A frica Transport A Technical Note Road Management Initiative SSATP Note No. 15 August 1998 Restructuring Highway Agencies 22587 The FinnRa Case: Options for Africa? by Lauri Ojala and Esko Sirvio U | ntil the late 1970s, the Finnish Road and Waterways Administration (RWA). under Finland's Ministry of Transportation and Communications (MOTC). operated as a highly centralized, monopolistic agency The country's thirteen road management districts had little or no (lecision- making authority Outsourcing construction works was limited, contracting main- The case of Finland illustrates how tenance services was r'are, and RWA often implemented its road construction public management reforms can be projects using in-iouse labor and rented machinery and vehicles. Following the oil successfully designed and imple- mented, leading to increased effi- crisis of 1974. public resources were constrained and road expenditure was tar- ciency and improved service in road geted at maintenance rather than at new construction. Simultaneously. RWA's fo- management. The process of reform in Finland has been gradual. It started cus shifted to construction management (rather than actual execution of works) in the 1970's and is still evolving. and to maintenance activities. Outsourcing of planning, design, and construction Lauri Otala is professor at the Turku services became more prevalent. New. more user-friendly procurement procedures School of Economics and Business were introduced, facilitating the use of private small contractors. This trend contin- Administration in Finland; Esko Sirvio ued through the 1980s, when individual road districts assumed the practice of slic- is director of the production branch of the Finnish National Road Administra- ing up the procurement of works into contracts small enoughi to allow small re- tion (FinnRa). gional-based contractors to bid for them. The purpose of this series is to share Reforms since the mid-1980s information on studies carried out by The second stage of reform began in 1985 when the Committee on State-Owned or of interest to the SSATP. The opin- Enterprises (SOEs) proposed that SOEs be given autonomy over decision-aking ions expressed in the studies are those of the authors and do not neces- and removed from the state budget. whereas their public service obligations sarily reflect the views of the World should be finaniced fully by the state budget. These recommendations were ap- Bank or any of Its affiliated organiza- tions. proved as part of the SOE Act in early 1988. Within this reform process, Finland's force account-type Road and Waterways Adminiistration (RWA) began evolving tact Julie Wagshal in the Africa Re- into a market-oriented road administration (FinnRA- the Finnish National Road gion of the World Bank, Washington, Adrninistration as renamed in 1990)). Three imperatives have driven this reform DC. Internet address: process: the need to reduce the size of the public sector. competitive pressures aris- inig from membership in th, European Unioni. and the growing need to purstle en- vironmental values while promoting economic development. An amendimient to the road administration laws in 1987 launched the reforms by delegating decision-makinig power to the country's thirteen road management districts. Until that time, all large-scale procuremnents were submitted to headquar- Sub-Saharan Africa Transport Policy Program (SSATP) * IUINIECA, 11FAd1 he ] Wo,IrFJ W ,ir dlnik 2 1 Box 1: MOTC's Performance Targets for FinnRa in 1998 As of 1998, FinnrRa is operating as a government agency, with in- The targets for Finnra's production entity in 1998 underline its role ternally separated entites for road administration and production. For as a commercial-like entity: road administration, MOTC has set the following performance targets, which clearly reflect its role as a government authority: 1. Competitiveness: To improve competitiveness under fair busi- ness practices 1. Traffic safety: to have 45 fewer accidents resulting in personal in- 2. Economical targets: to reduce the fixed costs by 2 percent. juries, and to improve the network for pedestrians and bicycles. 2. Smooth traffic flow: to increase the predictability of cargo traffic Based on the MOTC targets shown above, Finnra's production en- on main arteries, and to improve the road information network tity has internally set the following operational and quantifiable targets through advanced telematics. for 1998 as follows: 3. The condition of the road network: The main roads shall be kept in current condition. The length of penpheral paved roads in bad * Economical targets: to reduce fixed cost by 2 percent, and to im- condition may increase by no more than 200 km in 1998. prove the accounting systems. 