Infrastructure 54799 165 August 2000 Findings reports on ongoing operational, economic, and sector work carried out by the World Bank and its member governments in the Africa Region. It is published periodically by the Knowledge and Learning Center on behalf of the Region. The views expressed in Findings are those of the author/s and should not be attributed to the World Bank Group. Restructuring Highway Agencies -- the FinnRa Case Options for Africa ? Findings Until the late 1970s, the Finnish that SOEs be given autonomy over Road and Waterways Administration decision-making and removed from (RWA), under Finland's Ministry of the state budget, whereas their public Transportation and Communications service obligations should be financed (MOTC), operated as a highly central- fully by the state budget. These ized, monopolistic agency. The recommendations were approved as country's thirteen road management part of the SOE Act in early 1988. districts had little or no decision-mak- Within this reform process, Finland's ing authority. Outsourcing construc- force account-type Road and tion works was limited, contracting Waterways Administration (RWA) maintenance services was rare, and began evolving into a market-oriented RWA often implemented its road con- road administration able to operate in struction projects using in-house la- an economically, socially, and bor and rented machinery and ve- environmentally sustainable manner hicles. Following the oil crisis of 1974, (FinnRA ¾ the Finnish National Road public resources were constrained Administration as renamed in 1990). and road expenditure was targeted at Three imperatives have driven this maintenance rather than at new con- reform process: the need to reduce the struction. Simultaneously, RWA's fo- size of the public sector, competitive cus shifted to construction manage- pressures arising from membership ment (rather than actual execution of in the European Union, and the works) and to maintenance activities. growing need to pursue environmental Outsourcing of planning, design, and values while promoting economic construction services became more development. prevalent. New, more user-friendly An amendment to the road procurement procedures were intro- administration laws in 1987 launched duced, facilitating the use of private the reforms by delegating significant small contractors. This trend contin- decision-making power to the ued through the 1980s, when indi- country's thirteen road management vidual road districts assumed the districts. Until that time, all large-scale practice of slicing up the procurement procurements were submitted to of works into sufficiently small con- headquarters for final decisions. This tracts to allow small regional-based highly centralized system did not contractors to bid for them. facilitate outsourcing, and hampered middle-management's ability to develop managerial and strategic skills Reforms since 1987 of its own. As part of the reform The second stage of reform began in process, authority for procurement 1985 when the Committee on State- decisions was decentralized, helping Owned Enterprises (SOEs) proposed Box 1: MOTC's Performance Targets for FinnRa in 1998 As of 1998, FinnrRa is operating as a government agency, with preconditions for competition. internally separated entities for road administration and production. The targets for Finnra's production entity in 1998 underline its role For road administration, MOTC has set the following performance as a commercial-like entity: targets, which clearly reflect its role as a government authority: 1. Competitiveness: To improve competitiveness under fair 1. Traffic safety: to have 45 fewer accidents resulting in personal business practices injuries, and to improve the network for pedestrians and 2. Economical targets: to reduce the fixed costs by 2 percent. bicycles. 2. Smooth traffic flow: to increase the predictability of cargo Based on the MOTC targets shown above, Finnra's production traffic on main arteries, and to improve the road information entity has internally set the following operational and quantifiable network through advanced telematics. targets for 1998 as follows: 3. The condition of the road network: The main roads shall be kept in current condition. The length of peripheral paved roads · Economical targets: to reduce fixed cost by 2 percent, and to in bad condition may increase by no more than 200 km in 1998. improve the accounting systems. 4. Environment: to continue implementing the environmental · Customers: to improve cutomer satisfaction, and to establish action program. new customer relationships 5. Budget: to reduce the personnel expenses by 2 percent. · Efficiency: to develop process and teamwork practices, and to 6. Organization: to improve the process of tendering and the strive for competitive pricing · Competencies: to enhance the core competencies, and to improve the personell satisfaction. to increase the use of private In addition, growing environmental These changes have required FinnRA contractors in the road sector. awareness has brought about a to strictly monitor fixed costs and Although there is still widespread use complete change in the regulatory enact significant structural changes. of force account in maintenance, this culture and a new approach to doing Consequently, the number of road situation is expected to change as business in the road sector. For years, management districts has been