FR 20150704 EN Final - hti.am · roughton international limited t a b l e o f c o n t e n t s armenia lifeline roads network improvement project consulting services for roads financing

Government

of Armenia

The World

Bank

Armenia Lifeline Roads

Network Improvement Project

(LRNIP)

Consulting Services for Roads

Financing Study

Final Report

July 2015

international ltd

ARMENIA LIFELINE ROADS NETWORK IMPROVEMENT PROJECT

CONSULTING SERVICES FOR ROADS FINANCING STUDY

P a g e | I



# FS-LRNIP-2014

FINAL REPORT

JUNE 2015

Notice

This report was produced by Roughton International Limited for TRANSPORT PROJECTS

IMPLEMENTATION UNIT STATE INSTITUTION OF THE MINISTRY OF TRANSPORT AND

COMMUNICATION OF REPUBLIC OF ARMENIA for the specific purpose of ARMENIA

LIFELINE ROADS NETWORK IMPROVEMENT PROJECT - ROADS FINANCING STUDY x.

This report may not be used by any person other than the TRANSPORT PROJECTS

IMPLEMENTATION UNIT STATE INSTITUTION OF THE MINISTRY OF TRANSPORT AND

COMMUNICATION OF REPUBLIC OF ARMENIA express permission. In any event Roughton

International Limited accepts no liability for any costs, liabilities or losses arising as a result

of the use of or reliance up the contents of this report by any person other than

TRANSPORT PROJECTS IMPLEMENTATION UNIT STATE INSTITUTION OF THE MINISTRY OF

TRANSPORT AND COMMUNICATION OF REPUBLIC OF ARMENIA.

Document History

JOB NUMBER: ARM003 DOCUMENT REF: TR1

01 Final Report J Standingford

D L Anderson

L Etherington

Checked E Begović 04/07/15

Revision Purpose Description Originated Checked Reviewed Authorised Date

Roughton International Limited T A B L E O F C O N T E N T S


CONSULTING SERVICES FOR ROADS FINANCING STUDY II

P a g e | II



TABLE OF CONTENTS

E1. EXECUTIVE SUMMARY..................................................................................................... 1-1

1. INTRODUCTION ............................................................................................................... 1-1

The Consultancy ......................................................................................................... 1-1

Approach and Method ............................................................................................... 1-1

Terminology and Units ............................................................................................... 1-2

Report Structure, Content and Purpose ..................................................................... 1-3

2. FINDINGS......................................................................................................................... 2-1

Actual , Budgeted and Projected Expenditure............................................................ 2-1

Budget Process........................................................................................................... 2-4

Needed Expenditure .................................................................................................. 2-5

Existing Revenues from Road Users ........................................................................... 2-8

3. CONCLUSIONS ................................................................................................................. 3-1

Levels of Financing ..................................................................................................... 3-1

Strategic Options........................................................................................................ 3-2

Revenue ..................................................................................................................... 3-7

4. RECOMMENDATIONS...................................................................................................... 4-1

Expenditure................................................................................................................ 4-1

Revenue ..................................................................................................................... 4-1

Efficiency Improvements............................................................................................ 4-4

5. IMPLEMENTATION .......................................................................................................... 5-1

Expenditure................................................................................................................ 5-1

Revenue ..................................................................................................................... 5-1

Reducing Costs and Improving Efficiency ................................................................... 5-3

Transferring Responsibility......................................................................................... 5-4

Priorities..................................................................................................................... 5-5

6. SOCIAL AND ECONOMIC CONSEQUENCES ....................................................................... 6-1

‘Bad Roads Tax’ .......................................................................................................... 6-1

Economic Effects ........................................................................................................ 6-3

Social Implications...................................................................................................... 6-4

Roughton International Limited T A B L E O F C O N T E N T S


CONSULTING SERVICES FOR ROADS FINANCING STUDY III

P a g e | III

APPENDICES

Appendix 1A Data Supplied by MoTC

Appendix 2A Technical Details of HDM-4 Analysis of Needed Expenditure

Appendix 2B Revenue Estimation (from the First Technical Report)

Appendix 3A Report on Workshop 1

Appendix 3B Report on Workshop 2

Appendix 3C Case Study: Output and Performance Based Road Maintenance Contracting

(OPBRMC) in the Republic of Serbia

LIST OF TABLES

Table 1 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (1).....................................2-1



Table 4 Budgeted and Actual Expenditures in the Transport Sector, 2009-13 (AMD billion).............2-3

Table 5 Needed Expenditure on Interstate and Republican Roads (AMD billion) ..............................2-6

Table 6 Needed Expenditure on All Common Roads (AMD billion) ....................................................2-6

Table 7 Needed Expenditure on Interstate and Republican Roads (US$ million)...............................2-7

Table 8 Needed Expenditure on All Common Roads (US$ million).....................................................2-7

Table 9 Summary of Existing Identifiable Revenues from Road Users ...............................................2-8

Table 10 Incidence of Fuel Taxation by Class of Vehicle and Type of Tax...........................................2-9

Table 11 Total Fuel Tax Per Litre of Fuel ...........................................................................................2-10

Table 12 Comparative Retail Fuel Prices in Nine Countries (US$/litre) ..............................................3-8

Table 13 Proposed Rationalization of Fuel Taxation ...........................................................................4-2

Table 14 Vignettes Compared to Tolls ................................................................................................4-3

Table 15 Benefits to Road Users Compared With Proposed Tax Impact ............................................6-2

LIST OF FIGURES

Figure 1 Armenian Program Budgeting System ..................................................................................2-4

Figure 2 Summary of Strategic Options and Arguments (2 pages) .....................................................3-6

Figure 3 Projected Average Roughness (IRI): Interstate Road Network .............................................6-2

Figure 4 Projected Average Roughness (IRI): Republican Road Network ...........................................6-2

ACRONYMS AND ABBREVIATIONS


CONSULTING SERVICES FOR ROADS FINANCING STUDY IV

P a g e | IV

ACRONYMS AND ABBREVIATIONS

AC Asphaltic Concrete

ADB Asian Development Bank

ADS Armenian Development Strategy (issued as an annex to RA Government Decree No.442-N on 27 March 2014)

AMD Armenian Dram [Approximate current exchange rate US$1 = AMD475]

ARD Armenian Roads Directorate SNCO

CCP Cement Concrete Pavement

CNG Compressed Natural Gas

CPI Consumer Price Index

DBST Double Bituminous Surface Treatment

EBRD European Bank for Reconstruction and Development

EDB Eurasian Development Bank

ESAL Equivalent Standard Axle Load

GoA Government of Armenia

GDP Gross Domestic Product

GFC Global Financial Crisis (which started in 2008)

GVW Gross Vehicle Weight

HDM-4 Highway Development and Management software (4th generation)

HGV Heavy Goods Vehicle

IFI International Financial Institution

IRI International Roughness Index (approximating the vertical distance in metres that a vehicle travels in a horizontal distance of 1km, due to road surface unevenness.

IRN Interstate Road Network

KPI Key Performance Indicator

LNG Liquified Natural Gas

LRN Local Road Network

LRNIP Lifeline Road Network Improvement Program


CONSULTING SERVICES FOR ROADS FINANCING STUDY V

P a g e | V

Marz One of 10 administrative regions of Armenia, each administered by a Governor.

Marzpetaran Administrative body responsible for a Marz.

MoF Ministry of Finance

MoTC Ministry of Transport and Communication

MTEF Medium Term Public Expenditure Framework

PBMC Performance Based Maintenance Contract

OPBRMC Output and Performance Based Road Maintenance Contracting

RA Republic of Armenia

RAMS Road Asset Management System

RIL Roughton International Limited

RRN Republican Road Network

RUC Road User Cost, including the value of time

SBST Single Bituminous Surface Treatment

SNCO State Non-Commercial Organization

TOR Terms of Reference

TPIU Transport Project Implementation Unit

TR1 / TR2 First / Second Technical Report (of the consultants)

USD / US$ United States Dollar [Approximate current exchange rate US$1 = AMD475]

VAT Value Added Tax

VOC Vehicle Operating Cost

WB World Bank

Note ISO abbreviations are used in this report, for example: kg (kilograms), km (kilometres),

km/h (kilometres per hour), M (millions), Ml (megalitres), Mt (megatonnes), t (tonnes).

The non-standard abbreviation ‘bn’ is used for billion (109), for example in ‘AMDbn’.

Roughton International Limited E X E C U T I V E S U M M A R Y


CONSULTING SERVICES FOR ROADS FINANCING STUDY 1-1

P a g e | E1-1

E1. EXECUTIVE SUMMARY

E1.1 The Consultancy

The consulting firm Roughton International Limited (the Consultant) was engaged by the Govern-

ment of the Republic of Armenia to make a study of current and needed expenditure in the roads

sector, and recommend means of ensuring adequate future funding and the efficient application

thereof. The study is funded under the Armenia Lifeline Roads Network Improvement Project

(LRNIP), supported by the World Bank.

Attention has focused on the maintenance and rehabilitation of interstate, republican and local

roads, while taking into account the ongoing program of upgrading of the North-South Corridor.

Funding for upgrading purposes is considered capital in nature, qualitatively different from the

ongoing funding required to keep the road network in a stable condition.

The consultancy was designed to maximize engagement with interested parties, in particular the

ministries responsible for transport, the economy, finance, and territorial administration; the Marz-

petarans; the international financial institutions (IFIs) involved in supporting the Armenian roads

sector; and the commercial transport sector. Two technical reports were produced, each followed by

a workshop to consider the Consultant’s conclusions and proposals. This report draws on data

supplied in the course of the study, the Consultant’s analysis and feedback from those workshops.

E1.2 Expenditure

Average annual expenditure on road maintenance and rehabilitation during 2010-14 (actual), 2015

(budgeted) and 2016-17 (planned) is estimated at AMD20 billion (US$44M) at constant 2015 prices.

