UOPP- I/S

115 K S World Bank Discussion Papers

Designing MajorPolicy Reform

Lessons from the TransportSector

Ian G. Heggie

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1 1 5 Ez1 World Bank Discussion Papers

Designing MajorPolicy Reform

Lessons from the TransportSector

Ian G. Heggie

The World BankWashington, D.C.

Copyright O 1991The International Bank for Reconstructionand Development/THE WORLD BANK

1818 H Street, N.WWashington, D.C. 20433, US.A.

All rights reservedManufactured in the United States of AmericaFirst printing January 1991Third printing October 1995

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The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should notbe attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of ExecutiveDirectors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in thispublication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denomina-tions, and other information shown on any map in this volume do not imply on the part of the World Bank Group anyjudgment on the legal status of any territory or the endorsement or acceptance of such boundaries.

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ISSN: 0259-21OX

Ian G. Heggie is a principal economist in the Transport Division of the World Bank's Infrastructure and UrbanDevelopment Department.

Library of Congress Cataloging-in-Publication Data

Heggie, Ian GraemeDesigning major policy reform: lessons from the transport sector

/ Ian G. Heggie.p. cm.-(World Bank discussion papers; 115)

ISBN 0-8213-1756-31. Transportation and state-Developing countries.

2. Transportation-Developing countries-Finance. 3. World Bank.I. Tide II. Series.HE148.5.H38 1991388'.068-dc2O 90-25746

CIP

Abstract

The Bank's increasing emphasis in operations on and realistic timetables and implementationpolicy reform has focused attention on how best arrangements (including the need for technicalto promote such reform. After analyzing Bank assistance).experience promoting policy reform in thetransport sector and in recent structural ° When there is a need for technical assistance,adjustment operations (transport case studies in bank documents should outline the16 countries are included as an Appendix), it is supplementary (supervisory) support Bankconcluded that: staff must provide to be sure it is effective.

o The Bank has been least successful 0 Structural adjustment loans are most effectivereforming policies that involve significant at reforming sector policies when they arepolitical and organizational issues. targeted to overcome clearly identified

political and organizational constraints ono It has been more successful when the reform.

decisions involved could be taken by oneagency. When more than one agency was Bank staff should become more familiar withinvolved, reforms needed more time than the process of policy reform and methods ofwas allowed for them. designing policy reform components to be

included in Bank operations. Components ofo Major Policy reform takes 10 to 15 years to policy reform should be designed with the

complete. The Bank should treat policy same care as a project's physical elements.dialogue as a long-term process and should Those who design policy reform should:have more modest expectations of each Bankoperation. (1) Identify the proposed reforms - and

possible political and organizatione Major policy reform must generally be constraints on reform - on the basis ofimplemented over several operations. Each a detailed country analysis.operation should try to complete a specificset of actions that are part of an agreed- (2) Be sure the government considers theupon, long-term program. reforms timely and relevant and that

there is a committed constituency withino Most reform programs seriously overtax the the government willing and able to

borrowers' administrative capabilities and implement them.cannot be completed in the five to sevenyears typically specified in Bank operations. (3) Estimate the benefits and costs ofThe case studies repeatedly show the Bank reform.staff's failure to appreciate how much timeit takes to replace one set of policies with (4) Be sure the government has theanother. administrative resources to implement

reform.o Bank country economic and sector work is

good for broad policy advice but weak in (5) Include specific components to overcomeidentifying the origin of existing policies political and organizational constraints.and developing a practical program toreform them. (6) Establish a realistic timetable.

o Bank documents must include more explicit (7) Formulate loan conditions to supportanalysis of proposed reforms showing, implementation of reform.among other things, their benefits and costs

Acknowledgements

The case studies used in this report were prepared by G. Billington, R. Carruthers andD. King (Consultants). The report also benefitted from a consultant study in Pakistan preparedby N. Krough-Poulsen that was conceived and directed by F. Johansen.

The report was prepared by Ian G. Heggie, edited by Pat Mc Nees, typed by WendyWright and formatted by Rita Vartanian.

The author would like to thank the many World Bank colleagues who reviewed andcommented upon earlier drafts of the report, including Graham Smith, Victor Wouters(Consultant), Jeffrey Gutman, Asif Faiz, Louis Thompson and Keith Thomas.

Table of Contents

AbstractPem No.

L DINRODUCTION ............................... 1

H. LESSONS FROM BANK EXPERIENCE ................. 3

m. DESIGNING POLICY REFORM ...................... 6

AnalyzeBenefits and Costs .......................... 7Recognize Administrative Constraints ................. 9Andicipate Political and Organizational Constraints .... ...... 10Establish a Realistic Timetable for Reform .............. 11Design Loan Conditions ......................... 13The Design Process in Brief ....................... 15

Iv. MLICATIONS FOR THE WORLD BANK ............... 17

Flgure:1 Factors to Consider in Designing Policy Reform .... ....... 7

Tables:1 Possible Effects of Major Policy Reform ............... 82 Generic Timetable for Policy Reform ................. 123 Typical Time Needed for Selected Policy Reforms .... ...... 14

Appendix 1 Review of Transport Sector Experience ............. 18

A. Policy Reform in the Railways Subsector ............... 18B. Policy Reform in the Highways Subsector ............... 21C. Policy Reform in the Ports Subsector .................. 24

Annex A: Projects Reviewed ........... .. ............. 26

Appendix 2 Time Taken to Implement Major Policy Reformon Roads (Papua New Guinea and Kenya) .... ........ 28

Appendix 3 Time Taken to Implement Major Policy Reformin Railways (Yugoslavia and Togo) ..... ........... 29

Appendix 4 Time Taken to Deregulate Transport Industries(United States and U.K.) ..................... 30

Appendix 5 Time Taken to Revise Road User Charges(United States and New Zealand) ................. 31

Appendix 6 Loan Conditions Used to Promote PolicyReform ........................... i ..... 32

t~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ l i

I. INTRODUCTION

1. The policy components of Bank operations have received increasing attentionin recent years. Formerly regarded as additional components in a lending operation,policy reforms are increasingly viewed as their main purpose. Projects are now beingspecifically designed to facilitate policy reform.

2. The Bank's early sectoral priorities were to establish basic infrastructure in itsdeveloping member countries. In Bank operations, the emphasis was on supporting theimplementation of civil works and the procurement of equipment. Technical assistancewas also usually provided to help design and implement a project and to strengthen theinstitutions responsible for operating and maintaining project facilities. In this earlierphase, the Bank's main concern was to ensure that projects were properly prepared andefficiently implemented and operated. Bank dialogue focussed on such topics as usingconsultants to design and supervise project implementation, using internationalcompetitive bidding (ICB) procedures to procure works and equipment, providingenough counterpart funds for project implementation, strengthening the executing agencyso it could adequately maintain and operate project facilities, and generally improvingcosting and accounting procedures.

3. In the transport sector, the scope of the Bank's policy dialogue with borrowersbegan to widen in the early 1970s as the Bank moved toward lending to support sectorinvestment programs rather than discrete investment projects.!/ Typical subjects forpolicy dialogue at this time included: preparation of economically justified subsectorinvestment programs, revision of tariff structures, closure of uneconomic services(particularly in railways), improving the borrowers' ability to maintain transportinfrastructure, and strengthening institutional performance.

4. Since the introduction in 1980 of adjustment lending - macroeconomic andsectoral - the Bank's policy dialogue has widened further. Components of policyreform are now more explicit and increasingly promote sectorwide reforms that cannoteasily be addressed in the subsectors. The emphasis in operations has shifted fromfinancing civil works and equipment to promoting policy reform by disbursing the loanproceeds against general imports (adjustment operations) or sector investment programs(projects).2/ Recent examples of promoting policy reform through operations include:revising petroleum product pricing, improvng pricing and tax policies to supportincreased allocations for maintenance (especially road maintenance), reducing surpluslabor, and improving performance of public transport enterprises (sometimes throughprivatization).

5. This paper reviews how effective the Bank has been at promoting policy reformand considers how the design of policy reform components could be improved. It doesso by drawing on general Bank experience and specific case studies of Bank transport

1I Sector lending was formally introduced through a Central Projects Memorandum in June 1974, althoughsubsector lending (particularly for railways) had started earlier.

2/ Some sector adjustment operations disburse the loan proceeds against general imports - or imports for thesector - and the sector investment program.

2

projects approved between 1964 and 1982 in Colombia, Ethiopia, Indonesia, theRepublic of Korea, Mali, Mexico, Pakistan, Senegal, Turkey, and Yugoslavia. (Tberesults of these case studies are summarized in Appendix 1.) The paper then draws onlessons learned from this experience to propose a better analytical framework forexamining policy reform and designing policy reform components for inclusion in Bankoperations.

