitation of taxation of vehicle insurance premiums.
• Legal facilitation of road/bridge/tunnel tolls, vignettes and associated franchising.
• Introduction of periodic maintenance into the normal maintenance cycle.
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• Continued experimentation with more cost-effective maintenance treatments for low-
traffic roads.
• Continued strengthening of ARD’s capacity, including RAMS acquisition.
• Changes to contractual arrangements, including the inclusion of medium-term routine
maintenance into road rehabilitation contracts; and true performance-based mainten-
ance contracts (PBMCs).
• Amendment of Decree 1419-N to include roughness (IRI) as a performance indicator.
1. INTRODUCTION
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1. INTRODUCTION
THE CONSULTANCY
1 The consulting firm Roughton International Ltd has been engaged by the Government of the
Republic of Armenia under the Armenia Lifeline Roads Network Improvement Project
(LRNIP), which is supported by a loan from the World Bank, to make a study of roads
financing.
2 In summary, the purpose of this study is to review current and recent budgetary provision for
the roads sector; identify existing road user taxes and charges and estimate the revenues
they produce; estimate the road sector’s medium- and long-term financing needs; and
propose ways in which those needs could be met.
3 This is the last of four reports. The first two were technical reports intended as inputs to two
workshops:
• First Technical Report (TR1) which a) detailed recent and planned expenditure on road
maintenance and improvement; b) estimated future expenditure needed to “keep the
road network in a stable long-term condition”; c) identified and estimated the yield
from taxes and charges levied on road users; and d) proposed optional strategies for
closing the gap between existing and needed expenditure levels.
• Second Technical Report (TR2) which set out a time-bound implementation plan for
those elements of the proposed strategies that were preferred by participants in the
First Workshop, held on 28 April 2015. TR2 was presented and discussed at the Second
Workshop, held on 26 May 2015, and written comments were received from the World
Bank. A revised version of TR2 took these comments into account and was submitted to
the Client after the Second Workshop.
The third was the Draft Final Report, from which this report has been developed. It was
presented and discussed at the Second Workshop but no written comments were received.
4 Brief reports on the First and Second Workshops are included here as Appendices 3A and 3B
respectively.
APPROACH AND METHOD
5 Official data were used to build up a comprehensive picture of the condition of the three
road networks, relevant actual expenditure since 2009, budget expenditure in 2015 and
planned expenditure in 2016 and 2017. Appendix 1A presents data provided by MoTC for
the period 2004-15.
6 Official sources were also used as far as possible to identify and quantify existing revenues
from road users, including taxes usually regarded as general in nature (customs duty, VAT
etc) as well as taxes and charges specific to road users. Available official data were
supplemented from a variety of sources, including interviews with private sector represent-
atives and the consultants’ own estimates.
7 Estimates of needed expenditure were made for the interstate and republican road networks
(IRN and RRN) using the HDM-4 model and the Armenian Roads Directorate’s (ARD’s)
database of road specifications, condition and traffic. HDM-4’s Program mode was used,
which produced a 20-year section-wise list of optimum interventions and costs. The model
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selected from a menu of possible interventions to produce the best possible economic rate
of return within a defined budget limit.
8 No objective data exist for the local road network (LRN) so a much cruder approach had to
be adopted. Costs were estimated for rehabilitation of 5% of the network annually and full
routine maintenance (comprising winter and summer maintenance) of the remainder.
Allowing for progressive deterioration, and consequent slippage from ‘good’ to ‘fair’ and
then to ‘poor/bad’ condition, this is projected to bring 35% of the LRN to good condition and
65% to fair condition in 2034. At present the proportions are reported to be 18% good, 25%
fair and the remainder poor or bad (see Appendix 1A).
9 Other estimates have been made of needed expenditure on the IRN and RRN, notably by the
World Bank in 2011 (Report No.66533-AM ‘Improving the Sustainability of Road Manage-
ment’) and by ADB’s consultant AARC in 2015 (ADB TA-8710 ‘Road Maintenance Financing
Strategy’). As is to be expected, those estimates are similar to the present Consultant’s,
given that the World Bank estimates covered only the IRN and RRN and were conducted at a
time when a proportion of local roads had been temporarily re-classified as republican roads.
10 There is evidently a wide gap between needed expenditure and the resources allocated to
road maintenance and rehabilitation in the State Budget. The Consultant explored ways to
close that gap and presented them in his First Technical Report for discussion at the First
Workshop. Some were unacceptable to the Ministry of Finance and were therefore
eliminated from the second phase of the study, which dealt with implementation of the
preferred proposals and culminated with TR2 and the Second Workshop.
TERMINOLOGY AND UNITS
11 To understand all parts of this report it is necessary to understand the meanings of some
different terms that are used by international institutions (such as the World Bank) and in
Armenia. Internationally, maintenance is usually classified as:
• Routine. This comprises patching the road surface; clearing and repairing drains; cutting
back roadside foliage; repairing and replacing roads signs and protective barriers;
refreshing road markings; and whatever other minor works that are needed to keep a
road serviceable and safe. In Armenia it would include snow clearance. For a concrete
pavement (such as the North-South Corridor) it includes joint re-sealing.
• Periodic. A bitumen road typically needs a major maintenance intervention every 5-10
years. This usually includes an overlay of some kind to ensure the integrity of the
surface and restore it to a smoothness close to that of a newly-built road.
• Reconstruction. Roads typically have a design life of 20 years, during which they receive
two periodic interventions and intervening routine maintenance. At the end of its
design life a road should be reconstructed. If the traffic volume has changed sub-
stantially, or its role in the network has changed, it may be reconstructed to a higher or
lower design standard.
12 In Armenia, however, road works are defined differently:
• Routine maintenance – winter. Winter maintenance is meant to keep roads passable
during the five months of winter and it chiefly involves snow-clearing. It does not
involve repair or protection of the road surface, drains or other associated structures.
• Routine maintenance – summer. This is like ‘routine maintenance’ as described above,
the main activity being the filling and patching of potholes.
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• Capital repair (or ‘rehabilitation’). This term is applied to both ‘reconstruction’ and
‘periodic maintenance’ as defined above and usually occurs after a period during which
a road is considered to be in such poor condition that it is unmaintainable. Most of the
local road network is in this condition now.
13 The Armenian State Budget uses the terms ‘routine maintenance’ and ‘capital repair’. The
latter is considered capital in nature, even if it resembles periodic maintenance, and there-
fore eligible for loan financing.
14 On the other hand the World Bank’s analysis in 2011 and the two analyses by consultants in
2015, all of which made use of HDM-4, are based on the internationally recognised cycle of
road maintenance comprising routine maintenance, periodic maintenance and rehabilit-
ation/reconstruction. The associated terms are also used. In those analyses some kind of
intervention is required every year: at least routine maintenance. They do not accommodate
the current Armenian strategy of leaving bad road sections unmaintained for long periods
until capital repairs can be afforded.
15 In TR1 all findings concerning needed expenditure were shown in two currencies: US$ and
AMD. This was done for the convenience of readers outside Armenia and because the WB
analysis that was a major input to this study was carried out entirely in US$. In this report,
however, the primary currency in most tables is AMD. The dollar equivalents of some key
figures are included, using an exchange rate of US$1 = AMD475.
REPORT STRUCTURE, CONTENT AND PURPOSE
16 The Consultant’s terms of reference (TOR) call for the Final Report to present his findings,
conclusions and recommendations. This report is structured accordingly, with separate
chapter outlining a) the legal and other measures required to implement the recommend-
ations and b) the social and economic consequences of adopting or rejecting the recom-
mendations.
17 This report is intended to be read as a stand-alone document, but some of the detailed
analyses that were explained in TR1 are excluded. Readers who want to have a more
complete understanding or check the reliability of the Consultant’s findings may ask for soft
copies of that report from MoTC.
18 The purpose of this report is twofold:
• To establish a factual basis for policy-making with regard to road maintenance and
rehabilitation encompassing current levels of expenditure, needed future levels of
expenditure, revenues currently received from road users and the potential for
increasing and/or supplementing those revenues.
• To offer specific recommendations for achieving a better outcome for road users and for
the national economy within existing and projected fiscal constraints.
2. FINDINGS
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2. FINDINGS
ACTUAL , BUDGETED AND PROJECTED EXPENDITURE
19 Table 1 shows the total expenditure in the road sector from the State Budget and external loan
disbursements during 2009-2014 (actual), 2015 (approved budget) and 2016-17 (planned,
according to the latest available MTEF). Two totals are shown at the foot of the table:
• Total expenditure from all sources and for all road maintenance, rehabilitation and upgrad-
ing activities.
• Total current expenditure, excluding the North-South Corridor project which is regarded as
upgrading and therefore ‘capital’ in nature.
Table 1 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (1)
AMD billion at current prices
Budget
2009 2010 2011 2012 2013 2014 2015 2016 2017
Capital repair 5.52 0.73 0.96 1.49 2.39 3.04 1.56
Routine maintenance
Capital repair 5.67 0.49 1.85 1.05 0.45 1.07 0.86
Routine maintenance
Capital repair 4.00 4.00
Routine maintenance 5.60 5.52 5.33 5.55 5.51 5.82 5.96 6.26 6.57
Capital repair 2.15 0.07 0.81 2.18 0.91 1.98 0.59
Routine maintenance 0.78 0.76 0.76 0.76 0.76 0.76 0.80 0.84 0.88
Capital repair 13.34 1.29 3.62 4.71 3.75 6.09 3.01 4.00 4.00
Routine maintenance 6.37 6.28 6.09 6.31 6.27 6.59 6.76 7.09 7.45
Total 19.72 7.57 9.72 11.02 10.01 12.67 9.77 11.09 11.45
ADB North-South Corridor 0.47 7.01 7.96 29.64 12.83 21.64 43.83
EBRD Bagratashen-Border [a] 1.63 1.52 1.95
WB Lifeline Roads 30.77 10.74 10.39 6.49 8.37 2.63 4.78 6.84 5.28
Total 30.77 10.74 10.86 13.50 16.33 32.27 19.24 30.00 51.06
50.49 18.31 20.58 24.52 26.34 44.94 29.01 41.09 62.51
50.49 18.31 20.11 17.51 18.38 15.30 16.18 19.45 18.68
Actual Expenditure Planned
Interstate
Roads (IRN)
Republican
Roads (RRN)
State Budget
IRN/RRN un-
differentiated
Local Roads
All Common
Roads
Excluding capital component [b]
External loan disbursements
[a] Provisional figures.
[b] Assuming that 100% of the North-South Corridor expenditure is for upgrading (capital) works.
Source: MoTC/ARD and MoF reports. This is an updated and more disaggragated version of Table 3 in Chapter 2
of the First Technical Report.
Total for the Roads Sector
20 This table is repeated below in two variants:
• Table 2: The effects of inflation are removed from Table 1 by applying the Consumer Price
Index (CPI), as published by the Armenian Statistical Service, to the actual expenditure
figures in 2009-14, and the average inflation rate to the planned figures in 2016 and 2017.
• Table 3: The constant price figures in Table 2 are converted to US dollars using average
annual exchange rates published by the Central Bank of Armenia. The average annual rate
of depreciation since 2009 is used to convert planned figures in 2016 and 2017.
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Table 2 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (2)
AMD billion at constant 2015 prices
Budget
2009 2010 2011 2012 2013 2014 2015 2016 2017
Capital repair 7.61 0.93 1.13 1.72 2.60 3.22 1.56
Routine maintenance
Capital repair 7.82 0.62 2.19 1.21 0.49 1.13 0.86
Routine maintenance
Capital repair 3.80 3.61
Routine maintenance 7.71 7.03 6.31 6.40 6.00 6.16 5.96 5.95 5.94
Capital repair 2.96 0.09 0.96 2.51 0.99 2.09 0.59
Routine maintenance 1.07 0.97 0.90 0.88 0.83 0.81 0.80 0.80 0.80
Capital repair 18.39 1.65 4.29 5.44 4.08 6.44 3.01 3.80 3.61
Routine maintenance 8.79 8.00 7.21 7.27 6.83 6.97 6.76 6.74 6.73
Total 27.18 9.65 11.50 12.71 10.91 13.41 9.77 10.55 10.35
ADB North-South Corridor 0.56 8.08 8.67 31.36 12.83 20.57 39.61
EBRD Bagratashen-Border [a] 1.63 1.44 1.76
WB Lifeline Roads 42.42 13.68 12.29 7.48 9.12 2.78 4.78 6.50 4.77
Total 42.42 13.68 12.85 15.56 17.80 34.14 19.24 28.52 46.14
69.60 23.33 24.34 28.27 28.71 47.55 29.01 39.07 56.49
69.60 23.33 23.79 20.19 20.03 16.19 16.18 18.49 16.88
[a] Provisional figures.
[b] Assuming that 100% of the North-South Corridor expenditure is for upgrading (capital) works.
Source: MoTC/ARD and MoF reports. The published CPI index has been used to express annual figures in 2015
constant prices. The average inflation rate of 5.2%pa has been used to adjust the amounts planned for 2016 and
All Common
Roads
External loan disbursements
Total for the Roads Sector
Excluding capital component [b]
Interstate
Roads (IRN)
Republican
Roads (RRN)
IRN/RRN un-
differentiated
Local Roads
Actual Expenditure Planned
State Budget
21 The annual amounts for road maintenance, excluding the upgrading of the North-South Corridor
which is taken to be truly capital in nature, fall far short of all estimates of the needed level: see
the section below, beginning with paragraph 29.
22 In its 2011 report on its analysis of needed expenditure, the World Bank recommended an
increase of US$30M in the annual expenditure on routine maintenance, periodic maintenance
and rehabilitation. This figure has often been quoted out of context. At the time of the analysis
the Government was planning to spend US$68M and the World Bank was recommending
expenditure on US$98M. As shown in Table 1 above, actual expenditure in 2011 was only 30%
of the planned amount and 21% of the World Bank’s recommendation.
23 Such discrepancies are not unusual. Table 4 shows budgeted and actual expenditure in the
transport sector as a whole and in the roads sector between 2009 and 2013.
24 Local roads have fared particularly badly, suffering a big reduction in their budget allocation for
routine maintenance between 2009 and 2015. The reduction has been 22% in dollar terms, or
28% in real AMD terms using the CPI as a deflator. An average of AMD1.35 billion was spent on
capital repair in each of the years 2009-14 and AMD0.59 billion is included in the current State
Budget. AMD0.59 billion is enough to rehabilitate about 9km of local road, or 0.4% of the total
length of road considered to be beyond maintenance.
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Table 3 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (3)
US$ million at constant 2015 prices
Budget
2009 2010 2011 2012 2013 2014 2015 2016 2017
Capital repair 17.2 2.2 2.8 3.9 6.1 7.5 3.3
Routine maintenance
Capital repair 17.6 1.5 5.4 2.8 1.1 2.6 1.8
Routine maintenance
Capital repair 7.9 7.4
Routine maintenance 17.4 16.3 15.5 14.7 14.0 14.3 12.5 12.3 12.1
Capital repair 6.7 0.2 2.4 5.8 2.3 4.9 1.3
Routine maintenance 2.4 2.3 2.2 2.0 1.9 1.9 1.7 1.7 1.6
Capital repair 41.5 3.8 10.5 12.5 9.5 14.9 6.3 7.9 7.4
Routine maintenance 19.8 18.6 17.7 16.7 15.9 16.2 14.2 14.0 13.8
Total 61.3 22.4 28.3 29.2 25.5 31.1 20.6 21.9 21.2
ADB North-South Corridor 1.4 18.5 20.2 72.7 27.0 42.7 81.0
EBRD Bagratashen-Border [a] 3.4 3.0 3.6
WB Lifeline Roads 95.6 31.8 30.2 17.2 21.3 6.5 10.1 13.5 9.8
Total 95.6 31.8 31.6 35.7 41.5 79.2 40.5 59.2 94.4
156.9 54.2 59.9 64.9 67.0 110.3 61.1 81.1 115.6
156.9 54.2 58.5 46.3 46.7 37.5 34.1 38.4 34.5Excluding capital component [b]
[a] Provisional figures.
[b] Assuming that 100% of the North-South Corridor expenditure is for upgrading (capital) works.
Source: MoTC/ARD and MoF reports. Published average annual exchange rates have been used to convert AMD
values to US$. The average depreciation rate of 4.6%pa has been used to adjust the amounts planned for 2016
Local Roads
All Common
Roads
External loan disbursements
Total for the Roads Sector
State Budget
Interstate
Roads (IRN)
Republican
Roads (RRN)
IRN/RRN un-
differentiated
Actual Expenditure Planned
Table 4 Budgeted and Actual Expenditures in the Transport Sector, 2009-13 (AMD billion)
2009 2010 2011 2012 2013
Transport sector Original budget 54.6 40.7 50.3 69.1 83.7
Revised budget 71.4 43.7 49.6 61.5 75.6
Actual expenditure 60.7 36.7 30.4 35.3 37.9
Road transport sector Original budget 50.8 38.0 39.7 61.8 73.8
Revised budget 67.4 39.4 38.5 54.3 68.9
Actual expenditure 57.8 32.5 24.6 29.5 31.3
Actual as % of original budget Transport sector 111% 90% 60% 51% 45%
Road transport sector 114% 86% 62% 48% 42%
Actual as % of revised budget Transport sector 85% 84% 61% 57% 50%
Road transport sector 86% 83% 64% 54% 45%
Source: Ministry of Finance, Annual Reports on RA State Budget Execution
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BUDGET PROCESS
25 Armenia has an integrated program budgeting system which includes the Armenia Development
Plan for 2014-25 (ADS), annexed to Decree No.442-N of 27 March 2014; a 3-year rolling public
expenditure framework (the MTEF); and the annual State Budget. In Figure 1 the consultants
have tried to describe the system as it is intended to work.
26 The system is well conceived and has the features of an integrated process that involves
strategic planning, prioritisation, economic appraisal of alternatives, targets, performance
monitoring and feedback. But in practice, with regard to the roads sector at least, the system
does not seem to work as intended. There is little connection between the various components
of the system; objective analysis has little influence on sectoral or program allocations; and
there is minimal feedback.
27 Considerable effort and resources have been and are being devoted to equipping the Armenian
Roads Directorate SNCO (ARD) to manage the national road network efficiently. ARD already
has equipment to measure road surface roughness, pavement structural capacity and traffic
volumes; and the same software (HDM-4) that has been used by WB, AARC and Roughton to
estimate needed expenditure as reported in this report. Additional equipment and software will
be bought by the end of 2015, including a road asset management system (RAMS) that will be
linked to HDM-4, giving ARD a powerful tool to determine annual priorities and also formulate
longer-term network development plans. But this will be of limited value if the budgeting
system remains as it is.
28 Commenting on Armenia’s planning and budgeting processes lies outside the Consultant’s TOR,
but systemic weaknesses appear to have had a damaging effect on the roads sector and may be
an obstacle to the successful implementation of whatever financing strategy is eventually
adopted.
Figure 1 Armenian Program Budgeting System
Strategic Plan
(Armenian DevelopmentStrategy, ADS)
Annual Budget approved by Parliament
Actual expenditure and implementation of
programs
Review of
outcomes,
comparisonwith KPIs,
and
consequent adjustment
of future
plans and methods
Broad allocation of funds
between programs
Identification of program elements, and
their costs and intended benefits
Cost-benefit analyses of
program elements (quantitative
where possible)
Rolling 3-year forward program of
expenditure and expected measurable outcomes (MTEF)
Definition of key performance
indicators (KPIs)
Identification of programs to implement
ADS
Annual budgeting process
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NEEDED EXPENDITURE
29 The national road network comprises three networks, differentiated according to each road
section’s level of significance. These levels correspond closely with design standards and traffic
volumes. The current length of road in each of the three networks is as follows, according to
the Consultant’s TOR, with the corresponding figures for 2011 shown in parenthesis:
• Interstate Road Network IRN: 1,759km (1,686km)
• Republican Road Network RRN: 1,964km (4,056km)
• Local Road Network LRN: 3,825km (1,962km)
• Total national network: 7,548km (7,704km)
The status in 2011 is significant because that is when the WB carried out its own analysis of
needed expenditure on the primary roads (IRN and RRN), the results of which are shown below
for comparison with Consultant’s own.
30 HDM-4 was run for four different scenarios, compiling for each an economically optimum works
programme for individual road sections over 20 years:
• Scenario 1: Unconstrained (ie with no upper limit to annual expenditure).
• Scenario 2: Non-routine maintenance expenditure constrained to US$30M/year (IRN) and
US$22M/year (RRN), which was found by iterative means to be sufficient to keep network-
wide average IRI values within 1.5 of the present values.
• Scenario 3: Non-routine maintenance expenditure constrained to US$13M/year (IRN) and
US$8.5M/year (RRN), which correspond approximately to the amount allocated to road
maintenance under the State Budget in recent years.
• Scenario 4: Routine maintenance only.
31 The first of these scenarios is the ideal if there is no financial constraint, since it produces the
best overall solution for the country as a whole. It takes into account costs born by the
Government, as owner and manager of the roads, and by road users. But it may be over-
optimistic to expect the necessary public funds to be available in the medium term.
32 The second scenario allows for no overall improvement but it prevents further deterioration. It
comes closest to meeting the requirement in the consultants’ TOR and is, in the consultants’
opinion, the minimum acceptable scenario.
33 The third and fourth scenarios have been included for comparative purposes, not for realistic
consideration.
34 The results of this analysis were presented in detail in an appendix to the First Technical Report
and in summary tables in the main text of that report. The estimates for the IRN have since
been adjusted, at ARD’s instigation, to allow for continuation of the program of concreting in
the North-South Corridor, which may be extended to other high traffic volume roads. The
Consultant has assumed:
• Concreting of 92km of M-1 and 20km of M-2 by 2020, including stretches that have already
been completed or are under way.
• Thereafter, concreting of 30km of unspecified road per year to the end of the 20-year
analysis period.
The result is a reduction of between $1M and $3M per year in rehabilitation and periodic
maintenance costs, depending on the degree of financial constraint. The average annual saving
is $2M (AMD1 billion) in the Consultant’s recommended second scenario. Revised summary
tables are presented in Appendix 2A.