Of this amount, 43% has been financed by borrowing from IFIs on highly concessional terms.

In real terms, after adjustment for inflation, budgeted expenditure in 2015 is the lowest since 2010 in

terms of both the State Budget and the total expenditure on maintenance and rehabilitation incl-

uding loan disbursements.

The local road network has suffered particularly severe underfunding over a long period, resulting in

57% of the network being classified as ‘poor’ or ‘bad’ in 2014. Most of the LRN receives no routine

summer maintenance because of the funding shortfall.

Three estimates of needed expenditure have been made since 2011, by the World Bank, the

consulting firm AARC (for ADB) and now Roughton. The World Bank’s estimate was for interstate

and republican roads only, but at a time when much of the present local road network was classified

as republican. AARC’s assumed much more rapid continuation of concreting the North-South

Corridor than in the present analysis.

After adjustment for these differences, there is little difference between the conclusions reach by the

three sets of analysts. In order to keep the interstate and republican road networks at or near their

present average condition, annual expenditure of AMD28 billion (US$58M) is required up to 2020,

and AMD22 billion (US$47M) thereafter.

The present Consultant does not consider the local road network to be in a state that makes stabiliz-

ation a realistic option immediately. The recommendation is for annual expenditure of AMD14

billion (US$30M) to 2020 and AMD8 billion (US$18M) thereafter.

The Consultant recommends that in the longer term the cost of road maintenance and rehabilitation

should be met entirely from the State Budget, with loan financing only for upgrading projects. This

could be achieved as early as 2020 if the recommendations contained in this report are fully




P a g e | E1-2

implemented. However, extended borrowing on concessional terms for rehabilitation projects

would be preferable to continued underfunding.

E1.3 Revenue

Road users contribute an estimated AMD 143 billion (US$301M) per year through taxes on imported

vehicles, parts, tyres, fuel etc; VAT; and a range of taxes and fees that apply exclusively to road users.

Some apply to foreign-registered vehicles using Armenian roads, but the majority are born by the

owners of Armenian-registered vehicles.

Fuel taxes were studied especially closely, as required by the Consultant’s terms of reference. It was

found that the mix of taxes and their incidence vary greatly between the three type of fuel used by

the Armenian vehicle fleet: petrol, diesel fuel and compressed natural gas (CNG). Armenia is unique

in that CNG provides two-thirds of the energy consumed for road transport. Diesel fuel, although it is

the only fuel used by heavy vehicles, provides no more than 8%.

According to the Consultant’s estimates the total tax burden, comprising customs duty, excise tax,

environmental tax and VAT, amounts to AMD95/litre of petrol, AMD38/litre of diesel fuel and

AMD36/litre equivalent of CNG (1m3 of natural gas contains the calorific value of 1 litre of petrol).

This is clearly irrational, inequitable and inefficient. Some disparity might be justified on environ-

mental grounds, especially in the case of CNG whose CO2 emissions are some 26% lower then those

from petrol combustion and 36% lower than those from diesel fuel combustion. But the scale of the

existing disparity and the low level of taxation of diesel fuel and CNG require to be addressed.

A review of the Tax Code is under way at present. The Consultant recommends that the review

should specifically address the need to rationalize fuel taxes, and has proposed a 2-stage strategy

whereby:

• VAT would be restored to diesel fuel, which was exempted in 2010 as a way to reduce

costs born by farmers, miners and other operators of off-road diesel-powered equip-

ment. The restoration would apply only at the point of sale to road vehicles, to preserve

that policy objective.

• An ‘equalization levy’ would be applied to petrol and CNG, also at the point of sale to

road vehicles, at levels that resulted in equal taxation of all three fuel types, factored by

their relative contributions to CO2 emissions.

This recommendation would increase annual revenue from fuel taxes by an estimated AMD27.4

billion. This would be enough to close the gap completely between the present level of expenditure

and the recommended level. The 2-stage strategy is clumsy and is designed to minimize changes to

the existing untidy structure of fuel taxation. The Consultant would support a more fundamental

rationalization within the context of the ongoing review of the Tax Code, achieving approximately the

same result in terms if equity and incremental revenue.

Hypothecation was explicitly rejected at the First Workshop associated with this consultancy, but this

would not preclude adoption of a policy to ensure a relationship between this additional revenue

from road users and the level of expenditure on the roads.

It is also recommended that ARD review the road fee schedules with a view to rationalizing them and

perhaps increasing the revenue yield. As far as possible fees related to vehicle weight and axle loads

should reflect but not exceed the incremental costs attributable to the passage of heavy vehicles.

The Consultant offers an indicative schedule of rates for Armenian-registered heavy vehicles.

If rationalization of fuel taxes and road fees fails to raise enough money to allow the recommended

level of expenditure on road maintenance and rehabilitation, it is further recommended that a




P a g e | E1-3

special tax on vehicle insurance premiums be introduced. An ad valorem rate in the range 2.5–5.0%

would raise AMD0.5–1.0 billion per year.

For the longer term, it is recommended that the necessary legal steps be taken to allow tolling of

roads, bridges and tunnels without the present requirement that an alternative toll-free must be

available.

E1.4 Efficiency Improvements

Participants at the First Workshop emphasized the need to improve the efficiency with which funds

for road maintenance and rehabilitation are spent. MoTC has adopted several measures to reduce

costs and improve cost-effectiveness, including some proposed by the World Bank in 2011. Others

are recommended in this report:

• Adoption of periodic maintenance as integral to the maintenance cycle.

• Inclusion in rehabilitation contracts of routine maintenance for at least 5 years.

• A 2-stage procedure for taking over projects, on completion of rehabilitation and on

completion of the period of routine maintenance.

• Revision of pavement standards and use of cheaper methods on low traffic volume

roads, and for periodic maintenance on all roads.

• Amendment of Government Decree No.1419-N to add roughness (as measured by the

International Roughness Index, IRI) as a criterion for assessing road condition.

• Use of the Road Asset management Systems (RAMS) that is now being acquired by ARD

to produce economically optimal works programs within the prevailing resource limit-

ations.

• Pilot projects to test the efficacy of performance-based maintenance contracts (PBMCs)

with fixed payments over at least 5 years in return for meeting agreed performance

criteria, which should include maximum roughness defined as an IRI.

E1.5 Implementation

A policy decision should be taken as soon as possible to effect a substantial, enduring increase in the

State Budget allocation to road maintenance and rehabilitation. This should taken and announced

together with a decision to increase revenue collection from road users, with a firm commitment to

use the extra revenue to support the increase in expenditure. The Consultant recommends formal

hypothecation of revenue.

The Tax Code is currently under review, providing an opportunity to implement the Consultant’s

recommendations with respect to revenue. The primary recommendation is fuel tax rationalization

with a substantial increase in the average tax per litre. Secondary recommendations are the rational-

ization of road fees and creation of a new tax on vehicle insurance premiums.

Legal provision should be made now for the future imposition of road, bridge and tunnel tolls, with

the possibility of franchised toll collection and sale of vignettes.

Various proposals have been made to reduce costs and improve efficiency, some of which have been

introduced or are being tried. High priority should now be given to reviewing contractual arrange-

ments with a view to a) combining medium-term routine maintenance contracts with rehabilitation

contracts; and b) piloting performance-based maintenance contracts (PBMCs) as an alternative to

the present unit price based contracts.

The Consultant does not recommend devolution of responsibility for road maintenance, other than

through toll franchising arrangements. But if this is preferred to increasing the State Budget alloc-




P a g e | E1-4

ation to roads, legal steps should be initiated to give both responsibility and commensurate revenue-

raising powers to communities.

E1.6 Social and Economic Consequences

Participants at the First Workshop expressed concern that higher transport costs, caused by new or

increased taxes and charges paid by road users, would have a depressive effect on the economy. The

Consultant offers the counter-argument that bad roads impose much higher costs on road users,

therefore if the proceeds of higher taxes or charges were devoted road maintenance and rehab-

ilitation there would be a significant net reduction in transport costs.

If the Consultant’s recommended level of expenditure on road maintenance and rehabilitation were

adopted, then the measurable improvement in road quality would be an average reduction of 4 IRI

points (from about 11 to about 7 in the case if interstate roads, and from about 12 to 8 in the case of

republican roads). This would result in a reduction of about 15% in vehicle operating costs and a 16%

reduction in road user costs (including time savings). The recommended rationalization of fuel taxes

would add between 2% and 4% to vehicle operating costs.

A notional example indicates that the cost of goods transported by medium-sized truck to a typical

village would be reduced by 0.2% because of the net reduction in transport costs. Bus fares should

be reduced by about 8%.

It is possible, but unprovable, that the high proportion of uncropped arable land and the rapid

growth of food imports might be impacted positively by the improvement in local roads that would

result from the recommended level of expenditure. It is also probable that the improvement would

enhance employment opportunities, especially in rural areas and among the poor, and make Arm-

enian exports more competitive.

A policy of selective depopulation to reduce the cost of providing access and essential services to

remote areas is not recommended.

E1.7 Summary of Recommendations

The Consultant has considered several possible ways to bridge the gap between a) the existing

budgetary allocation to road maintenance and rehabilitation and b) the level of expenditure needed

to keep the road network in a stable condition. But only a few of those possibilities are recom-

mended. They are:

• A high-level policy decision to increase the level of annual expenditure from about

AMD19 billion now to AMD42 billion until 2020 and AMD31 billion thereafter.

• Loan financing of rehabilitation until 2020, after which all road maintenance (including

rehabilitation) would be financed from the State Budget.

• Rationalization of fuel taxation with an increase of AMD38 (US$0.08) in the average tax

per litre, yielding sufficient additional revenue to cover the recommended increase in

expenditure and ameliorating the present inequity between users or the three fuel

types.

• Rationalization of road fees, to ensure that they accurately reflect the relative road

construction and maintenance costs imposed by different classes of vehicle.

• Legal facilitation of taxation of vehicle insurance premiums.