FinnRA's progressively withdraws providing a steady increase in traffic reduced from 13 to 9, and the number from being the dominant supplier. volume was the main principle of field managers from 175 to 80. Districts have been made respon- governing road management in Recession in the construction industry sible for preparing development plans Finland. The MOTC and FinnRA are in the mid-1990s and a surplus of and programs in coordination with now faced with the challenge of supply in the sector forced both elected local government councils, creating sustainable transport policies FinnRA and private sector contractors which make policy for regional devel- which encourage land use and to cut back on their costs while opment. Part of the money allocated transport demand to develop in a way increasing efficiency. As a result, to roads comes from the regional de- that minimizes traffic flows while employment in the sector declined velopment funds, requiring constant increasing the use of less sharply from more than 40,000 cooperation and communication be- infrastructure-intensive (and more people in the late 1980s to only 28,000 tween road management authorities environmental-friendly) alternatives, people in 1995. Although gradual, this and local governments with regard to namely public transport. Obtaining change has moved labor groups to transport projects and land use plan- road finance in this framework has resist further restructuring efforts. ning. This decentralization of author- become particularly challenging, since Within FinnRA, the energy of the ity has given the districts a strong such financing is generally linked with newly empowered management and sense of ownership in road manage- traffic volume, while environmental staff has been directed at ment and has sparked improved re- policies place priority on reducing organizational development, including sponsiveness to the needs of users road flows. the development of a credible and beneficiaries. organizational vision and mission, Throughout the 1990s, FinnRA has upgrading of managerial skills, and a Results of reform worked to adopt client-oriented renewed focus on public relations. Prior to the onset of the reform operating principles and to apply Since 1990, an effort has been made process, the RWA's dual mission was commercial principles in defining to improve FinnRA's image among to rapidly expand and upgrade goals and evaluating performance. users and other stakeholders through Finland's road network, and to The MOTC sets annual targets for the use of a uniform corporate identity generate employment. The new, FinnRA related to traffic safety, service and the development of high-profile restructured FinnRA is dealing with a quality, environmental issues, and advertising and PR campaigns. more complex set of goals, ranging operational cost efficiency (see box). Table 1. Trends on the Finnish Road Sector Indicators 1970-1997 1970 1975 1980 1985 1990 1995 1997 Vehicle stock (million) 0.8 1.1 1.3 1.7 2.2 2.2 2.2 Vehicle km (billions) * 12.4 16.7 18.1 21.6 27.9 27.2 28.2 Injury accidents * 5,697 4,768 4,128 4,252 4,333 3,492 3,112 FinnRa personel 21,925 18,083 15,102 13,200 10,777 8,071 6,855 FinnRa expenditure ** 6,477 5,259 5,591 5,679 5,034 5,199 4,522 * on public roads ** in billion Finnish M. at 1997 prices 1970 1975 1980 1985 1990 1995 1997 1000 vehicle km * / employee 566 924 1,199 1,636 2,589 3,370 4,114 Injury accidents/ billion vehicle km * 459 286 228 197 155 128 110 Expenditure */vehicle km ** 522 315 309 263 180 191 160 * on public roads ** in Finnish M. at 1997 prices from traffic safety, environmental Today, there is a functional market sustainability, and maintenance of the for road planning and construction in · Government agency: FinnRA current network, to improving user Finland, but the market for road would remain a vertically integrated satisfaction within its constrained maintenance is below its potential. government agency managed by budgetary resources. Employment The involvement of local private sector results under the supervision of itself is no longer a goal of the firms capable of carrying out large MOTC. administration, and as the state maintenance projects is still limited. · Corporatization (SOE): The entire budget for road construction and As a result, FinnRA's share of the FinnRA would be transformed into a maintenance gets tighter and tighter, maintenance market is still very high user-financed SOE under a funding sources such as shadow tolls at 77 percent. Given time, the reforms contractually based relationship with and private sector participation are enacted in Finland should strengthen the government. becoming more common. FinnRA has the private sector and increase its · Unbundling production from also been allowed to provide share of the market. regulation (ARA+SOE): This model chargeable services at market prices, would separate the regulatory function mostly to municipalities, private road from the service and maintenance Future options owners, and the railways, and has function, creating an administrative The Finnish government has been granted greater budgetary road authority (ARA) and a service- considered a number of models for autonomy for the use of carry-overs. producing SOE. further structural reform. Full As part of this process, there have privatization was not among these been profound changes in competition As seen in Table 2, the ARA+SOE options; nor was the