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35 In Table 5 and Table 6 below the adjusted results for only the second scenario are shown,
together with the most closely comparable results from the World Bank (WB) and AARC
analyses. These results have also been adjusted as follows:
• The WB’s Option 4 estimates were selected for comparison, since that option was
calibrated to ‘keep existing road conditions’. These estimates were factored by 0.67 to
take account of differences in the number of kilometres allocated to the interstate and
republican networks then and now (see para.29 above).
• AARC’s ‘Proposed strategy’ was selected as the closest to Roughton’s second scenario. The
IRN estimate was factored by 1.22 to allow for different assumptions about the extent and
pace of North-South Corridor concreting, made on advice from the MoTC.
• The AARC estimates were presented as annual averages over the 10-year period 2015-
2025, whereas the WB and Roughton estimates were averaged over two periods: the first 5
years and the subsequent 15 years. For comparison purposes it is assumed that AARC’s
estimates for years 6-10 apply to years 11-20 too.
For the convenience of readers outside Armenia the same comparisons are repeated in US$ in
Table 7 and Table 8.
Table 5 Needed Expenditure on Interstate and Republican Roads (AMD billion)
Re
ha
bil
itati
on
Peri
od
ic
Ma
inte
na
nc
e
Ro
uti
ne
Ma
inte
na
nc
e
To
tal
Re
ha
bil
itati
on
Peri
od
ic
Ma
inte
na
nc
e
Ro
uti
ne
Ma
inte
na
nc
e
To
tal
WB Option 4 17 3 8 28 5 9 8 21
AARC Proposed Strategy 29 25
Roughton Scenario 2 7 16 4 28 9 9 5 22
Strategy Option / Scenario
In each of years 1-5 In each of years 6-20
Sources: World Bank 2011, Report No.66533-AM ‘Improving the Sustainability of Road Management and Financing in Armenia’.
AARC 2015: ADB TA-8710 ‘Road Maintenance Financing Strategy’. Roughton International Limited: current study.
Table 6 Needed Expenditure on All Common Roads (AMD billion)
Re
ha
bil
ita
tio
n
Peri
od
ic
Ma
inte
nan
ce
Ro
uti
ne
Ma
inte
nan
ce
To
tal
Re
ha
bil
ita
tio
n
Peri
od
ic
Ma
inte
nan
ce
Ro
uti
ne
Ma
inte
nan
ce
To
tal
WB: Local roads not covered na na na na na na na na
AARC Proposed Strategy 32 29
Roughton Scenario 2 19 16 6 42 14 9 8 31
Strategy Option / Scenario
In each of years 1-5 In each of years 6-20
Sources: World Bank 2011, Report No.66533-AM ‘Improving the Sustainability of Road Management and Financing in Armenia’.
AARC 2015: ADB TA-8710 ‘Road Maintenance Financing Strategy’. Roughton International Limited: current study.
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Table 7 Needed Expenditure on Interstate and Republican Roads (US$ million)
Re
ha
bil
itati
on
Peri
od
ic
Ma
inte
na
nc
e
Ro
uti
ne
Ma
inte
na
nc
e
To
tal
Re
ha
bil
itati
on
Peri
od
ic
Ma
inte
na
nc
e
Ro
uti
ne
Ma
inte
na
nc
e
To
tal
WB Option 4 36 7 17 59 9 18 17 45
AARC Proposed Strategy 60 53
Roughton Scenario 2 15 34 9 58 19 19 10 47
Strategy Option / Scenario
In each of years 1-5 In each of years 6-20
Sources: World Bank 2011, Report No.66533-AM ‘Improving the Sustainability of Road Management and Financing in Armenia’.
AARC 2015: ADB TA-8710 ‘Road Maintenance Financing Strategy’. Roughton International Limited: current study.
Table 8 Needed Expenditure on All Common Roads (US$ million)
Re
ha
bil
ita
tio
n
Peri
od
ic
Ma
inte
nan
ce
Ro
uti
ne
Ma
inte
nan
ce
To
tal
Re
ha
bil
ita
tio
n
Peri
od
ic
Ma
inte
nan
ce
Ro
uti
ne
Ma
inte
nan
ce
To
tal
WB: Local roads not covered na na na na na na na na
AARC Proposed Strategy 68 60
Roughton Scenario 2 40 34 14 88 30 19 16 65
Strategy Option / Scenario
In each of years 1-5 In each of years 6-20
Sources: World Bank 2011, Report No.66533-AM ‘Improving the Sustainability of Road Management and Financing in Armenia’.
AARC 2015: ADB TA-8710 ‘Road Maintenance Financing Strategy’. Roughton International Limited: current study.
36 There are inevitably differences between the three sets of results, arising from somewhat
different scenario definitions and different estimated values entered to HDM-4. But it is clear
that total annual expenditure in the range AMD32–42 billion (US$68–88M) in the short term
and about AMD30 billion (US$63M) in the longer term is needed simply to prevent further
deterioration of the road network. This is considerably less than the 1.2% of GDP which is
committed in the Armenian Development Strategy (ADS). But it relates only to maintenance
and rehabilitation, not to upgrading works such as those currently under way in the North-South
Corridor.
37 The main difference between the three analyses is in the local roads sector. The WB excluded
local roads from their analysis. AARC assumed an average maintenance cost of US$2,000/
km/year (AMD0.95M/km/year). Roughton allowed for a program of rehabilitation and routine
maintenance that would eliminate ‘bad’ roads by 2027. This may seem to contradict the TOR
which call for an estimation of needed expenditure “to keep the road network in a stable long-
term condition” not to achieve improvement. But in the Consultant’s opinion the degree of
neglect to which the LRN has been subjected necessitates a period of remediation before
seeking stability.
38 The term ‘backlog’ is imprecise, but an analysis was made of HDM-4 output for each of the
Consultant’s three scenarios for which HDM-4 was applied to the interstate and republican road
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networks. In this analysis the backlog was defined as all stretches of road that were categorized
by MoTC as ‘poor’ or ‘bad’ in 2014; and the simple assumption was made that all of HDM-4’s
recommended major interventions (periodic maintenance or reconstruction) in the early years
were for ‘poor’ or ‘bad’ stretches of road. On that basis:
• In Scenario 1 (unconstrained funding) all of the IRN backlog is cleared in the first year and
the RRN backlog is cleared by 2020.
• In Scenario 2 (stable condition, recommended by the Consultant) the IRN backlog is cleared
by 2019 and the RRN backlog is cleared by 2025.
• In Scenario 3 (present level of funding) the IRN backlog is cleared by 2026 but the RRN
backlog is not cleared within the 20-year period of the analysis.
EXISTING REVENUES FROM ROAD USERS
39 Very few data were available on revenues collected from road users, so the Consultant derived
information and estimates from a variety of sources. The findings and their derivation are set
out in detail in Chapter 5 of TR1 and reproduced as Appendix 2B to this report. The findings are
summarized in Table 9 below. The figures are conservative in that they exclude some minor
revenues for which the Consultant could not find a reliable basis for estimation. However, the
following have been added to the taxes and charges that were included in the analysis reported
in TR1:
• Excise tax and VAT on lubricants, which have many more uses than road transportation.
Road users’ share of annual revenue from this source is estimated at AMD4.2 billion.
• Environmental fees on foreign-registered as they enter Armenia; and levied annually on
Armenian-registered vehicles according to vehicle class, propensity for air pollution and
horsepower. The Consultant has estimated that Armenian road users pay AMD2.2 billion
per year.
Table 9 Summary of Existing Identifiable Revenues from Road Users
Source of revenue Unit Cu
sto
ms
du
ty
Ex
cis
e t
ax
VA
T
En
vir
on
-
me
nta
l ta
x
Oth
er
taxes
Fees
an
d
fin
es
To
tal
Taxes on fuel AMDbn/year 2.6 6.0 31.9 0.3 40.8
Taxes on other imports AMDbn/year 19.6 47.9 67.5
Road fees AMDbn/year 5.5 5.5
Property tax on vehicles AMDbn/year 14.9 14.9
Other levies AMDbn/year 14.5 14.5
Total Revenue AMDbn/year 22.2 6.0 79.9 0.3 20.4 14.5 143.2
US$M/year [a] 46.7 12.5 168.1 0.6 43.0 30.5 301.5
[a] Converted at US$ 1 = AMD 475
40 It is apparent that VAT, customs duty and property tax are the dominant sources of revenue.
The Consultant’s TOR required a special focus on fuel taxation, which accounts for only 27% of
the total. A closer examination revealed significant differences between the tax burden born by
the three types of fuel used to power road vehicles in Armenia: petrol (or gasoline), diesel fuel
and compressed natural gas (CNG). In summary:
• Although CNG powers 73% of vehicle usage, it contributes only 49% of the tax revenue.
This is because customs duty and excise tax (the only taxes applied to CNG) are ad valorem
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taxes – ie they are calculated on the value of goods not the tonnage – and gas is a much
cheaper source of energy than refined petroleum products.
• In contrast, petrol powers 26% of vehicle usage and contributes 46% of tax revenue.
• No VAT is levied on diesel fuel, it having been exempted in 2010, but diesel fuel is the only
one to bear the environmental tax.
• CNG bears no excise tax, it being produced from natural gas which is (unlike petroleum gas)
explicitly exempt.
41 The incidence of fuel taxation, as estimated by the Consultant, is shown in Table 10. The total
incidence per litre of fuel is shown in Table 11. It is coincidental that diesel fuel and CNG (1m3 of
natural gas being counted as 1 litre, the energy content being very close to that if 1 litre of
petrol) are taxed at almost the same level. The total weighted average tax on fuel is AMD51
(US$0.11) per litre. As has been pointed out in other reports, this is low by world standards. It
is even lower than in the USA, where according to the American Petroleum Institute the average
rate of tax (State and Federal) is US$0.129/litre on petrol and US$0.143 on diesel fuel. Fuel
taxes in Europe range between US$0.40 and US$0.90 per litre.
42 The gap between the tax burden born by petrol compared with that born by the other fuels is
hard to justify in terms of equity or efficiency. If fuel taxes are considered a proxy for road use
charges, the greatest burden should be born by diesel fuel, since in the road transport sector it
is used chiefly by heavy goods vehicles (HGVs) which impose the greatest costs on the road
network in terms of design standards and maintenance.
43 There are understandable reasons for the disparity. Diesel fuel was exempted from VAT
because at least 70% is used for non-road-related purposes such as agriculture and mining.
Road transport accounts for less than 20% of natural gas consumption, the rest being used
mainly for domestic heating and cooking purposes. Nevertheless, the Consultant has addressed
this issue and made specific proposals in Chapter 4.
Table 10 Incidence of Fuel Taxation by Class of Vehicle and Type of Tax
Lig
ht
Me
diu
m
He
avy
Se
mi-
tra
ilers
Petrol: Excise tax AMDbn/year 2.9 0.1 0.2 0.1 3.3
Petrol: VAT at the border AMDbn/year 10.1 0.3 0.8 0.3 11.5
Petrol: VAT at point of sale AMDbn/year 1.8 0.0 0.1 0.0 2.1
Diesel: Excise tax AMDbn/year 0.1 0.2 0.4 0.5 0.3 1.5
Diesel: Environment tax AMDbn/year 0.0 0.0 0.1 0.1 0.1 0.3
Diesel: VAT at point of sale AMDbn/year
CNG: Customs duty AMDbn/year 2.4 0.2 0.1 2.6
CNG: VAT at the border AMDbn/year 9.9 0.8 0.3 11.0
CNG: VAT at point of sale AMDbn/year 4.0 0.3 0.1 4.4
Total Revenue AMDbn/year 31.1 1.8 1.9 0.9 0.5 0.4 36.6
US$M/year 65.5 3.7 4.0 1.9 1.1 0.8 77.1
% 85% 5% 5% 3% 1% 1%
Trucks
To
tal
Unit Cars
Bu
se
s
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Table 11 Total Fuel Tax Per Litre of Fuel
Petrol 95
Diesel 38
CNG (1 litre = 1 m3) 36
Fuel type AMD/litre
44 In the absence of VAT on diesel fuel, there are road fees payable by the owners of Armenian-
registered HGVs with gross tonnage of at least 20t; and a separate scale of road fees that apply
to foreign-registered vehicles using Armenian roads. Together these are estimated to raise
AMD5.5 billion annually. Apart from property tax on vehicles, which is collected directly by
communities as a contribution to general revenue, the taxes and charges applied specifically to
road users are minimal. The Consultant estimates total annual revenue of AMD12.3 billion from
these sources, mainly from annual technical inspections of vehicles and traffic fines.
45 Two kinds of revenue are notable by their absence:
• Tolls for the use of roads, bridges or tunnels.
• Fines for overloading. However, a new law will soon be in place together with mobile
weighbridges allowing spot checks as well as the existing checks on gross vehicle weights
and axle loads at the international borders. These measures are intended to deter
overloading, not to raise revenue. Consequently the Consultant has not assumed any
revenue from this source.
3. CONCLUSIONS
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3. CONCLUSIONS
LEVELS OF FINANCING
46 A comparison of recent actual expenditure on road maintenance and rehabilitation with the
three independent estimates of needed expenditure (by the World Bank, AARC and Roughton)
leads to the conclusion that the State Budget is equivalent to 25–30% of the needed amount
in the medium term (to 2020) and 35–40% in the longer term. Taking into account the
average rate of borrowing since 2009, total expenditure has been about 40% of the needed
amount in the medium term and 60% in the longer term.
47 This assessment takes into account expenditure on local roads but excludes expenditure to
upgrade the North-South Corridor, since this lies outside the definition of ‘maintenance amd
rehabilitation’. ‘Needed expenditure’ is taken to mean expenditure that is necessary to keep
the primary road network (IRN+RRN) in its present average condition; and to bring the local
roads gradually to a situation where about half the length is in good condition and none is in
bad condition.
48 However, in order to estimate future maintenance needs it was necessary to make assump-
tions about the nature and pace of major upgrading works in the North-South Corridor,
explained in para.34 above. The capital cost of replacing the existing 2-lane asphaltic concrete
pavement with a 4-lane cement concrete pavement (CCP) is about US$5M (AMD2.4 billion) per
kilometre. More precise estimates will be possible only when preliminary designs have been
done. The cost of continuing this program is therefore expected to be about US$150M
(AMD70 billion) per year. Given Armenia’s tight budgetary situation and restrictive policy on
future borrowing, the Consultant does not envisage any other major upgrading works during
the period covered by his analysis.
49 It may be questioned whether the scale of expenditure on the North-South Corridor is appr-
opriate, in view of the chronic underfunding of road maintenance and rehabilitation that was
documented in TR1 and in this report. The Consultant recommends that all public investment
projects be subjected to rigorous economic appraisal, with a view to maximizing social returns
from available funds from whatever sources. In the roads sector such appraisals can be done
with relative ease by ARD using HDM-4 and its growing arsenal of equipment and expertise.
50 It was hoped that the First Workshop would result in a broad consensus about the strategy to
be followed, allowing the Consultant to draw up a meaningful implementation plan. The
workshop turned out to be a useful forum for exchanging ideas and opinions and gaining
deeper understanding among interested parties of their respective points of view. But it did
not produce a consensus; see Appendix 3A.
51 After the workshop the Consultant received written comments on TR1 from the World Bank,
the Director of the ARD and the Minister of Finance (MoF). The latter confirmed the
differences of opinion that underlie the failure to reach a consensus. In summary, there is a
fundamental disagreement in Armenia between public finance professionals who believe that
the Armenian road network of 7,548km can be maintained and rehabilitated adequately for
AMD16–20 billion (US$33–42M) per year, and road sector professionals who believe that it
cannot. The Consultant shares the latter group’s belief.
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STRATEGIC OPTIONS
52 The Consultant put five strategic options forward in TR1 and at the First Workshop:
• Adjust State Budget allocations to give more to the roads sector and consequently less to
one or more other sectors.
• Generate new or increased revenues from road users and hypothecate them to the roads
sector, either via an autonomous Road Fund or via the State Budget.
• Extend the present reliance on borrowing for rehabilitation works, on concessional terms
if possible.
• Reduce road maintenance costs by adopting cheaper methods, accepting lower standards
or involving local communities.
• Reduce Government’s responsibility for road maintenance by transferring local roads to
the communities served; franchising parts of the network to private operators who would
cover their costs through tolling; or abandoning parts of the network.
Summaries of the discussions at both workshops appear in Appendix 3A and Appendix 3B
together with a list of the participants, the agenda and photographs. The five options are
described and discussed below. The arguments for and against each are summarized in matrix
format in Figure 2 on page 3-6, extending over 2 pages.
Option 1: Adjust State Budget Allocations
53 In view of the high economic cost of bad roads it may be good policy to adjust sectoral shares
in the State Budget to allocate more to the roads sector, and in particular to road maintenance
and rehabilitation. Reduced transport costs would benefit every other sector of the economy,
promoting economic growth and consequently increased public revenues.
54 However, this result would not be immediate. In the short term there would be reduced
allocations to other sectors, with potentially harmful economic and social consequences. Every
sector is constrained and will remain so until the Government significantly strengthens its
fiscal position. As stated in the ADS:
“The modest level of tax revenues collection, which is also reflected in the tax/GDP ratio, has
always been and continues to be the main challenge of the public revenues system. In the
future, the reorientation of the state revenues policy and the strengthening of country’s fiscal
position become objective necessities and serious challenges.”
Option 2: Increase and Hypothecate Revenues from Road Users
55 One way to increase the tax/GDP ratio is to increase the contribution made by road users. This
might be achieved through a) increasing the rates at which existing taxes and charges are
levied or b) introducing new taxes and charges. Fuel taxation of the most obvious medium for
increasing revenue from road users, since:
• The average level of fuel taxation in Armenia is low by world standards.
• There are wide, irrational disparities between the total rates of taxation on the three
types of fuel used for road vehicles: petrol, diesel fuel and CNG. Correction of this
anomaly provides an opportunity to increase the average rate of fuel taxation as well as
to make the system more equitable.
• Fuel consumption is a reasonable proxy for road usage.
56 Road users would more easily accept an increase in taxes and charges if they were assured
that all or most of the increase would be allocated as additional funds for the roads sector.
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This implies hypothecation (or earmarking) which was vigorously opposed by MoF represent-
atives at the First Workshop for the following reasons:
• Hypothecation reduces the Government’s ability to decide and adjust priorities as chang-
ing circumstances require.
• If the roads sector benefits from a policy of hypothecation, other sectors would feel
justified in demanding the same.
57 The following counter-arguments were made:
• Limiting the Government’s ability to adjust priorities is the point of hypothecation.
Backed up by law, it would give road users some confidence that the additional money
taken from them would be used for their benefit.
• The roads sector is exceptional in that a) road transport costs affect the viability of every
other economic sector; b) taxes and charges can be accurately targeted at beneficiaries;
and c) the economic benefits to road users from increased expenditure can be reliably
shown to exceed the additional taxes and charges that they would have to pay.
58 Road users might have more confidence if the principle of hypothecation were combined with
the creation of the Road Fund. In its purest form a Road Fund is characterized by:
• A dedicated revenue stream, protected from diversion to other purposes.
• An independent governing body that decides how to allocate funds in accordance with its
charter, which would normally define economic and social objectives to be met. The
private sector and regional interests would be represented on the governing body as well
as the Government’s nominees.
• Professional staff equipped to undertake technical and economic analyses to determine
the optimum allocation of resources to meet those objectives. ARD is already staffed and
equipped in this way and is currently being strengthened.
59 This proposal was opposed with as much vigour as was the proposal to hypothecate revenues.
The MoF representatives pointed out that:
• Armenia’s capacity for financial management is limited. That capacity is used most
efficiently in a system of centralized control and decision-making.
• As with hypothecation, if there were a Road Fund other sectors would demand similar
treatment. Why should there not be a Health Fund or an Education Fund?
60 MoF representatives were also reluctant to support any proposals to rationalize and increase
taxes and charges born by road users, pointing out the impact on road user costs and
suppression of economic growth that would result. However, a review of the Tax Code is
under way and it cannot be ruled out that anomalies, such as those in the taxation of the
different types of fuel (see Table 11 above) will be addressed.
61 It is the Consultant’s view that if more is to be spent on the roads it should come predom-
inantly if not exclusively from road users, however this is arranged. The arguments against a
Road Fund are reasonable and understood; but hypothecation in some form would probably
be essential to gain road users’ trust and support for increased taxes and charges.
Option 3: Extend reliance on Borrowing
62 The WB representative at the First Workshop pointed out the danger posed by rising levels
indebtedness, echoing the ADS which states that “it is envisaged to limit the borrowing by
1.8% of GDP by 2017 and after that period steadily decrease the borrowings down to 1.3% of
GDP in 2025.”
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63 Armenia’s gross external indebtedness started to rise sharply at the time of the GFC and
peaked at 83% of GDP in 2013. It declined in absolute and relative terms in 2014 and is now
equivalent to about 75% of GDP.
64 This is not alarmingly high by international standards, and much of the borrowing has been
from IFIs on very concessional terms (which are equivalent to a capital subsidy in excess of
50%). If all expenditure on rehabilitation and periodic maintenance works, as estimated to be
necessary by the World Bank in 2011, were financed from external borrowing it would add 1.9
percentage points to external debt as a percentage of GDP by 2020, and 2.8 percentage points
by 2025. This should not materially affect Armenia’s credit rating (currently BB–).
65 However, for several reasons the consultants do not recommend this option:
• It is not prudent to borrow for current expenditure, which in the Consultant’s view
encompasses routine maintenance, periodic maintenance and rehabilitation. Capital
expenditure entails the creation of new assets or the substantial upgrading of existing
assets. Thus the current upgrading program in the North-South Corridor is capital in
nature and is therefore considered a candidate for loan financing.
• IFIs will not necessarily be willing to continue lending on concessional terms for projects
that do not represent investment, as conventionally defined. Alternative sources of
capital on commercial terms would be much costlier.
• Because of the ADS’s limit, referred to above, borrowing for road maintenance is likely to
displace borrowing for investment purposes in other sectors.
• The burden of debt-servicing will fall on the tax-paying public in general, rather than on
road users as direct beneficiaries.
• The inflow of loan funds specifically for road maintenance would not be guaranteed.
66 The difference between commercial and concessional loan terms is very wide. Concessional
funds are available at interest rates as low as 1%pa with a 10-year grace period. The Armenian
Government’s Dram-denominated instruments carry yields of at least 12%pa. Its Euro-
denominated 7-year ‘Kardashian Bonds’ were issued last year with a yield of 6%pa. Viet Nam,
with a similar credit rating, has issued Dollar-denominated 10-year bonds that are yielding
6.4%pa. Borrowing in foreign currency carries the obvious danger that large adverse exchange
rate movements may outweigh the favourable difference in interest rates.