4. Environment: to continue implementing the environmental action * Customers: to improve cutomer satsfaction, and to establish new program. 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 pre- strive for competitive pricing conditions for competition. * Competencies: to enhance the core competencies, and to improve the personell satisfaction. ters lor final decisions. As part of the reform process, authority for Within FinnRA. the newly empowered maniagemenit and staff pl(curement decisions was decentralized, which increased the tise have focused on organiizationial developimient. includinig the devel- of private contractors in the road sector. Althougih there is still opment of a credible orgarnizatiorial vision anid iission, upgradinig widespread use of ftorce account in maintenanice, this should of managerial skills, and a renewed focus on public relations. Since change as FinoiRA withdraws fromil being the dominiarit supplier. 1990. an effort has been made to improve FinnRA's inmage among Districts have been miiade responsible for preparing develop- users and other stakeholders throtugh the use of a Uniform coOlpo- rment plans and programils in coordiriation with local government tate identity and thie development of high-profile advertisinig and counIcils, which make policy for regionial development. Part of the PR campaigns. mioney allocated to roads conies from the regional developmnent Irn addition, growing environmental awareness has brought ftLtids. reCnlirilig constanit cooperation betweerr road maniagemiient abotrt a coriiplete change in the regulatory culture and a new ap- autlhor-ities and local governmients with regard to transport projects proach to doing business in the road sector. For years, providing and latid use planniniig, capacity for a steady increase in traffic volunie was the main prin- Thiorrghoot the 1990s. FinriRA has tried to adopt client-ori- ciple governing road rmanagement in Finland. The MOTC and ented operating principles atid to apply coriimercial principles in FinntRA are now faced with the challenge of creating strstainiable defining goals atid evaluating performance. The MOTC sets annual transport policies which encourage land use arid transport demanid targets for FitiriRA related to traffic safety, service qtrality. environ- to develop in a way that minimiiizes traffic flows while increasing merital isstres, an(i operational cost effectiveness (Box I). These the trse of less infrastrUcture-interisive (and niore environimiienital- changes have required FinnRA to strictly monitor fixed costs and friendly) alternatives. naritely public transport. Obtaining road fi- enact structural chariges. Coriseqteritly. the number of road rimari- nance in this framework has become particularly challenging. since agemernt districts has been reduced from 13 to 9. and the number of such finaricirig is generally linked with traffic volumiie, while envi- field maniagers front 175 to 80. Recession in the constrictioni indtrs- rotiniental policies place priority on redtrcing road flows. try in the miiicd-199ts and a supply surpltis in the sector forced both FiniRA and private sector contiactot-s to cut back on their costs Results of reform whiile increasirig efficiency As a restilt. eniploynient in the sector Before the reforIll process began. the R\'VA's dual missiorr was to tieclinied sharply fromi niore than 40.000 people in the late 1980s to expand and upgrade Finland's road network, atid gerieiate erii- onily 28,0(00 people in 1995. Althoughl this charige was gradual, it ployment. Thle restiuctured FinroRA is dealing with a more coIl- has nioved labor groutps to resist ftrrthier restructuring effor ts. pl)ex set of goals. ranging fromn traffic safety, environmiental strstaimr- ability, and maintenance of the current network, to improvinig user satisfaction withiirn its constiainied budgetary resources (Table I). 1 3 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 FinnRapersonel 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 Employment is no longer a goal of the administration, and as the governmnent's gradual approach towards reformn. Three options for state budget for road construction and maintenance gets tighter. reform of road mnanagement have been considered in Finland: funding sources such as shadow tolls and private sector participa- * Government agency: FinnRA would remain a veirtically inte- tion are more common. FinnRA has also been allowed to provide grated government agency under the supervision of MOTC. chargeable services at mnarket prices, mnostly to municipalities, pri- * Corporatization (SOE): The entire FinnRA would he tranis- vate road owners. and the railways, and has been granted greater formed into a user-financed SOE under a contractually based budgetary autonomy for the rise of carry-overs. As part of this