• Legal facilitation of road/bridge/tunnel tolls, vignettes and associated franchising.

• Introduction of periodic maintenance into the normal maintenance cycle.




P a g e | E1-5

• Continued experimentation with more cost-effective maintenance treatments for low-

traffic roads.

• Continued strengthening of ARD’s capacity, including RAMS acquisition.

• Changes to contractual arrangements, including the inclusion of medium-term routine

maintenance into road rehabilitation contracts; and true performance-based mainten-

ance contracts (PBMCs).

• Amendment of Decree 1419-N to include roughness (IRI) as a performance indicator.

1. INTRODUCTION

Roughton International Limited Introduction



P a g e | 1-1

1. INTRODUCTION

THE CONSULTANCY

1 The consulting firm Roughton International Ltd has been engaged by the Government of the

Republic of Armenia under the Armenia Lifeline Roads Network Improvement Project

(LRNIP), which is supported by a loan from the World Bank, to make a study of roads

financing.

2 In summary, the purpose of this study is to review current and recent budgetary provision for

the roads sector; identify existing road user taxes and charges and estimate the revenues

they produce; estimate the road sector’s medium- and long-term financing needs; and

propose ways in which those needs could be met.

3 This is the last of four reports. The first two were technical reports intended as inputs to two

workshops:

• First Technical Report (TR1) which a) detailed recent and planned expenditure on road

maintenance and improvement; b) estimated future expenditure needed to “keep the

road network in a stable long-term condition”; c) identified and estimated the yield

from taxes and charges levied on road users; and d) proposed optional strategies for

closing the gap between existing and needed expenditure levels.

• Second Technical Report (TR2) which set out a time-bound implementation plan for

those elements of the proposed strategies that were preferred by participants in the

First Workshop, held on 28 April 2015. TR2 was presented and discussed at the Second

Workshop, held on 26 May 2015, and written comments were received from the World

Bank. A revised version of TR2 took these comments into account and was submitted to

the Client after the Second Workshop.

The third was the Draft Final Report, from which this report has been developed. It was

presented and discussed at the Second Workshop but no written comments were received.

4 Brief reports on the First and Second Workshops are included here as Appendices 3A and 3B

respectively.

APPROACH AND METHOD

5 Official data were used to build up a comprehensive picture of the condition of the three

road networks, relevant actual expenditure since 2009, budget expenditure in 2015 and

planned expenditure in 2016 and 2017. Appendix 1A presents data provided by MoTC for

the period 2004-15.

6 Official sources were also used as far as possible to identify and quantify existing revenues

from road users, including taxes usually regarded as general in nature (customs duty, VAT

etc) as well as taxes and charges specific to road users. Available official data were

supplemented from a variety of sources, including interviews with private sector represent-

atives and the consultants’ own estimates.

7 Estimates of needed expenditure were made for the interstate and republican road networks

(IRN and RRN) using the HDM-4 model and the Armenian Roads Directorate’s (ARD’s)

database of road specifications, condition and traffic. HDM-4’s Program mode was used,

which produced a 20-year section-wise list of optimum interventions and costs. The model




P a g e | 1-2

selected from a menu of possible interventions to produce the best possible economic rate

of return within a defined budget limit.

8 No objective data exist for the local road network (LRN) so a much cruder approach had to

be adopted. Costs were estimated for rehabilitation of 5% of the network annually and full

routine maintenance (comprising winter and summer maintenance) of the remainder.

Allowing for progressive deterioration, and consequent slippage from ‘good’ to ‘fair’ and

then to ‘poor/bad’ condition, this is projected to bring 35% of the LRN to good condition and

65% to fair condition in 2034. At present the proportions are reported to be 18% good, 25%

fair and the remainder poor or bad (see Appendix 1A).

9 Other estimates have been made of needed expenditure on the IRN and RRN, notably by the

World Bank in 2011 (Report No.66533-AM ‘Improving the Sustainability of Road Manage-

ment’) and by ADB’s consultant AARC in 2015 (ADB TA-8710 ‘Road Maintenance Financing

Strategy’). As is to be expected, those estimates are similar to the present Consultant’s,

given that the World Bank estimates covered only the IRN and RRN and were conducted at a

time when a proportion of local roads had been temporarily re-classified as republican roads.

10 There is evidently a wide gap between needed expenditure and the resources allocated to

road maintenance and rehabilitation in the State Budget. The Consultant explored ways to

close that gap and presented them in his First Technical Report for discussion at the First

Workshop. Some were unacceptable to the Ministry of Finance and were therefore

eliminated from the second phase of the study, which dealt with implementation of the

preferred proposals and culminated with TR2 and the Second Workshop.

TERMINOLOGY AND UNITS

11 To understand all parts of this report it is necessary to understand the meanings of some

different terms that are used by international institutions (such as the World Bank) and in

Armenia. Internationally, maintenance is usually classified as:

• Routine. This comprises patching the road surface; clearing and repairing drains; cutting

back roadside foliage; repairing and replacing roads signs and protective barriers;

refreshing road markings; and whatever other minor works that are needed to keep a

road serviceable and safe. In Armenia it would include snow clearance. For a concrete

pavement (such as the North-South Corridor) it includes joint re-sealing.

• Periodic. A bitumen road typically needs a major maintenance intervention every 5-10

years. This usually includes an overlay of some kind to ensure the integrity of the

surface and restore it to a smoothness close to that of a newly-built road.

• Reconstruction. Roads typically have a design life of 20 years, during which they receive

two periodic interventions and intervening routine maintenance. At the end of its

design life a road should be reconstructed. If the traffic volume has changed sub-

stantially, or its role in the network has changed, it may be reconstructed to a higher or

lower design standard.

12 In Armenia, however, road works are defined differently:

• Routine maintenance – winter. Winter maintenance is meant to keep roads passable

during the five months of winter and it chiefly involves snow-clearing. It does not

involve repair or protection of the road surface, drains or other associated structures.

• Routine maintenance – summer. This is like ‘routine maintenance’ as described above,

the main activity being the filling and patching of potholes.




P a g e | 1-3

• Capital repair (or ‘rehabilitation’). This term is applied to both ‘reconstruction’ and

‘periodic maintenance’ as defined above and usually occurs after a period during which

a road is considered to be in such poor condition that it is unmaintainable. Most of the

local road network is in this condition now.

13 The Armenian State Budget uses the terms ‘routine maintenance’ and ‘capital repair’. The

latter is considered capital in nature, even if it resembles periodic maintenance, and there-

fore eligible for loan financing.

14 On the other hand the World Bank’s analysis in 2011 and the two analyses by consultants in

2015, all of which made use of HDM-4, are based on the internationally recognised cycle of

road maintenance comprising routine maintenance, periodic maintenance and rehabilit-

ation/reconstruction. The associated terms are also used. In those analyses some kind of

intervention is required every year: at least routine maintenance. They do not accommodate

the current Armenian strategy of leaving bad road sections unmaintained for long periods

until capital repairs can be afforded.

15 In TR1 all findings concerning needed expenditure were shown in two currencies: US$ and

AMD. This was done for the convenience of readers outside Armenia and because the WB

analysis that was a major input to this study was carried out entirely in US$. In this report,

however, the primary currency in most tables is AMD. The dollar equivalents of some key

figures are included, using an exchange rate of US$1 = AMD475.

REPORT STRUCTURE, CONTENT AND PURPOSE

16 The Consultant’s terms of reference (TOR) call for the Final Report to present his findings,

conclusions and recommendations. This report is structured accordingly, with separate

chapter outlining a) the legal and other measures required to implement the recommend-

ations and b) the social and economic consequences of adopting or rejecting the recom-

mendations.

17 This report is intended to be read as a stand-alone document, but some of the detailed

analyses that were explained in TR1 are excluded. Readers who want to have a more

complete understanding or check the reliability of the Consultant’s findings may ask for soft

copies of that report from MoTC.

18 The purpose of this report is twofold:

• To establish a factual basis for policy-making with regard to road maintenance and

rehabilitation encompassing current levels of expenditure, needed future levels of

expenditure, revenues currently received from road users and the potential for

increasing and/or supplementing those revenues.

• To offer specific recommendations for achieving a better outcome for road users and for

the national economy within existing and projected fiscal constraints.

2. FINDINGS

Roughton International Limited Findings



P a g e | 2-1

2. FINDINGS

ACTUAL , BUDGETED AND PROJECTED EXPENDITURE

19 Table 1 shows the total expenditure in the road sector from the State Budget and external loan

disbursements during 2009-2014 (actual), 2015 (approved budget) and 2016-17 (planned,

according to the latest available MTEF). Two totals are shown at the foot of the table:

• Total expenditure from all sources and for all road maintenance, rehabilitation and upgrad-

ing activities.

• Total current expenditure, excluding the North-South Corridor project which is regarded as

upgrading and therefore ‘capital’ in nature.

Table 1 Expenditure on Road Maintenance and Rehabilitation, 2009-17 (1)

AMD billion at current prices

Budget

2009 2010 2011 2012 2013 2014 2015 2016 2017

Capital repair 5.52 0.73 0.96 1.49 2.39 3.04 1.56

Routine maintenance

Capital repair 5.67 0.49 1.85 1.05 0.45 1.07 0.86

Routine maintenance

Capital repair 4.00 4.00

Routine maintenance 5.60 5.52 5.33 5.55 5.51 5.82 5.96 6.26 6.57

Capital repair 2.15 0.07 0.81 2.18 0.91 1.98 0.59


Capital repair 13.34 1.29 3.62 4.71 3.75 6.09 3.01 4.00 4.00


Total 19.72 7.57 9.72 11.02 10.01 12.67 9.77 11.09 11.45

ADB North-South Corridor 0.47 7.01 7.96 29.64 12.83 21.64 43.83

EBRD Bagratashen-Border [a] 1.63 1.52 1.95

WB Lifeline Roads 30.77 10.74 10.39 6.49 8.37 2.63 4.78 6.84 5.28

Total 30.77 10.74 10.86 13.50 16.33 32.27 19.24 30.00 51.06

50.49 18.31 20.58 24.52 26.34 44.94 29.01 41.09 62.51

50.49 18.31 20.11 17.51 18.38 15.30 16.18 19.45 18.68

Actual Expenditure Planned

Interstate

Roads (IRN)

Republican

Roads (RRN)

State Budget

IRN/RRN un-

differentiated

Local Roads

All Common

Roads

Excluding capital component [b]

External loan disbursements

[a] Provisional figures.