67 Highly concessional loans should perhaps be maximized while they are available, and deployed
in accordance with Armenian priorities. But the assumption that such loans will be available
indefinitely should not be built into a financing strategy designed for the long term.
Option 4: Reduce Costs, Improve Efficiency
68 The WB suggested several ways in which maintenance costs could be reduced, in its report
‘Improving the Sustainability of Road Management and Financing in Armenia’. These were
summarised in TR1 and some have been adopted by MoTC – in particular the use of a road
asset management system (RAMS); use of cheaper base construction methods for low traffic
volume roads; use of cement concrete for high traffic volume roads; and adjusting design
standards to match projected demand. In the Consultant’s estimates of needed expenditure
he allowed for 40mm instead of 50mm overlays and double bituminous surface treatment
(DBST). MoTC is experimenting with gravelling some local roads. The possibility of involving
local communities in routine maintenance was considered following a WB-sponsored study
tour to Latin America, and rejected.
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69 In TR2 the Consultant proposed additional measures to reduce costs and improve efficiency,
some technical and some procedural. These included the addition of routine maintenance for
at least 5 years to every rehabilitation contract, and introduction of medium-term perform-
ance-based maintenance contracts (PBMCs). A case study of Serbia’s introduction of PBMCs is
presented at Appendix 3C.
70 There may be other cost-saving measures that could be introduced, but it would be unrealistic
to expect them to deliver savings on a scale that would close the gap between existing
expenditure levels and those estimated by WB, AARC and Roughton to be needed.
71 Moreover one should not confuse cost saving with improving efficiency. It would certainly be
more efficient to introduce periodic maintenance in Armenia, instead of allowing roads to
deteriorate to the point where reconstruction is unavoidable, but it would cost the Govern-
ment more money. The efficiency gains would be enjoyed by road users.
72 HDM-4 is designed to optimize net gains to the whole economy, not just to Government. In
the Consultant’s HDM-4 analysis to estimate needed expenditure on the maintenance and
rehabilitation of interstate and republican roads, without budgetary constraint, the median
ratio of benefits (NPV of cost savings enjoyed by road users) to costs (born by Government)
was 17.7 for the IRN and 6.0 for the RRN. Even if the benefits were overestimated by 100%
road users would be much better off if they paid slightly higher taxes, provided that:
• The extra tax revenue were devoted to road maintenance and rehabilitation.
• The extra expenditure were allocated and expended efficiently.
This issue is addressed in detail in Chapter 6 below.
Option 5: Reduce Central Government’s Responsibilities
73 The fifth strategic option is to reduce the Government’s responsibilities by eith or both of the
following means:
• Inducing private investors and/or local communities to bear some or all the cost of
maintaining selected parts of the road network.
• Abandoning parts of the network whose maintenance is no longer considered worth-
while.
74 Abandonment has already occurred in the case of roads leading to closed international
borders. It may be that as some rural populations age, decline and become unproductive it
would be cost-effective to re-locate them rather than to continue providing them with access.
75 Private investment would be a realistic option only if user charges were collected, either
through tolls or by selling vignettes allowing access to a specific stretch of road or item of
transport infrastructure for a specified period of time, and the revenue substantially exceeded
the costs of collection. It is not clear that tolling could be introduced anywhere in Armenia at
present and, in any case, it is prohibited by law unless there is an alternative route which can
be used free of charge.
76 Responsibility could also be handed over to local communities. This would go beyond the
proposal to pay local people to carry out labour-intensive maintenance work: communities
would be financially responsible for the roads that provide them with access to urban centres
and the republican and interstate road networks. Initially this would be seen as an admission
of failure on the part of the Central Government, but it could be introduced in conjunction
with the proposed consolidation of small communities into more viable administrative units,
about which there was a referendum in the Marzes of Tavush, Syunik and Lori in May 2015.
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Figure 2 Summary of Strategic Options and Arguments (2 pages)
Option Arguments for Arguments against Conclusion
1. Adjust State
Budget allocations
in favour of roads.
• Bad roads harm all sectors
of the economy.
• Economic benefits can be
shown to exceed costs by
a wide margin.
• Over time, the net benefits
will allow increased
funding for all sectors.
• The State Budget is tight
and all sectors are under-
funded.
• Representatives of other
sectors would not accept
that the roads sector is
exceptional.
This is not a politically
viable option.
2. Increase and
hypothecate
revenues from
road users.
• Road users pay substantial
taxes and charges already,
but these are not high by
world standards.
• Benefits to road users
would greatly exceed the
additional taxes or
charges.
• Hypothecation would
assure road users that the
extra money is actually
used for their benefit.
• Any increase in taxes or
charges has a multiplier
effect throughout the
economy and suppresses
growth.
• Hypothecation reduces the
Government’s ability to
manage the economy and
decide priorities.
• Other sectors would seek
revenue hypothecation
too.
The costs arising from
bad roads are far higher
than the proposed add-
itional revenues. There-
fore these proposals
should be accepted and
implemented.
Hypothecation is needed
to ensure that additional
revenues are used as
intended, and to gain the
trust of road users.
2a. Create a Road
Fund to manage
hypothecated
revenues.
• A Road Fund would be the
strongest guarantee that
hypothecated revenues
are used as intended,
having private as well as
public sector interests
represented in its govern-
ance structure.
• Independent professional
management would
ensure technically and
economically based
allocation of funds.
• Armenia is a small country
with a small administration
and constrained budget. It
cannot afford to set up
multiple agencies to
manage funds and assets.
• Centralized control is the
surest way to ensure
efficient and honest
financial management.
• If there were a road Fund,
other sectors would seek
their own funds.
This is not a politically
viable option. It might be
re-considered at some
future time if hypothec-
ation without a Road
Fund is found to be
ineffective.
3. Extend reliance
on borrowing. • Rehabilitation may be seen
as replacing worn-out
assets, and therefore
capital in nature.
• IFIs have been willing to
lend money on highly
concessional terms.
• The scale of borrowing for
road rehabilitation is not
so great as to affect
Armenia’s credit rating.
• Armenia’s levels of public
and external debt are
already high.
• With a limited capacity to
borrow, borrowing for
maintenance displaces
borrowing for genuinely
capital purposes.
• If IFIs are unwilling to lend
more, commercial loans
would be much costlier.
In the medium term it
may be justifiable to
continue borrowing to
clear the backlog of road
rehabilitation, but in the
longer term loans should
be taken only for new
construction or up-
grading works.
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Option Arguments for Arguments against Conclusion
4. Reduce costs
and increase
efficiency.
• Cost and efficiency should
be viewed from a national
perspective, not just in
terms of Government
expenditure.
• Some existing standards
and methods applied to
low-traffic roads are not
economically justified.
• ARD’s expertise and equip-
ment allows optimal works
programming.
• No-cost initiatives are
possible, such as PBMCs.
• Cost reduction often
reduces efficiency too.
• Improving efficiency (eg by
introducing periodic main-
tenance) may impose
higher costs on the
Government.
• Rural communities have
grown accustomed to
asphalt roads and may
resist introduction of more
cost-effective alternatives.
Existing experiments with
low-cost methods (such
as graveling) should
continue and new ones
should be tried.
Periodic maintenance
should be introduced for
interstate and republican
roads.
PBMCs should be piloted,
subject to the outcome
of a consultancy due to
start in September 2015.
See Appendix 3C.
5. Reduce Central
Government’s
responsibilities.
• The Government is too
constrained fiscally to
meet its obligations fully
with respect to road
maintenance.
• Private investors can main-
tain roads and collect tolls
more cost-effectively than
a Government agency can.
• Local communities know
their priorities better than
a central agency can.
• There is untapped
potential for local revenue
raising.
• Local communities have
labour and other resources
which can be applied to
road maintenance at little
financial cost.
• Opportunities for tolling
are very limited, because
of low traffic volumes and
the law requiring toll-free
alternative routes.
• Public acceptance of
tolling is low.
• Local communities would
still need money and
technical expertise from
Central Government.
• There is great disparity
between communities
with respect to resources,
and the scale and cond-
ition of roads that they
would be responsible for.
• Maintenance may be
carried out at low cost, but
the quality may also be
very low.
Tolling is not appropriate
now, but the way should
be cleared to introduce
tolling and toll franchis-
ing at a later date.
Transferring financial
responsibility for local
road maintenance to
communities should be
considered only as a last
resort.
REVENUE
77 According to the Consultant’s estimates, some of which have now been confirmed by official
data, road users contribute about AMD140 billion (US$295M) per year to the State Budget,
mostly in the form of VAT, customs duty and property tax. Taxes on fuel (petrol, diesel fuel
and CNG) amount to AMD37 billion (US$78M) per year.
78 It has been pointed out by others, and mentioned in the Consultant’s TOR, that fuel taxes and
fuel prices in Armenia are low by world standards and in comparison with other countries with
similar per capita GDP levels. This may be less true now than in the past (see Table 12 below).
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Among the nine countries tabulated, Armenian prices are closest to those in Ukraine and in
the middle of the range spanned by other members of the Eurasian Union. LPG prices are
shown as a close equivalent to CNG prices in Armenia, Armenia being unique in the extent of
penetration of its market by CNG. At the time of writing, the Armenian retail prices for petrol
and diesel fuel, as observed by the Consultant, are up to 18% lower than those shown in this
table. But for a fair comparison all the data are taken from the same sources.
Table 12 Comparative Retail Fuel Prices in Nine Countries (US$/litre)
Country Petrol Diesel CNG LPG
Armenia 1.04 1.02 0.44
Belarus 1.33 1.37 0.68
Georgia 0.74 0.81
Kazakhstan 0.75
Moldova 0.97 0.92 0.56
Macedonia 1.28 1.04 0.51
Russian Federation 0.70 0.68 0.36
Turkey 1.74 1.49 0.72
Ukraine 1.04 0.95 0.44
Sources: http://www.fuel-prices-europe.info/ and http://www.mytravelcost.com/petrol-
prices/
79 As a landlocked country Armenia inevitably bears higher border prices than countries with
direct port access. Therefore Belarus, Macedonia and to a lesser extent Moldova (which does
have access to the Black Sea via a port on the Danube) may offer more apt comparisons than
Georgia, Turkey or Ukraine. Kazakhstan and Russia are oil-rich states and may be expected to
have low domestic fuel prices. So too are Azerbaijan and Iran which, although Armenia’s
neighbours, were excluded from this comparison for that reason.
80 There is already a price differential between Armenia and Georgia which might encourage
smuggling, or at least border-crossing by people living close to the border to fill their tanks. A
price rise such as that proposed by the Consultant is unlikely to make a material difference.
81 The Consultant believes that there is scope to increase average fuel tax per litre in the course
of removing anomalies between the three fuel types. Fuel taxes have the advantage that they
fall unambiguously on road users, provided that the taxes are levied at the point of sale and
therefore do not unintentionally affect other consumers including:
• In the case of diesel fuel: farmers, miners and manufacturers.
• In the case of CNG: domestic and commercial consumers of natural gas for space heating,
water heating, cooking and industrial processes.
4. RECOMMENDATIONS
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4. RECOMMENDATIONS
82 In TR1 the Consultant put forward a number of strategic options as well as specific proposals.
Feedback in the form of workshop discussions and written comments have resulted in a
shorter list of recommendations.
EXPENDITURE
83 First, it is recommended that the State Budget allocation for road maintenance and
rehabilitation, encompassing winter and summer maintenance and capital repair, should be
increased from its present level of AMD11 billion per year (the average for 2013-2017, shown
in Table 2 above) to AMD35 billion per year, supplemented by continued concessional
borrowing of AMD7 billion per year (also the average for 2013-17) for rehabilitation works.
84 This borrowing is distinct from and additional to the ongoing borrowing to upgrade the
North-South Corridor, and is conditional on the willingness of lending agencies to continue
lending at this level.
85 This level of expenditure should be sustained for at least five years, after which borrowing
for maintenance and rehabilitation should be terminated.
86 This recommended level of expenditure is predicated on the Government’s rejection of
proposals to transfer responsibility for local road maintenance to other agencies or to
abandon sections of the LRN, neither of which is recommended by the Consultant.
87 It is also predicated on the conviction that Armenia’s social and economic development
strategy cannot be realised without devoting significant resources to restoring and sustaining
the LRN. The Consultant’s cost estimates take account of some possible cost-cutting
measures but the possibility of going further in this direction is not precluded; see paras.99–
106 below.
88 It is further recommended that all decisions on capital expenditure (meaning expenditure to
augment or upgrade capital assets) be based on economic analysis using comprehensive, up-
to-date empirical data and international best practice. In the roads sector this means using
HDM-4 software. HDM-4 should also be used to determine the necessary level and optimal
disposition of expenditure on road rehabilitation and periodic maintenance – as has been
done in the three analyses of needed expenditure cited in this report, and annually by ARD as
input to the budgeting process. Rigorous economic analysis should not be confined to
projects which are candidates for international financing.
REVENUE
89 The proposal to rationalize fuel taxation, made in TR1 and discussed at the First Workshop,
would raise an estimated AMD27.4 billion in additional annual revenue (see Table 13), which
would be more than enough to pay for the proposed increase in the State Budget allocation
to roads. It is recommended that this proposal be considered during the current
comprehensive review of the Tax Code.
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Table 13 Proposed Rationalization of Fuel Taxation
Incre-
ment Total
Incre-
ment Total Now
Prop-
osed
Petrol 95 95 12 107 16.9 19.1
Diesel 38 85 124 124 1.8 5.8
CNG 36 36 43 79 17.9 39.1
Total 36.6 64.0
Average 51 56 89
Appy equaliz-
ation levy
Revenue, AMD
billion at 2015
levels of usage
Fuel type Pre
sen
t ta
x
(AM
D / l
itre
) Restore VAT on
diesel fuel for
road vehicles
90 In making this recommendation the Consultant has taken account of:
• The targeted nature of a fuel tax.
• The relative ease of collection.
• The desirability of making all forms of taxation as equitable as possible, free from
perverse incentives, and immune to erosion due to changing consumer choices (such as
switching from petrol to CNG as the primary energy source for road transport).
• The much greater benefits that would accrue to all road users if the incremental tax
revenue were devoted to road maintenance and rehabilitation; see Chapter 6 for an
analysis of the net effects on road user costs.
The 2-stage strategy (restoration of VAT on diesel fuel for use in road vehicles, and intro-
duction of an ‘equalization levy’) is not ideal. It has been put forward as a way of achieving
equity and increased revenue with minimal disturbance to the existing system of fuel
taxation. But the Consultant would prefer to see a tidier and more radical approach to fuel
tax rationalization.
91 In case the Government is unwilling or unable to accept this proposal in its entirety, the
Consultant recommends two further measures for early implementation:
• Rationalization of road fees applied to foreign-registered and Armenian-registered
heavy vehicles, with the dual aim of a) aligning the fees with actual costs imposed on
the road network and b) raising somewhat more than the current annual revenue of
AMD5.5 billion.
• Introduction of a small ad valorem tax on vehicle insurance premiums to raise between
AMD0.5 and $1.0 billion per year.
As with fuel taxes, these additional levies would be targeted exclusively at road users and
would be easy to collect.
92 With regard to rationalizing road fees, the Consultant has made an estimate of road maint-
enance costs that are attributable to each of the three classes of truck that are distinguished
in the ARD’s traffic counts and HDM-4 files: 2-axle, 3-axle and >3-axle. HDM-4 was run four
times for the IRN and the RRN, for the unconstrained budget scenario, using the same input
data as were reported in TR1. The first run included all vehicle classes; the second, third and
fourth excluded each of the truck classes in turn. The differences revealed the costs
attributable to each class. These were found to be, in AMD per vehicle-kilometre:
• 2-axle trucks: AMD 4.7 (IRN) and AMD 3.5 (RRN).
• 3-axle trucks: AMD 8.4 (IRN) and AMD 9.5 (RRN).
• >3-axle trucks: AMD 18.2 (IRN) and AMD 20.6 (RRN).
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93 These figures are conservative because they do not take into account the original capital cost
of the road network, which would have been much lower if heavy goods vehicles had not
been taken into account in the design standards.
94 Applying the estimated annual distances travelled by each class of truck (40,000km for 2-axle
trucks and 86,000km for larger trucks) the annual attributable costs are approximately:
• 2-axle trucks: AMD 165,000.
• 3-axle trucks: AMD 760,000.
• >3-axle trucks: AMD 1,620,000.
95 The present schedule of Road Rees for Armenian-registered heavy goods vehicles is based on
gross vehicle weight (GVW), not number of axles, and ranges between AMD15,000/month to
AMD60,000/month (AMD180,000/year to AMD720,000/year). The schedule only applies to
trucks with a GVW of at least 20t, so it may be assumed that 2-axle trucks are excluded.
Allowing for the fact that Armenian-registered trucks do not run on local and foreign roads as
well as interstate and republican roads, an uniform increase of 50% would be easily
justifiable.
96 The data available to the Consultant do not support a more precise study, aimed at recom-
mending rationalization of Road Fees rather than a general increase. The data do not support
any meaningful analysis of the Road Fees applied to foreign-registered vehicles.
97 With a view to the longer term, the Consultant recommends making the necessary legislative
preparations for introducing tolls on roads, bridges and tunnels without the requirement
that alternative toll-free routes be available. Provision should be made to allow toll-free
access to homes, farms and businesses; and to exempt specified classes of vehicle. In TR1 it
was estimated that gross toll revenue of AMD35M/km/year might be expected from a road
carrying 10,000 vehicle per day, based on capturing 25% of computed RUC savings. More
specific recommendations would require a specialized toll study for a specific stretch of road
or item of infrastructure.
98 Instead of collecting a toll from each vehicle as it enters a stretch of road, vignettes can be
sold to the owners of vehicles that will then be allowed unlimited access to that stretch of
road for a specified period of time, which may vary from 1 day to 1 year. A vignette can take
the form of a windscreen sticker that can be checked by road police officers, or an electronic
card that can be read remotely when the vehicle passes a control point. The advantages and
disadvantages of vignettes compared to tolls are summarized in Table 14 below. Overall, the
Consultant sees no net advantage for Armenia.
Table 14 Vignettes Compared to Tolls
Criterion Advantages Disadvantages
Collection cost No need for roadside infrastructure and
staff.
Compliance
cost
No stopping and waiting at toll booths.
No in-vehicle equipment if vignettes take
the form of windscreen stickers
Investment in onboard electronic devices if
electronic vignettes are used.
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Criterion Advantages Disadvantages
Avoidability Access to priced infrastructure does not
have to be restricted to enforce
payment.
The probability of being caught without
a vignette is proportional to usage.
Reliance on spot-checks by police. If these
are infrequent or predictable road users
may risk travelling without vignettes.
Risk of corruption of officers entrusted with
making spot-checks.
Risk of forgery.
Convenience Vignettes can be sold online and/or at
petrol stations and other retail outlets.
Road users who make infrequent use of
priced infrastructure have to predict that
usage and buy vignettes in advance.
Fairness Usage within the period of a vignette can
vary widely, whereas tolls vary in pro-
portion to distance travelled.
Depending on the system used to allow
them free access to their homes, farms and
businesses, residents may also gain free
access to other parts of the priced network.
Efficiency Low-cost investment and operation. Because of the variability of usage
mentioned above, vignettes must be priced
at a level that does not deter low-level
users from enjoying the economic
advantages of the priced infrastructure.
Potential revenue for high-level users will
therefore not be fully realized.
Flexibility Without associated toll collection
infrastructure and access restrictions the
extent of the priced network can be
changed easily when appropriate.
EFFICIENCY IMPROVEMENTS
99 Periodic maintenance is recommended to be included as part of the normal maintenance
cycle. The Consultant’s estimates of needed expenditure include routine maintenance,
periodic maintenance and rehabilitation. Experience worldwide has shown that, except for
cement concrete roads which should require only routine maintenance, inclusion of periodic
maintenance maximizes the ratio of benefits (to road users) to costs (born by road agencies).
100 Four initiatives are recommended to make less radical improvements to the efficiency of
road maintenance and rehabilitation:
• Inclusion of medium-term (at least 5 years) routine maintenance in contracts for road
rehabilitation.
• A 2-stage procedure for taking over projects on completion, the second being at the end
of the routine maintenance period, with realistic condition criteria at each stage.
• Revision of pavement standards and use of cheaper methods on low volume roads
(DBST, SBST); and for periodic maintenance on all roads after trials to ensure their
appropriateness to Armenian conditions.
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• Amendment of Government Decree No.1419-N on road maintenance (on approving the
procedures for assessing levels of routine summer maintenance and routine winter
maintenance of general use roads of Armenia and acceptance of performed works) to
use IRI as a criterion for assessing road condition.
Details of these recommendations are included in the Consultant’s Second Technical Report.
101 ARD already has a powerful set of tools for maximizing efficiency, and is in the process of
enhancing it with additional equipment and a road asset management system (RAMS). By
the end of 2015 ARD will be have the capability to complete and continually update its
database of road condition, covering all three networks (IRN, RRN and LRN); to produce
economically optimal works programs to make the best use of available resources; and to
quantify the cost to the national economy of any funding shortfall below the levels that have
been estimated as necessary. It is recommended that this capability be fully used.
102 Performance-based maintenance contracts (PBMCs) have proved successful in other
countries and may prove successful in Armenia. It is recommended that one or more pilot
projects be implemented with a view to making PBMCs the norm if the pilot projects
demonstrate cost savings and/or improved cost-effectiveness.
103 The existing 5-year maintenance contracts are not ‘performance-based’ in the sense that the
term is used in this report. They are essentially input-based because the length of road to be
maintained each year under each contract depends on the funds available. It is significant
that the Serbian system, outlined in Appendix 3C, is described as ‘Output and Performance
Based Road Maintenance Contracting (OPBRMC) to emphasize its focus on output.
104 Under such a system a contractor would be paid a fixed fee in return for keeping a stretch of
road at or above a defined standard throughout the period of the contract. This is a true
PBMC as understood by the Consultant and as recommended in this report. Ideally the
acceptable standard should be defined in such a way that it is objectively measurable: IRI
values are normally used for this purpose.