process. there have been profound changes in cormpetitiorn law, principles of public procurement. and in the legis- * Unbundling production from regulation (ARA+SOE): This lation enabling the creation of state-owned enterprises (SOEs) and model separates the regulatory from the service and mainte- the comrmercialization of government agencies. The reforms have nance function, creating an administrative road authority also resulted in significant budgetary savings, a more streamlinled (ARA) and a service-producing SOE. bureaucracy increased decentralization, greater transparency in Asseen inTable 2 theARA+SOE model is likelytoprovide the procurement, and a more strategic approach to change and reform. best overall combination of benefits. The SOE model is likely to Today, there is a functional marker for road planning and con- have the most beneficial fiscal impact. but this is more than offset struction in Finland, but the market for road maintenance is belov by the reduction in user satisfaction and hampered competition. its potential. The involvement of local private sector firms capable The business-as-usual model, where governmental agencies con- of carrying out large maintenance projects is still limited. As a re- tinute as unbundled entities do not deliver efficiency gains across suilt, FinnRA's share of the maintenance mnarket is still very high at the society compared to the ARA+SOE model. 77 percent. Given time, the reforms enacted in Finland should The current direction for FinnRa was laid in May 1997 by the strengthen thie private sector and increase its share of the milarket. Council of State. FinnRa was formally kept as a government agency. but it was reorganized into separate entities for road ad- Future options ministrationi and production. The MOTC and FinnRa managemilent The Finnish Government has considered several models for further had been strongly in favor of a ARA+SOE model. buit the staff was structural reform. Full privatization was not among these options: firmly against it. Also the private contractors were opposed to the instead, the government has preferred the state-owned enterprise immiiinent launch of the production-SOE. which would be the big- (SOE) or mixed enterprise approach. wvhich allows the state to oest civil construction firm in Finland. The decision was a compro- maintain ownership and control. This is consistent with the mise, which gives more time for FinnRa staff and management to 41 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 find ways of improving its internal practices and efficiency while * Fromi the beginning of the process. the road organization must allowing for its eventuial competitors to adjust their activities. develop a shared vision and strategy, and managemenit must make timely decisions at key junctures. In addition, a wide Conclusions and lessons availability of infornmation and a deep staff involvement at all * Road marnagemiienit reform is a continuous process whose pace levels are critical to the success and suistainability of the pro- has to be set in the context of the harmonization of the interests cess. Staff must believe that the reforms are being under taken of politicians. management. labor, and the private sector. Per- for themii and by themr1. forming road agencies. such as FinnRA. can probably afford a A road agency can competitively provide services to third par- miore timie to restructure thani inefficient agencies. ties. including local governments and the private sector. on a * Road sector reformr1 is fostered by external fiscal, comnpetitive charge basis, henece generating revenue. However, these ser- and envit-onimiental pressures. International "peer pressure." vices can be more advantageously provided in the framework particularly within the context of regional road associations, of pluri-annual contracts. can also create awareness of the need for reform atmong sector managers. However. the implementatiorn of reform requires marnagemiiernt leadership. cornmitment to the goals, and a ma- jor participatory effort managed from within the road agertcy _- I.l- The RMI was launched in 1988 by the United Nations Economic Commission for Africa (UNECA) and the Wordd Bank, under the aus- pices of the Sub-Saharan Africa Transport Policy Program (SSATP). The countries taking part in the RMI are Cameroon, Kenya, Madagas- car, Rwanda, Tanzania, Uganda, Zambia, and Zimbabwe. Others receiving assistance from the program include Angola, Benin, Ethiopia, Ghana, Lesotho, Malawi, Mozambique, and Togo. RMI is administered by the World Bank's Africa Region, and is co-financed with the governments of Denmark, France, Germany, Japan, the Netherlands, Sweden, Switzerland, and the European Union. France, Japan and Norway provide senior staff members to work on the Program.