[b] Assuming that 100% of the North-South Corridor expenditure is for upgrading (capital) works.

Source: MoTC/ARD and MoF reports. This is an updated and more disaggragated version of Table 3 in Chapter 2

of the First Technical Report.

Total for the Roads Sector

20 This table is repeated below in two variants:

• Table 2: The effects of inflation are removed from Table 1 by applying the Consumer Price

Index (CPI), as published by the Armenian Statistical Service, to the actual expenditure

figures in 2009-14, and the average inflation rate to the planned figures in 2016 and 2017.

• Table 3: The constant price figures in Table 2 are converted to US dollars using average

annual exchange rates published by the Central Bank of Armenia. The average annual rate

of depreciation since 2009 is used to convert planned figures in 2016 and 2017.




P a g e | 2-2


AMD billion at constant 2015 prices

Budget

2009 2010 2011 2012 2013 2014 2015 2016 2017

Capital repair 7.61 0.93 1.13 1.72 2.60 3.22 1.56

Routine maintenance

Capital repair 7.82 0.62 2.19 1.21 0.49 1.13 0.86

Routine maintenance



Capital repair 2.96 0.09 0.96 2.51 0.99 2.09 0.59


Capital repair 18.39 1.65 4.29 5.44 4.08 6.44 3.01 3.80 3.61


Total 27.18 9.65 11.50 12.71 10.91 13.41 9.77 10.55 10.35




Total 42.42 13.68 12.85 15.56 17.80 34.14 19.24 28.52 46.14

69.60 23.33 24.34 28.27 28.71 47.55 29.01 39.07 56.49

69.60 23.33 23.79 20.19 20.03 16.19 16.18 18.49 16.88



Source: MoTC/ARD and MoF reports. The published CPI index has been used to express annual figures in 2015

constant prices. The average inflation rate of 5.2%pa has been used to adjust the amounts planned for 2016 and

All Common

Roads



Excluding capital component [b]

Interstate

Roads (IRN)

Republican

Roads (RRN)

IRN/RRN un-

differentiated

Local Roads


State Budget

21 The annual amounts for road maintenance, excluding the upgrading of the North-South Corridor

which is taken to be truly capital in nature, fall far short of all estimates of the needed level: see

the section below, beginning with paragraph 29.

22 In its 2011 report on its analysis of needed expenditure, the World Bank recommended an

increase of US$30M in the annual expenditure on routine maintenance, periodic maintenance

and rehabilitation. This figure has often been quoted out of context. At the time of the analysis

the Government was planning to spend US$68M and the World Bank was recommending

expenditure on US$98M. As shown in Table 1 above, actual expenditure in 2011 was only 30%

of the planned amount and 21% of the World Bank’s recommendation.

23 Such discrepancies are not unusual. Table 4 shows budgeted and actual expenditure in the

transport sector as a whole and in the roads sector between 2009 and 2013.

24 Local roads have fared particularly badly, suffering a big reduction in their budget allocation for

routine maintenance between 2009 and 2015. The reduction has been 22% in dollar terms, or

28% in real AMD terms using the CPI as a deflator. An average of AMD1.35 billion was spent on

capital repair in each of the years 2009-14 and AMD0.59 billion is included in the current State

Budget. AMD0.59 billion is enough to rehabilitate about 9km of local road, or 0.4% of the total

length of road considered to be beyond maintenance.




P a g e | 2-3


US$ million at constant 2015 prices

Budget

2009 2010 2011 2012 2013 2014 2015 2016 2017

Capital repair 17.2 2.2 2.8 3.9 6.1 7.5 3.3

Routine maintenance

Capital repair 17.6 1.5 5.4 2.8 1.1 2.6 1.8

Routine maintenance



Capital repair 6.7 0.2 2.4 5.8 2.3 4.9 1.3


Capital repair 41.5 3.8 10.5 12.5 9.5 14.9 6.3 7.9 7.4


Total 61.3 22.4 28.3 29.2 25.5 31.1 20.6 21.9 21.2




Total 95.6 31.8 31.6 35.7 41.5 79.2 40.5 59.2 94.4

156.9 54.2 59.9 64.9 67.0 110.3 61.1 81.1 115.6

156.9 54.2 58.5 46.3 46.7 37.5 34.1 38.4 34.5Excluding capital component [b]



Source: MoTC/ARD and MoF reports. Published average annual exchange rates have been used to convert AMD

values to US$. The average depreciation rate of 4.6%pa has been used to adjust the amounts planned for 2016

Local Roads

All Common

Roads



State Budget

Interstate

Roads (IRN)

Republican

Roads (RRN)

IRN/RRN un-

differentiated


Table 4 Budgeted and Actual Expenditures in the Transport Sector, 2009-13 (AMD billion)

2009 2010 2011 2012 2013

Transport sector Original budget 54.6 40.7 50.3 69.1 83.7

Revised budget 71.4 43.7 49.6 61.5 75.6

Actual expenditure 60.7 36.7 30.4 35.3 37.9

Road transport sector Original budget 50.8 38.0 39.7 61.8 73.8

Revised budget 67.4 39.4 38.5 54.3 68.9

Actual expenditure 57.8 32.5 24.6 29.5 31.3

Actual as % of original budget Transport sector 111% 90% 60% 51% 45%

Road transport sector 114% 86% 62% 48% 42%

Actual as % of revised budget Transport sector 85% 84% 61% 57% 50%

Road transport sector 86% 83% 64% 54% 45%

Source: Ministry of Finance, Annual Reports on RA State Budget Execution




P a g e | 2-4

BUDGET PROCESS

25 Armenia has an integrated program budgeting system which includes the Armenia Development

Plan for 2014-25 (ADS), annexed to Decree No.442-N of 27 March 2014; a 3-year rolling public

expenditure framework (the MTEF); and the annual State Budget. In Figure 1 the consultants

have tried to describe the system as it is intended to work.

26 The system is well conceived and has the features of an integrated process that involves

strategic planning, prioritisation, economic appraisal of alternatives, targets, performance

monitoring and feedback. But in practice, with regard to the roads sector at least, the system

does not seem to work as intended. There is little connection between the various components

of the system; objective analysis has little influence on sectoral or program allocations; and

there is minimal feedback.

27 Considerable effort and resources have been and are being devoted to equipping the Armenian

Roads Directorate SNCO (ARD) to manage the national road network efficiently. ARD already

has equipment to measure road surface roughness, pavement structural capacity and traffic

volumes; and the same software (HDM-4) that has been used by WB, AARC and Roughton to

estimate needed expenditure as reported in this report. Additional equipment and software will

be bought by the end of 2015, including a road asset management system (RAMS) that will be

linked to HDM-4, giving ARD a powerful tool to determine annual priorities and also formulate

longer-term network development plans. But this will be of limited value if the budgeting

system remains as it is.

28 Commenting on Armenia’s planning and budgeting processes lies outside the Consultant’s TOR,

but systemic weaknesses appear to have had a damaging effect on the roads sector and may be

an obstacle to the successful implementation of whatever financing strategy is eventually

adopted.

Figure 1 Armenian Program Budgeting System

Strategic Plan

(Armenian DevelopmentStrategy, ADS)

Annual Budget approved by Parliament

Actual expenditure and implementation of

programs

Review of

outcomes,

comparisonwith KPIs,

and

consequent adjustment

of future

plans and methods

Broad allocation of funds

between programs

Identification of program elements, and

their costs and intended benefits

Cost-benefit analyses of

program elements (quantitative

where possible)

Rolling 3-year forward program of

expenditure and expected measurable outcomes (MTEF)

Definition of key performance

indicators (KPIs)

Identification of programs to implement

ADS

Annual budgeting process




P a g e | 2-5

NEEDED EXPENDITURE

29 The national road network comprises three networks, differentiated according to each road

section’s level of significance. These levels correspond closely with design standards and traffic

volumes. The current length of road in each of the three networks is as follows, according to

the Consultant’s TOR, with the corresponding figures for 2011 shown in parenthesis:

• Interstate Road Network IRN: 1,759km (1,686km)

• Republican Road Network RRN: 1,964km (4,056km)

• Local Road Network LRN: 3,825km (1,962km)

• Total national network: 7,548km (7,704km)

The status in 2011 is significant because that is when the WB carried out its own analysis of

needed expenditure on the primary roads (IRN and RRN), the results of which are shown below

for comparison with Consultant’s own.

30 HDM-4 was run for four different scenarios, compiling for each an economically optimum works

programme for individual road sections over 20 years:

• Scenario 1: Unconstrained (ie with no upper limit to annual expenditure).

• Scenario 2: Non-routine maintenance expenditure constrained to US$30M/year (IRN) and

US$22M/year (RRN), which was found by iterative means to be sufficient to keep network-

wide average IRI values within 1.5 of the present values.

• Scenario 3: Non-routine maintenance expenditure constrained to US$13M/year (IRN) and

US$8.5M/year (RRN), which correspond approximately to the amount allocated to road

maintenance under the State Budget in recent years.

• Scenario 4: Routine maintenance only.

31 The first of these scenarios is the ideal if there is no financial constraint, since it produces the

best overall solution for the country as a whole. It takes into account costs born by the

Government, as owner and manager of the roads, and by road users. But it may be over-

optimistic to expect the necessary public funds to be available in the medium term.