105 The following key features of a true PBMC are lost under the existing system:
• With a guaranteed flow of work and income over a number of years a contractor finds it
worthwhile to invest in equipment, staff development and new methods.
• He is also able to submit competitive bids without an extra margin to cover the risk that
future budgets will fail to provide for fulfilment of the contract.
• Knowing that he will be required to maintain the whole road length every year, a
contractor has a strong incentive to use the most efficient methods and do as good a job
as he can in order to minimize his future expenditure.
106 The World Bank sponsored a recent study tour to Bolivia to see how local communities may
be involved in road maintenance activities, providing cost savings for the Government and
better roads for the communities. This approach has been rejected, but may be worthy of
reconsideration following the currently envisaged consolidation of small communities into
more viable administrative units, if it is carried out.
5. IMPLEMENTATION
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5. IMPLEMENTATION
EXPENDITURE
107 A policy decision should be taken to effect a substantial and enduring increase in the State
Budget allocation to road maintenance ad rehabilitation, guided by the three analyses of
needed expenditure referred to in this report.
108 Such a decision should be taken on the advice of the inter-ministerial Road Council, whose
activities are defined as:
• Presentation of proposals for road sector policy and united implementation of specified
standards for all general use roads (including local roads)
• Coordination of preparation of road construction, rehabilitation and maintenance yearly
programs.
• Coordination of preparation of MTEF for road sector.
• Coordination of adoption works of Road asset management system.
• Monitoring of road maintenance planning process.
• Monitoring of road construction, rehabilitation and maintenance implementation yearly
projects.
• Coordination of the implementation activities in road sector within the state, private
and international cooperation system.
109 This decision might be made public in the form of a decree, but this would not guarantee its
implementation. The ADS, which stated that “from 2015 contributions to the sphere [the
transport sector] from consolidated budget will comprise around 1.4–1.5% of GDP annually
on average, 85% of which will be aimed at the road network,” was issued as an appendix to
Decree No.442-N and has had no effect on the State Budget or the MTEF.
110 The announcement of the policy decision should be combined with an announcement of
revenue measures to support it. Ideally this should include a formal hypothecation of defined
revenues in order to give road users confidence that the extra taxes or charges will be used
for their benefit and that there will be no future withdrawal from the commitment.
111 In any case, there should be a parallel requirement that ARD use its data gathering and
analytical tools to determine the economically optimum deployment of the increased budget
allocation for recommendation to the Road Council.
REVENUE
112 Implementation of all revenue-related recommendations should be considered within the
context of the ongoing review of the Tax Code, due for completion later in 2015.
Fuel Taxation
113 The principal recommendation is to rationalize the taxation of fuel, making it more equitable
and increasing the average total incidence of tax by about AMD38 (US$0.08) per litre. For
minimal disturbance to the existing tax structure, it could be implemented in two stages.
The first stage would be the restoration of VAT on diesel fuel used in road vehicles. This can
be achieved by a) removing the blanket exemption that was given in 2010; b) applying
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instead a zero rate of VAT at the point of importation; and c) applying the normal 20% rate at
the point of sale where diesel fuel is delivered to a road vehicle.
114 Off-road agricultural vehicles and machinery, mining equipment, industrial machinery etc
would continue to benefit from the present low tax rate, but delivered via the medium of
zero-rating rather than exemption. No new legislation would be required.
115 The second stage would be the introduction of a new levy, applicable at different rates to the
three types of fuel used for road vehicles. The Consultant believes that this too can be
achieved without new legislation, within the provisions of the Law on Taxes (Article 2 and
Article 12).
116 Article 12 allows for simplified taxes to replace profit tax, income tax, excise tax and VAT. At
present petrol is subject to excise tax and VAT; diesel fuel is subject to excise tax and
environmental tax; and CNG is subject to customs duty and VAT. Simplification is desirable
therefore, and offers an opportunity to increase revenue while also delivering equity by
bringing the total level of taxation of the three fuel types into line.
Road Fees
117 Road fees are defined in Decree No.203 (March 1998) in separate schedules applicable to
foreign-registered and Armenian-registered vehicles. In the latter case it applies only to
heavy goods vehicles with a gross weight of at least 20t. These schedules can be amended
under existing legislation.
118 The Consultants recommend that any amendment be preceded by an analytical exercise by
ARD, using HDM-4 to estimate the actual costs imposed on the road network by a vehicle of
each class travelling for 1km with a typical load. Because a road is designed for a total
number of equivalent standard axle loads (ESALs), each heavy vehicle that passes brings
forward the time when reconstruction of the road will be necessary. It also affects the rate
of surface deterioration and hence annual maintenance costs. The consultant’s own
estimate of maintenance costs attributable to each of the three classes of truck that are
distinguished in ARD’s data is presented and explained in paragraphs 92 to 96 above.
Vehicle Insurance Tax
119 New legislation would be required for the imposition of a tax on vehicle insurance premiums.
The Consultant recommends initiation of this process, in consultation with the insurance
industry and road users’ representative groups (the Association of International Road carriers
of Armenia and the Automobile Federation of Armenia).
Tolls and Vignettes
120 Under present legislation tolls cannot be applied to roads, bridges or tunnels unless a toll-
free alternative route exists. The Consultant recommends either amendment or replace-
ment by new legislation that also provides for:
• Franchising of tolled infrastructure under public-private partnership arrangements, such
as are already envisaged for the North South Corridor.
• Sale of vignettes as an alternative to roadside toll collection.
121 It was questioned at the Second Workshop whether tolls would be in compliance with the
Constitution’s guarantee of freedom of movement, where alternative toll-free routes do not
exist. Article 25 of the Constitution states that “Everyone legally residing in the Republic
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Armenia shall have the right to freedom of movement and choice of residence in the
territory of the Republic Armenia.”
122 The Consultant sees a distinction between ‘freedom of movement’ and ‘free-of-charge
movement’, so does not consider this to be an insurmountable obstacle. The following is an
extract from the World Bank document ‘Toll Roads and Concessions’ accessible at http://
www.worldbank.org/transport/roads/toll_rds.htm:
Is it necessary to have a parallel free road? This will depend on the reasons for provision of
the new road. If the road is provided simply to add capacity in a constrained area, for
example, then leaving the existing network untolled should be appropriate. The argument in
favor of free parallel roads is one of social equity, to ensure that the poor can still have
access to the road network. However it also detracts from the effectiveness of the new tolled
road in alleviating congestion and may well cause problems for financial cost recovery if even
the revenue-maximizing toll cannot produce enough revenue. With a parallel road however
it is possible to provide for slower moving traffic (animal drawn vehicles for example) where
a toll road does not.
REDUCING COSTS AND IMPROVING EFFICIENCY
Maintenance Methods
123 The methods by which roads are constructed, maintained and rehabilitated are operational
matters, to be decided by MoTC with technical input from ARD and, in the case of projects
supported by donors or IFIs, in consultation with those agencies.
124 Such decisions should include the introduction of periodic maintenance into the normal
maintenance cycle, at least for interstate and republican roads.
Contractual Arrangements
125 Inclusion of 5 or more years of routine maintenance within the scope of rehabilitation
contracts can be done without any change to legislation but Decree 1419-N should be
amended or superseded to include roughness, as measured by the International Roughness
Index (IRI) as a performance indicator.
126 At present the ARD has limited capacity to measure roughness, so this is done only for
project hand-over purposes; for annual monitoring of the quality of the interstate road
network; and for monitoring of 20% of the republican network per year. But by the end of
2015 it will be equipped to make measurements over the whole network, making it possible
to enforce contracts that specify performance in terms of IRI.
Performance-Based Maintenance Contracts (PBMCs)
127 This is a more radical recommendation, and would ideally require legislative and procedural
changes to allow multi-year contracts to be written with assured annual payments for
achievement of performance targets. At present each year’s State Budget is subject to
availability of funds and decisions about relative priorities. Ongoing contractual commit-
ments must accommodate this flexibility, which explains why the present multi-year
maintenance contracts are based on unit prices (AMD per kilometre) with no guarantee of
the length of road that a contractor will be paid to maintain in any of the years during the
currency of his contract.
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128 In the Consultant’s opinion the full benefits of multi-year PBMCs cannot be realized with
such a system. It is recommended that legal or procedural means be found to give
contractors a much greater degree of certainty about the revenue they can expect from a
multi-year contract. For example, the MoF might adopt and announce an internal policy to
honour multi-year fixed-payment contracts up to a defined ceiling in each sector, or in the
roads sector alone, irrespective of future budgetary restrictions.
129 Further detailed consideration of this matter would require in-depth analysis which falls
outside the scope of the present consultancy.. A consultancy will commence in September
2015 to review all contractual arrangements in the roads sector and is expected to address
the possibility of introducing PBMCs. Presumably this consultancy will also address questions
of implementation, including necessary legislative and procedural changes.
TRANSFERRING RESPONSIBILITY
130 If it is decided that Central Government cannot accept full financial responsibility for maint-
aining the national road network, there would have to be radical changes in the allocation of
legal responsibilities and powers, including revenue-raising powers.
131 Chapter 7 of the Constitution provides for local self-government. Article 106 states that:
• The community shall generate its budget independently.
• The law shall define the sources of the community revenues.
• The law shall define the sources of community finances that will secure the discharge of
their responsibilities.
• Responsibilities delegated to the communities shall be funded from the state budget.
• The communities shall establish local taxes and duties within the scope defined by law.
The communities can set forth fees for their services.
Article 107 states (in part) that:
• The Council of Aldermen of the community shall in conformity with the procedure
defined by the law manage the community property, approve the community budget
upon the submission of the Head of Community, oversee the community budget exec-
ution, envisage local taxes, duties and fees in conformity with the procedure defined by
the law and adopt legal acts subject to observance in the territory of the community.
The acts adopted by the community Council of Aldermen shall not contradict the
legislation; the law shall define the procedure for their publication and coming into
force
132 There appears to be no constitutional obstacle to giving Councils of Aldermen rights to
collect revenue from their residents. However, Article 107 requires funding from the State
Budget for any responsibilities that are delegated to communities. Therefore, if Central
Government wishes to devolve financial responsibility to local communities the law would
have to be worded to avoid the claim that ‘delegation’ of responsibility has occurred.
133 Abandonment of sections of the local road network may be a legally sound policy. Local
communities would be allowed to keep those roads open at their own expense, using their
powers to levy ‘local taxes, duties and fees’, but Central Government would have no legal
obligation to contribute.
134 Article 110 of the Constitution allows the National Assembly to merge or separate commun-
ities in the public interest. The Consultant understands that some consolidation of small
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communities is under consideration at present. This may enhance the feasibility of devolving
some responsibilities and powers.
PRIORITIES
135 The top priority should be given to the following actions, which should be taken before the
end of 2015:
• A Government decision, on the advice of the Road Council, to increase the medium-
term and longer-term levels of financing for road maintenance and rehabilitation in
accordance with the recommendations contained in this report, which confirm those
from other sources.
• Include fuel taxation in the current review of the Tax Code, with a view to a) reducing
anomalies and inequities and b) raising more revenue from road users.
• Amendment of Decree No.1419-N to include roughness (as measured by IRI) as an
indicator of road quality and contract performance.
• Moves towards introduction of PBMCs, subject to the findings and recommendations of
the consultant due to come to Armenia in September 2015 to review the system of
contracting.
136 Within the same timeframe the following measures should be initiated for longer-term
implementation:
• Draft legislation to allow tolling of all roads and associated infrastructure, through road-
side toll collection and/or sale of vignettes, irrespective of the existence of alternative
toll-free routes and with the possibility of incorporating toll collection into PPP arrange-
ments. Such arrangements are already envisaged for the North-South Corridor.
• Consultations with insurance and road user representatives about the possible intro-
duction of a tax on vehicle insurance premiums, with an associated guarantee of
increased spending on road maintenance.
• Detailed review of road fee schedules by the ARD, using HDM-4 and enlarging on the
Consultant’s own analysis reported on above.
• Review of contractual arrangements, including the consultancy scheduled to begin in
September, with particular focus on the possible introduction of PBMCs.
6. SOCIAL AND ECONOMIC
CONSEQUENCES
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6. SOCIAL AND ECONOMIC CONSEQUENCES
‘BAD ROADS TAX’
137 In para.72 the point was made that HDM-4, the analytic tool used by WB, AARC and
Roughton in their analyses of needed expenditure on maintenance and rehabilitation, is
designed to help analysts to maximize net benefits to the community at large. If an
intervention does not produce benefits that represent a rate of return at least equal to the
social rate of discount, HDM-4 will not include it in a recommended works program. If a
budget constraint is included in the analysis, HDM-4 will select interventions that make the
most profitable use of the funds available.
138 In all three analyses summarized and compared in Chapter 2, the social discount rate was set
at 12%pa. It happens that the Government of Armenia is currently able to borrow domestic-
ally at 12%pa, but this is a nominal rate of interest. The social discount rate is a real rate,
which must be factored by the rate of inflation to arrive at a comparable interest rate.
Therefore, since the average general rate of inflation in Armenia has been 5.2%pa since
2008, a social discount rate of 12%pa may be compared with a nominal interest rate of
17.8%pa.
139 It was pointed out at the First Workshop that increasing the tax burden, for example by
rationalizing fuel taxation in a way that increases the average tax per litre (as proposed by
the Consultant), would reduce purchasing power and therefore have a depressive effect on
the economy. The Consultant’s proposal, as made in Chapter 4, would add about 3% to
vehicle operating costs (VOC): rather more for buses, less for trucks.
140 The counter-argument to this is that bad roads impose their own ‘tax’ on road users in the
form of higher vehicle operating costs and loss of time. These two cost components are
together referred to as ‘road user costs’ (RUC).
141 In principle there is no reason to suppose that the ‘bad roads tax’ has any less of a depressive
effect on the economy than a real tax. Indeed, since most of the additional cost burden
imposed by bad roads takes the form of maintenance parts and vehicle depreciation, both
with very high import components, the depressive effect is compounded by leakage out of
the economy and loss of foreign exchange.
142 An examination of RUC predicted by HDM-4 for each vehicle class and over a range of IRI
values shows that the benefits to road users from a 1 point reduction in IRI (form 7 to 6)
exceeds the additional fuel taxes proposed by the Consultant. This is true in every vehicle
class, as is apparent in Table 15 below. The last row of the table shows the average ratio of
RUC savings to proposed additional tax for each vehicle class, ranging from 6.1 to 16.0.
143 The average difference in IRI between the Consultant’s Scenario 2 (keeping the network-wide
average IRI about the same as now) and Scenario 3 (continuation of spending at present
levels) is predicted to be 1.1 (IRN) and 0.8 (RRN) in the first 5 years; and 4.4 (IRN) and 3.9
(RRN) in the following 15 years. This may be seen by comparing the graphs below (Figure 3
and Figure 4).
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Table 15 Benefits to Road Users Compared With Proposed Tax Impact
Unit Passeng
er
car
Deliv
ery
veh
icle
Bus L
igh
t
Bus M
ediu
m
Bus H
eavy
Tru
ck L
ight
Tru
ck
Med
ium
Tru
ck H
ea
vy
Tru
ck
Art
icula
ted
Per litre of fuel AMD/litre 34.9 45.2 44.1 44.1 44.1 39.0 70.4 85.0 85.0
Per vehicle-km AMD/km 2.6 4.2 5.7 6.1 6.6 4.8 9.1 12.1 17.0
AMD/km 3.8 9.1 10.9 17.9 12.4 11.6 16.7 26.8 46.7
Average ratio savings/tax (2016-34) 7.3 8.7 10.1 16.8 17.1 9.5 7.6 9.9 13.7
Proposed
additional
tax
Saving per IRI point reduction
Figure 3 Projected Average Roughness (IRI): Interstate Road Network
4
5
6
7
8
9
10
11
12
13
14
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Scenario 2
Scenario 3
Figure 4 Projected Average Roughness (IRI): Republican Road Network
4
5
6
7
8
9
10
11
12
13
14
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Scenario 2
Scenario 3
144 These results will surprise some people. They come from HDM-4, which is the most used and
trusted research-based tool for predicting the effect of road condition on VOC and RUC,
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using as input data the estimates and assumptions presented in TR1 (Chapter 5 and Appendix
4A) and the ARD’s road database.
145 Unless these results are disproved, it must be concluded that the potential negative impact
of the proposed changes to fuel taxation would be greatly outweighed by the positive impact
on other costs born by road users – provided that the proceeds of the proposed changes are
applied to preventing the steady deterioration in the interstate and republican road net-
works that will result from continued underfunding of maintenance and rehabilitation. That
deterioration is represented by the top lines in the above two graphs.
ECONOMIC EFFECTS
146 Road transport plays a role in all economic activities and accounts for about 5% of GDP. That
estimate is based on official statistics showing that the Transport and Communication sector
has accounted for 6.5–8.0% of GDP since 2000, and road transport accounts for about 60% of
freight tonnage and 90% of passenger numbers. In terms of turnover (tonne-kilometres) the
road share of freight transport is only 12% because of the dominance of pipeline and rail in
long-haul transport of oil, gas and other bulk commodities.
147 Directly, road transport costs constitute a small part of the Consumer Price Index. But in-
directly they effect all other components. The Consultant’s HDM-4 analysis suggests that
VOC could be reduced on average by about 15% by adopting Scenario 2 in place of Scenario 3
(which represents continuation of the present level of funding). Netting out the additional
fuel tax that could pay for the adoption of Scenario 2, the reduction would be 12%.
148 It is impossible to compute an overall average impact on prices, but the Consultant offers a
notional example as an illustration of the scale of impact that could be expected:
• The village of Bnorosh is supplied exclusively by road. The average distance over which
goods are carried to the village is 200km.
• Medium-sized trucks make the deliveries, carrying an average of 5 tonnes (including a
backload).
• The average value of the goods is AMD1M (US$2,100) per tonne.
• The freight rate is equivalent to the VOC, as predicted by HDM-4 (AMD418 per vehicle-
km with an IRI of 11, including taxes), factored by 1.30 to allow for the operator’s
overhead and profit.
• The freight cost is therefore AMD21,700 per tonne, adding 2.2% to the cost of the goods
to the people of Bnorosh.
• Assuming a competitive environment and no change in the operator’s overhead or
profit margin, a reduction of 12% in the VOC would allow a reduction in the freight rate
from AMD21,700 to AMD19,700 per tonne, equivalent to a 0.2% reduction in the cost of
goods in Bnorosh.
A similar calculation suggests an average 8% reduction in bus fares, again assuming a 30%
mark-up on existing VOC for overhead and profit.
149 In rural areas the biggest potential impact would be on agricultural production. Farmers
cannot be expected to invest in land, equipment, storage, seeds, fertilizers, pesticides,
animal feed, veterinary services and other inputs if they are faced with costly and uncertain
access to their markets on roads that are so uneven that fragile produce is likely to be
damaged in transit.
Roughton International Limited Social and Economic Consequences
ARMENIA LIFELINE ROADS NETWORK IMPROVEMENT PROJECT
CONSULTING SERVICES FOR ROADS FINANCING STUDY
P a g e | 6-4
150 It is noticeable that much of the fresh produce for sale in Yerevan is imported. To a great
extent this is due to climate, seasonality and demand from an affluent middle class for exotic
foods. But the ADS points out that 32% of Armenia’s arable land is uncropped and it is
reasonable to speculate that poor access and high transport costs have contributed to this.
151 Official statistics suggest a clear trend. The share of the Agriculture, Forestry and Fishing
sector in GDP has declined from 24% in 2000-2002 to below 20% in recent years. At the
same time there has been a surge in food imports. In 2010 Armenia imported 73,000t of
Food, Beverages and Tobacco worth US$156M. By 2013 this had increased to 155,000t
worth US$388M. Over this period the Food, Beverages and Tobacco category increased its
share of total imports from 15% to 27% by value. The Consultant cannot prove a connection
between these statistics and Armenia’s poor roads, especially local roads, but the possibility
should not be ignored.
152 If there is a connection, the ADS (2014-25) gives two reasons for responding to the situation
with some urgency: “Firstly, agriculture is the key link of the food industry value chain, which
is one of the sub-branches with export potential. Secondly, development of agriculture is
critical for increase of productivity and creation of non-agricultural jobs in rural areas, thus
contributing to balanced regional development.”
153 Adding value to primary produce and developing export markets are key components of
Armenia’s economic development strategy. They depend on a range of conditions that
include:
• High quality transport infrastructure and services connecting primary producers to pro-
cessing facilities and markets.
• International competitiveness, in terms of both cost and quality.
The Consultant’s proposals would contribute to fulfilling both these conditions.
154 Tourism is another sector that depends heavily on transport infrastructure. The ADS has a
target of 2.7 million incoming tourists per year by 2015, requiring an annual growth rate of
8–9%. Achievement of this target will require investment in facilities and infrastructure. If
the benefits of increased tourism are to be spread throughout the country, with opport-
unities for rural producers of all kinds to earn a share of the tourism dollar, the republican
and local road networks cannot be allowed to fall into decay.
SOCIAL IMPLICATIONS
155 Any measures to increase Government revenues will directly affect the same people: those
with money, jobs, businesses and vehicles. Since most of the country’s wealth is con-
centrated in Yerevan, the people of Yerevan will always bear the largest share of the cost of
any policy or program, whether it is orientated towards economic development, social
improvement or strengthened security. This is certainly true of the Consultant’s proposals to
rationalize fuel taxation and road fees.
156 However, the benefits from spending the increased revenues on the roads would be enjoyed
throughout the country and by all inhabitants, urban and rural, rich and poor. In TR1 the
Consultant offered three reasons why the poor may suffer disproportionately from the
effects of poor or non-existent road maintenance:
• High transport costs reduce Armenia’s international competitiveness and so reduce
employment opportunities.
Roughton International Limited Social and Economic Consequences
ARMENIA LIFELINE ROADS NETWORK IMPROVEMENT PROJECT
CONSULTING SERVICES FOR ROADS FINANCING STUDY
P a g e | 6-5
• Rural dwellers have little choice as consumers. They must either pay the retail prices of
goods delivered to their communities, which include transport costs, or incur the cost of
travelling to an urban centre to buy goods at lower prices.
• The LRN in particular gives access to markets for agricultural goods. Bad local roads not
only increase farm-to-market transport costs but also increase the risk of damage to
goods in transit, because of jolting and/or extended journey times for perishable goods.