3

II. LESSONS FROM BANK EXPERIENCE

6. The Bank recently prepared case studies in selected countries to assess theeffectiveness of its attempts to promote policy reform. Some focussed on theeffectiveness of the Bank's policy dialogue in the main transport subsectors - railways,highways, and ports - based on desk studies by consultants in 16 countries. Othersreviewed experience under the Bank's structural adjustment operations. 3/ The mainlessons learned from transport case studies are summarized in Appendix 1. The generallessons learned from these and the Bank's structural adjustment operations aresummarized below.

7. First, the Bank was more successful when it provided informed and sympatheticadvice on technical issues and supported policy reform in areas the government hadalready identified as important. The Bank was least successful when the issues wereidentified by Bank staff who tried to resolve them in terms of a technical, economic, andoperational rationale, without understanding their inherently political and organizationalnature. In Pakistan's highways sector, for example, the Bank was helpful when itintervened on such issues as postponement of the Indus highway, because it supportedthe position of planning commission staff who had doubts about the project. In that casethe Bank provided a technical and economic rationale that helped staff members in theprocess of seeking political consensus. On the other hand, the Bank was not successfulwhen it tried to increase road maintenance in Pakistan, as the consultants used did nottake time to understand the organizational and political framework within which suchdecisions took place. The government's view was that the most pressing need was notfor better road maintenance but for more rehabilitation and improvement of roads.

8. Second, policy reform tended to be more effective when it dealt with technicalissues and when necessary decisions could be made by a single agency. When morethan one agency was involved, reform encountered considerable resistance from theother agencies and was generally unsuccessful within the time frame set for it. Thiswas partly because the Bank had the right audience for technical discussions - theexecuting agency - but the wrong audience for discussions on institutional matters.Decisions about giving public transport enterprises more autonomy, for example, aregenerally made at the highest levels of government.- and given the breadth of theirconcerns, people at this level are not readily influenced by the technical arguments ofBank transport staff. That type of reform has more chance for success whensupplemented by the dialogue conducted under Bank-supported structural adjustment andpublic enterprise reform operations.

9. Third, the Bank's economic and sector work tended to be good at providingbroad policy advice in the transport sector, but was often weak at identifying the originof and rationale for existing policies and developing a practical program for reformingthem tailored to the country's circumstances. Moreover, the reforms proposed by Bank

3/ Structural Adjustment Lending: A First Review of Experience, Report No. 6409, OED, September 24, 1986;and Institutional Reform: Some Lessons from Structural Adjustment Lending, PSMU, PPD, November 1984.

4

staff often appeared ill-advised to the Bank's borrowers (for example, promoting portautonomy in Korea, reorganizing the highway authorities in Korea and Colombia, orpromoting cost-based port tariffs). Borrowers did not see the policy's relevance to theircountry and tended to regard the solutions proposed by the Bank as reflecting thedoctrinaire views of developed countries. Indeed, the design and analysis of theproposed reforms rarely presented:

o justification for the reforms in the context of that specific country;

o their likely benefits and costs;

o the decision process through which the government must come to agree withand implement the reforms;

o the need for supportive actions to help offset or overcome identified obstaclesto reform (for example, to heighten public awareness, or agree procedures forconsulting the public); and

° a clear timetable for implementing the reforms in a feasible period of time.

Moreover, most programs advocated by the Bank seriously overtaxed the borrower'sability to administer and implement reforms, even when the government fully understoodand wished to implement them. This was particularly true in institutionally weakcountries of Sub-Saharan Africa, which generally cannot sustain policy reform withoutprolonged institutional development.

10. Fourth, policy reform takes a great deal of time. It cannot easily be completedin the five to seven years typically specified in Bank operations (that is, within thelifetime of one investment or sector project, or two consecutive structural adjustmentloans). Major reform is both politically and organizationally sensitive; it takes a longtime to negotiate and arrive at the compromise and consensus needed for successfulimplementation. Deregulation of road transport in the Bank's developing membercountries, for example, usually takes more than ten years. Closing uneconomic railwaylines usually takes about ten years for important lines and four to six years for low-density lines. Experience in developed countries is similar. Replacing one major policywith another is time-consuming and generally means that major policy reform must beimplemented over several consecutive Bank operations, with each operation trying tocomplete a defined set of actions that are part of an agreed-upon long-range program.

11. Fifth, a brief review of the transport components of recent structural adjustmentloans (SALs) suggests that SALs, by themselves, were no more effective at promotingpolicy reform than regular sector operations. 4/ Nearly all the components reviewedwere prepared under earlier sector operations and had already appeared as loanconditions in operations already in progress. The role of the SALs was to providemutually reinforcing loan conditions. These conditions were generally targeted at the

4/ Project staff were consulted about progress on the following SALs: Guinea 1, Ivory Coast 11, Jamaica 11 and 111,Niger 1, Togo 11, Thailand 11, and Turkey Ill.

5

ministry of finance, to ensure that transport policy issues being discussed with the Bankreceived more attention than usual from the finance ministry - which helped speed upthe pace of reform.

12. The case studies repeatedly emphasize the need for a better analytical frameworkfor analyzing transport policy reforms and for designing policy reform components forinclusion in Bank lending operations. The rest of this paper outlines such a framework.

6

III. DESIGNING POLICY REFORM

13. Policy reform components should be designed and implemented with the samecare as a project's physical elements. The analysis should demonstrate that the proposedreforms are the simplest available - particularly when they call for major institutionalchanges - and that the same aim could not be achieved through better use of existingpolicies and institutions. Dialogue should be confined to issues the government andBank agree are timely and relevant. The Bank might initiate the reform process - bydemonstrating the advantages of reform through economic and sector work, by citingexamples of good practice in other countries, or by identifying a group in the borrower'scountry or administration that agrees with the proposed reforms and is willing to helpimplement them. But it must avoid promoting policy reforms to which the governmentis firmly opposed. Policy reform is a complex process. The Bank cannot forceborrowers to make policy changes they consider ill-timed, irrelevant to the goal of thelending operation, unlikely to offer significant benefits, or likely to involve unacceptablepolitical risks.

14. Within this framework, the design and analysis of policy reform componentsmust:

o Establish that the social and economic benefits of each reform exceeds its costs.

o Ensure that implementation arrangements do not exceed the government'sadministrative capacities.

o Recognize possible political and organizational obstacles to reform, provideincentives to offset or overcome them, and make these explicit in the projectdesign.

O Establish a realistic timetable.

O Formulate loan conditions to support implementation (see Figure 1).

Unless these factors are taken into account in the design stage, reformn is likely to proveunrealistic - a problem loan conditions will be unable to overcome.

7

Figure 1: Factors to Consider in Designing Policy Refonn

ADDRESS THE RIGHT AGENCYAND LEVEL OF GOVERNMET;BEARING IN MIND:

o The socioeconomic benefits andcosts of reform.

o Administrative, bureaucratic, andpolitical constraints.

o A feasible timetable.

DESIGN A JUSTIFIABLEPROGRAM TO OVERCOME THEOBSTACLES TO REFORM

Analyze Benefits and Costs

15. The first step should be to identify costs and benefits - at least in qualitativeterms - to demonstrate that a reform's social and economic benefits are likely tooutweigh its costs. Failure to perform such analysis is an important weakness in muchof the Bank's transport sector work and contrasts sharply with the procedures used toevaluate the physical elements of Bank projects. Each element of the project issubjected to a detailed benefit-cost analysis (and often to a detailed financial analysis)to demonstrate its economic (and financial) viability and to establish priorities.

16. The same procedures should be followed for each policy reform component,with the idea of demonstrating that each is worthwhile and establishing an order ofpriority. Analysis furthermore cannot always be confined to socioeconomic effects.Many proposed reforms - particularly those associated with adjustment - try to reducethe government's fiscal and balance-of-payments deficits, so their justification requiresan evaluation of their combined socioeconomic, fiscal, and foreign exchange effects.

8

17. This analysis will generally start by identifying the broad qualitative benefits andcosts of the proposed policy reforms in terms of their:

o Socioeconomic benefits and costs.o Impact on the government's fiscal balance.o Impact on the country's balance of payments (see Table 1).

The next step, based on a detailed country analysis, is to convert these qualitativebenefits and costs to specifics (for example, deregulation of the trucking industry isexpected to reduce empty running by x percent) and then - when feasible - to expressthese in monetary terms. These results will enable the government and the Bank to forma judgment about the overall desirability of the reforms.