32 The second scenario allows for no overall improvement but it prevents further deterioration. It

comes closest to meeting the requirement in the consultants’ TOR and is, in the consultants’

opinion, the minimum acceptable scenario.

33 The third and fourth scenarios have been included for comparative purposes, not for realistic

consideration.

34 The results of this analysis were presented in detail in an appendix to the First Technical Report

and in summary tables in the main text of that report. The estimates for the IRN have since

been adjusted, at ARD’s instigation, to allow for continuation of the program of concreting in

the North-South Corridor, which may be extended to other high traffic volume roads. The

Consultant has assumed:

• Concreting of 92km of M-1 and 20km of M-2 by 2020, including stretches that have already

been completed or are under way.

• Thereafter, concreting of 30km of unspecified road per year to the end of the 20-year

analysis period.

The result is a reduction of between $1M and $3M per year in rehabilitation and periodic

maintenance costs, depending on the degree of financial constraint. The average annual saving

is $2M (AMD1 billion) in the Consultant’s recommended second scenario. Revised summary

tables are presented in Appendix 2A.




P a g e | 2-6

35 In Table 5 and Table 6 below the adjusted results for only the second scenario are shown,

together with the most closely comparable results from the World Bank (WB) and AARC

analyses. These results have also been adjusted as follows:

• The WB’s Option 4 estimates were selected for comparison, since that option was

calibrated to ‘keep existing road conditions’. These estimates were factored by 0.67 to

take account of differences in the number of kilometres allocated to the interstate and

republican networks then and now (see para.29 above).

• AARC’s ‘Proposed strategy’ was selected as the closest to Roughton’s second scenario. The

IRN estimate was factored by 1.22 to allow for different assumptions about the extent and

pace of North-South Corridor concreting, made on advice from the MoTC.

• The AARC estimates were presented as annual averages over the 10-year period 2015-

2025, whereas the WB and Roughton estimates were averaged over two periods: the first 5

years and the subsequent 15 years. For comparison purposes it is assumed that AARC’s

estimates for years 6-10 apply to years 11-20 too.

For the convenience of readers outside Armenia the same comparisons are repeated in US$ in

Table 7 and Table 8.

Table 5 Needed Expenditure on Interstate and Republican Roads (AMD billion)

Re

ha

bil

itati

on

Peri

od

ic

Ma

inte

na

nc

e

Ro

uti

ne

Ma

inte

na

nc

e

To

tal

Re

ha

bil

itati

on

Peri

od

ic

Ma

inte

na

nc

e

Ro

uti

ne

Ma

inte

na

nc

e

To

tal

WB Option 4 17 3 8 28 5 9 8 21

AARC Proposed Strategy 29 25

Roughton Scenario 2 7 16 4 28 9 9 5 22

Strategy Option / Scenario

In each of years 1-5 In each of years 6-20

Sources: World Bank 2011, Report No.66533-AM ‘Improving the Sustainability of Road Management and Financing in Armenia’.

AARC 2015: ADB TA-8710 ‘Road Maintenance Financing Strategy’. Roughton International Limited: current study.

Table 6 Needed Expenditure on All Common Roads (AMD billion)

Re

ha

bil

ita

tio

n

Peri

od

ic

Ma

inte

nan

ce

Ro

uti

ne

Ma

inte

nan

ce

To

tal

Re

ha

bil

ita

tio

n

Peri

od

ic

Ma

inte

nan

ce

Ro

uti

ne

Ma

inte

nan

ce

To

tal

WB: Local roads not covered na na na na na na na na










P a g e | 2-7

Table 7 Needed Expenditure on Interstate and Republican Roads (US$ million)

Re

ha

bil

itati

on

Peri

od

ic

Ma

inte

na

nc

e

Ro

uti

ne

Ma

inte

na

nc

e

To

tal

Re

ha

bil

itati

on

Peri

od

ic

Ma

inte

na

nc

e

Ro

uti

ne

Ma

inte

na

nc

e

To

tal

WB Option 4 36 7 17 59 9 18 17 45







Table 8 Needed Expenditure on All Common Roads (US$ million)

Re

ha

bil

ita

tio

n

Peri

od

ic

Ma

inte

nan

ce

Ro

uti

ne

Ma

inte

nan

ce

To

tal

Re

ha

bil

ita

tio

n

Peri

od

ic

Ma

inte

nan

ce

Ro

uti

ne

Ma

inte

nan

ce

To

tal

WB: Local roads not covered na na na na na na na na







36 There are inevitably differences between the three sets of results, arising from somewhat

different scenario definitions and different estimated values entered to HDM-4. But it is clear

that total annual expenditure in the range AMD32–42 billion (US$68–88M) in the short term

and about AMD30 billion (US$63M) in the longer term is needed simply to prevent further

deterioration of the road network. This is considerably less than the 1.2% of GDP which is

committed in the Armenian Development Strategy (ADS). But it relates only to maintenance

and rehabilitation, not to upgrading works such as those currently under way in the North-South

Corridor.

37 The main difference between the three analyses is in the local roads sector. The WB excluded

local roads from their analysis. AARC assumed an average maintenance cost of US$2,000/

km/year (AMD0.95M/km/year). Roughton allowed for a program of rehabilitation and routine

maintenance that would eliminate ‘bad’ roads by 2027. This may seem to contradict the TOR

which call for an estimation of needed expenditure “to keep the road network in a stable long-

term condition” not to achieve improvement. But in the Consultant’s opinion the degree of

neglect to which the LRN has been subjected necessitates a period of remediation before

seeking stability.

38 The term ‘backlog’ is imprecise, but an analysis was made of HDM-4 output for each of the

Consultant’s three scenarios for which HDM-4 was applied to the interstate and republican road




P a g e | 2-8

networks. In this analysis the backlog was defined as all stretches of road that were categorized

by MoTC as ‘poor’ or ‘bad’ in 2014; and the simple assumption was made that all of HDM-4’s

recommended major interventions (periodic maintenance or reconstruction) in the early years

were for ‘poor’ or ‘bad’ stretches of road. On that basis:

• In Scenario 1 (unconstrained funding) all of the IRN backlog is cleared in the first year and

the RRN backlog is cleared by 2020.

• In Scenario 2 (stable condition, recommended by the Consultant) the IRN backlog is cleared

by 2019 and the RRN backlog is cleared by 2025.

• In Scenario 3 (present level of funding) the IRN backlog is cleared by 2026 but the RRN

backlog is not cleared within the 20-year period of the analysis.

EXISTING REVENUES FROM ROAD USERS

39 Very few data were available on revenues collected from road users, so the Consultant derived

information and estimates from a variety of sources. The findings and their derivation are set

out in detail in Chapter 5 of TR1 and reproduced as Appendix 2B to this report. The findings are

summarized in Table 9 below. The figures are conservative in that they exclude some minor

revenues for which the Consultant could not find a reliable basis for estimation. However, the

following have been added to the taxes and charges that were included in the analysis reported

in TR1:

• Excise tax and VAT on lubricants, which have many more uses than road transportation.

Road users’ share of annual revenue from this source is estimated at AMD4.2 billion.

• Environmental fees on foreign-registered as they enter Armenia; and levied annually on

Armenian-registered vehicles according to vehicle class, propensity for air pollution and

horsepower. The Consultant has estimated that Armenian road users pay AMD2.2 billion

per year.

Table 9 Summary of Existing Identifiable Revenues from Road Users

Source of revenue Unit Cu

sto

ms

du

ty

Ex

cis

e t

ax

VA

T

En

vir

on

-

me

nta

l ta

x

Oth

er

taxes

Fees

an

d

fin

es

To

tal

Taxes on fuel AMDbn/year 2.6 6.0 31.9 0.3 40.8

Taxes on other imports AMDbn/year 19.6 47.9 67.5

Road fees AMDbn/year 5.5 5.5

Property tax on vehicles AMDbn/year 14.9 14.9

Other levies AMDbn/year 14.5 14.5

Total Revenue AMDbn/year 22.2 6.0 79.9 0.3 20.4 14.5 143.2

US$M/year [a] 46.7 12.5 168.1 0.6 43.0 30.5 301.5

[a] Converted at US$ 1 = AMD 475

40 It is apparent that VAT, customs duty and property tax are the dominant sources of revenue.

The Consultant’s TOR required a special focus on fuel taxation, which accounts for only 27% of

the total. A closer examination revealed significant differences between the tax burden born by

the three types of fuel used to power road vehicles in Armenia: petrol (or gasoline), diesel fuel

and compressed natural gas (CNG). In summary:

• Although CNG powers 73% of vehicle usage, it contributes only 49% of the tax revenue.

This is because customs duty and excise tax (the only taxes applied to CNG) are ad valorem




P a g e | 2-9

taxes – ie they are calculated on the value of goods not the tonnage – and gas is a much

cheaper source of energy than refined petroleum products.

• In contrast, petrol powers 26% of vehicle usage and contributes 46% of tax revenue.

• No VAT is levied on diesel fuel, it having been exempted in 2010, but diesel fuel is the only

one to bear the environmental tax.

• CNG bears no excise tax, it being produced from natural gas which is (unlike petroleum gas)

explicitly exempt.

41 The incidence of fuel taxation, as estimated by the Consultant, is shown in Table 10. The total

incidence per litre of fuel is shown in Table 11. It is coincidental that diesel fuel and CNG (1m3 of

natural gas being counted as 1 litre, the energy content being very close to that if 1 litre of

petrol) are taxed at almost the same level. The total weighted average tax on fuel is AMD51

(US$0.11) per litre. As has been pointed out in other reports, this is low by world standards. It

is even lower than in the USA, where according to the American Petroleum Institute the average

rate of tax (State and Federal) is US$0.129/litre on petrol and US$0.143 on diesel fuel. Fuel

taxes in Europe range between US$0.40 and US$0.90 per litre.