In this context the word ‘goods’ includes livestock.
157 If the poor suffer disproportionately from poor road maintenance they will also benefit
disproportionately from good road maintenance. Therefore the Consultant’s proposals have
a redistributive effect. The urban rich will pay more and the rural poor will enjoy lower living
costs and enhanced economic opportunities.
158 The rich will also benefit directly from lower costs as road users, but only when they take
their vehicles outside the municipal boundaries. Urban roads, especially in Yerevan, are
already in good condition. Private cars are used mostly on those roads and their owners will
notice little improvement as a result of increasing the road maintenance budget. Their
benefits will take the form of lower transport costs for the goods that they consume and for
the businesses from which their incomes are derived.
159 In most countries the population is becoming more urbanized, with rural communities
shrinking and being populated mainly by the elderly. This is not the case in Armenia. The
rural share of the population has risen from 31% in 1989, just before the demise of the USSR,
to 37% now. This has happened while the national population has declined by 12.5%. The
proportion of the rural population over 60 years of age is 13% compared to 17% in urban
areas. The proportion of under-20s is higher in the rural areas: 28% compared to 25% in
urban areas. The proportion of people in the prime working age group (20-59) is about the
same in both populations.
160 These statistics are significant if one considers a strategy of selective depopulation, allowing
abandonment of sections of the local road network and other economic and social infra-
structure such as schools and medical centres. The villages are not dying. In general they are
poor and their young people have meagre prospects for higher education and employment,
but closing down whole communities and progressively concentrating their populations at
locations that are easier to provide with access and essential services would not be an easy
option, nor a cheap one.
Roughton International Limited
APPENDICES
Appendix 1A
NETWORK DATA SUPPLIED BY MOTC
Road Network Length (km)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Interstate highways 1,561 1,561 1,561 1,561 1,686 1,686 1,686 1,686 1,686 1,686 1,759
Republican roads 1,832 1,832 1,832 1,832 1,747 4,056 4,056 4,056 4,056 4,056 1,966
Local roads 4,236 4,122 4,111 4,122 4,271 1,962 1,962 1,962 1,962 1,962 3,805
Total 7,629 7,515 7,504 7,515 7,704 7,704 7,704 7,704 7,704 7,704 7,530
Lifeline Roads Network Length (km)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Republican roads N/A N/A N/A N/A N/A 4,056 4,056 4,056 4,056 4,056 1,966
Local roads N/A N/A N/A N/A N/A 0 0 0 0 0 2,090
Total 4,056 4,056 4,056 4,056 4,056 4,056
Republican Roads Length (km)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Managed by ARD 1,832 1,832 1,832 1,832 1,747 1,747 1,747 1,747 1,747 1,747 1,955
Managed by Marzes 0 0 0 0 0 2,309 2,309 2,309 2,309 2,309 0
Manged by Yerevan 0 0 0 0 0 0 0 0 0 0 11
Total 1,832 1,832 1,832 1,832 1,747 4,056 4,056 4,056 4,056 4,056 1,966
Road Network Condition (km)
2010 2011 2012 2013 2014 2014
Interstate highways %
Good/Fair 88 88 89 90 145 8
Fair 1,240 1,212 1,155 1,121 1,093 62
Poor/Bad 274 301 355 387 426 24
Bad 84 85 87 88 95 5
Total 1,686 1,686 1,686 1,686 1,759 100
Republican roads %
Good 514 493 473 436 397 20
Fair 1,026 1,185 1,136 1,110 523 27
Poor 1,011 1,103 1,135 1,121 611 31
Bad 1,505 1,275 1,312 1,389 435 22
Total 4,056 4,056 4,056 4,056 1,966 100
Local roads %
Good 359 529 633 690 691 18
Fair 180 220 278 330 938 25
Poor 483 471 420 442 873 23
Bad 941 742 631 500 1,303 34
Total 1,962 1,962 1,962 1,962 3,805 100
All roads %
Good 961 1,110 1,196 1,216 1,233 16
Fair 2,446 2,617 2,569 2,561 2,554 34
Poor 1,768 1,875 1,910 1,950 1,910 25
Bad 2,530 2,102 2,029 1,977 1,833 24
Total 7,704 7,704 7,704 7,704 7,530 100
Road Network Descriptions
2008 2009 2010 2011 2012 2013 20142015
(planned)
US$M US$M US$M US$M US$M US$M US$M US$M
1 State budget 25.2 23.9 14.8 10.9 14.4 8 11.6 7.4
2IFIs Loans plus RA Government
co-financing0.0 61.6 21.4 20.8 13 16.8 3 7.8
25.2 85.5 36.2 31.7 27.4 24.8 14.6 15.2
2008 2009 2010 2011 2012 2013 20142015
(planned)
km km km km km km km km
1 State budget 192.0 112.0 126.0 63.0 75.0 32.9 63.3 46.6
2IFIs Loans plus RA Government
co-financing0.0 299.0 224.0 173.0 112.0 101.0 12.0 45.0
192.0 411.0 350.0 236.0 187.0 133.9 75.3 91.6
2008 2009 2010 2011 2012 2013 2014 2015
(planned)
US$M US$M US$M US$M US$M US$M US$M US$M
1IFIs Loans plus RA Government
co-financing0.0 0.0 0.0 0.0 16.6 19 52.2 162 73
0.0 0.0 0.0 0.0 16.6 19.0 52.2 162.0 73
2008 2009 2010 2011 2012 2013 20142015
(planned)
US$M US$M US$M US$M US$M US$M US$M US$M
1 State budget 11.4 11.6 12.4 12.2 12.6 12.4 12.6 14.4
11.4 11.6 12.4 12.2 12.6 12.4 12.6 14.4
2008 2009 2010 2011 2012 2013 2014
2015
(planned)
km km km km km km km km
1 State budget 3,246 3,246 3,246 3,159 3,184 3,298 3,298 3,465
3,246 3,246 3,246 3,159 3,184 3,298 3,298 3,465
2008 2009 2010 2011 2012 2013 20142015
(planned)
US$M US$M US$M US$M US$M US$M US$M US$M
Total: Maitenance
Total
(2012-
2015)
km
Expenditures on Roads (only MoTC programs), 2008-2015
No Source of financing
No Source of financing
Source of financing
Total: Roads rehabilitation
3.Roads Routine maintenance
No Source of financing
2.Roads New Construction (North-South Road Corridor)
No
Total: New construction
No
Total: Roads rehabilitation
1.Roads rehabilitation
Source of financing
GRAND TOTAL (MoTC programs)
Total: Maitenance
56.6 56.2 79.4 191.643.9
Grand Total: Roads Rehabilitation,
New Construction and Routine
Maintenance
36.6 97.1 48.6
Appendix 2A
TECHNICAL DETAILS OF HDM-4 ANALYSIS OF NEEDED EXPENDITURE
Road Inventory, Geometrics and Condition
Interstate and Republican road network survey data were provided by ARD. For Interstate road network
condition by the end of 2014 and for republican road network condition of different sections for the
years 2014, 2012, 2011, 2010. In total ARD has provided about 1,660km road survey data for Interstate
roads and 801km for republican roads (41% of the republican roads network).
Minister of transport and communication has previously approved a decree named «guidelines for
implementation of collecting data on road pavement condition, traffic counts, state road rehabilitation
project development, traffic management and safety improvement works» №239-A dated 5 of May
2011. According which the existing equipment allows to investigate 30-40km/per day road and taking
into consideration the methodology used it is possible to implement the annual measurement for
almost all interstate roads network and some of the republican roads. The investigation of total
republican roads network shall be done within 4-5 years.
Existing Traffic, Forecast and Vehicle Operating Costs
The traffic data for economic evaluation of Interstate and republican road networks and each road
section were provided by ARD.
The vehicle operating cost (VOC) and fleet input to HDM-4 is summarized in Tables below covering
vehicle characteristics, VOCs and vehicle utilization respectively. These are a combination of values
derived from recent research in Armenia and used in recent road studies. The fuel costs for each vehicle
type have been evaluated within current study.
Table 4A.1 Basic Vehicle Characteristics
Vehicle type
No Basic characteristics
Pa
sse
ng
er
car
Ve
hic
les
1.5
-3.0
t
Min
i bu
s
Bu
s
Big
bu
s
Tru
cks
2 a
xle
s
Tru
cks
3 a
xle
s
Tru
cks
4 a
xle
s
Physical
1 Passenger car space equiv. 2 1 1.4 1.5 1.6 1.4 1.6 1.8
2 Number of wheels 4 4 6 6 6 6 10 18
3 Number of axles 2 2 2 2 2 2 3 5
Utilization
4 Annual km 25,000 30,000 47,000 70,000 70,000 40,000 86,000 86,000
5 Working hours 550 1,300 2,100 1,750 2,500 1,200 2,600 2,050
6 Average life, years 10 8 8 7 12 12 14 14
7 Private use, % 90 75 10 10 0 30 10 0
8 Passengers, persons 2 2 12 25 40 0 0 0
9 Work related passenger trips % 75 90 75 90 95 0 0 0
2
Table 4A.2 Economic Unit Costs of Vehicles (US$)
Vehicle type
No Basic characteristics
Pa
sse
ng
er
car
Ve
hic
les
1.5
-3.0
t
Min
i bu
s
Bu
s
Big
bu
s
Tru
cks
2 a
xle
s
Tru
cks
3 a
xle
s
Tru
cks
4 a
xle
s
Vehicle resources
1 New vehicle cost 15,000 25,000 25,000 35,000 50,000 35,000 60,000 100,000
2 Replacement tyre 75 120 120 200 350 350 350 350
3 Fuel cost per litre 0.45 0.61 0.44 0.44 0.44 0.82 0.84 0.84
4 Lubricating oil cost per litre 3 3 3 3 3 3 3 3
5 Maintenance labour cost per
hour 3 3 3 3 3 3 3 3
6 Crew wages cost per hour 4 4 4 4 4 4 4 4
7 Annual overhead 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500
8 Annual interest, % 12 12 12 12 12 12 12 12
Time Value
9 Passenger working time cost
per hour 2 2 2 2 2 2 2 2
10 Passenger non-working time
cost per hour 1 1 1 1 1 1 1 1
11 Cargo cost per hour 2 2 2 2 2 2 2 2
Traffic growth is primarily driven by economic development and reflects the increasing prosperity of
society and the attendant increases in vehicle ownership and vehicle usage. National economic growth
is best represented by growth in real Gross Domestic Product (GDP). A set of national economic growth
forecasts has been developed for the study to reflect the expected growth in the national economy of
Armenia.
The IMF`s forecasts for Armenia over the period to 2016 have been used as starting point for the
development of central or best estimate, growth forecasts for the national economy.
For the remainder of the evaluation period to 2035 reference has been made to wider international
development studies, including work by Scott Wilson, which predict the longer term economic growth of
Eastern European and former Soviet countries in terms of catch up periods to growth rates experienced
by European Union members, and work by Roughton International1, which predict the longer term
economic growth of Armenia.
The strong relationship between economic growth and traffic growth is widely recognized and in the
developing stage of an economy, cars and other passenger vehicle traffic are generally considered to
grow slightly faster than GDP while goods vehicle traffic, being driven directly by the economy, is
commonly in line with GDP growth.
Accordingly, 1.2 for car and passenger traffic has been adopted until 2020 with 1.1 thereafter and 1.0
for goods vehicles throughout the evaluation period. These values are in line with TRACECA guidance.
1 PREPARATION OF DESIGN AND EMP FOR THE AF2-LRIP YEAR 2011 ROADS REHABILITATION WORKS, PHASE 1 ROADS, FINAL
ECONOMIC ANALYSIS REPORT, #DDAS-AF2-LRIP-2011, AUGUST 2011, Roughton International
3
The growth rates are summarized in table below.
Table 4A.3 Projected Normal Traffic Growth Rates (% per annum)
Year Passenger
vehicles Goods Vehicles
2014 - 2020 4.8% 4.0%
2020 - 2025 3.9% 3.5%
2025 - 2035 3.3% 3.0%
Source: Roughton International
Improvement Alternatives, Maintenance Strategies and Costs
When construction, maintenance, and rehabilitation costs are considered, the single most costly
element of our nation`s road system is the pavement structure.
HDM-4 compares a base alternative situation (Do Minimum) with one or more with section alternatives.
This enables the net economic impact of the proposed option(s) to be rank.
Do Minimum Situation
A realistic do minimum situation has been assumed for each of the study roads of the network. The do
minimum strategies reflect current maintenance standards and practices in Armenia and consist of
routine summer and routine winter maintenance, pothole patching and crack sealing for roads in fair
condition.
These have been based upon the Consultants’ experience of road maintenance projects in Armenia and
the values provided by ARD.
Applied alternatives
Applied alternatives are summarized in table below.
Table 4A.4 Applied Alternatives
Alternative Work items Condition
Base Routine maintenance (roads in fair condition)
Option 1 Routine maintenance (roads in good condition) + Reconstruction Reconstruction @8m/km IRI
Option 2 Routine maintenance (roads in good condition) + Reconstruction Reconstruction @10m/km IRI
Option 3 Routine maintenance (roads in good condition) + Reconstruction Reconstruction @12m/km IRI
Option 4 Routine maintenance (roads in good condition) + Reconstruction Reconstruction @16m/km IRI
Option 5 Routine maintenance (roads in good condition) + Overlay 50mm Overlay 50mm @4m/km IRI
Option 6 Routine maintenance (roads in good condition) + Overlay 50mm Overlay 50mm @5m/km IRI
Option 7 Routine maintenance (roads in good condition) + Overlay 50mm Overlay 50mm @6m/km IRI
Option 8 Routine maintenance (roads in good condition) + Overlay 50mm Overlay 50mm @7m/km IRI
Option 9 Armenian Road Directorate used alternative
Option 10 Routine maintenance (roads in good condition) + Overlay 40mm Overlay 40mm @4m/km IRI
Option 11 Routine maintenance (roads in good condition) + Overlay 40mm Overlay 40mm @5m/km IRI
Option 12 Routine maintenance (roads in good condition) + Overlay 40mm Overlay 40mm @6m/km IRI
Option 13 Routine maintenance (roads in good condition) + Overlay 40mm Overlay 40mm @7m/km IRI
The estimated costs of the options are summarized in table below.
• The average maintenance costs for interstate and republican roads have been calculated using
current routine summer and routine winter maintenance contract prices.
4
• The reconstruction and overlay cost per square meters are back calculated from the similar
recent rehabilitation projects.
Table 4A.5 Costs of Options
Interstate roads Republican roads
Alternatives Economical Cost/km US$
Financial Cost/km US$
Economical Cost/km US$
Financial Cost/km US$
Routine Maintenance
(roads in fair condition) 2,850 3,420 2,500 3,000
Routine Maintenance
(roads in good condition) 2,250 2,700 2,250 2,700
Cost/m2 US$ Cost/m
2 US$ Cost/m
2 US$ Cost/m
2 US$
Reconstruction (width 8m) 31.20 37.44 26.00 31.20
Overlay 50mm 20.80 24.96 20.80 24.96
Overlay 40mm 18.75 22.50 18.75 22.50
Economic Evaluation Parameters
A discount rate of 12% has been adopted for this program in line with the requirements of the ToR.
The discount base year has been taken to be 2015.
An evaluation period of 20 years has been adopted, commencing with base year of 2015 and with
program opening year expected to be 2016 for each of the road sections. Final evaluation year is 2034.
Results of Economic Analysis
The output files are available for inspection. Year-wise summaries are presented below for the first
three scenarios. They show total expenditure on non-routine maintenance (Total ex RM) disaggregated
into reconstruction/rehabilitation and periodic maintenance, and routine maintenance. RRN results
have been scaled up to allow for the incomplete coverage, assuming that the road sections for which
data are unavailable are similar to those for which data are available.
The fourth scenario (routine maintenance only) involves uniform annual expenditure of US$6.0M for the
interstate road network and US$5.9M for the republican road network.
5
Scenario 1 (Unconstrained)
Interstate Road Network
km US$M km US$M km US$M km US$M
2015 939 193 939 193 820 2
2016 62 13 62 13 1,697 5
2017 51 11 51 11 1,708 5
2018 105 26 105 26 1,654 4
2019 120 26 120 26 1,639 4
2020 104 24 104 24 1,655 4
2021 64 15 64 15 1,695 5
2022 48 10 48 10 1,711 5
2023 190 40 190 40 1,569 4
2024 16 3 16 3 1,743 5
2025 96 18 96 18 1,663 4
2026 143 32 143 32 1,616 4
2027 111 22 111 22 1,648 4
2028 144 30 144 30 1,615 4
2029 167 37 167 37 1,592 4
2030 181 39 181 39 1,578 4
2031 33 7 33 7 1,726 5
2032 38 8 38 8 1,721 5
2033 128 28 128 28 1,631 4
2034 60 14 60 14 1,699 5
Total 2,801 595 2,801 595 32,379 87
Average per year
Overall 140 30 140 30 1,619 4
Yrs 1-5 256 54 256 54 1,503 4
Yrs 6-20 102 22 102 22 1,657 4
Total ex RM Recon. Periodic Routine
Republican Road Network
km US$M km US$M km US$M km US$M2015 722 151 0 0 722 151 1,243 3
2016 21 4 0 0 21 4 1,945 52017 19 4 0 0 19 4 1,946 5
2018 113 24 0 0 113 24 1,853 52019 134 33 0 0 134 33 1,832 5
2020 87 15 0 0 87 15 1,879 52021 135 27 0 0 135 27 1,831 5
2022 203 40 0 0 203 40 1,762 52023 174 42 22 5 151 37 1,792 5
2024 14 3 0 0 14 3 1,952 52025 150 30 74 16 76 14 1,816 5
2026 55 10 0 0 55 10 1,910 52027 197 40 25 5 172 35 1,769 5
2028 272 59 0 0 272 59 1,694 52029 115 25 0 0 115 25 1,851 5
2030 65 12 0 0 65 12 1,901 52031 16 3 0 0 16 3 1,950 5
2032 182 44 0 0 182 44 1,784 52033 196 42 0 0 196 42 1,770 5
2034 121 24 0 0 121 24 1,844 5Total 2,992 632 121 26 7,041 606 36,325 98
Average per year
Overall 150 32 6 1 352 30 1,816 5
Yrs 1-5 202 43 0 0 202 43 1,764 5Yrs 6-20 132 28 8 2 124 26 1,834 5
Total ex RM Recon. Periodic Routine
Legend
ՊայմանականՊայմանականՊայմանականՊայմանական նշաններնշաններնշաններնշաններ
Total ex RM
Total expenditure excluding routine maintenance
Ընդհանուր ծախսերը,
բացառությամբ ընթացիկ
սպասարկումը
Recon.
Reconstruction / Rehabilitation
Վերակառուցում /
Վերականգնում
Periodic
Periodic maintenance
Պարբերական
սպասարկում
Routine
Routine maintenance
Ընթացիկ սպասարկում
6
Scenario 2 (Keep IRI within 1.5 of now)
Interstate Road Network
km US$M km US$M km US$M km US$M
2015 154 30 154 30 1,605 4
2016 129 30 20 8 109 22 1,630 4
2017 114 25 26 9 88 17 1,645 4
2018 139 30 23 8 116 22 1,620 4
2019 115 30 45 16 70 14 1,644 4
2020 128 29 52 15 76 15 1,631 4
2021 107 29 57 19 50 10 1,652 4
2022 79 28 79 28 1,680 5
2023 95 28 79 25 16 3 1,664 4
2024 77 24 71 23 6 1 1,682 5
2025 87 18 19 6 68 13 1,672 5
2026 133 24 133 24 1,626 4
2027 81 16 81 16 1,678 5
2028 59 12 59 12 1,700 5
2029 61 12 61 12 1,698 5
2030 47 10 47 10 1,712 5
2031 21 6 10 4 11 2 1,738 5
2032 75 22 44 15 31 6 1,684 5
2033 95 18 95 18 1,664 4
2034 64 16 31 10 33 6 1,695 5
Total 1,860 438 557 185 1,302 253 33,320 90
Average per year
Overall 93 22 28 9 65 13 1,666 4
Yrs 1-5 130 29 23 8 107 21 1,629 4
Yrs 6-20 81 20 29 10 51 10 1,678 5
Total ex RM Recon. Periodic Routine
Republican Road Network
km US$M km US$M km US$M km US$M2015 128 22 14 4 114 18 1,838 5
2016 85 17 37 8 48 9 1,881 5
2017 82 21 52 13 30 7 1,884 5
2018 101 21 0 0 101 21 1,865 5
2019 100 20 34 8 66 12 1,866 5
2020 93 21 37 12 56 10 1,873 5
2021 99 19 39 9 60 11 1,867 5
2022 86 19 23 8 63 11 1,880 5
2023 88 20 88 20 0 0 1,878 5
2024 92 17 32 8 60 10 1,874 5
2025 90 22 47 13 43 9 1,876 5
2026 80 19 38 10 42 9 1,886 5
2027 86 16 56 12 29 3 1,880 5
2028 118 22 19 4 99 18 1,847 5
2029 102 21 14 4 87 18 1,864 5
2030 67 17 47 12 19 5 1,899 52031 0 0 0 0 0 0 1,966 5
2032 85 19 30 8 54 11 1,881 5
2033 93 21 37 12 56 10 1,873 5
2034 86 18 34 8 52 9 1,880 5
Total 1,760 372 678 172 0 200 37,557 101Average per year
Overall 88 19 34 9 0 10 1,878 5
Yrs 1-5 99 20 27 7 72 13 1,867 5
Yrs 6-20 84 18 36 9 48 9 1,882 5
Total ex RM Recon. Periodic Routine
7
Scenario 3 (Continue spending as now)
Interstate Road Network
km US$M km US$M km US$M km US$M
2015 69 13 69 13 1,690 5
2016 62 13 3 1 59 12 1,697 5
2017 62 13 12 4 50 9 1,697 5
2018 71 13 71 13 1,688 5
2019 45 13 28 9 18 4 1,714 5
2020 52 13 23 7 29 6 1,707 5
2021 49 12 30 8 19 4 1,710 5
2022 41 12 41 12 1,718 5
2023 41 12 37 11 4 1 1,718 5
2024 38 12 38 12 1,721 5
2025 50 11 6 2 44 10 1,709 5
2026 45 10 20 6 25 4 1,714 5
2027 58 10 58 10 1,701 5
2028 57 11 57 11 1,702 5
2029 46 10 6 2 40 8 1,713 5
2030 4 1 4 1 1,755 5
2031 13 3 10 3 3 1 1,746 5
2032 26 5 3 1 23 5 1,733 5
2033 22 6 11 4 11 2 1,737 5
2034 39 9 10 3 29 6 1,720 5
Total 889 202 277 84 612 118 34,291 93
Average per year
Overall 44 10 14 4 31 6 1,715 5
Yrs 1-5 62 13 9 3 53 10 1,697 5
Yrs 6-20 39 9 16 5 23 4 1,720 5
Total ex RM Recon. Periodic Routine
Republican Road Network
km US$M km US$M km US$M km US$M
2015 44 8 0 0 44 8 1,921 5
2016 40 7 25 5 15 2 1,926 52017 25 6 14 4 10 2 1,941 5
2018 30 8 12 3 18 4 1,935 5
2019 21 6 21 6 0 0 1,945 5
2020 39 8 22 5 17 3 1,927 52021 35 8 6 2 29 5 1,931 5
2022 37 7 27 5 10 2 1,929 5
2023 29 6 29 6 0 0 1,936 52024 32 8 32 8 0 0 1,933 5
2025 46 8 0 0 46 8 1,920 5
2026 29 6 29 6 0 0 1,936 5
2027 32 6 17 4 15 2 1,934 52028 39 7 0 0 39 7 1,927 5
2029 30 6 20 4 10 2 1,936 5
2030 40 8 40 8 0 0 1,926 52031 28 5 0 0 28 5 1,938 5
2032 20 5 14 4 6 1 1,945 5
2033 36 8 21 6 15 2 1,930 5
2034 22 5 12 3 10 2 1,944 5Total 656 134 344 79 0 54 38,661 104Average per year
Overall 33 7 17 4 0 3 1,933 5Yrs 1-5 32 7 15 4 18 3 1,934 5
Yrs 6-20 33 7 18 4 15 3 1,933 5
Total ex RM Recon. Periodic Routine
Appendix 2B
REVENUE ESTIMATION (FROM THE FIRST TECHNICAL REPORT)
The following text and tables are repeated from the Consultant’s First Technical Report (TR1),
paragraphs 70–97.