Table 1: Possible effects of Major Policy Reform

Impact on:

Policy reform Socioeconomic benefits/costs Government's fiscal balance Country's balance of payments

Deregulate transport In the long-term, better use of In the short-term, the rmances In the short-term, relaxationindustries assets and quality of service. of public transport enterprises of industry entry requirements

Transport cost should be are likely to deteriorate. is likely to increase vehiclereduced. Loss of jobs imports.possible.

Revise structure of road user Should reduce damage to road Will generally increase May hurt the balance ofcharges pavement and lower road revenues, since heavy vehicles payments slightly as users

maintenance and vehicle generally pay too little tax. switch to trucks with differentoperating costs. Should also axle configurations.encourage better allocation oftraffic between road and rail.

Close uneconomic railway Uneconomic railway lines Saving are rikely to be small. Savins are likely to belines carry little traffic, so savings negligible.

will be small unless assetsneed to be replaced. Someusers may be left withoutalternative services andclosure will usually cause somejobs to disappear.

Privatization In the long-term, use of assets Should have an immediate May increase imports as theshould improve and costs positive impact on government privatized enterprise procuresshould fall. Some jobs will revenue, which may be partly spare-parts and replacesdisappear. offset by the cost of wornout or obsolete assets.

establishing a laborredundancy scheme.

9

Recognize Administrative Constraints

18. The design of policy reform components should take account of the government'sability to process and implement the reforms. The administrative resources likely to be neededcan be analyzed in five steps:

(1) Preliminary discussions leading to agreement on the need for reform.

(2) Examination of the options available and their likely consequences.

(3) Consultations with parties likely to be affected by the reforms.

(4) Implementation:

o Detailed specification of new policies.o Changes in laws and legislation.o Revision of existing administrative arrangements.

(5) Introduction of the new policies, perhaps gradually.

19. Bank projects nearly always recognize the need for the first two activities, and projectsgenerally include technical assistance to help the government undertake them. Similarly Bankstaff play an active part in drafting Terms of Reference, advising on the recruitment ofconsultants, and supervising implementation of the technical assistance. All too often, however,the Bank's contribution ends there. The consultant studies recommend policy reforms and thegovernment is simply expected to go ahead on its own - usually under very general projectloan conditions - to prepare consultation documents, conduct consultations, decide whichoptions are politically feasible, draft and pass new laws and legislation, and adapt the machineryof government to effectively administer the new policies. Some developing countrygovernments have the administrative capability to undertake these tasks. 5/ Others do not orcan undertake them only over a long period.

20. Designers of policy reform must answer the following questions: (1) Whatadministrative resources are needed to process the reforms? (2) What resources does thegovernment have at its disposal to do this ? And (3), when item (2) is less than (1), what kindof technical assistance is needed to supplement government resources? The technical assistanceshould be sharply focused to supply expertise tailored to meet clearly identified shortfalls ingovernment resources. It is not enough simply to provide a general consultant in theexpectation that the average consultant will be able to provide the technical services needed.JTerms of Reference must explicitly identify the skills required (for example, legislativedrafting), for how long, and for which task. The corollary is that Bank staff must: (1) havea better understanding of the process of policy reform and of the sociopolitical and technicalskills needed to support it; and (2) be available more regularly to help the government superviseimplementation of the technical assistance.

5/ Indeed, some governments conduct their own studies without outside consultants.

10

Anticipate Political and Organizational Constraints £/21. Political and organizational constraints vary from being trivial to being so significantthat they threaten the govemment's tenure. One key to successful design of policy reform isto be able to identify these constraints and include elements in the reform program to offset orovercome them. In general, concem arises briefly during preliminary discussions of the needfor reform (as vested interests become aware of its possibility), abates while the govemmentexamines the available options and their likely consequences, rises again during consultationswhen it becomes clear that govemment is seriously considering the reforms (and is perhapsclose to making up its mind on their scope), and peaks in the legislative stage, when vestedinterests try to prevent the passage of new legislation or to amend it to protect their owninterests. The final stage, involving administrative reform, may also elicit concern -particularly organizational conerm - but generally less than legislation does.

22. Govemments deal with these constraints by drawing on their accumulated politicalcapital. Most governments - and the ministries within them - generally enjoy enough of amandate that they can handle all but the consultation and legislative stages without difficulty.Even the consultation stage - provided it is handled sensitively and merely seeks the views ofinterested parties - can often be completed without significant political problems. 7/ Politicaland organizational obstacles nearly always arise in the legislative stage, however, and a weakgovernment, or even a weak minister in a strong government, may therefore be unable totranslate the proposed policy reforms into effective legislation.

23. The Bank is specifically prohibited by its Articles of Agreement from participating inthe political affairs of its member countries; only economic considerations are to be taken intoaccount in promoting those countries' economic development. I/ The Bank must recognizepolitical realities, however, if it wants policy reform to have a reasonable chance of success.A government's ability to persuade people of the need for painful adjustments is generallyhighest after a change of government - since the adjustments will have been forgotten by thetime the government is again accountable to its constituents 2/ - or during periods of extremestress that can be blamed on external factors. Often it is during serious financial crises that agovernment invites the Bank and the IMF to discuss financial and macroeconomic restructuring.It is at such times - and after changes of government - that politically and organizationallysensitive policy reforms are most likely to be feasible.

6/ Organizational constaints are a subset of political constraints. They generally consist of ovext opposition bygovernment servants who use their position to influence, or prevent the introduction of, policy reforms to whichthey are opposed, often by using government procedures to delay - often indefinitely - their implementation.

2/ The importance of the consultation stage depends on the structure of government and the need to build apolitical consensus. Under a decentralized, democratic system with strong pressure groups, consultations aregenerally extensive, thorough, and time-consuming. In a strongly centalized system with weak pressure groups(as in most of Sub-Saharan Africa), consultations can often be shorter and confined to a few key individuals.

8t Articles of Agreement, Article I, Sec. 10, 1965.

2/ In several of the case studies - the road sector in Colombia being a notable example - major policy decisionswere taken only after a change of government.

11

24. Generally, handling political and organizational constraints requires three steps: (1)identifying the constraints associated with each stage of the proposed reforms, (2) processingall stages that lie within the government's current political mandate, and (3) if the governmentdoes not have enough of a mandate to implement all stages of reform, choosing the rightmoment to request implementation of the politically sensitive stages - possibly when the Bankis formulating a SAL. 10/

Establish a Realistic Timetable for Reform

25. Specifying a realistic timetable for reform is one of the most important aspects ofdesign. Major policies cannot be changed overnight; reform takes a great deal of time.Although the process can be accelerated - perhaps by omitting or compressing some stages,or through active Bank intervention - this generally raises administrative costs and increasesthe organizational and political obstacles. How much time is needed depends on thegovernment's legislative and administrative structure and how the necessary political consensusis developed. To get a sense of how long this might take, selected case studies in bothdeveloping and developed countries were examined (see in Appendices 2 to 5 for details). Thecase studies in developing countries give some idea of how long policy change takes toimplement:

o In Papua New Guinea, deregulation of road transport took about 12 years to complete.

o In Kenya, attempts to revise road user charges - to increase the taxes heavy vehiclespay - has already taken 12 years and is still not complete.

o In Yugoslavia, closing uneconomic railway lines took about 10 years for an importantline and 4 to 6 years for low-density lines.

o In Togo, closing of two uneconomic railway lines took nearly 20 years.

26. The results in developed countries - despite having well-developed administrativesystems, ample resources, and, in the U.K., a determined government with a clear mandate -were not significantly different:

o Deregulating the U.S. transport sector took more than 13 years. The administrationformally recognized that deregulation was desirable as early as 1962, but the processwas completed only in 1980.

o In the U.K., deregulation of the bus industry has already taken more than 10 years andwill take at least another 2 to 3 years to complete.

o Revision of road user charges - increasing the tax on heavy vehicles - took morethan 15 years in the U.S.

10/ A SAL sharply targeted to overcoming clearly identified political and organizational constraints is more likelyto be effective than one that simply "sweeps up" outstanding transport sector issues to include in the operation.

12

° Revising of road user charges in New Zealand took only 12 years, because of the waylegislation was revised (the new Act provided for it own periodic revision).

27. The case studies confirm a standard pattem for processing reform: discussion leadingto agreement on the need for reform, studies, consultations with interested parties, attempts toavoid the need for reform, and changes in laws and legislation (together with changes inassociated administrative arrangements). Implementation of typical transport policy reformgenerally takes at least ten years (see Table 2 for break down on stages).