42 The gap between the tax burden born by petrol compared with that born by the other fuels is

hard to justify in terms of equity or efficiency. If fuel taxes are considered a proxy for road use

charges, the greatest burden should be born by diesel fuel, since in the road transport sector it

is used chiefly by heavy goods vehicles (HGVs) which impose the greatest costs on the road

network in terms of design standards and maintenance.

43 There are understandable reasons for the disparity. Diesel fuel was exempted from VAT

because at least 70% is used for non-road-related purposes such as agriculture and mining.

Road transport accounts for less than 20% of natural gas consumption, the rest being used

mainly for domestic heating and cooking purposes. Nevertheless, the Consultant has addressed

this issue and made specific proposals in Chapter 4.

Table 10 Incidence of Fuel Taxation by Class of Vehicle and Type of Tax

Lig

ht

Me

diu

m

He

avy

Se

mi-

tra

ilers

Petrol: Excise tax AMDbn/year 2.9 0.1 0.2 0.1 3.3

Petrol: VAT at the border AMDbn/year 10.1 0.3 0.8 0.3 11.5

Petrol: VAT at point of sale AMDbn/year 1.8 0.0 0.1 0.0 2.1

Diesel: Excise tax AMDbn/year 0.1 0.2 0.4 0.5 0.3 1.5

Diesel: Environment tax AMDbn/year 0.0 0.0 0.1 0.1 0.1 0.3

Diesel: VAT at point of sale AMDbn/year

CNG: Customs duty AMDbn/year 2.4 0.2 0.1 2.6

CNG: VAT at the border AMDbn/year 9.9 0.8 0.3 11.0

CNG: VAT at point of sale AMDbn/year 4.0 0.3 0.1 4.4


US$M/year 65.5 3.7 4.0 1.9 1.1 0.8 77.1

% 85% 5% 5% 3% 1% 1%

Trucks

To

tal

Unit Cars

Bu

se

s




P a g e | 2-10

Table 11 Total Fuel Tax Per Litre of Fuel

Petrol 95

Diesel 38

CNG (1 litre = 1 m3) 36

Fuel type AMD/litre

44 In the absence of VAT on diesel fuel, there are road fees payable by the owners of Armenian-

registered HGVs with gross tonnage of at least 20t; and a separate scale of road fees that apply

to foreign-registered vehicles using Armenian roads. Together these are estimated to raise

AMD5.5 billion annually. Apart from property tax on vehicles, which is collected directly by

communities as a contribution to general revenue, the taxes and charges applied specifically to

road users are minimal. The Consultant estimates total annual revenue of AMD12.3 billion from

these sources, mainly from annual technical inspections of vehicles and traffic fines.

45 Two kinds of revenue are notable by their absence:

• Tolls for the use of roads, bridges or tunnels.

• Fines for overloading. However, a new law will soon be in place together with mobile

weighbridges allowing spot checks as well as the existing checks on gross vehicle weights

and axle loads at the international borders. These measures are intended to deter

overloading, not to raise revenue. Consequently the Consultant has not assumed any

revenue from this source.

3. CONCLUSIONS

Roughton International Limited Conclusions



P a g e | 3-1

3. CONCLUSIONS

LEVELS OF FINANCING

46 A comparison of recent actual expenditure on road maintenance and rehabilitation with the

three independent estimates of needed expenditure (by the World Bank, AARC and Roughton)

leads to the conclusion that the State Budget is equivalent to 25–30% of the needed amount

in the medium term (to 2020) and 35–40% in the longer term. Taking into account the

average rate of borrowing since 2009, total expenditure has been about 40% of the needed

amount in the medium term and 60% in the longer term.

47 This assessment takes into account expenditure on local roads but excludes expenditure to

upgrade the North-South Corridor, since this lies outside the definition of ‘maintenance amd

rehabilitation’. ‘Needed expenditure’ is taken to mean expenditure that is necessary to keep

the primary road network (IRN+RRN) in its present average condition; and to bring the local

roads gradually to a situation where about half the length is in good condition and none is in

bad condition.

48 However, in order to estimate future maintenance needs it was necessary to make assump-

tions about the nature and pace of major upgrading works in the North-South Corridor,

explained in para.34 above. The capital cost of replacing the existing 2-lane asphaltic concrete

pavement with a 4-lane cement concrete pavement (CCP) is about US$5M (AMD2.4 billion) per

kilometre. More precise estimates will be possible only when preliminary designs have been

done. The cost of continuing this program is therefore expected to be about US$150M

(AMD70 billion) per year. Given Armenia’s tight budgetary situation and restrictive policy on

future borrowing, the Consultant does not envisage any other major upgrading works during

the period covered by his analysis.

49 It may be questioned whether the scale of expenditure on the North-South Corridor is appr-

opriate, in view of the chronic underfunding of road maintenance and rehabilitation that was

documented in TR1 and in this report. The Consultant recommends that all public investment

projects be subjected to rigorous economic appraisal, with a view to maximizing social returns

from available funds from whatever sources. In the roads sector such appraisals can be done

with relative ease by ARD using HDM-4 and its growing arsenal of equipment and expertise.

50 It was hoped that the First Workshop would result in a broad consensus about the strategy to

be followed, allowing the Consultant to draw up a meaningful implementation plan. The

workshop turned out to be a useful forum for exchanging ideas and opinions and gaining

deeper understanding among interested parties of their respective points of view. But it did

not produce a consensus; see Appendix 3A.

51 After the workshop the Consultant received written comments on TR1 from the World Bank,

the Director of the ARD and the Minister of Finance (MoF). The latter confirmed the

differences of opinion that underlie the failure to reach a consensus. In summary, there is a

fundamental disagreement in Armenia between public finance professionals who believe that

the Armenian road network of 7,548km can be maintained and rehabilitated adequately for

AMD16–20 billion (US$33–42M) per year, and road sector professionals who believe that it

cannot. The Consultant shares the latter group’s belief.




P a g e | 3-2

STRATEGIC OPTIONS

52 The Consultant put five strategic options forward in TR1 and at the First Workshop:

• Adjust State Budget allocations to give more to the roads sector and consequently less to

one or more other sectors.

• Generate new or increased revenues from road users and hypothecate them to the roads

sector, either via an autonomous Road Fund or via the State Budget.

• Extend the present reliance on borrowing for rehabilitation works, on concessional terms

if possible.

• Reduce road maintenance costs by adopting cheaper methods, accepting lower standards

or involving local communities.

• Reduce Government’s responsibility for road maintenance by transferring local roads to

the communities served; franchising parts of the network to private operators who would

cover their costs through tolling; or abandoning parts of the network.

Summaries of the discussions at both workshops appear in Appendix 3A and Appendix 3B

together with a list of the participants, the agenda and photographs. The five options are

described and discussed below. The arguments for and against each are summarized in matrix

format in Figure 2 on page 3-6, extending over 2 pages.

Option 1: Adjust State Budget Allocations

53 In view of the high economic cost of bad roads it may be good policy to adjust sectoral shares

in the State Budget to allocate more to the roads sector, and in particular to road maintenance

and rehabilitation. Reduced transport costs would benefit every other sector of the economy,

promoting economic growth and consequently increased public revenues.

54 However, this result would not be immediate. In the short term there would be reduced

allocations to other sectors, with potentially harmful economic and social consequences. Every

sector is constrained and will remain so until the Government significantly strengthens its

fiscal position. As stated in the ADS:

“The modest level of tax revenues collection, which is also reflected in the tax/GDP ratio, has

always been and continues to be the main challenge of the public revenues system. In the

future, the reorientation of the state revenues policy and the strengthening of country’s fiscal

position become objective necessities and serious challenges.”

Option 2: Increase and Hypothecate Revenues from Road Users

55 One way to increase the tax/GDP ratio is to increase the contribution made by road users. This

might be achieved through a) increasing the rates at which existing taxes and charges are

levied or b) introducing new taxes and charges. Fuel taxation of the most obvious medium for

increasing revenue from road users, since:

• The average level of fuel taxation in Armenia is low by world standards.

• There are wide, irrational disparities between the total rates of taxation on the three

types of fuel used for road vehicles: petrol, diesel fuel and CNG. Correction of this

anomaly provides an opportunity to increase the average rate of fuel taxation as well as

to make the system more equitable.

• Fuel consumption is a reasonable proxy for road usage.

56 Road users would more easily accept an increase in taxes and charges if they were assured

that all or most of the increase would be allocated as additional funds for the roads sector.




P a g e | 3-3

This implies hypothecation (or earmarking) which was vigorously opposed by MoF represent-

atives at the First Workshop for the following reasons:

• Hypothecation reduces the Government’s ability to decide and adjust priorities as chang-

ing circumstances require.

• If the roads sector benefits from a policy of hypothecation, other sectors would feel

justified in demanding the same.

57 The following counter-arguments were made:

• Limiting the Government’s ability to adjust priorities is the point of hypothecation.

Backed up by law, it would give road users some confidence that the additional money

taken from them would be used for their benefit.

• The roads sector is exceptional in that a) road transport costs affect the viability of every

other economic sector; b) taxes and charges can be accurately targeted at beneficiaries;

and c) the economic benefits to road users from increased expenditure can be reliably

shown to exceed the additional taxes and charges that they would have to pay.

58 Road users might have more confidence if the principle of hypothecation were combined with

the creation of the Road Fund. In its purest form a Road Fund is characterized by:

• A dedicated revenue stream, protected from diversion to other purposes.

• An independent governing body that decides how to allocate funds in accordance with its

charter, which would normally define economic and social objectives to be met. The

private sector and regional interests would be represented on the governing body as well

as the Government’s nominees.

• Professional staff equipped to undertake technical and economic analyses to determine

the optimum allocation of resources to meet those objectives. ARD is already staffed and

equipped in this way and is currently being strengthened.

59 This proposal was opposed with as much vigour as was the proposal to hypothecate revenues.

The MoF representatives pointed out that:

• Armenia’s capacity for financial management is limited. That capacity is used most

efficiently in a system of centralized control and decision-making.