INTRODUCTION
70 The Ministry of Finance has been unable to provide full information about revenue raised
from road users, so the consultants have made their own estimates based on whatever information
was available from other sources.
71 The approach may be summarised as follows:
• Estimate the level and incidence of all significant taxes and charges payable by road
users in 2015.
• Identify those which may considered ‘service fees and general taxes’ as meant in the
consultants’ TOR (paragraph 13(iv)).
• Consider which other taxes and charges might be considered as proxy charges for road
use and therefore be candidates for hypothecation to the roads budget or to an auto-
nomous agency with responsibility for road network management.
• Consider the scope for increasing existing taxes or charges and/or introducing new
ones.
• Assess the potential revenues which increased or new taxes and changes would yield.
• Assess the wider economic and social implications of such measures.
72 Special attention was paid to the taxation of fuel, as required by the TOR. Fuel is the most
obvious taxable good that is necessarily bought by road users, and it has been observed in previous
studies that Armenian fuel taxes are low by world standards.
TAXES ON IMPORTED GOODS
73 Four taxes and four categories of imports are included in this analysis:
Taxes
• Customs duty.
• Excise tax.
• Value added tax (VAT).
• Environmental tax.
Imports
• Vehicles.
• Tyres.
• Parts.
• Fuel (petrol, diesel fuel, gas).
74 Foreign trade statistics are available for most goods in 2014, but for fuel the latest data
relate to 2013 and the published statistics do not differentiate between petrol and diesel fuel. The
consultants sought advice from private business sources and have constructed a set of estimated
import volumes and values for 2015, presented in Error! Not a valid bookmark self-reference..
75 Tax laws were consulted to find the appropriate tax rates and estimates were made of the
gross mark-ups (value added) in Armenia as a basis for computing VAT at the point of retail sale. See
Table . Taxation of petrol and diesel fuel is complicated by the application of ad valorem customs
duty and excise tax but subject to minimum collections per tonne. The results of this analysis are
presented in Table .
2
Table 15 Road-Related Imports
Pe
tro
l
Die
se
l
CN
G
Import volumes '000t 2 132 39 361
'000 items 52 665
Import values US$M 361 38 13 100 32 110 653
AMDbn 171 18 6 48 15 52 310
Unit values AMD'000/t 3,223 361 382 144
AMD'000/item 3,320 27
Unit
Fuel
To
tal
Ro
ad
ve
hic
les
Tyre
s
Pa
rts
Table 16 Rates of Tax on Road-Related Imports
Pe
tro
l
Die
se
l
CN
G
Customs duty % 10% 10% 10% 5%
Excise tax, ad valorem % 10%
Excise tax, volumetric AMD/tonne 25,000
Excise tax, minimum AMD/tonne 32,500
VAT, minimum AMD/tonne 87,000
Environmental tax % 2%
VAT at the border % 20% 20% 20% 20% 20%
VAT at final point of sale % 20% 20% 20% 20% 20%
Assumed gross mark-up % [a,b] 10% 20% 25% 20% 20% 40%
[a] Used to compute VAT revenue from value added after importation.
[b] A low mark-up is assumed on vehicles because many are imported for own use.
Fuel
Ro
ad
ve
hic
les
Ty
res
Pa
rts
Unit
76 The results of the analysis are presented in Error! Not a valid bookmark self-reference..
Total estimated taxes amount to AMD102.6 billion (US$216.0M). Taxes on imported vehicles
account for 57% of this total and taxes on fuel account for 36%. Looking at the breakdown by type
of tax, VAT accounts for 75% and customs duty 22%. Excise tax and environmental tax – the only
taxes shown here that are not general in nature – account for only 3.5%.
3
Table 17 Estimated Taxes on Road Related Imports
Pe
tro
l
Die
se
l
CN
G
Customs duty AMDbn/year 17.1 1.8 0.6 2.6 22.2
Excise tax, ad valorem AMDbn/year 1.5
Excise tax, volumetric AMDbn/year 3.3 3.3
Excise tax, minimum AMDbn/year
VAT, minimum AMDbn/year 11.5 11.5
Environmental tax AMDbn/year 0.3 0.3
VAT at the border AMDbn/year 37.7 4.0 1.3 10.9 54.0
VAT at final point of sale AMDbn/year 3.8 0.8 0.3 2.1 4.4 11.4
Total Revenue AMDbn/year 58.6 6.6 2.2 16.9 1.8 17.9 102.6
US$M/year [a] 123.4 14.0 4.7 35.6 3.8 37.7 216.0
[a] Converted at US$ 1 = AMD 475
Unit Ro
ad
ve
hic
les
Tyre
s
Pa
rts
Fuel
To
tal
INCIDENCE OF FUEL TAXES
77 Many assumptions underlie the consultants’ estimates of the incidence of fuel taxes, by
vehicle class and by type of tax. These assumptions are presented in full in Before making the crude
estimates of fleet composition shown in Error! Not a valid bookmark self-reference.18, the
consultants examined fleet statistics for Georgia, Macedonia and Moldova, these being countries
that are similar to Armenia in population and per capita GDP and, in the case of Macedonia and
Moldova, landlocked. The proportion of fuel usage in each vehicle class, annual kilometrage and
rates of fuel consumption were based on information obtained in meetings or online together with
the consultants’ own knowledge and experience. The figures were adjusted in an iterative process
to match total consumption of each type of fuel with estimated import volumes.
78 Table . No Government agency has been able to provide information on the size and
composition of the national fleet of road vehicles, but from insurance industry sources the
consultants found that there were 464,000 insured vehicles in Armenia at the end of 2014. Since
motor insurance is compulsory, this may be taken as a reasonable estimate of the number of
registered vehicles. Allowing for imports during 2015 and a small number of unregistered or illegally
uninsured vehicles, the consultants have estimated the total average fleet in 2015 to be 480,000.
79 Before making the crude estimates of fleet composition shown in Error! Not a valid
bookmark self-reference.18, the consultants examined fleet statistics for Georgia, Macedonia and
Moldova, these being countries that are similar to Armenia in population and per capita GDP and, in
the case of Macedonia and Moldova, landlocked. The proportion of fuel usage in each vehicle class,
annual kilometrage and rates of fuel consumption were based on information obtained in meetings
or online together with the consultants’ own knowledge and experience. The figures were adjusted
in an iterative process to match total consumption of each type of fuel with estimated import
volumes.
4
Table 18 Estimation of Fuel Consumption by Class of Vehicle, 2015
Lig
ht
Me
diu
m
He
av
y
Se
mi-
tra
ile
rs
Vehicle population, 2015 Number 460,000 8,000 6,000 3,000 2,000 1,000 480,000
Petrol % [a] 26% 10% 40% 20% 26% Diesel % [a] 10% 20% 80% 100% 100% 2% CNG % [a] 74% 80% 40% 73% Petrol Number 119,600 800 2,400 600 123,400
Diesel Number 800 1,200 2,400 2,000 1,000 7,400
CNG Number 340,400 6,400 2,400 349,200
Average distance travelled km/year 17,500 40,000 40,000 45,000 50,000 50,000
Petrol consumption km/litre [b] 13.3 7.5 7.5 6.5
Diesel consumption km/litre [b] 16.0 9.0 9.0 7.8 7.0 5.0
CNG consumption km/litre [b] 13.3 7.5 7.5 6.5
Petrol consumption Ml/year 157.4 4.3 12.8 4.2 178.6Diesel consumption Ml/year 3.6 5.3 13.8 14.3 10.0 47.0CNG consumption Ml/year 447.9 34.1 12.8 494.8 Total fuel consumption Ml/year 720.4
To
tal
Trucks
[a] Many cars use predominantly CNG but also petrol, especially in winter. The proportions shown here
relate to usage and the computed numbers below are 'equivalent vehicles'. Fuel usage percentages have
been derived from snippets of information from various sources, together with some general knowledge
and guesswork.
[b] These are the consultants' estimates. It is assumed that diesel-powered vehicles achieve 20% more
kilometres per litre than petrol-powered vehicles, and CNG-powered vehicles achieve the same. CNG is
sold by the cubic metre, which has almost exactly the same calorific value as 1 litre of petrol. Therefore in
this analysis 1 litre of CNG means 1m3.
Unit Ca
rs
Bu
se
s
80 By combining the data, estimates and assumptions in the preceding tables it is possible to
estimate the total amount of fuel tax paid by owners of each vehicle class, differentiating the three
types of fuel and four types of tax. These results are presented in Table . It is immediately apparent
that car owners bear the great majority of the fuel tax burden, but it is not out of proportion to the
number of cars (96% of the fleet) or the number of kilometres that they travel (91% of the total for
the fleet).
Table 19 Incidence of Fuel Tax by Class of Vehicle and Type of Tax
Lig
ht
Me
diu
m
He
av
y
Sem
i-
tra
ile
rs
Petrol: Excise tax AMDbn/year 2.9 0.1 0.2 0.1 3.3
Petrol: VAT at the border AMDbn/year 10.1 0.3 0.8 0.3 11.5
Petrol: VAT at point of sale AMDbn/year 1.8 0.0 0.1 0.0 2.1
Diesel: Excise tax AMDbn/year 0.1 0.2 0.4 0.5 0.3 1.5
Diesel: Environment tax AMDbn/year 0.0 0.0 0.1 0.1 0.1 0.3
Diesel: VAT at point of sale AMDbn/year
CNG: Customs duty AMDbn/year 2.4 0.2 0.1 2.6
CNG: VAT at the border AMDbn/year 9.9 0.8 0.3 11.0
CNG: VAT at point of sale AMDbn/year 4.0 0.3 0.1 4.4
Total Revenue AMDbn/year 31.1 1.8 1.9 0.9 0.5 0.4 36.6
US$M/year 65.5 3.7 4.0 1.9 1.1 0.8 77.1
% 85% 5% 5% 3% 1% 1%
TrucksT
ota
l
Unit Cars
Bu
se
s
5
81 It is also apparent that the fuel tax burden is not uniform across the three types of fuel. The
following facts stand out:
• Although CNG powers 73% of vehicle usage, it contributes only 49% of the tax revenue.
This is because customs duty and excise tax (the only taxes applied to CNG) are ad
valorem taxes – ie they are calculated on the value of goods not the tonnage – and gas
is a much cheaper source of energy than refined petroleum products.
• In contrast, petrol powers 26% of vehicle usage and contributes 46% of tax revenue.
• No VAT is levied on diesel fuel, it having been exempted in 2010, but diesel fuel is the
only one to bear the environmental tax.
• CNG bears no excise tax, it being produced from natural gas which is (unlike petroleum
gas) explicitly exempt.
• VAT accounts for 79% of all tax on fuel, excise tax 13% and customs duty 7%.
The net result is that diesel fuel and CNG are taxed at about the same level, coincidentally,
while petrol is taxed 2.3 times more heavily; see Table .
Table 20 Total Fuel Tax Per Litre of Fuel
Petrol 95
Diesel 38
CNG (1 litre = 1 m3) 36
Fuel type AMD/litre
82 The reasons for such anomalous and inequitable taxation of fuel are not mysterious. Petrol
is used almost exclusively to power road vehicles, whereas only 25-30% of diesel fuel and 15-20% of
natural gas is used for this purpose. Diesel fuel is used predominantly for vehicles and equipment in
the agriculture, mining, manufacturing and military sectors that make little or no use of the roads.
Gas is used for heating homes, businesses and water, and for cooking. These are purposes which the
Government does not wish to tax highly.
83 But the inconsistent way in which taxes have been used to penalise or favour certain goods
calls into question the meaning of ‘general taxation’. As mentioned earlier, the consultants’ TOR
suggest that ‘service fees and general taxes’ should be excluded from consideration of additional or
new hypothecated sources of revenue for the roads sector. VAT would normally be considered a
general tax, but exempting diesel fuel from VAT because it is used for purposes that do not involve
use of the roads, or that merit subsidy, suggests that VAT is available as a policy tool. The same
argument can be made about customs duty, which is levied on natural gas but not on petrol or diesel
fuel.
ROAD FEES
84 Road fees are levied in quite different ways on foreign-registered and Armenian-registered
vehicles. In summary:
• Foreign-registered vehicles pay between AMD10,000 and AMD150,000 for using Arm-
enian roads for a period of up to 15 days.
• Foreign-registered heavy vehicles (≥36t) also pay a minimum of AMD110/km travelled
within Armenia, increasing with gross vehicle weight (GVW).
• Foreign-registered heavy vehicles with axle-loads exceeding specified limits (depending
on axle configuration) also pay a minimum of AMD45/km.
• Armenian-registered heavy vehicles (≥36t) pay between AMD15,000 and AMD60,000
per month, depending on GVW. If a vehicle is not operated on Armenian roads for a
period, its owner does not have to pay road fees during that period.
• There are also fees for oversized vehicles and harmful emissions.
6
85 According to data provided by the MoF, foreign-registered vehicles paid road fees totalling
AMD4.4bn in 2012, AMD3.64bn in 2013 and AMD3.82bn in 2014. The consultants estimate revenue
from this source of AMD4.0bn in 2015.
86 No official data are available on road fee revenue from Armenian-registered vehicles. An
annual estimate of AMD1.5bn is derived from the consultants’ own assumptions about the
composition of the national fleet.
PROPERTY TAX ON VEHICLES
87 Armenia is unusual in levying a property tax on vehicles, based on a vehicle’s rated horse-
power (or power expressed in kW). This tax is paid directly to local governments with no monitoring
by any central agency. Table shows the consultants’ estimation of the scale and incidence of
property taxation applied to vehicles, based on the assumed composition of the national fleet, the
assumed distribution of vehicles by horsepower and the rates of tax prescribed by the relevant law.
88 Car-owners bear an even higher proportion of this tax burden than of fuel taxation: 97.8%.
It is clearly a proxy wealth tax, affecting the owners of powerful private cars rather than the owners
of the HGVs that do most of the damage to the roads. Moreover the revenue from this tax makes an
important contribution to local governments budgets. So although it cannot be considered a
‘general tax’, neither is it a realistic candidate for hypothecation to the roads sector.
Table 21 Estimation of Property Taxes on Vehicles
Lig
ht
Me
diu
m
He
av
y
Se
mi-
tra
ile
rs
Cars 1-120 60%
121-150 15%
151-250 20%
251+ 5%
Other vehicles 1-200 67% 100% 50%
201+ 33% 50% 100% 100%
Tax rates for cars 1-120 200
AMD/horsepower 121-150 300
151-250 1,300
251+ 1,500
Tax rates for other vehicles 1-200 100 100 100 100 100
AMD/horsepower 201+ 200 200 200 200 200
Average discount for age % 30% 30% 30% 30% 30% 30%
Total Revenue AMDbn/year 14.6 0.1 0.1 0.1 0.1 0.0 14.9
US$M/year 30.8 0.3 0.1 0.1 0.1 0.1 31.5
% 97.8% 0.9% 0.4% 0.4% 0.4% 0.2%
Trucks
To
tal
Horsepower
range Ca
rs
Bu
se
s
OTHER TAXES AND CHARGES
89 There are fees for vehicle registration and technical inspection, for driving licences, and for
registration of transport businesses. And there are traffic fines. Information from Government
agencies about the revenue from these sources has been supplemented by the consultants’ own
estimates.
90 Registration of a vehicle in Armenia costs AMD23,000, irrespective of its type or size. This is
a once-only payment. According to published foreign trade statistics, 41,000 vehicles were imported
into Armenia in 2013 and 47,000 in 2014. Assuming a volume of 51,600 vehicles in 2015 (see
Foreign trade statistics are available for most goods in 2014, but for fuel the latest data relate to
7
2013 and the published statistics do not differentiate between petrol and diesel fuel. The
consultants sought advice from private business sources and have constructed a set of estimated
import volumes and values for 2015, presented in Error! Not a valid bookmark self-reference..
91 Tax laws were consulted to find the appropriate tax rates and estimates were made of the
gross mark-ups (value added) in Armenia as a basis for computing VAT at the point of retail sale. See
Table . Taxation of petrol and diesel fuel is complicated by the application of ad valorem customs
duty and excise tax but subject to minimum collections per tonne. The results of this analysis are
presented in Table .
92 Table above), the revenue from vehicle registration this year may be estimated at AMD1.2
billion (US$2.5M).
93 Vehicles must undergo technical inspection every year, for which the fee is AMD10,000 for
cars and up to AMD35,000 for bigger vehicles. Assuming an average fee of AMD10,500 (since cars
are estimated to account for 96% of the national fleet) the revenue in 2015 would be AMD5.0 billion
(US$10.5M).
94 The total cost of applying for a driving licence, taking the theoretical and practical tests and
having the licence issued is AMD28,000. However, allowing for some applicants’ having to take the
test more than once, the consultants have assumed an average cost of AMD35,000 paid by 1% of the
total population each year. This gives an estimated annual revenue of AMD1.1 billion (US$2.3M).
95 MoTC is responsible for licensing certain businesses, including taxi services, and collecting
fees. These amount to AMD200–250 million per year, say AMD225 million (US$0.5M).
96 The consultants assume, very crudely, an average payment of AMD10,000 (US$21) in traffic
fines per vehicle per year, giving an estimated annual revenue of AMD4.8 billion (US$10.1M).
97 If the consultants’ estimates are approximately correct, these taxes and charges generate
total annual revenue of about AMD12.3 billion (US$25.9M).
98 There are no tolls on roads, bridges or tunnels, but the possibility of introducing tolls has
been considered by Government and is thought by some people to be inevitable eventually.
99 Nor are there the means to weigh vehicles and impose fines for overloading, but this
situation is being corrected with the purchase of mobile weighbridges and the passing of a new law.
Fines for overloading will be EUR200/t of GVW in excess of 40t, or EUR100/500kg of axle-load in
excess of 11.5t. Overloaded vehicles will not be allowed to proceed until the load is reduced to the
legal limit. (There are already weighing devices at the international borders, to allow determination
of road fees, referred to in paragraph 84 above.)
SUMMARY OF EXISTING REVENUES
100 Table summarises the revenues from all the sources discussed in this chapter. The total of
AMD136.8 billion is close to 3% of Armenia’s GDP, which is broadly in line with observations in other
countries. However, if one disregards customs duties and VAT (as general taxes) and property tax
(as an important source of revenue to local governments) only AMD22.9 billion remains for possible
hypothecation to the roads sector.
8
Table 22 Summary of Existing Identifiable Revenues from Road Users
Source of revenue Unit Cu
sto
ms
du
ty
Ex
cis
e t
ax
VA
T
En
vir
on
-
me
nta
l ta
x
Oth
er
tax
es
Fe
es
an
d
fin
es
To
tal
Taxes on fuel AMDbn/year 2.6 4.8 28.9 0.3 36.6
Taxes on other imports AMDbn/year 19.6 47.9 67.5
Road fees AMDbn/year 5.5 5.5
Property tax on vehicles AMDbn/year 14.9 14.9
Other levies AMDbn/year 12.3 12.3
Total Revenue AMDbn/year 22.2 4.8 76.8 0.3 20.4 12.3 136.8
US$M/year [a] 46.7 10.1 161.8 0.6 43.0 25.9 288.1
[a] Converted at US$ 1 = AMD 475
Appendix 3A
NOTES ON THE FIRST WORKSHOP, 28 APRIL 2015
Introduction
The workshop was held between 1000 and 1600 on Tuesday 28 April at the Metropol Hotel, Yerevan. Representatives of ministries, international financial institutions, the freight haul-age industry and a related consultant team were invited to attend. Mr Gagik Grigoryan, MoTC Head of Staff, was the moderator.
The purpose was to discuss the Roughton International Ltd (RIL) consultants’ First Technical Report and decide which of its proposals should be pursued in the second phase of the consultants’ study, in which implementation issues are to be addressed and specific measures recommended.
In addition to the RIL Team Leader’s, there were presentations from MoTC on ongoing up-grading and rehabilitation activities, and from a representative of a team of consultants assisting MoTC to finalise a roads financing strategy in compliance with an ADB loan covenant.
Attached are:
• A list of participants.
• The agenda.
• Photographs of the event.
• The RIL Team Leader’s presentation slides.