Table 2: Generic Timetable for Policy Reform(Average number of years)

Deregulating Revising Closingtransport structure of uneconomicindustries road user railway

Activity charges lines Privatization

Preliminary agreement 3on the need for the reformn 3-5 2-3 2-3 3-5

Detailed examination ofoptions available and likelyconsequences of reform 1-2 2-3 1-2 1-2

Preliminary consultationswith parties likely to beaffected 1 3-5 2-3 1

Attempts to avoid reformthrough rationalization (orexperimentation to establishlikely cogsequences ofreform) . 2-3 - 3-4 2-3

Implementation of reform(detailed specification ofpolicies, establishing newlaws and legislation, andrevising administrativearrangements) 2-3 2-3 2-3 2-3

Introduction of newpolicies (transitionstage) 1 1 0 0

Total time needed 10-15 10-15 10-15 9-13

a/ Generally involves discussions and preparation of Terms of Referencebr/ This stage is often omitted.

13

28. The administrative, organizational, and political elements of policy reform can beanalyzed separately. Administrative analysis, for example, might examine if the reforminvolves (1) changing laws and legislation, (2) changing government staffing or organizationalarrangements, and (3) consultation with other government departments or agencies.Organizational analysis might examine if it affects (adversely) established departmental interestsor the interests of other departments or other public agencies. Political analysis might examineif (and how) it affects (1) other national policies, (2) a small or a large number of interestgroups, or a few influential ones, and (3) major political constituencies that requires attentionby the highest levels of government. It takes time to address each of these elements. Il/ Bybreaking policy reform down into these basic elements - and making broad estimates foreach - one can estimate how long the whole process might take (see Table 3).

29. A typical analysis, of a sample of transport policy reforms, is summarized in Table 3,which assumes that all activity times are additive. This is not strictly true, since someactivities - such as studies, consultations, and preparation of legislation - can be doneconcurrently. The table also makes no allowance for slippage and ignores the time spent oninitial dialogue and the examination of options. What is suggests is that implementing a minorreform may take about three years (five to six if you allow for slippage, dialogue, and studies);a modest reform may take three to four years (six to eight, with slippage, dialogue, andstudies); and major reform may take five to seven years (nine to twelve with slippage).

30. Recognizing the amount of time major policy reform requires should not encourageinaction. It does, however, suggests several lessons for designers of Bank operations:

o Implementation schedules that specify unrealistic timetables for reform discredit theBank's competence and the seriousness of its intentions.

o Long times are involved so it is essential to recognize the underlying processes ofreform - so that loan conditions can be tied to completion of intermediate activitiesbased on a realistic timetable.

o Major reform must be implemented over several Bank operations in sequence. Eachoperation should aim to complete specific actions that form part of an agreed-uponlong-range program.

o Promoting several Bank operations in sequence is difficult without more staff continuityand a longer planning horizon for Bank operations.

Design Loan Conditions

31. The final stage in the design process is to formulate loan conditions to supportimplementation of the proposed reform. These conditions play a small but important part inpolicy reform. They can help to overcome (1) the natural inertia of government institutions;(2) minor political obstacles; and (3) internal organizational constraints (such as opposition fromindividuals in an agency otherwise committed to the reform). Loan conditions can also be usedto set out a timetable for reform (for example, certain actions to be completed by appraisal)and - particularly with loan covenants - to formally record agreements reached for thepurpose of monitoring implementation.

II/ How much time is country-specific and related to the government's administrative, legislative, and poLiticalstructure.

Table 3. Typical Time Needed for Solected Policy Reforms

(Years)

Iapediaents/constraints Administrative Organizational Political

IRequires Requires Requires Affect.. Affects. Affects Affect. Affect. Affects Innolvee I MININLIMI changes ':hanges, in consultationsI established intorost. interests other "sall numbor large number maejor 1I TOTALIin loaw and staffing, or with other daparteental of oth.r of other I national of interest of interest political I TIM~EIlegislation organization departmont.a interests depsrtmonta public policies groups groups or some conflict.s I TAKEN

I ~~~of govornmnt or agenciosa adversely agencies m ajor groups,I

Minor reformsI

Revise engineering dlesign ,stantlards I I 0Prepare a plan for road saintonence II

and rehabilitation .I --- I - -- 0

Upgrade staff training I -- (0 0.5) I - (0.5 -1.0) g I 0.5

Improve efficiency of roadl aaintenence I - - I 1.0 - I 1.0Establish economic investa.nt priori tioal I I

for the traneport sector- I .5 1.0 - (01.0) 0.5 - I 2.0Prpeare, a reed sefaty prrogrmI (1.0- 2.0) (1.0- 2.0) 0.5 - 0.5 1.0 -I ---- I 3.0

Reduce construction and i ntenence IIcarried out with own direct labor I - 1.0-2.0 - I 1.0 -- I -0.5 - I 2.5

Modest reforms II

Raise rovil freight chargses significantlyl - .5 0.5 -1.0 0.5 - 1.0 I(0 1.0) 0.5 - - II 2.0Raise fuel tawes (especial ly diesel IItaeas) I -- 0.5 I - 0. - 1.0 (0.5- 1.0) O (0-10) - 1.0 - II 2.5

Change eubaectoralI invest.ent IIallocations -- 0.5 I. - 051.0 0.5 -1.0 I (0 -1.0) .. 1.0 - I 2.5

Raise railway passenger fares IIsignificantly I -- 0.5 I --- (0 - 1.0) - 1.0 1.0 - 2.0 II 2.5

Change otructure of road user charges, tolI increase tsaxes on heavy vehicles I(1.0 -2.0) -0.5 I - - (0.5 -1.0) I -- 1.0 (1.0 - 2.0) II 4.0

Revise organizational structure of IIosecuting agency I - 1.0-2.0 0.5 I 1.0 -- I -- 1.0 - II 3.5

Major reform I------------- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I

Enforce awls weight regulastions I(1.0 -2.0) (1.0 -2.0) 0.5 I - 0.5 - 1.0 --- 1.0 (1.0 - 2.0) II 5.0Increase investment in the transport IIsector -- 0.5 I. - 051.0 0.5-1.0 1.0 - 1.0 (1.0 -2.0) I 4.5

Allocate more fundsi for road Imsintenance/rehabilitation I -- 0.5 I - 0.5 - i.o 0.5 - 1.0 I 1.0 - 1.0 (1.0 - 2.0) II 4.5

Eliminate railways' operatIng deficit I -- 0.5 I - 0.5 - 1.0 0.5 - 1.0 I(0 - 1.0) - 1.0 1.0 - 2.0 3.5Close uneconosic railway lines I(1.0 - 2.0) -0.5 (0.5 - 1.0) 0.5 - 1.0 I(0 - 1.0) - 1.0 1.0 - 2.0 II 4.5Reduce otaff of ports/railways I(1.0 - 2.0) - .5 (0.5 - 1.0) - I 1.0 - 1.0 1.0 - 2.0 II 5.0Revise cost recovery policies for II

transprt onterpriaes I (1.0 - 2.0) -0.5 O's0. - 1.0 0.5 - 1.0 I 1.0 - 1.0 (1.0 - 2.0) II 5.5Deregulate road haulago industry I1.0 - 2.0 1.0 -2.0 0.5 1.0 0.5 - 1.0 (0.5 - 1.0) I(0 - 1.0) 0.5 - - II .0Privatizs Public transport I

onterprises 1.0 - 2.0 (1.0 -2.0) (0 - 0.5) I(0 - 1.0) (0.5 - 1.0) 0.5 - 1.0 I(0 - 1.0) - 1.0 (1.0 - 2.0) gj 5.0Deregulate public buo companies 1.0 - 2.0 1.0 -2.0 0.5 I 1.0 - (0.5 - 1.0) I 1.0 -1.0 (1.0 - 2.0) II 7.0

Average amount af tim Ilikely to be taken by each activity I1.0 - 2.0 1.0 2.0 0.5 I 1.0 0.5 - 1.0 0.5 -1.0 I 1.0 0.5 1.0 1.0 -2.0

Notes: Figures in brackote-indicate thaet this activity my not always be, involved when policies are reformed.These figures oxclude the tim spent on initial dialogue and the examination of options.The sumtin assum, that activity time are additive and there are no sl ippage..