• As with hypothecation, if there were a Road Fund other sectors would demand similar

treatment. Why should there not be a Health Fund or an Education Fund?

60 MoF representatives were also reluctant to support any proposals to rationalize and increase

taxes and charges born by road users, pointing out the impact on road user costs and

suppression of economic growth that would result. However, a review of the Tax Code is

under way and it cannot be ruled out that anomalies, such as those in the taxation of the

different types of fuel (see Table 11 above) will be addressed.

61 It is the Consultant’s view that if more is to be spent on the roads it should come predom-

inantly if not exclusively from road users, however this is arranged. The arguments against a

Road Fund are reasonable and understood; but hypothecation in some form would probably

be essential to gain road users’ trust and support for increased taxes and charges.

Option 3: Extend reliance on Borrowing

62 The WB representative at the First Workshop pointed out the danger posed by rising levels

indebtedness, echoing the ADS which states that “it is envisaged to limit the borrowing by

1.8% of GDP by 2017 and after that period steadily decrease the borrowings down to 1.3% of

GDP in 2025.”




P a g e | 3-4

63 Armenia’s gross external indebtedness started to rise sharply at the time of the GFC and

peaked at 83% of GDP in 2013. It declined in absolute and relative terms in 2014 and is now

equivalent to about 75% of GDP.

64 This is not alarmingly high by international standards, and much of the borrowing has been

from IFIs on very concessional terms (which are equivalent to a capital subsidy in excess of

50%). If all expenditure on rehabilitation and periodic maintenance works, as estimated to be

necessary by the World Bank in 2011, were financed from external borrowing it would add 1.9

percentage points to external debt as a percentage of GDP by 2020, and 2.8 percentage points

by 2025. This should not materially affect Armenia’s credit rating (currently BB–).

65 However, for several reasons the consultants do not recommend this option:

• It is not prudent to borrow for current expenditure, which in the Consultant’s view

encompasses routine maintenance, periodic maintenance and rehabilitation. Capital

expenditure entails the creation of new assets or the substantial upgrading of existing

assets. Thus the current upgrading program in the North-South Corridor is capital in

nature and is therefore considered a candidate for loan financing.

• IFIs will not necessarily be willing to continue lending on concessional terms for projects

that do not represent investment, as conventionally defined. Alternative sources of

capital on commercial terms would be much costlier.

• Because of the ADS’s limit, referred to above, borrowing for road maintenance is likely to

displace borrowing for investment purposes in other sectors.

• The burden of debt-servicing will fall on the tax-paying public in general, rather than on

road users as direct beneficiaries.

• The inflow of loan funds specifically for road maintenance would not be guaranteed.

66 The difference between commercial and concessional loan terms is very wide. Concessional

funds are available at interest rates as low as 1%pa with a 10-year grace period. The Armenian

Government’s Dram-denominated instruments carry yields of at least 12%pa. Its Euro-

denominated 7-year ‘Kardashian Bonds’ were issued last year with a yield of 6%pa. Viet Nam,

with a similar credit rating, has issued Dollar-denominated 10-year bonds that are yielding

6.4%pa. Borrowing in foreign currency carries the obvious danger that large adverse exchange

rate movements may outweigh the favourable difference in interest rates.

67 Highly concessional loans should perhaps be maximized while they are available, and deployed

in accordance with Armenian priorities. But the assumption that such loans will be available

indefinitely should not be built into a financing strategy designed for the long term.

Option 4: Reduce Costs, Improve Efficiency

68 The WB suggested several ways in which maintenance costs could be reduced, in its report

‘Improving the Sustainability of Road Management and Financing in Armenia’. These were

summarised in TR1 and some have been adopted by MoTC – in particular the use of a road

asset management system (RAMS); use of cheaper base construction methods for low traffic

volume roads; use of cement concrete for high traffic volume roads; and adjusting design

standards to match projected demand. In the Consultant’s estimates of needed expenditure

he allowed for 40mm instead of 50mm overlays and double bituminous surface treatment

(DBST). MoTC is experimenting with gravelling some local roads. The possibility of involving

local communities in routine maintenance was considered following a WB-sponsored study

tour to Latin America, and rejected.




P a g e | 3-5

69 In TR2 the Consultant proposed additional measures to reduce costs and improve efficiency,

some technical and some procedural. These included the addition of routine maintenance for

at least 5 years to every rehabilitation contract, and introduction of medium-term perform-

ance-based maintenance contracts (PBMCs). A case study of Serbia’s introduction of PBMCs is

presented at Appendix 3C.

70 There may be other cost-saving measures that could be introduced, but it would be unrealistic

to expect them to deliver savings on a scale that would close the gap between existing

expenditure levels and those estimated by WB, AARC and Roughton to be needed.

71 Moreover one should not confuse cost saving with improving efficiency. It would certainly be

more efficient to introduce periodic maintenance in Armenia, instead of allowing roads to

deteriorate to the point where reconstruction is unavoidable, but it would cost the Govern-

ment more money. The efficiency gains would be enjoyed by road users.

72 HDM-4 is designed to optimize net gains to the whole economy, not just to Government. In

the Consultant’s HDM-4 analysis to estimate needed expenditure on the maintenance and

rehabilitation of interstate and republican roads, without budgetary constraint, the median

ratio of benefits (NPV of cost savings enjoyed by road users) to costs (born by Government)

was 17.7 for the IRN and 6.0 for the RRN. Even if the benefits were overestimated by 100%

road users would be much better off if they paid slightly higher taxes, provided that:

• The extra tax revenue were devoted to road maintenance and rehabilitation.

• The extra expenditure were allocated and expended efficiently.

This issue is addressed in detail in Chapter 6 below.

Option 5: Reduce Central Government’s Responsibilities

73 The fifth strategic option is to reduce the Government’s responsibilities by eith or both of the

following means:

• Inducing private investors and/or local communities to bear some or all the cost of

maintaining selected parts of the road network.

• Abandoning parts of the network whose maintenance is no longer considered worth-

while.

74 Abandonment has already occurred in the case of roads leading to closed international

borders. It may be that as some rural populations age, decline and become unproductive it

would be cost-effective to re-locate them rather than to continue providing them with access.

75 Private investment would be a realistic option only if user charges were collected, either

through tolls or by selling vignettes allowing access to a specific stretch of road or item of

transport infrastructure for a specified period of time, and the revenue substantially exceeded

the costs of collection. It is not clear that tolling could be introduced anywhere in Armenia at

present and, in any case, it is prohibited by law unless there is an alternative route which can

be used free of charge.

76 Responsibility could also be handed over to local communities. This would go beyond the

proposal to pay local people to carry out labour-intensive maintenance work: communities

would be financially responsible for the roads that provide them with access to urban centres

and the republican and interstate road networks. Initially this would be seen as an admission

of failure on the part of the Central Government, but it could be introduced in conjunction

with the proposed consolidation of small communities into more viable administrative units,

about which there was a referendum in the Marzes of Tavush, Syunik and Lori in May 2015.




P a g e | 3-6

Figure 2 Summary of Strategic Options and Arguments (2 pages)

Option Arguments for Arguments against Conclusion

1. Adjust State

Budget allocations

in favour of roads.

• Bad roads harm all sectors

of the economy.

• Economic benefits can be

shown to exceed costs by

a wide margin.

• Over time, the net benefits

will allow increased

funding for all sectors.

• The State Budget is tight

and all sectors are under-

funded.

• Representatives of other

sectors would not accept

that the roads sector is

exceptional.

This is not a politically

viable option.

2. Increase and

hypothecate

revenues from

road users.

• Road users pay substantial

taxes and charges already,

but these are not high by

world standards.

• Benefits to road users

would greatly exceed the

additional taxes or

charges.

• Hypothecation would

assure road users that the

extra money is actually

used for their benefit.

• Any increase in taxes or

charges has a multiplier

effect throughout the

economy and suppresses

growth.

• Hypothecation reduces the

Government’s ability to

manage the economy and

decide priorities.

• Other sectors would seek

revenue hypothecation

too.

The costs arising from

bad roads are far higher

than the proposed add-

itional revenues. There-

fore these proposals

should be accepted and

implemented.

Hypothecation is needed

to ensure that additional

revenues are used as

intended, and to gain the

trust of road users.

2a. Create a Road

Fund to manage

hypothecated

revenues.

• A Road Fund would be the

strongest guarantee that

hypothecated revenues

are used as intended,

having private as well as

public sector interests

represented in its govern-

ance structure.

• Independent professional

management would

ensure technically and

economically based

allocation of funds.

• Armenia is a small country

with a small administration

and constrained budget. It

cannot afford to set up

multiple agencies to

manage funds and assets.

• Centralized control is the

surest way to ensure

efficient and honest

financial management.

• If there were a road Fund,

other sectors would seek

their own funds.

This is not a politically

viable option. It might be

re-considered at some

future time if hypothec-

ation without a Road

Fund is found to be

ineffective.

3. Extend reliance

on borrowing. • Rehabilitation may be seen

as replacing worn-out

assets, and therefore

capital in nature.

• IFIs have been willing to

lend money on highly

concessional terms.

• The scale of borrowing for

road rehabilitation is not

so great as to affect

Armenia’s credit rating.

• Armenia’s levels of public

and external debt are

already high.

• With a limited capacity to

borrow, borrowing for

maintenance displaces

borrowing for genuinely

capital purposes.

• If IFIs are unwilling to lend

more, commercial loans

would be much costlier.

In the medium term it

may be justifiable to

continue borrowing to

clear the backlog of road

rehabilitation, but in the

longer term loans should

be taken only for new

construction or up-

grading works.




P a g e | 3-7

Option Arguments for Arguments against Conclusion

4. Reduce costs

and increase

efficiency.

• Cost and efficiency should

be viewed from a national

perspective, not just in

terms of Government

expenditure.

• Some existing standards

and methods applied to

low-traffic roads are not

economically justified.