Overview
Discussion was open and lively, focusing on:
• The necessary level of expenditure “to keep the road network in a stable long-term condition” as stated in the consultants’ TOR. Estimates were available from the World Bank (2011), the ADB’s consultants and the RIL consultant team showing the need for ongoing expenditure substantially higher than currently budgeted. Only the RIL team had estimated needed expenditure on local roads.
• The potential for achieving the same result for less money, by changing road agency practices or improving efficiency.
• The consultants’ proposal to establish a Road Fund, with a degree of autonomy and assured revenue.
• The consultants’ proposal to hypothecate certain revenues to the roads sector, giving road users confidence that increased taxes or charges would translate into better roads and hence lower operating costs to themselves.
• The consultants’ various proposals to increase revenues; impose new road user taxes or charges; and pass some responsibility for road maintenance to local communities.
Representatives of the Ministry of Finance (MoF) and the Ministry of Transport and Com-munication (MoTC) were the most vocal, but there were also significant contributions from the representative of Ararat Marzpetaran and the World Bank.
While the workshop served to improved mutual understanding among the parties, it did not produce a consensus that gave the consultants an unambiguous basis for the second phase of the study: formulation of measures to implement a broadly-supported strategy to close the gap between existing and necessary levels of expenditure.
2
Discussion
The case for increased expenditure was made strongly, but MoF representatives retained the belief that significant savings could be made to achieve more within the existing and planning budget.
As examples of possible cost reduction measures, MoF representatives suggested more appropriate maintenance methods and improved procurement practices. MoTC represent-atives mentioned reforms to tendering and contracting procedures, including the new 5-year contracts, that had already reduced malpractices on the part of contractors and delivered more value for money. The consultants drew attention to the cost reduction proposals made by the World Bank in 2011 and summarised in their First Technical Report (Chapter 7).
MoF representatives stated that increased budget allocations might be available after 2017, but that did not preclude the need to explore ways to use existing allocations as efficiently as possible.
The point was made from the MoTC side that the budget process was top-down in practice, whereas the formal process was designed to allow more bottom-up influence on the alloc-ation of resources between sectors and progams, based on analyses such as those performed by the Armenian Roads Directorate (ARD).
The Road Fund proposal was rejected outright, as an unnecessary new institution. MoF representatives pointed out that the present arrangements embody rigorous financial control, transparency and the flexibility to adjust allocations to different sectors as needs arose. It was also argued that Armenia, as a small and relatively poor country could not afford a multiplicity of institutions with associated overheads.
Likewise, the principle of hypothecation was rejected on the grounds that it reduced budget-ary flexibility and would open the way for other sectors to claim similar treatment. In defence of the principle it was pointed out that the roads sector was unusual in that road users contributed substantial and identifiable revenue to the budget.
With respect to additional and new revenues, the consultants’ chief proposal was to ration-alize the taxation of fuel, bringing the total tax per litre into line for all three fuel types, adjusted to recognise their differential contributions to CO2 emissions. If adopted in full, the proposal would yield additional estimated revenue of AMD27 billion at the current level of fuel consumption and increase average tax from AMD51 to AMD89 per litre
The consultants also proposed rationalizing and increasing existing road fees on foreign-registered vehicles and Armenian-registered heavy goods vehicles; taxing motor insurance premiums; and tolling selected trunk road sections, perhaps through a franchising system to encourage private investment in road construction/rehabilitation and maintenance; and
MoF representatives pointed out that increased taxes or charges of any kind would have an adverse multiplier effect on the economy. The consultants added that higher transport costs, occasioned by underfunding of road maintenance, have a similar multiplier effect and are much larger.
Extending the existing reliance on borrowing was also considered, but the World Bank representative said that Armenia’s indebtedness was at a level where further borrowing, beyond existing commitments, would be imprudent, whether on concessional or commercial terms.
The consultants suggested the possible transfer of some or all responsibility for local roads to the communities that they serve or to the Marzpetarans. The representative of Ararat Marzpetaran pointed out that the Marzpetarans have no independent revenue and rely solely on allocations from the State Budget, which have always fallen far below the necessary level for proper road maintenance. The consultants mentioned that communities collect property tax on vehicles estimated to yield almost AMD15 billion per year, some of which might be devoted to road maintenance.
It was stated that 40% of the local road network had been rehabilitated and only 10% was being maintained. The Ararat Marzpetaran represntative added that accidents due to poor
3
maintenance sometimes led to legal claims against government. MoF representatives said that local authorities were reluctant to allocate more than a small proportion of their State Budget subventions to road maintenance.
Conclusion
The consultants conclude from the workshop that there is no possibility of an early increase in budgetary allocation to road maintenance; establishment of a Road Fund; or revenue hypothecation to the roads sector.
However, a full review of the Tax Code is under way and should be completed “within a few months”. MoF representatives could say nothing of the work that had already been done on the review or the likely outcome, but it is fair to assume that it will include an examination of anomalies and inequities in the present system with a view to correcting them. If that is the case, the anomalous taxation of fuel is very likely to be addressed. Accordingly, the consultants will include this in the scope of their second phase of work.
The consultants will also address legal and other implementation issues associated with amending road fees, taxing motor insurance premiums and, at some stage, introducing road tolls.
They will also consult with MoTC about further possible cost-cutting and efficiency improve-ments that might be made, and the specific measures that would be needed to put them into affect.
The balance of responsibilities and allocation of revenue-raising powers among the different levels of Government is a political matter that lies beyond the scope of this consultancy.
4
Participants in the First Workshop, in Alphabetical Order of Organizations
Organisation Name
AARC (Consultants to ADB) Tim Yates
Apaven company Suren Nersesyan
Armenian Roads Directorate SNCO Karapet Barseghyan
International Freight Association of Armenia Herbert Hambardzumyan
Marzpetaran of RA Aragatsotn Hovhannes Ghonakhchyan
Marzpetaran of RA Aragatsotn Hrachya Gevorgyan
Marzpetaran of RA Ararat Ashot Muradyan
Ministry of Economy Astghik Saghatelyan
Ministry of Finance Artak Karapetyan
Ministry of Finance Arthur Matevosyan
Ministry of Finance Hayser Gasparyan
Ministry of Finance Vahagn Arshakyan
Ministry of Territorial Administration and Emergency Situations Arthur Shahinyan
Ministry of Territorial Administration and Emergency Situations Hayk Galstyan
Ministry of Transport and Communication Armine Astvatsatryan
Ministry of Transport and Communication Gagik Grigoryan
Ministry of Transport and Communication Gohar Mikayelyan
Ministry of Transport and Communication Kajik Kababyan
Ministry of Transport and Communication Kristine Beglaryan
Ministry of Transport and Communication Lilit Harutyunyan
MoTC Transport PIU Emil Sargsyan
MoTC Transport PIU Karen Badalyan
North-South Road Corridor Investment Program Bagrat Badalyan
North-South Road Corridor Investment Program Karen Jeyranyan
Road Police Kostanyan Konstantin
Roughton International Limited David Anderson
Roughton International Limited Edin Begovic
Roughton International Limited Hasmik Gharibyan
Roughton International Limited John Standingford
World Bank Tigran Kostanyan
5
Selected Photographs of the First Workshop
11
Armenia Lifeline Roads Network Improvement ProjectArmenia Lifeline Roads Network Improvement Project
Roads Financing StudyRoads Financing Study
FIRST WORKSHOPFIRST WORKSHOP
ՀայաստանիՀայաստանի ԿենսականԿենսական ՆշանակությանՆշանակության ՃանապարհայինՃանապարհայինՑանցիՑանցի ԲարելավմանԲարելավման ԾրագիրԾրագիր
ՃանապարհներիՃանապարհների ֆինանսավորմանֆինանսավորմանուսումնասիրությունուսումնասիրությունԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆ ՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐ
John John StandingfordStandingford
RoughtonRoughton International LtdInternational Ltd
Yerevan, 28 April 2015Yerevan, 28 April 2015
ՋոնՋոն ՍթենդինգֆորդՍթենդինգֆորդՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթն ԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլ ԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԵրևանԵրևան, 2015, 2015թթ..--իի ապրիլիապրիլի 2828
22
Purpose of the StudyPurpose of the StudyՈւսումնասիրությանՈւսումնասիրության նպատակընպատակը
• Estimate current and recent road expenditure.
• Estimate revenues from road user taxes/charges.
• Estimate needed road expenditure.
• Propose ways to meet those needs.
• Գնահատել ընթացիկ և վերջին ճանապարհայինծախսերը:
• Գնահատել ճանապարհից օգտվողիհարկերից/վճարներից ստացվող եկամուտները:
• Գնահատել անհրաժեշտ ճանապարհային ծախսերը:
• Առաջարկել ուղիներ այդ կարիքները բավարարելուհամար:
33
Financing Needs:Financing Needs: World Bank Projection, 2011World Bank Projection, 2011
ՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորման անհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունը՝՝՝՝՝՝՝՝ ՀամաշխարհայինՀամաշխարհայինԲանկիԲանկի կանխատեսումկանխատեսում, 2011, 2011թթ..
US$MՄիլիոն ԱՄՆ դոլար
AMDbnՀՀ դրամ միլիարդ
44
Terminology Terminology ՏերմինաբանությունՏերմինաբանություն
• Routine maintenance
• Periodic maintenance
• Rehabilitation
• Ընթացիկսպասարկում
• Պարբերականսպասարկում
• Վերականգնում
• Winter maintenance
• Summer maintenance
• Capital repair
• Ձմեռայինսպասարկում
• Ամառայինսպասարկում
• Հիմնանորոգում
55
Actual/Planned Expenditure (AMD billion)Actual/Planned Expenditure (AMD billion)ՓաստացիՓաստացի//ՆախատեսվողՆախատեսվող ծախսերծախսեր ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ))
0
10
20
30
40
50
60
70
80
2009 2010 2011 2012 2013 2014 2015 2016 2017
Upgrading (Loans)
Rehabilitation (Loans)
Rehabilitation (Budget)
Routine maintenance
ԱրդիականացումԱրդիականացում((ՎարկերՎարկեր))
ՎերականգնումՎերականգնում((ՎարկերՎարկեր))
ՎերականգնումՎերականգնում((ԲյուջեԲյուջե))
ԸնթացիկԸնթացիկսպասարկումսպասարկում
66
Needed Expenditure (AMD billion per year)Needed Expenditure (AMD billion per year)ԱնհրաժեշտԱնհրաժեշտ ծախսերծախսեր ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ տարեկանտարեկան))
0
5
10
15
20
25
30
35
40
45
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Interstate Roads ՄիջպետականՄիջպետականՄիջպետականՄիջպետական ճանապարհներճանապարհներճանապարհներճանապարհներ
Republican Roads ՀանրապետականՀանրապետականՀանրապետականՀանրապետական ճանապարհներճանապարհներճանապարհներճանապարհներ
Local Roads ՏեղականՏեղականՏեղականՏեղական ճանապարհներճանապարհներճանապարհներճանապարհներ
77
Scenario 2: Scenario 2: Interstate Road Interstate Road
ConditionsConditionsՏարբերակՏարբերակ 2`2`ՄիջպետականՄիջպետականճանապարհներիճանապարհներիպայմաններըպայմանները
Average IRIՄիջին ՄԱՑ
Average km/hՄիջին կմ/ժ
88
Scenario 2: Scenario 2: Republican Road Republican Road
ConditionsConditionsՏարբերակՏարբերակ 22
ՀանրապետականՀանրապետականճանապարհներիճանապարհներիպայմաններըպայմանները
Average IRIՄիջին ՄԱՑ
Average km/hՄիջին կմ/ժ
99
Revenue from Road UsersRevenue from Road Users
(AMD billion)(AMD billion)
ՃանապարհիցՃանապարհից օգտվողներիցօգտվողներիցստացվողստացվող եկամուտեկամուտ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ))
1010
Fuel Taxes Fuel Taxes ՎառելիքիՎառելիքի հարկերհարկեր
• Taxation of fuel is inconsistent, irrational, inequitable and inefficient. There is wide disparity between the 3 fuels.
• Վառելիքի հարկումը կայուն չէ, անտրամաբանական է, անհավասար և անարդյունավետ: 3 վառելիքների միջևառկա է անհավասարություն:
1111
Additional and New RevenuesAdditional and New Revenues
ԼրացուցիչԼրացուցիչ ևև նորնոր եկամուտներեկամուտներ
• Rationalization of fuel taxation.
• Increased road fees.
• Tax on insurance premiums.
• Tolls.
• Վառելիքի հարկման հիմնավորումը:
• Ավելացված ճանապարհային վճարներ:
• Ապահովագրավճարների հարկ:
• Տուրքեր:
1212
Rationalization of Fuel TaxationRationalization of Fuel Taxation
ՎառելիքիՎառելիքի հարկմանհարկման հիմնավորումհիմնավորում
1313
Issues to be ConsideredIssues to be Considered
ՀարցերՀարցեր, , որոնքորոնք պետքպետք էէ հաշվիհաշվի առնելառնել
• Social and distributional implications.
• Increased costs for heavy goods vehicle operators.
• Evasion, avoidance and leakage.
• Սոցիալական և բաշխիչ հետևանքները:
• Ավելացված ծախսեր ծանրաքաշ տրանսպորտայինմիջոցներ շահագործողների համար:
• Խուսափանք, խուսափում և արտահոսք:
1414
Five Options Five Options ՀինգՀինգ տարբերակներտարբերակներ
1. Increase State Budget allocation to roads.
2. Create a Road Fund.
3. Continue to rely on borrowing.
4. Reduce road maintenance costs.
5. Reduce Central Government’s responsibility.
1. Ավելացնել պետական բյուջեի հատկացումներըճանապարհներին:
2. Ստեղծել ճանապարհային հիմնադրամ:
3. Շարունակել հիմնվել փոխառության վրա:
4. Նվազեցնել ճանապարհային սպասարկման ծախսերը:
5. Կրճատել Կենտրոնական կառավարությանպատասխանատվությունը:
1515
Implementation: Options 1, 2 and 3Implementation: Options 1, 2 and 3
ԻրականացումԻրականացում՝՝ ՏարբերակներՏարբերակներ 1, 2 1, 2 ևև 33
1616
Implementation: Option 4Implementation: Option 4
ԻրականացումԻրականացում՝՝ ՏարբերակՏարբերակ 44
1717
Implementation: Option 5Implementation: Option 5
ԻրականացումԻրականացում՝՝ ՏարբերակՏարբերակ 55
Appendix 3B
NOTES ON THE SECOND WORKSHOP, 26 MAY 2015
Introduction
The workshop was held between 0900 and 1200 on Tuesday 26 May at the Metropol Hotel, Yerevan. Representatives of ministries, international financial institutions and the freight transport/logistics industry participated. Mr Gagik Grigoryan, MoTC Head of Staff, was the moderator.
The purpose was to discuss the Roughton International Ltd (RIL) team’s Second Technical Report (TR2) and Draft Final Report (DFR); and to provide guidance to the Consultant on preparation of the Final Report, due by the end of June.
Attached are:
• The agenda.
• A list of participants.
• Photographs of the event.
• The RIL Team Leader’s presentation slides.
Overview
The presentation and discussion took place in two sessions, the first dealing with TR2 and the second with the DFR. However, the discussion focused on the same key issues in both sessions:
• The Consultants’ proposals to increase revenue from road users by rationalizing fuel taxation, taxing vehicle insurance premiums and introducing tolls.
• Ways to reduce costs and improve efficiency, in particular by using performance-based maintenance contracts (PBMCs) as a way to save money and deliver better outcomes.
• The possibility of involving local communities in road maintenance, or even devolving responsibility to local authorities.
• The potential impact of increased taxation on the economy.
• The need to explain in detail the arguments for and against each option, means of implementation, and the implications of choosing one option over another.
Discussion
The need for increased expenditure on maintenance and rehabilitation was not disputed but the tightness of budgetary constraints, now and in the foreseeable future, was restated.
The Consultant’s recommendation that fuel taxation be rationalized, with an overall average increase of AMD38 (US$0.08) per litre, was discussed at length. The main concern was the impact of restoring VAT on diesel fuel would have on the economy, in particular the agri-cultural and mining sectors. It was suggested, however, that the low taxation of diesel fuel merely allowed importers and distributors to make excessive profits. It was also pointed out that diesel fuel contains 12% more energy per litre than petrol or CNG; therefore, with a level playing field, it should be more expensive (as it is in Belarus and Georgia, for example).
The RIL Team Leader expounded the concept of ‘bad roads tax’, explained in Chapter 6 of the DFR, and presented new material showing the potential savings to road users as a multiple of the recommended additional tax burden. He argued that under-spending on road maintenance was an obstacle to economic growth and social progress, which could be alleviated by a tax increase that amounted to a small fraction of the resulting savings – provided that all the incremental revenue was devoted to the roads.
2
The proposal to tax vehicle insurance premiums had a mixed reception. There was concern about its impact on vehicle owners. The Consultant’s representative said that a low tax rate (2.5% to 5%) was proposed, which would yield no more than AMD1 billion per year. However, this revenue would be inflation proofed and likely to rise at faster than GDP as vehicle ownership become more widespread.
A representative of the North-South Corridor project pointed out that tolls were already envisaged on three sections of that road, under PPP arrangements where IFI funding would not be sought; but strongly supported the present law forbidding tolls where there is no alternative toll-free route. A representative of the Ministry of Finance cited the Constitution’s guarantee of freedom of movement. The Consultant’s representative questioned whether freedom of movement necessarily meant free-of-charge movement. Two IFI representatives supported in principle the idea of payment for road use.
It was generally acknowledged that Armenia had little room for more public borrowing. So that option for closing the gap between existing and needed levels of expenditure, presented but not favoured by the Consultant, should not be considered.
The was much interest in the idea of performance-based maintenance contracts (PBMCs). A representative of MoTC explained the existing 5-year contracts, under which contractors tender fixed unit prices for maintenance works that are specified annually in accordance with needs and available funds. The Consultant’s representative described the advantages of a fundamentally different system which allows contractors to tender for a fixed payment for maintaining a section of road at a measurable standard, by whatever means he chooses, accepting the risk that in some years he may lose money. It was agreed that the Consult-ant’s Final report should include details of PMBCs and experience of them in other countries.
An important step towards PBMCs would be the amendment of Decree 1419-N to include IRI as a performance criterion, allowing a more rational and objective approach to asset management and contract management.
A representative of MoTC informed the meeting that a consultant was due to come to Armenia in September 2015 to review existing contractual arrangements and make recom-mendations that may include the introduction of PBMCs.
The same representative also informed the meeting that initiation of a community-based road maintenance scheme had been considered by MoTC and rejected. This followed a study tour to Latin America sponsored by the World Bank and careful study by experts in Armenia. However, it was also mentioned that a process of consolidating small communities is under consideration, which may allow reconsideration of this decision.
There was no support, from the Consultant or from any other agencies represented at the meeting, for devolving financial responsibility for road maintenance to local communities or abandoning parts of the network. One IFI representative stated, “We will not leave people without roads.”
With regard to the content of the Final Report, it was agreed that the Consultant should:
• Present all options and their implications, irrespective of the degree of support that had been shown at the two workshops.
• Clearly state his own recommendations.
• Provide concrete advice on measures to implement those recommendations.
Conclusion
The Consultant will proceed to finalise his report on the basis of these discussions, meeting the end-June deadline.
3
Armenia Lifeline Roads Network Improvement Project (LRNIP) Consulting Services for Roads Financing Study
Agenda for Second Workshop
Metropol Hotel, Yerevan
26 May 2015
Time Session Scope Minutes
0930 Opening by the Chairman • Progress since First Workshop
• Developments in Government Policy
20
0950 Presentation by Roughton Team Leader: ‘Overview of the Second Technical Report’
• Policy Options for Consideration
• Outcome of First Workshop
• Implementation measures
20
1010 Questions and discussion
50
1100 Tea/coffee break 20
1120 Presentation by Roughton Team Leader: ‘Draft Final Report’
• Findings
• Conclusions
• Recommendations
• Social and economic consequences
20
1140 Questions and discussion
60
1240 Chairman’s summary of conclusions
• What was agreed
• What was not agreed.
• Final Report Preparation – Guidance for
Consultant
15
1255 Chairman’s closing remarks
5
4
List of Participants at the Second Workshop
Organisation Name
Apaven company Suren Nersesyan
Asian Development Bank Bagrat Badalyan
Asian Development Bank Grigor Gyurzyan
Eurasian Development Bank Armen Poghosyan
Marzpetaran of RA Aragatsotn Hovhannes Ghonakhchyan
Ministry of Economy Astghik Saghatelyan
Ministry of Finance Artak Karapetyan
Ministry of Finance Arthur Matevosyan
Ministry of Finance Hayser Gasparyan
Ministry of Territorial Administration and Emergency Situations Hayk Galstyan
Ministry of Transport and Communication Armine Astvatsatryan
Ministry of Transport and Communication Artak Papyan
Ministry of Transport and Communication Gagik Grigoryan
Ministry of Transport and Communication Gohar Mikayelyan
Ministry of Transport and Communication Kristine Beglaryan
MoTC Transport PIU Karen Badalyan
North-South Road Corridor Investment Program Karen Jeyranyan
Road Police Simonyan Armen
Roughton International Limited Hasmik Gharibyan
Roughton International Limited John Standingford
World Bank Tigran Kostanyan
5
Selected Photographs of the Second Workshop
vv
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Armenia Lifeline Roads Network Improvement ProjectArmenia Lifeline Roads Network Improvement Project
Roads Financing StudyRoads Financing Study
SECOND WORKSHOPSECOND WORKSHOP
ՀայաստանիՀայաստանի ԿենսականԿենսական ՆշանակությանՆշանակության ՃանապարհայինՃանապարհայինՑանցիՑանցի ԲարելավմանԲարելավման ԾրագիրԾրագիր
ՃանապարհներիՃանապարհների ֆինանսավորմանֆինանսավորմանուսումնասիրությունուսումնասիրությունԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴ ՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐ
John John StandingfordStandingford
RoughtonRoughton International LtdInternational Ltd
Yerevan, 26 May 2015Yerevan, 26 May 2015
ՋոնՋոն ՍթենդինգֆորդՍթենդինգֆորդՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթն ԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլ ԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԵրևանԵրևան, 2015, 2015թթ..--իի ՄայիսՄայիս 2626
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Purpose of the StudyPurpose of the Study
ՈւսումնասիրությանՈւսումնասիրության նպատակընպատակը• Estimate current and recent road expenditure.