15

32. The Bank uses various instruments to record its loan conditions. These vary fromrelatively weak instruments - such as establishing a project schedule or dated legal covenants(which are difficult to enforce, except through an extreme measure such as suspendingdisbursements) 12/ - to moderately effective instruments such as tranching. 13/ (For a list oftypical weak and moderate loan conditions, see Appendix 6). In some cases, the effectivenessof loan conditions depends on the instrument's inherent characteristics (for example, a conditionof disbursement can hold up implementation of a project component until relevant loanconditions have been complied with), or on the instrument's involvement of a higher level ofgovernment (preparation of a development letter, for example, or conducting an investmentreview may involve the planning or finance ministry - which is helpful when the policy reformreqw,res their support). On the whole, loan conditions are not a particularly effective way toinvolve other ministries. It is generally better to secure the support of other ministries oragencies by designing the operation to ensure that they benefit directly from the operation. Thefinance ministry, for example, can become a direct beneficiary by formulating the project asan adjustment operation and disbursing part of the loan proceeds against general imports.

ne Design Process in Brief

33. The steps for designing policy reform, in brief, are as follows:

(1) Identify the proposed reforms on the basis of a detailed country analysis, paying specialattention to the origins of present policies. Ensure that the proposed reforms -particularly when they involve major institutional change - are the simplest availableand that the same objective could not be achieved through better use of existing policiesand institutions.

(2) Be sure the government considers the reforms both timely and relevant. This mightinvolve identifying a group in the borrower country that agrees with the proposedreforms and is willing to work within the government to help implement them.

(3) Estimate the reforms' benefits and costs (their socioeconomic, fiscal, and balance-of-payments effects) to demonstrate that benefits exceed costs, and that the solutionsproposed are the best options available - and to establish priorities.

(4) Be sure that the government recognizes the costs identified in (3) and that resources areavailable to meet them (if, for example, the reforms require establishing a laborredundancy scheme, be sure that financing is available to cover these costs). 14/

(5) Estimate the administrative resources needed to process the reforms and compare thesewith the government's present administrative capabilities.

12/ It is difficult to suspend disbursements when implementation of the project's physical components are proceedingwell.

13/ The loan (or credit) is divided into several installments which are released only after the govemment hascomplied with the conditions specified in the loan documents.

14/ They may need to be financed under the Bank project.

16

(6) If the required resources exceed the government's administrative capabilities design asharply focused technical assistance component to supplement government resources.

(7) Analyze the political and organizational costs of reform and decide which stages ofreform can be implemented without difficulty, which require compensation to offsetpolitical and organizational costs, and which involve such sensitive issues thatimplementation must await favorable political conditions.

(8) When compensation is required - closing an uneconomic railway line, for example,may require construction of a low-cost road or support for regional developmentprograms - be sure it is included in the benefit-cost analysis and that the governmentcan finance it or that it can be financed under the Bank project.

(9) Establish a realistic timetable, both generally and for specific actions the governmenthas agreed to complete under each Bank operation - assuming the timetable is likelyto extend beyond a single Bank operation. The schedule can often be lengthened (toreduce the need for additional administrative resources), or shortened (at the expenseof raising both administrative and organizational/political costs).

(10) Finally, policy reform must be supported by appropriate loan conditions, selected tocomplement the project design by helping to overcome minor obstacles to reform,establishing a clear timetable for reform, and serving as a record of agreements reachedfor purposes of monitoring implementation.

17

IV. IMPLICATIONS FOR THE WORLD BANK

34. Those in charge of Bank operations should keep the following important conclusionsin mind:

(1) Policy reform takes a great deal of time. It cannot easily be completed in the 5- to 7-year lifetime of one investment or sector project or two consecutive structuraladjustment operations. The Bank must treat its policy dialogue as a long-term processand should be more modest about its expectations for each Bank operation.

(2) The time-consuming procedures involved in replacing one major policy with anothermeans that major policy reforms must generally be implemented in a sequence ofseveral operations, with each operation trying to complete a specific set of actions thatare part of an agreed-upon, long-term program. Operations designed to support policyreform need to be planned over a 10- to 15-year time horizon.

(3) Bank documents must present a more explicit analysis of proposed policy reforms.Among other things, the analysis should discuss the origins of present policies, assessthe government's commitment to reforming them, fully analyze benefits and costs, givea realistic timetable, and discuss implementation arrangements (including the need fortechnical assistance).

(4) In identifying the need for technical assistance, Bank documents should outline thesupplementary support Bank staff must provide to ensure effective technical assistance.

(5) Structural adjustment operations, by themselves, are not effective instruments forreforming sector policies. The disbursement schedule does not match the timetableneeded to reform major sector policies. As complementary lending instruments,structural adjustment loans are most effective at the sector level when they are targetedto overcoming clearly identified political and organizational constraints, rather thanbeing used to sweep up a package of outstanding sector policy issues.

(6) To effectively promote policy reform, Bank staff need to become more familiar withthe process of policy reform, the way it impinges on a government's political agenda,and methods for designing policy reform components to include in Bank operations.

18

Appendix 1Page 1 of 8

Review of Transport Sector Experience /

The bank has recently undertaken a number of case studies in selected countries toassess the effectiveness of past attempts to promote policy reform (a full list of the projectsreviewed is included as Annex A to this Appendix). The countries included in the review wereselected to provide reasonable geographical coverage and, to the extent practicable, a series ofsequential operations in each sub-sector. The case studies were carried out as desk studies,based on a review of credit/loan documents, project completion and project performance auditreports, mid-term project supervision reviews and other project documents; supplementaryinformation was gathered from Bank staff involved in project supervision. To limit the scopeof the case studies, the sub-sectoral reviews focussed on a limited number of attempted policyreforms.

A. Policy Reform in the Railways Subsector 2/

1. These case studies examined the effectiveness of the Bank's attempts to reformtransport policies in the following areas: (i) increasing railway tariffs; (ii) closing uneconomicrailway lines; and (iii) strengthening railway management.

(i) Increasing Railway Tariffs

2. In all the countries studied, the Bank attempted to improve costing and accountingprocedures and to bring about an increase in tariffs. In some cases the Bank requested a directincrease in tariffs; in others it specified an improved working or operating ratio which couldonly be achieved by increasing tariffs and/or reducing costs.

3. The Bank was generally successful in improving costing and accounting procedures,but was rarely successful in achieving tariff increases. The main obstacles to tariff increaseswere the political sensitivity of increasing passenger fares (the public invariably resisted fareincreases - particularly in low income and landlocked countries - and argued that they shouldnot be expected to pay for the operational inefficiencies of the railways), resistance withingovernment to raising freight rates (since government departments were usually significant usersof freight services and did not welcome increases in rates) and the need to seek formalgovernment approval for the increases (which made revisions cumbersome and time-consuming). Legislative responsibility for tariff increases furthermore often rested with a special

I/ The case studies were carried out by four consultants; three were former Bank staff and all had a detailed knowledgeof at least one of the countries reviewed.

2/ The case studies included three projects in Pakistan, three in Colombia, two in Korea, two in Senegal (and one associatedproject in Mali) and four in Yugoslavia.

19

Appendix 1Page 2 of 8

ministry 3/ (even the Ministry of Finance - as borrower - often had no direct control overprice increases) and the Bank's policy dialogue on railway tariffs rarely included discussionswith this ministry. Some governments - as in Korea - furthermore regarded certainpassenger services as a social service and were reluctant to raise fares to meet efficiency-oriented financial objectives, or even to make the implicit subsidies associated with these farestransparent.

4. Attempts to increase tariffs indirectly by specifying an improved operating, orworking ratio were less effective than requests to achieve a specific increase in tariffs. Theindirect nature of the actions required to improve this ratio divided responsibility for achievingit between the commercial manager of the railways (who dealt with tariffs) and the operatingmanager (who dealt with operating costs). The commercial manager expected most of theimprovements to come from reductions in operating costs, while the operating manager (whowas frequently faced with unrealistic targets for future reductions in costs) expected them tocome from tariff increases. As a result, neither would take responsibility for achieving thespecified increase in the working, or operating ratio. 4/

(ii) Closing Uneconomic Railway Lines

5. In four countries (Korea being the exception) the Bank requested that railway linesidentified as being uneconomic should be closed; the aim was to improve the financial healthof the railways and, when low-cost social services were deemed desirable, to provide these bymeans of a lower cost alternative mode. Closure of these lines, usually identified following astudy financed under a Bank loan, proved more difficult than expected. Railway lines have animportant symbolic value and the threat of closure usually mobilizes substantial political supportto keep them open. The political support is furthermore of such importance, that decisions onclosure must frequently be referred to the highest levels of government. Since the costs ofoperating lines with low traffic volumes usually forms a small part of the railway's totaloperating costs, meaning that the tangible benefits of closure are relatively small, the politicalcosts of closure usually outweigh potential benefits. For example, in Pakistan it was estimatedin 1985/1986 that closure of 1,959 km of uneconomic railway lines (reducing the overall lengthof the network from 8,775 km to 6,816 km) would reduce total operating costs by a mere 1.7percent and the overall deficit by 6.6 percent. The closures that were successful thereforeproceeded slowly and (as in Yugoslavia) were mainly dependent on the government's politicalstrength and the manner in which the proposed closures were presented to the public, or (as inSenegal) were facilitated by building an alternative low standard road alongside the railway line.