creation of a road law, principles of public procurement model is likely to provide the best fund, because earmarking tax moneys and in the legislation enabling the combination of benefits. The SOE is politically unfeasible. Instead, the creation of state-owned enterprises model is likely to have the most government has preferred the state- (SOEs) and the commercialization of beneficial fiscal impact, but this is owned enterprise (SOE) or mixed government agencies. The reforms more than offset by the reduction in enterprise approach, which allows the have also resulted in significant user satisfaction and hampered state to maintain ownership and budgetary savings, a more competition. The business-as-usual control. This is consistent with the streamlined bureaucracy, increased model, where governmental agencies government's gradual approach decentralization, greater transparency continue as unbundled entities, does towards reform. Three options for in procurement and a more strategic not deliver efficiency gains across the reform of road management have been approach to change and reform. society compared to the ARA+SOE considered in Finland (see Table 2): model. Table 2. Likely Impact of Restructuring Models Fiscal Impact User Satisfaction Impact on Competition Govt Agency MARGINAL INCREASED MODERATE Small internal efficiency gains Improving user Increased contracting-out of services orientation with stable charging and works SOE SUBSTANTIAL REDUCED NEGATIVE Potential for monopolistic pricing Level of service unchanged, Barriers to entry for private contractors and reduced budgetary dependence but increasing direct user charges and service providers ARA + SOE MODERATE INCREASED SUBSTANTIAL Efficiency gains induced Improving quality and Increased participation of private contrac- by competition faster implementation of works tors and service providers in competition with SOE introduced slowly, although with a shared vision and strategy, and The current direction for FinnRa consistent sense of direction. management must make timely was laid in May 1997 by the CoS. Consequently, there was little decisions at key junctures. FinnRa was formally kept as a controversy with labor and the private Furthermore, a wide availability of government agency, but it was sector, which have been systematically information and a deep staff reorganized into separated entities for involved in the process. The result is involvement at all levels are critical to road administration and production. a streamlined bureaucracy that the success and sustainability of the The MOTC and FinnRa management produces a higher level of service at process. Staff must believe that the had been strongly in favor of a consistently lower costs. reforms are being undertaken for ARA+SOE model, but the staff was The following lessons have been them and by them. firmly against it. Also the private learned as part of the ongoing reform · A road agency can competitively constructors were opposed to the process in Finland: provide services to third parties, imminent launch of the production- including local governments and the SOE, which would be the biggest civil · Road management reform is a private sector, on a charge basis, hence construction firm in Finland. The continuous process whose pace has generating revenue. However, these decision was a compromise, which to be set in the context of the services can be more advantageously gives more time for the management harmonization of the interests of provided in the framework of pluri- and staff of FinnRa staff and politicians, management, labor, and annual contracts. management to find ways of improving private sector. Performing road · Should dedicated road funding from its internal practices and efficiency agencies, such as FinnRA, can the state budget have been made while allowing for its eventual probably afford more time to available to FinnRA, as requested competitors to adjust their activities restructure than inefficient agencies. during the reform process, the accordingly. · Road sector reform is fostered by incentives for restructuring would In view of the already implemented external fiscal, competitive and likely be weaker than under the restructuring of public administration environmental pressures. prevailing circumstances. in Finland in general, and under the International "peer pressure," purview of the MOTC in particular particularly within the context of (Post & Telecom, railways, vehicle regional road associations, which can This article was authored by Lauri inspection), FinnRa is likely to reach also create awareness of the need for Ojala and Esko Sirvio of the Turku the ARA+SOE stage under the new reform among sector managers. School of Economics and Business Cabinet taking office after the election However, the implementation of Administration, Finland and the in March 1999. reform requires management Finnish National Road Administra- leadership and commitment to the tion respectively. It was first pub- goals, and a major participatory effort lished by the Road Management Ini- Conclusions and lessons to be managed from within the road tiative for Africa, World Bank, as Road reform in Finland has evolved agency. SSATP Note No. 15, August 1998. For gradually over the last 20 years, and · From the beginning of the process, more information, please e- continues to evolve today. Change was the road organization must develop a mailJwagshal@worldbank.org