• Estimate revenues from road user taxes/charges.
• Estimate needed road expenditure.
• Propose ways to meet those needs.
• Գնահատել ընթացիկ և վերջին ճանապարհայինծախսերը:
• Գնահատել ճանապարհից օգտվողիհարկերից/վճարներից ստացվող եկամուտները:
• Գնահատել անհրաժեշտ ճանապարհային ծախսերը:
• Առաջարկել ուղիներ այդ կարիքները բավարարելուհամար:
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Milestones Milestones ԿատարողականԿատարողական
• 1st Technical Report
• 1st Workshop
• 2nd Technical Report
• Draft Final Report
• 2nd Workshop
• Final Report
• 1-ին Տեխնիկականհաշվետվություն
• 1-ին սեմինար
• 2-րդ Տեխնիկականհաշվետվություն
• Վերջնական հաշվետվությաննախագիծ
• 2-րդ սեմինար
• Վերջնական հաշվետվություն
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2nd Technical Report2-րդ Տեխնիկական հաշվետվություն
• 1st Workshop: Issues and options.
• Discussion and conclusions.
• Implementation of favoured proposals.
• 1-ին սեմինար՝ հարցեր և տարբերակներ• Քննարկում և եզրակացություններ• Նախընտրելի առաջարկների իրականացում
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Funding Level Ֆինանսավորման մակարդակ
• Expenditure on road maintenance & rehabilitation has been about half of what is needed.
• Road users contribute 3-4 times the needed amount in taxes and charges, mainly in general taxation.
• But there is scope to increase revenue.
• Ճանապարհների սպասարկման և վերականգնմանծախսերը եղել են պահանջվածի մոտ կեսը:
• Ճանապարհից օգտվողները 3-4 անգամ նպաստում ենանհրաժեշտ գումարին հարկերում և վճարներում, հիմնականում ընդհանուր հարկման մեջ:
• Սակայն առկա է եկամուտներն ավելացնելու շրջանակ:
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Needed Expenditure (AMD billion per year)Needed Expenditure (AMD billion per year)ԱնհրաժեշտԱնհրաժեշտ ծախսերծախսեր ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ տարեկանտարեկան))
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Interstate Roads ՄիջպետականՄիջպետականՄիջպետականՄիջպետական ճանապարհներճանապարհներճանապարհներճանապարհներ
Republican Roads ՀանրապետականՀանրապետականՀանրապետականՀանրապետական ճանապարհներճանապարհներճանապարհներճանապարհներ
Local Roads ՏեղականՏեղականՏեղականՏեղական ճանապարհներճանապարհներճանապարհներճանապարհներ
�
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5 Options 5 տարբերակներ• Adjust budget priorities in favour of roads.• Raise more revenue and hypothecate it to roads.• Continue reliance on borrowing.• Reduce road maintenance costs.• Reduce Central Government responsibility for roads.
• Կարգավորել բյուջեի առաջնահերթություններըճանապարհների օգտին:
• Ավելի շատ եկամուտ ստանալ և դրանք գրավ դնելճանապարհների համար:
• Շարունակել հիմնվել փոխառության վրա:
• Նվազեցնել ճանապարհների սպասարկման ծախսերը• Նվազեցնել կենտրոնական կառավարությանպատասխանատվությունը ճանապարհների համար:
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Conclusions 1 Եզրակացություններ 1
� Re-prioritize in favour of roads.
� Hypothecate selected revenue to roads.
� Establish Road Fund.
� Extend reliance on borrowing.
�Reduce costs.
� Improve efficiency.
� Վերաառաջնայնավորելճանապարհների օգտին
� Գրավ դնել ընտրվածեկամուտները ճանապարհներիհամար
� Ստեղծել ճանապարհայինհիմնադրամ
� Երկարաձգել հիմնվելփոխառության վրա
�Նվազեցնել ծախսերը�Բարելավել արդյունավետությունը
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Conclusions 2 Եզրակացություններ 2
�Rationalize fuel taxes.
�Rationalize road fees.
�Tax vehicle insurance premiums.
� Introduce tolling.
�Reassign responsibility.
�Abandon some roads.
�Ռացիոնալացնել վառելիքիհարկերը
�Ռացիոնալացնել ճանապարհայինվճարները
�Մեքենաներիապահովագրավճարների հարկում
�Ներկայացնել տուրքերի գանձում�Պատասխանատվությանվերաստանձնում
�Որոշ ճանապարհներ բաց թողնել
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Costs & Efficiency 1 � Ծախսեր և արդյունավետություն 1
� Include routine maintenance in rehabilitation contracts.
� Introduce periodic maintenance.
�Use alternative surface treatments for low-traffic roads.
�Ընթացիկ սպասարկումն ընդգրկել վերականգնմանպայմանագրերում
�Ներկայացնել պարբերական սպասարկումը�Կիրառել մակերեսի այլընտրանքային մոտեցումներչծանրաբեռնված երթևեկությամբ ճանապարհներիհամար
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Costs & Efficiency 2 � Ծախսեր և արդյունավետություն 2
�Revise Decree 1419-N to include IRI as a criterion.
�Test Performance-Based Maintenance Contracts.
�Test community-based local roads maintenance.
�Վերանայել 1419-Ն Որոշումը ՄԱՑ որպես չափանիշներառելու համար
�Փորձարկել Իրականացման վրա հիմնվածսպասարկման պայմանագրերը
�Փորձարկել համայնքի վրա հիմնված տեղականճանապարհների սպասարկումը
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Immediate 1 � Անհապաղ 1
� Include fuel taxation and road fees in current review of the Tax Code.
�Regulate to restore VAT selectively to diesel fuel.
�Regulate for ‘Fuel Equalization Levy’.
�Ներառել վառելիքի հարկումը և ճանապարհայինվճարները հարկային օրենսգրքի ընթացիկվերանայման մեջ
�Կարգավորել ԱԱՀ ընտրողաբար դիզելային վառելիքիվրա վերականգնելու համար
�Կարգավորել ‘Վառելիքի հավասարեցման գանձումը’
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Immediate 2 � Անհապաղ 2
�Review road fee schedules and amend as necessary.
�Legislate for new tax on vehicle insurance premiums.
�Վերանայել ճանապարհային վճարներիժամանակացույցերը և փոփոխել ըստանհրաժեշտության
�Օրենք հրապարակել մեքենաներիապահովագրավճարների վրա նոր հարկի համար
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Longer term 1 � Երկարաժամկետ 1
�Legislate for tolling and franchises.
�Legislate for vignettes as alternative to tolls.
�Օրենք հրապարակել տուրքերի գանձման ևֆրանչայզինգների համար
�Օրենք հրապարակել անցագրերի համար որպեստուրքերի այլընտրանք
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Longer term 2 � Երկարաժամկետ 2
�Draw up criteria for selecting roads for abandonment.
�Legislate for devolution of responsibility for local roads to local authorities.
�Մշակել չափանիշներ բաց թողնվող ճանապարհներնընտրելու համար:
�Օրենք հրապարակել տեղական ճանապարհներիպատասխանատվությունը տեղականիշխանություններին հանձնելու համար:
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Discussion of
2nd Technical Report
2-րդ Տեխնիկական հաշվետվությանքննարկում
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Draft Final ReportՎերջնական հաշվետվության նախագիծ
• Findings.
• Conclusions.
• Recommendations.
• Արդյունքներ• Եզրակացություններ• Առաջարկներ
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Expenditure & Revenue Ծախսեր և եկամուտներ• Expenditure on road maintenance & rehabilitation is
AMD19bn/year (average 2010-17). • 43% of that is borrowed money.• Needed expenditure is AMD42bn/year to 2020, then
AMD31bn/year.• Revenue from road users is over AMD140bn/year.
• Ճանապարհների սպասարկման և վերականգնմանծախսերը 19 մլրդ/տարեկան (միջինը 2010-17) ՀՀ դրամ է
• Դրա 43%-ը փոխառված գումար է• Անհրաժեշտ ծախսերը 42 մլրդ/տարեկան ՀՀ դրամ էմինչև 2020թ.-ը, այնուհետև 31 մլրդ/տարեկան ՀՀ դրամ
• Ճանապարհից օգտվողներից ստացվող եկամուտները140 մլրդ/տարեկան ՀՀ դրամից ավել է
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Needed Expenditure (AMD billion per year)Needed Expenditure (AMD billion per year)ԱնհրաժեշտԱնհրաժեշտ ծախսերծախսեր ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ տարեկանտարեկան))
Interstate Roads ՄիջպետականՄիջպետականՄիջպետականՄիջպետական ճանապարհներճանապարհներճանապարհներճանապարհներ
Republican Roads ՀանրապետականՀանրապետականՀանրապետականՀանրապետական ճանապարհներճանապարհներճանապարհներճանապարհներ
Local Roads ՏեղականՏեղականՏեղականՏեղական ճանապարհներճանապարհներճանապարհներճանապարհներ
��
2020
• These estimates are lower than those shown earlier.
• They result from HDM-4 analyses.
• They exclude upgrading projects.
• Այս հաշվարկները ավելի ցածր են, քան ավելի վաղներկայացվածները
• Դրանք առաջացել են HDM-4-ի վերլուծություններիարդյունքում
• Արդիականացվող ծրագրերն ընդգրկված չեն:
2121
• Annual figures are erratic – averages for 1st 5 years and subsequent years are a simplification.
• Proposed efficiencies may reduce estimates further, but not enough to change basic conclusions.
• Տարեկան թվերը սխալ են-1-ին 5 և հետագա տարիներիմիջինը պարզեցում է:
• Առաջարկվող արդյունավետությունը կարող էնվազեցնել հաշվարկները հետագայում, բայց ոչ այնքան, որպեսզի հիմնական եզրակացությունները փոխվեն:
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Fuel Taxation 1 Վառելիքի հարկում 1
• Taxation of fuel is irrational and inequitable. Petrol is taxed 150% more than diesel fuel or CNG.
• Rationalization could raise almost AMD30bn/year.
• Վառելիքի հարկումն իռացիոնալ է և անհավասար: Բենզինը 150% ավել է հարկվում, քան դիզելայինվառելիքը կամ ՍԲԳ-ն:
• Ռացիոնալացումը կարող էր կուտակել գրեթե30մլրդ/տարեկան ՀՀ դրամ:
2323
Fuel Taxation 2 Վառելիքի հարկում 2
• This would pay for the rehabilitation backlog and keep the network in stable condition.
• Road users’ savings would far exceed this extra cost.
• Դրա միջոցով հնարավոր կլիներ վճարելվերականգնման չիրականացված աշխատանքներիհամար և ցանցը պահպանել կայուն վիճակում:
• Ճանապարհից օգտվողների խնայողություններըբավականին կգերազանցեին այս լրացուցիչ ծախսերը:
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Average Roughness: Interstate Roads Difference between existing & recommended expenditure levelsՄիջին անհարթություն` Միջպետական ճանապարհներՏարբերությունն առկա և առաջարկվող ծախսերի մակարդակների միջև
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Scenario 2
Scenario 3
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Average Roughness: Republican Roads Difference between existing & recommended expenditure levelsՄիջին անհարթություն` Հանրապետական ճանապարհներ
Տարբերությունն առկա և առաջարկվող ծախսերի մակարդակների միջև
4
5
6
7
8
9
10
11
12
13
14
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Scenario 2
Scenario 3
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Other Revenues Այլ եկամուտներ
• Rationalization of road fee schedules.
• Tax on vehicle insurance premiums.
• Tolls and vignettes, perhaps with franchising.
• But any extra revenue must result in extra spending.
• Ճանապարհային վճարների ժամանակացույցերիռացիոնալացում:
• Մեքենաների ապահովագրավճարների հարկ:
• Տուրքեր և անցագրեր, հավանաբար ֆրանչայզինգով:
• Սակայն, ցանկացած լրացուցիչ եկամուտ պետք էառաջանա լրացուցիչ ծախսերի արդյունքում:
2727
Social and Economic Consequences 1Սոցիալական և տնտեսական հետևանքներ
• ‘Bad Roads Tax’ is already being paid by road users.
• Poor roads increase costs and hurt the economy.
• ‘Վատ ճանապարհների հարկն’ արդեն վճարվում էճանապարհից օգտվողների կողմից:
• Անորակ ճանապարհներն ավելացնում են ծախսերը ևվնասում տնտեսությանը:
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Social and Economic Consequences 2Սոցիալական և տնտեսական հետևանքներ
• Rural dwellers and the poor are affected most.
• Growth in agriculture and tourism is restricted.
• Ամենաշատն ազդեցության են ենթարկվում գյուղիբնակիչները և աղքատները:
• Գյուղատնտեսության և զբոսաշրջության աճըսահմանափակված է:
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Unit Pa
ssen
ge
r ca
r
Deliv
ery
veh
icle
Bu
s L
igh
t
Bu
s M
ediu
m
Bu
s H
ea
vy
Tru
ck L
igh
t
Tru
ck
Me
diu
m
Tru
ck H
eavy
Tru
ck
Art
icula
ted
Per litre of fuel AMD/litre 34.9 45.2 44.1 44.1 44.1 39.0 70.4 85.0 85.0
Per vehicle-km AMD/km 2.6 4.2 5.7 6.1 6.6 4.8 9.1 12.1 17.0
AMD/km 3.8 9.1 10.9 17.9 12.4 11.6 16.7 26.8 46.7
Average ratio savings/tax (2016-34) 7.3 8.7 10.1 16.8 17.1 9.5 7.6 9.9 13.7
Proposed additional
tax
Saving per IRI point reduction
Savings vs Tax Proposals
Միավոր Թեթև մարդատար
մեքենա
Առաքման մեքենա
Թեթև ավտոբուս
Միջին
չափի
ավտոբուս
Ծանրաքաշ
ավտոբուս
Թեթև բեռնատար
Միջին
չափի
բեռնատար
Ծանրաքաշ
բեռնատար
Կցորդով
բեռնատար
Վառելիքի յուրաքանչյուր լիտրի համար
ՀՀ դրամ/լիտր 34.9 45.2 44.1 44.1 44.1 39.0 70.4 85.0 85.0
Յուրաքանչյուր տրանս-պորտային միջոցի-կմ-ի համար
ՀՀ դրամ/կմ 2.6 4.2 5.7 6.1 6.6 4.8 9.1 12.1 17.0
ՀՀ դրամ/կմ 3.8 9.1 10.9 17.9 12.4 11.6 16.7 26.8 46.7
7.3 8.7 10.1 16.8 17.1 9.5 7.6 9.9 13.7
Խնայողություն յուրաքանչյուր ՄԱՑ-ի կետի կրճատմամբՄիջին հարաբերական խնայողություններ/հարկ
(2016-34)
Առաջարկ-վող լրացուցիչ հարկ
Խնայողություններնընդդեմ հարկայինառաջարկների
3030
Discussion of
Draft Final Report
Վերջնական հաշվետվության նախագծիքննարկում
Appendix 3C
CASE STUDY: OUTPUT AND PERFORMANCE-BASED ROAD MAINTENANCE CONTRACTING (OPBRMC) IN THE REPUBLIC OF SERBIA
The following is derived from a PowerPoint slide presentation by Dr Nebojsa Radovic of Roughton International Limited in Chisinau on 23-24 April 2015.
Description of OPBRMC
Under the OPBRMC, most of the payments to be made to the Contractor are based on measured “outputs” reflecting the target conditions of the roads under Contract, expressed through “Service Levels’’.
These Service Levels are defined in the Contract.
Contractor is fully responsible for the design of the works which are necessary to reach the required Service Levels.
OPBRMC within the road sector can be "pure" or "hybrid“.
“Hybrid” contract combines features of both method unit price - and performance-based contracts. Some services are paid on a unit rate basis, while others are linked to meeting performance indicators.
The Contract also allows for the execution of:
• Rehabilitation Works to be carried out in order to bring the Roads up to pre-defined standards.
• Improvement Works aiming at adding new characteristics to the Roads in response to new traffic, safety or other considerations.
• Emergency Works comprising of activities needed to reinstate the Roads after damage resulting from unforeseen natural phenomena.
An OPBRMC may cover either only individual assets (e.g., only traffic signs, only bridges) or all road assets (from right-of-way to right-of-way) within a road corridor.
The level of complexity of a OPBRMC can range from “simple” to “comprehensive”.
Short History of Performance-Based Contracting
The first PBC of road maintenance was piloted in British Columbia, Canada in 1988.
Later, PBCs were introduced and adopted in two other Canadian provinces: Alberta and Ontario.
In 1995 Australia launched its first PBC to maintain urban roads in Sydney. Since then New South Wales, Tasmania, and Southern and Western Australia have started using performance-based and ’’hybrid’’ approaches.
In 1998 a PBC was introduced in New Zealand to maintain 405 km of national roads.
A PBC was first introduced in the USA in Virginia State in 1996.
Since then, Alaska, Florida, Oklahoma, Texas) and Washington D.C. have started applying a PBC approach to maintain highways, bridges, tunnels, rest areas and urban streets.
In the developing world Latin America was the pioneer in developing and adopting its own PBC model.
In 1995, Argentina introduced PBCs which cover 44% of its national network.
2
Argentina refers to it as ‘’CREMA’’, which stands for ‘’Contrato de REcuperation y Mantenimiento’’ in Spanish or ‘’Contract for Rehabilitation and Maintenance’’.
Gradually, this trend has spread to other developed and developing countries in Europe, Africa and Asia, e.g., UK, Sweden, Finland, Netherlands, Norway, France, Estonia (63% of national roads), Serbia (8% of national roads), South Africa (100% of national roads), Zambia, Chad (17% of all season roads), the Philippines (231 km of national roads.
At present, many PBC programs are underway in Albania, Cape Verde, Chad, Mada-gascar, Tanzania, Burkina Faso, India, Cambodia, Thailand, Indonesia, Vietnam, Yemen and Georgia.
Contract duration ranges from 1 year (in several US states and the Netherlands) to 10 years (in British Colombia [Canada], New Zealand and Western Australia). The median duration is 5 years.
Cost savings from using performance-based contracts range from 10% to 40%, with a median of 20% (estimated by road agencies).
Pilot Project in Serbia
Pilot OPBMC Project was realized within Transport Rehabilitation Project (TRP) financed by World Bank Loan, 2004-2008.
The World Bank Project included implementations of two Pilot Contracts for Output Performance-based Maintenance Contract (OPBMC) for routine road maintenance on about 1,200km of road network in Macva and Kolubara District for 3 years + additional 2 years (2004-2008).
The agency responsible for the implementation was the Serbian Road Directorate, i.e. Public Enterprise “Roads of Serbia” (PERS).
Main characteristics of the Pilot Project:
• Procurement of routine road maintenance works by international bidding procedures – the first routine maintenance contracts in Serbia awarded on competitive procedure.
• Introducing into practice service quality level, lump sum payments and demerit points for non-compliance with the requested standards, for the certain types of routine maintenance items.
• Appliance of new winter maintenance service organization, winter maintenance performing and payment model based on RWIS (Road Weather Information System.
• Training (Twining Agreement between PERS and SRA under donation of SIDA – 1.5 million SEK).
Selection of Pilot territories:
• Length of the road network under the jurisdiction of the Directorate of Roads (PERS) is approximately the same (about 600 km per one area, or 1,200 km for both areas).
• Macva region with its geographical position presents flat terrain, while the Kolubara region presents mountainous terrain.
• Both areas are close to PERS’s head office in Belgrade allowing evaluation of the project, monitoring and supervision.
• In the previous period, the regular maintenance works are not carried out in a satisfactory way by road maintenance companies in charge for road maintenance on these territories.
• A comprehensive road asset data had to be collected to form adequate road information system and issue the tender documentation.
3
Legal and Technical Aspects
It was necessary to re-define road categories for routine and winter road mainten-ance in accordance of existing road classification, Public Road Law and Rulebook for road maintenance.
The categories of roads for routine and winter road maintenance are defined.
The technical specifications for the routine maintenance of roads and bridges are defined.
The desired Service Level (quality of construction) and how to measure and control is defined.
Penalties (demerit points) are defined.
The minimum set of construction machinery for the execution of maintenance works is defined.
The main differences comparing to previous ‘’classic’’ contracts:
• Maintenance categories are defined.
• Application of ‘’demerit points’’.
• Using RWIS in the process of road winter maintenance.
• Self control of the contractor (the introduction of the Internal Control Unit).
Penalties (Demerit Points)
If during the execution of the Contract the Contractor reaches 175 demerit points, the Contractor shall forfeit its right to participate in any tender of the Roads Directorate (PERS) in the next 2 years.
If during the first year of the Contract the Contractor will be allocated to more than 100 demerit points, the Investor has the right to terminate the Contract.
If, during the second year of the Contract, the Contractor is awarded a total of more than 160 demerit points, the Investor has the right to terminate the Contract.
If in the third year of the Contract the Contractor is awarded a total of more than 200 demerit points, the investor has the right to terminate the Contract.
In the Pilot Project 57% of demerit points were awarded for poor maintenance of drainage; 14% for road marking and equipment maintenance; and 13% for cross-section maintenance.
Preparation of Tender Documentation
Standard Bidding Documents are prepared by the procedures of the World Bank
February 2002.: The World Bank announced: “Sample Bidding Document for PMMR - Performance-based Management and Maintenance of Road Networks”
September 2005.: Revised edition “Sample Bidding Document, now called OPRC - Output-and Performance-based Road Contract”
October 2006 (November 2009 Revision): “Sample Bidding Document, now called OPRC - Output-and Performance-based Road Contract and Sample Specifications” (which can be downloaded from the WB Procurement Website http://www.worldbank .org/procure/
Cost Savings in Serbia
Routine maintenance costs were compared for roads within the Pilot Project and other roads. During 2005-09 Pilot Project roads cost 46% less to maintain.
4
Quality (Before and After Performance-Based Contracts)
Lessons Learned
After initial problems in adapting to new concept of road maintenance in the first year of the implementation, the Pilot project is completed successfully
Engagement of Consultants on Pilot project, especially through continuing education contractors, as well as the establishment of procedures and records, has significantly contributed to its successful completion.
Consumption of material for pavement maintenance is significantly reduced and the savings achieved total costs particularly with respect to the parameters for the rest of the road network in the Republic of Serbia
The most significant savings are made in the winter maintenance