3/ In Korea, it is the Economic Planning Bureau which regulates prices.

4/ This confusion might have been avoided by allocating responsibility for tariff increases more explicitly in the loandocuments.

20

Appendix 1Page 3 of 8

(Mii) Strengthening Railway Management

6. In all five countries studied, the Bank attempted to strengthen management of therailways, the main targets being improved investment planning, a re-evaluation of the futurerole of the railways and specifying more clearly the relationship between the railways and thegovernment as a means of reducing or eliminating government regulation.

7. Attempts to improve investment planning generally concentrated on preparation ofa long-term investment and financing plan, followed by annual consultations with the Bank toensure the railways adhered to this plan. In general, this aspect was dealt with satisfactorily,although plans were frequently over-ambitious and - in spite of the required consultations -the Bank was not always able to stop railways implementing projects outside the agreed plan(often because soft loans or supplier credits were available on favorable terms). Sincepreparation and revision of such plans generally formed part of loan preparation, potentialborrowers had a clear incentive to have such plans completed on time.

8. Re-evaluating the future role of the railways does not, of itself, constitute a changein policy, but does provide an economic and political context in which decisions about thefuture of the railways can be taken. The studies which re-evaluated the future role of therailways usually concluded that they still had a useful economic and social role to perform(similar to, but different from, their present role) but offered little guidance on how to achievethis new role. In some cases, the government and the Bank could not agree on what the newrole of the railways should be (in Pakistan, there was lack of agreement on whether passengersor freight should be given priority use of the network); in others, the analysis failed to dealsatisfactorily with the railways' human resource requirements, either by applying unrealisticnorms to the railways' operational requirements - without taking sufficient account ofemployment conditions, labor laws and the state of technology - or by providing insufficientguidance on how to deal with redundant labor. As a result, the studies did not provide a soundbasis for reforming the railways.

9. In all the countries reviewed, the Bank attempted to clarify the relationship betweenthe railways and the government with a view to strengthening railway autonomy to ensure thatfinancial and operational decisions were based on commercial rather than sociopolitical criteria.The implementation of a clearer relationship was difficult and slow, since greater emphasis oncommercial decision-making nearly always conflicted with the inherently political nature ofdecisions regarding closure of uneconomic railway lines, suspension of loss-making passengerservices, raising of tariffs and displacement of surplus labor. Attempts to strengthen railwayautonomy also had important legislative and human resource implications. It takes a long time

21

Appendix 1Page 4 of 8

to draft and pass the necessary legislation to make the railways more autonomous and it takeseven longer to create a commercial outlook in staff with a traditional public-service orientation.Indeed, except where the initiative for change came directly from the government or railwaymanagement (or, as in the Madagascar Second Railway Project, the Bank took the drastic stepof suspending disbursements to lessen government interference in financial matters), progresswas minimal.

B. Policy Reform in the Highways Subsector 5/

10. These case studies examined the effectiveness of the Bank's attempts to promotepolicy reform in four main areas: (i) improving operational policy; (ii) strengthening revenuemobilization; (iii) strengthening technical and organizational capacity; and (iv) controllingvehicle overloading.

(i) Operational Policy

11. Early policy dialogue focussed on the need to ensure that projects were successfullyimplemented and efficiently operated. The first few projects in the countries reviewedgenerally experienced the same difficulties: engineering designs were inadequate, supervisionand contract management were weak, there was a lack of coordination between the differentagencies involved, contracts were often awarded to financially weak local contractors andcontract disputes were common. 6/ However, the Bank and the borrower quickly acquiredsufficient experience to agree on the basic operational conditions needed to ensure successfulproject implementation. They included: completion of feasibility studies and detailedengineering before appraisal, use of international competitive bidding (ICB) procedures for allmajor contracts, establishment of project implementation units (or coordination committees) tofacilitate better coordination between the various agencies involved in the project and use ofconsultants to design and supervise the project. The Bank generally had little difficulty inpersuading the borrower to agree to these conditions; they were essentially technical in nature,did not raise political and organizational issues and did not depend on reaching agreement withother agencies. Since these conditions had to be agreed and acted upon before loan approval,they were necessarily complied with.

(ii) Revenue Mobilization

12. Another early subject of policy dialogue related to assurances that the governmentwould provide adequate counterpart funds to complete the project and, following that, maintain

SJ The case studies included three projects in Pakistan, nine in Colombia, seven in Ethiopia, seven in Indonesia and sixin Korea.

6/ Some, or all of these problems, were encountered in Colombia, Ethiopia and Indonesia. In other countries, whereconsultants were used right from the start of Bank operations, such problems were less common.

22

Apnendih 1Page 5 of 8

it to a reasonable standard. In addition, the Bank also tried to encourage governments to raisefuel prices to ensure they were at, or above, border prices, to promote energy conservation,raise revenue and reduce smuggling.

13. The Bank's dialogue on these issues led to a mixed response. The governmentgenerally provided adequate counterpart funds to complete the project, although usually withsome delay, 2/ but rarely provided sufficient funds for road maintenance. In some cases, thiswas because the Bank insisted on the entire road network being adequately maintained to a highstandard (even though the Bank was only supporting improvement of a few discrete roads) or,alternatively, insisted that project roads be maintained to a high standard regardless of the stateof the rest of the road network. Attempts to increase road maintenance allocations did,however, identify the main factors which made it difficult to increase such allocations: (a)increased allocation of resources to the roads sector generally needs to be discussed in thecontext of the govemments' overall fiscal balance (the roads sector is not the only sector wheremaintenance is underfunded and most governments are desperately short of fiscal resources);(b) reallocation of funds from the capital to the recurrent budget touches on sensitive politicalissues (since construction, which falls under the capital budget and is generally dealt with bya planning ministry, usually has higher political priority than maintenance, which falls underthe recurrent budget handled by the ministry of finance); 8/ and (c) governments were notconvinced that the benefits of economic efficiency pricing (which would have raised morerevenues by increasing the tax on heavy vehicles) were sufficient to offset their evident politicalcosts (trucking interests being an important political pressure group). The Bank was moresuccessful in persuading governments to raise fuel prices to ensure they were not priced belowtheir border price; this was particularly so after 1972 when widespread public concern at theenergy crisis - and the ensuing need to conserve fuel - enabled governments to raise theseprices without much difficulty.

(iii) Strengthening Technical and Organizational Capacitv

14. Early operations in all the countries reviewed highlighted the need to strengthen thetechnical and organizational capacity of the highway authority to ensure it could prepare,implement and operate projects without the need for expatriate assistance. The main emphasiswas on improving managerial and technical competence, introducing economic criteria to guideselection of projects, and developing the skills needed to prepare feasibility studies, undertakedetailed engineering and supervise the ensuing civil works.

2/ Delays of two or more years were not uncommon.

81 In Colombia, increased funds were only provided after a change of government; the new government which was returnedin 1979 was committed to increasing road maintenance expenditure and controlling labor costs.

23

Appendix 1Page 6 of 8

15. In general the Bank was successful in promoting these developments in the countriesreviewed. 2/ It achieved it through provision of technical assistance and training (assistancefrom foreign consultants, seconded staff, on-the-job training, and training through fellowships)over a series of operations which acted to reinforce each other. It therefore frequently took tento twenty years to complete. The Bank's success in this area appears to be attributable to thenon-controversial nature of the required actions,l0/ absence of the need to consult and seekagreement from other agencies, and the evident benefits - in terms of more Bank financedprojects - such technical improvements were likely to produce.

16. In cases where the Bank attempted to combine the above technical improvementswith reorganization of the executing agency, it encountered much more difficulty. In suchcases, Pakistan and Colombia being notable examples, the reforms were not willingly acceptedand the Bank had to exert considerable pressure over an extended period of time before thereforms were implemented. In Colombia it took a change of government (in 1966) before theBank was even able to reach agreement on the use of consultants to review the organizationalstructure of the Ministry of Public Works and Transport and it took another twelve years beforemost of the consultants' recommendations were implemented (again after a change ofgovernment in 1979). 11/ The reasons for these difficulties were: (a) lack of conviction thatthe existing organization would not have worked as well with better personnel, more fundingand a clearer mandate; and (b) covert opposition from staff likely to be affected by thereorganization (which nearly always affects vested interests).

(iv) Vehicle Overloading

17. All the countries reviewed suffered from vehicle overloading. In Korea, roadpavements are designed to carry tanks and military vehicles, so that overloading did not resultin premature deterioration of the road surface; in the other countries studied, overloading wasa major problem, resulting in pavement damage, increased maintenance and - in Ethiopia -thepremature need to resurface newly constructed (albeit underdesigned) roads.

18. In all the countries studied, the Bank's initial policy dialogue concentrated onattempting to persuade the borrower to ensure that existing regulations goveming vehicledimensions and axle load limits were enforced. However, in four of the five countries studied,it soon became apparent that existing regulations were inappropriate and studies therefore had

9J Another example of successful institution building was the Office des Routes in Zaire. It was first established in 1911and over the next ten years developed into a well-organized institution with motivated staff maintaining about 45,000km of roads.

10/ The same was not true in countries where the government opposed use of foreign consultants.

II1 In Korea, attempts to integrate the planning of national, provincial and local roads wete also not successful, becausethey conflicted with the govemment's policy of decentralizing responsibility and were opposed by the powerful Ministryof Home Affairs, which was responsible for local roads.

24

Appendix 1Page 7 of 8

to be undertaken to provide the basis for revising the regulations (which, in turn, led to theneed for time-consuming changes in government legislation). Apart from legislative difficulties,enforcement was also hampered by: (i) the fear that enforcement might significantly increasefreight rates; (ii) weak enforcement agencies (except in Korea); (iii) increasing recognition byBank staff and borrowers that the economic benefits from using heavier vehicles outweighed thecosts of rehabilitating and reconstructing pavements to a higher standard; (iv) the trucking lobbyrepresented a powerful pressure group, so that axle-load enforcement - withoutcompensation - was likely to incur substantial political as well as economic costs; and (v)concern that greater enforcement efforts would simply encourage corruption.

C. Policy Reform in the Ports Subsector l2/

19. These case studies examined the effectiveness of the Bank's attempts to promotepolicy reform in three areas: (i) encouraging establishment of an autonomous port authority; (ii)strengthening planning mechanisms; and (iii) strengthening financial management.

(i) Encouraging Establishment of an Autonomous Port Authority

20. In all five countries studied, the Bank attempted to encourage greater port autonomywith a view to strengthening financial management, improving the authority of management andproviding control over a portion of the port's foreign exchange earnings to facilitate promptprocurement of fuel and spare parts. In some cases the Bank pressed for full port autonomy;in others it concentrated on increasing the authority of port management and the earmarking ofsome foreign exchange earnings.

21. The above attempts all failed to achieve their stated objectives: there were too manyvested interests opposed to the change, the concept of autonomy raised questions about themanagement of other public enterprises, the retention of foreign exchange earnings ran counterto established government procedures, full autonomy would generally have required changes ingovernment legislation and the Bank failed to demonstrate that autonomy, by itself, offeredtangible advantages. 13/ This was particularly true in Korea; the existing organization workedwell enough and the government - faced with the need to expand capacity to support a rapidincrease in exports - was not willing to take the risk of introducing an untried solution whichmight impede exports. Instead, following Korean practice, the government established anoffice operating under the standard administrative, managerial and financial procedures ofgovernment, under the control of the Ministry of Transport. It was not that governments didnot agree that management improvements were needed, it was simply that the Bank failed todemonstrate that such improvements could only be achieved through greater port autonomy.

12/ The case studies included three projects in Pakistan, two in Korea, one in Turkey, one in Mexico and two in Senegal.

13/ In Senegal, some progress was made in relaxing the government's a priori financial controls, but the formal authorityof the port manager was not changed.

25

Appendix 1Page 8 of 8

(ii) Strengthening Planning Mechanisms

22. Strengthening planning mechanisms in the five countries reviewed, consisted ofimproving management and strengthening sector-wide investment planning. The managementimprovements concentrated on manpower training and - when the sector consisted of severalports - on better co-ordination between ports (e.g. standardization of port equipment, poolingof spare parts and establishment of common costing practices and uniform tariff systems). TheBank was generally successful in promoting manpower training. The training of managers,engineers and operating staff was usually carried out in a timely manner, staff skills improvedand port productivity increased. This appeared to be attributable to the neutral nature oftraining, the absence of contentious decisions and the absence of any need to consult otheragencies. On the other hand, better co-ordination between ports was not achieved; vestedinterests, organizational obstacles and (in some cases) the need for government legislation allcontributed to defense of the status quo.

23. Attempts to improve sector-wide investment planning - which also indirectlyinvolved co-ordination - were only slightly more successful. In nearly all cases, insufficientfunds were allocated for preparation of port development plans (a reflection of the government'sview of their limited importance), the Bank provided insufficient supervision and the finalrecommendations (which inevitably involved relative judgements about the desirability ofexpanding or contracting individual ports) were not supported by the individual port authorities.

(iii) Strengthening Financial Management

24. The Bank's attempts to improve financial management covered a wide range ofissues: establishment of commercial accounting systems, revaluation of port assets, improvingoverall financial viability of ports (by raising tariffs), introducing cost-based tariffs andremoving major anomalies from the tariff structure.

25. Substantial progress was made on all but the last two issues. Improved costingsystems were established and tariffs were raised to maintain revenue levels, but in no caseswere cost-based tariffs introduced and major anomalies in the tariff structure were not removed.The reasons for this mixed response to the Bank's policy dialogue appeared to be related to thebenefits which the government expected to achieve from these reforms. Improving financialdiscipline and maintaining revenue levels offered clear advantages to the port authority and thechanges did not generally encounter significant political or organizational obstacles. Cost-based tariffs, on the other hand, would not only have required more technical staff, but werenot perceived by governments or port authorities to offer any advantages. However, byconcentrating on this aspect of financial management, Bank staff diverted attention away fromthe removal of anomalies in the tariff structure (e.g. coastal shipping being exempted frompaying port fees) which otherwise might have been removed.

26

Annex APage 1 of 2

Projects Reviewed

Project Title Credit/Loan No.

Railways

Pakistan: Ninth Railway Project L-631-PAKTenth Railway Project C-648/L-1372-PAKEleventh Railway Project C-1278-PAK

Colombia: Fifth Railway Project L-551-COSixth Railway Project L-926-COSeventh Railway Project L-2090-CO

Korea: Sixth Railway Project L-1542-KOSeventh Railway Project L-1836-KO

Senegal: Second Railway Project C-314/L-83-5SEThird Railway Project L-1518-SE

Mali: Second Railway Project C-384-MAL

Yugoslavia: Second Railway Project L-395-YUBelgrade-Bar Railway Project L-0531-YUFourth Railway Project L-1026-YUFifti Railway Project L-1534-YU

Highways

Pakistan: First Highway Project C-54-PAKSecond Highway Project L-578-PAKThird Highway Project C-974-PAK

Colombia: First Highway Project L-43-COSecond Highway Project L-84-COThird Highway Project C-51L-144-COFourth Highway Project L-295-COFifth Highway Project L-550-COSixth Highway Project L-680-COSeventh Highway Project L-1471-CORural Roads Project L-1966-COFirst Highway Sector Project L-2121-CO

27

Annex APage 2 of 2

Higwhxs (cont'd)

Ethiopia: Highway Project L-31-ETSecond Highway Project L-166-ETThird Highway Project L-35-ETFourth Highway Project C-lll/L-523-ETFifth Highway Project C-332-ETSixth Highway Project C-552-ETRoad Sector Project C-708-ET

Indonesia: First Highway Project C-154-INDSecond Highway Project C-260-INDThird Highway Project C-388-INDFourth Highway Project L-1236-INDFifth Highway Project L-1696-INDJakarta-Cikampek Highway L-2049-INDFirst Rural RoadDevelopment Project L-2083-IND

Korea: First Highway Project L-769-KOSecond Highway Project L-956-KOThird Highway Project L-1203-KOFourth Highway Project L-1640-KOProvincial & CountyRoads Project L-2428-KOHighway Sector Project L-2392-KO

Korea: First Port Project L-917-KOSecond Port Project L-1401-KO

Mexico: Mexico Ports Project L-820-ME

Pakistan: Second Karachi Port L-376-PAKThird Karachi Port C-422-PAKFourth Karachi Port C-492-PAK

Senegal: Port of Dakar Project L-493-SEDakar Fishing Port Project L-1405-SE

Turkey: Ports Rehabilitation Project L-1741-TU

28

Appendix 2

Time Taken to Implement Major Policy Reform on Roads

(Papua New Guinea and Kenya)

DEREGULATION OF THE TRANSPORT SECTOR: REVISING THE STRUCTURE OF ROAD USER CHARGES:PAPUA NEW GUINEA KENYA

1978 Start of the Bank's policy dialogue on the desirability of 1978 Start of the Bank's policy dialogue on the desirabilityderegulating the transport sector. of revising the structure of road user charges to

increase taxes paid by heavy vehicles.

1983 The Bank approves a Road Improvement Project that 1980 The government cormnissions a consultant study toincludes finance of consulting services to undertake a examine, among other things, road users taxationnumber of transport policy studies. policies.

1984 Consultants are recruited to undertake a wide-ranging 1981 The consultant study is completed and recommends anTransport Operations Policy Study. increase in the license fees for heavy vehicles.

1985 The policy study is completed, the government circulates 1982 Some amendments are introduced to the system of roada consultation document based on the results of the study user charges, but when the effects of inflation are takenand holds a number of meetings to discuss the document into account, the revised charges appear to havewith interested parties. After these consultations, the reduced the relative tax burden on heavy vehicles.government decides to go ahead and deregulate thetransport sector.

1986 The government commissions another consultant study to 1984 The Bank's Second Highway Sector Project iswork out the details of the new policy for road transport, approved. It includes a covenant requiring theto outline legislation to implement it, and to prepare a government to increase the license fees of heavystaffing plan to administer the new legislation. vehicles by 10 percent. The government states that it

intends to increase the tax on heavy vehicles over a 3-year period during the Fifth Plan period (1984-88).

1987 Consultant studies are completed and are reviewed by the 1987 The government has not yet complied with the Bank'sgovernment, pending submission of a draft bill to covenant.Parliament.

1990 The sector is de facto deregulated and further studies are 1990 No decision yet taken.being undertaken to identify remaining regulatoryconstraints.

Source: World Bank and Asian Development Bank documents Source: World Bank documents

29

Appendix 3

TIme Taken to Implement Major Policy Reform in Railways

(Yugoslavia and Togo)

Closing Uneconomic Railway Lines: Yugoslavia Closure of Uneconomic Railway Lines: Toe

Name of Line (Ljubljana)/ 1968 The Bank started a dialogue on the desirabilityZenica/Lasva/ Brezovica/ Zednikl/ of closing uneconomic railway lines (the 119

Jacje Vrhnika Cantavir km Lome/Kpalime line and the 36 kmLome/Anecho line).

Length of line (kn) 111.2 12.4 8.0 1976 A consultant study is completed which statesthat closing of these lines would not reduee the

No. of Employees 1,100 B 15 11 railways' deficit.

Date Line was recog- 1977 The Bank's Third Highway Project isnized as uneconomic 19661960 1975 approved. It includes a study designed to

improve railway perfornance, followed bypreparation of an Action Plan.

When Studies werecarried out 1967- 1976

1982 The Action Plan is completed.

Introduction of ration- 1983 The government rsponds favorably to the ideaalization measures 1970/71 1964/65 - of closing uneconomic railway lines. It

proposes to close the Lome/Anecho line first,and the Lome/Kpalime line later.

When further studies (if 1985 The Bank's Structural Adjustment Loanany) were carried out 19731965 - includes a loan condition about restructuring

of the railways.Consultations onclosing lines (extensive) (brief) (limited)

Date line was fimally 1987 The uneconomic railway lines are effectivelyclosed 19751966 1979 closed (only exceptional traffic is permitted).

Overall time taken (yrs) 9 6 4

a/ Fell to 805 before being closed.

Source: The Closure of Uneconomic Railway Line in Source: Staff Appraisal Reports and Sector StudiesYugoslavia, Coopers & Lybrand (for the IBRD),1981

30

Agondix 4

Thne Taken to Deregulate Transport Industries

(United States and U.K.)

DereIulation of Transuort Industries: United States Deregulation or the Bus Industry: U.K.

prc-1960 There is a growing literature on the costs of economic 1972 There is growing concern about the rapidly increasingrcgulation. size of bus subsidies.

1962 The Kaenedy Administration sends the first 1976 A report by the Transport and Road Researchprocompetitive reform bill to Congress; Congress does Laboratory presents a very pessimistic outlook for futurenot respond. bus patronage and notes the adverse effect of subsidies

on operating efficiency. The Conservative (opposition)party establishes an informal committee to develop astrategy for the bus industry.

1967 The Broolings bntitution is given $1.8 million to 1977 The Right Track (a Conservative party publication)undertake studies on the impact of regulating economic promises reform of the bus licensing system.activities. (These are done from the mid-1960s to themid-1970s.)

1970 The Penn-Central railway collapses. 1979 The Conservative party wins the election.

1971 The Transportation Regulatory Modernization Act is 1980 A Transport Act is passed deregulating intercity bussubmitted to Congress and aborted. services.

1974 The Senate Sub-Committee on Administrative Practices 1981 The Transport Act becomes effective.and Procedures holds hearings on airline regulation thatcontinue in 1974 and 1975.

1975 The Ford Administration makes repulatory reform part 1984 A consultation document is published outliningof its donestic political agenda. possibilities for deregulating and privatizing the rest of

the bus industry.

1976 The Interstate Commerce Commission (ICC) starts 1985 Another Transport Act is passed deregulating andmaking procompetitive regulatory decisions and the privatizing all bus services, except London TransportRailroad revitalization and Regulatory Reform Act is and the Scottish Bus Co.passed, allowing some measure of railroad regulatoryreform.

1978 An ICC decision makes it easier to enter the trucking 1986 The Transport Act is implemented over a nine-monthindustry and the Airline Deregulation Act is passed. transition period.

1980 The Civil Aeronautics Board interprets the Airline 1986 The government announces its intention to deregulateDeregulation Act in a Way that constitutes complete (and possibly privatize) London Transport.deregulation, the Motor Vehicle Carrier Act is passed(deregulating the trucking industry) and the Staggers 1990 London Transport has not yet been deregulated.Act is passed (deregulating the railroad industry).

Source: The Politics of Deregulation, M. Derthic and P.J.Quirk, Broolings Institution, 1985

31

Appendix S

Time Taken to Revise Road User Charges

(United States and New Zealand)

Re-ising Road Under Charges: United States Revising Road User Charaes: New Zealand

1956 The Highway Revenue Act lays the basis for the pre-1973 Revenue from road users falls, mainly becauseUnited States system of user charges and establishes of falling petrol sales caused by the energythe Highway Trust Fund. crisis. The government is anxious to increase

revenue to avoid the need for goverunentsupport of the road program.

* Concerned that the benefits and costs of road use 1973 A consultant study recommends, among otherare not reflected in user charges, Congress initiates things, that the structure of road user chargesa study to review the entire system of user charges. be revised to promote more efficient

intermodal competition.

1962 Study completed. It recommends changes to the 1977 A new Road User Charges Act is passed tosystem to preserve equity between vehicle classes. generate more revenue and promote moreThese recommendations are incorporated into the efficient intermodal competition.Federal Aid Highways Act.

1965 A supplementary report to the 1961 study 1978 The new system of road user charges isrcommends changes in taxes, including a heavy introduced. It provides for periodic review ofvehicle tax. Recommendations not accepted by how the new system works.Congress.

1966 Recommendation for heavy vehicle taxes again 1984 The second review recommends introducing arejected by Congress. revised cost allocation methodology.

1970 A further cost allocation study confirms the need to 1985 New system of user charges recommended byrevise taxes on heavy vehicles. the review panel becomes effective.

1978 In response to conern that road revenues are fallingshort of expenditures, the Department of Transportis directed under the Surface TransportationAssistance Act to undertake another cost allocationstudy.

1982 Cost allocation study is completed.

1982 In December Congress passes legslation to reviseroad user taxes, including a substantial increase inthe heavy vehicle use tax.

Source: Revicw of Road Pricing in Australia andOverseas, Occasional Paper No. 3, Bureau ofTransport Economics, Canberra, 1985

32

APpendix 6

Leoan Conditions Used to Promote Policy Reform

1. Weak Loan Conditions

Inclusion of a project in the Bank's Country Program,

Establishment of a project processing schedule

Timing of appraisal

Legal agreements (covenants, side letters, minutes of loannegotiations) 14/

2. Moderate Loan Conditions

Conditions of loan negotiation

Conditions of Board presentation

Conditions of loan effectiveness

Conditions of loan disbursement 15/

Action plans

Development letters

Investment reviews

Tranching

14/ Failure to comply with these conditions may lead to the balance of the loan being suspended or cancelled.

15/ This may be preferable to conditions of effectiveness, since they can be tied to particular project components.

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No. 85 Implementing Educational Polides in Kenya. G. S. Eshiwani

No. 86 Implementing Educational Polkies in Tanzania. C. J. Galabawa

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