• ARD’s expertise and equip-

ment allows optimal works

programming.

• No-cost initiatives are

possible, such as PBMCs.

• Cost reduction often

reduces efficiency too.

• Improving efficiency (eg by

introducing periodic main-

tenance) may impose

higher costs on the

Government.

• Rural communities have

grown accustomed to

asphalt roads and may

resist introduction of more

cost-effective alternatives.

Existing experiments with

low-cost methods (such

as graveling) should

continue and new ones

should be tried.

Periodic maintenance

should be introduced for

interstate and republican

roads.

PBMCs should be piloted,

subject to the outcome

of a consultancy due to

start in September 2015.

See Appendix 3C.

5. Reduce Central

Government’s

responsibilities.

• The Government is too

constrained fiscally to

meet its obligations fully

with respect to road

maintenance.

• Private investors can main-

tain roads and collect tolls

more cost-effectively than

a Government agency can.

• Local communities know

their priorities better than

a central agency can.

• There is untapped

potential for local revenue

raising.

• Local communities have

labour and other resources

which can be applied to

road maintenance at little

financial cost.

• Opportunities for tolling

are very limited, because

of low traffic volumes and

the law requiring toll-free

alternative routes.

• Public acceptance of

tolling is low.

• Local communities would

still need money and

technical expertise from

Central Government.

• There is great disparity

between communities

with respect to resources,

and the scale and cond-

ition of roads that they

would be responsible for.

• Maintenance may be

carried out at low cost, but

the quality may also be

very low.

Tolling is not appropriate

now, but the way should

be cleared to introduce

tolling and toll franchis-

ing at a later date.

Transferring financial

responsibility for local

road maintenance to

communities should be

considered only as a last

resort.

REVENUE

77 According to the Consultant’s estimates, some of which have now been confirmed by official

data, road users contribute about AMD140 billion (US$295M) per year to the State Budget,

mostly in the form of VAT, customs duty and property tax. Taxes on fuel (petrol, diesel fuel

and CNG) amount to AMD37 billion (US$78M) per year.

78 It has been pointed out by others, and mentioned in the Consultant’s TOR, that fuel taxes and

fuel prices in Armenia are low by world standards and in comparison with other countries with

similar per capita GDP levels. This may be less true now than in the past (see Table 12 below).




P a g e | 3-8

Among the nine countries tabulated, Armenian prices are closest to those in Ukraine and in

the middle of the range spanned by other members of the Eurasian Union. LPG prices are

shown as a close equivalent to CNG prices in Armenia, Armenia being unique in the extent of

penetration of its market by CNG. At the time of writing, the Armenian retail prices for petrol

and diesel fuel, as observed by the Consultant, are up to 18% lower than those shown in this

table. But for a fair comparison all the data are taken from the same sources.

Table 12 Comparative Retail Fuel Prices in Nine Countries (US$/litre)

Country Petrol Diesel CNG LPG

Armenia 1.04 1.02 0.44

Belarus 1.33 1.37 0.68

Georgia 0.74 0.81

Kazakhstan 0.75

Moldova 0.97 0.92 0.56

Macedonia 1.28 1.04 0.51

Russian Federation 0.70 0.68 0.36

Turkey 1.74 1.49 0.72

Ukraine 1.04 0.95 0.44

Sources: http://www.fuel-prices-europe.info/ and http://www.mytravelcost.com/petrol-

prices/

79 As a landlocked country Armenia inevitably bears higher border prices than countries with

direct port access. Therefore Belarus, Macedonia and to a lesser extent Moldova (which does

have access to the Black Sea via a port on the Danube) may offer more apt comparisons than

Georgia, Turkey or Ukraine. Kazakhstan and Russia are oil-rich states and may be expected to

have low domestic fuel prices. So too are Azerbaijan and Iran which, although Armenia’s

neighbours, were excluded from this comparison for that reason.

80 There is already a price differential between Armenia and Georgia which might encourage

smuggling, or at least border-crossing by people living close to the border to fill their tanks. A

price rise such as that proposed by the Consultant is unlikely to make a material difference.

81 The Consultant believes that there is scope to increase average fuel tax per litre in the course

of removing anomalies between the three fuel types. Fuel taxes have the advantage that they

fall unambiguously on road users, provided that the taxes are levied at the point of sale and

therefore do not unintentionally affect other consumers including:

• In the case of diesel fuel: farmers, miners and manufacturers.

• In the case of CNG: domestic and commercial consumers of natural gas for space heating,

water heating, cooking and industrial processes.

4. RECOMMENDATIONS

Roughton International Limited Recommendations



P a g e | 4-1

4. RECOMMENDATIONS

82 In TR1 the Consultant put forward a number of strategic options as well as specific proposals.

Feedback in the form of workshop discussions and written comments have resulted in a

shorter list of recommendations.

EXPENDITURE

83 First, it is recommended that the State Budget allocation for road maintenance and

rehabilitation, encompassing winter and summer maintenance and capital repair, should be

increased from its present level of AMD11 billion per year (the average for 2013-2017, shown

in Table 2 above) to AMD35 billion per year, supplemented by continued concessional

borrowing of AMD7 billion per year (also the average for 2013-17) for rehabilitation works.

84 This borrowing is distinct from and additional to the ongoing borrowing to upgrade the

North-South Corridor, and is conditional on the willingness of lending agencies to continue

lending at this level.

85 This level of expenditure should be sustained for at least five years, after which borrowing

for maintenance and rehabilitation should be terminated.

86 This recommended level of expenditure is predicated on the Government’s rejection of

proposals to transfer responsibility for local road maintenance to other agencies or to

abandon sections of the LRN, neither of which is recommended by the Consultant.

87 It is also predicated on the conviction that Armenia’s social and economic development

strategy cannot be realised without devoting significant resources to restoring and sustaining

the LRN. The Consultant’s cost estimates take account of some possible cost-cutting

measures but the possibility of going further in this direction is not precluded; see paras.99–

106 below.

88 It is further recommended that all decisions on capital expenditure (meaning expenditure to

augment or upgrade capital assets) be based on economic analysis using comprehensive, up-

to-date empirical data and international best practice. In the roads sector this means using

HDM-4 software. HDM-4 should also be used to determine the necessary level and optimal

disposition of expenditure on road rehabilitation and periodic maintenance – as has been

done in the three analyses of needed expenditure cited in this report, and annually by ARD as

input to the budgeting process. Rigorous economic analysis should not be confined to

projects which are candidates for international financing.

REVENUE

89 The proposal to rationalize fuel taxation, made in TR1 and discussed at the First Workshop,

would raise an estimated AMD27.4 billion in additional annual revenue (see Table 13), which

would be more than enough to pay for the proposed increase in the State Budget allocation

to roads. It is recommended that this proposal be considered during the current

comprehensive review of the Tax Code.




P a g e | 4-2

Table 13 Proposed Rationalization of Fuel Taxation

Incre-

ment Total

Incre-

ment Total Now

Prop-

osed

Petrol 95 95 12 107 16.9 19.1

Diesel 38 85 124 124 1.8 5.8

CNG 36 36 43 79 17.9 39.1

Total 36.6 64.0

Average 51 56 89

Appy equaliz-

ation levy

Revenue, AMD

billion at 2015

levels of usage

Fuel type Pre

sen

t ta

x

(AM

D / l

itre

) Restore VAT on

diesel fuel for

road vehicles

90 In making this recommendation the Consultant has taken account of:

• The targeted nature of a fuel tax.

• The relative ease of collection.

• The desirability of making all forms of taxation as equitable as possible, free from

perverse incentives, and immune to erosion due to changing consumer choices (such as

switching from petrol to CNG as the primary energy source for road transport).

• The much greater benefits that would accrue to all road users if the incremental tax

revenue were devoted to road maintenance and rehabilitation; see Chapter 6 for an

analysis of the net effects on road user costs.

The 2-stage strategy (restoration of VAT on diesel fuel for use in road vehicles, and intro-

duction of an ‘equalization levy’) is not ideal. It has been put forward as a way of achieving

equity and increased revenue with minimal disturbance to the existing system of fuel

taxation. But the Consultant would prefer to see a tidier and more radical approach to fuel

tax rationalization.

91 In case the Government is unwilling or unable to accept this proposal in its entirety, the

Consultant recommends two further measures for early implementation:

• Rationalization of road fees applied to foreign-registered and Armenian-registered

heavy vehicles, with the dual aim of a) aligning the fees with actual costs imposed on

the road network and b) raising somewhat more than the current annual revenue of

AMD5.5 billion.

• Introduction of a small ad valorem tax on vehicle insurance premiums to raise between

AMD0.5 and $1.0 billion per year.

As with fuel taxes, these additional levies would be targeted exclusively at road users and

would be easy to collect.

92 With regard to rationalizing road fees, the Consultant has made an estimate of road maint-

enance costs that are attributable to each of the three classes of truck that are distinguished

in the ARD’s traffic counts and HDM-4 files: 2-axle, 3-axle and >3-axle. HDM-4 was run four

times for the IRN and the RRN, for the unconstrained budget scenario, using the same input

data as were reported in TR1. The first run included all vehicle classes; the second, third and

fourth excluded each of the truck classes in turn. The differences revealed the costs

attributable to each class. These were found to be, in AMD per vehicle-kilometre:

• 2-axle trucks: AMD 4.7 (IRN) and AMD 3.5 (RRN).

• 3-axle trucks: AMD 8.4 (IRN) and AMD 9.5 (RRN).

• >3-axle trucks: AMD 18.2 (IRN) and AMD 20.6 (RRN).




P a g e | 4-3

93 These figures are conservative because they do not take into account the original capital cost

of the road network, which would have been much lower if heavy goods vehicles had not

been taken into account in the design standards.

94 Applying the estimated annual distances travelled by each class of truck (40,000km for 2-axle

trucks and 86,000km for larger trucks) the annual attributable costs are approximately:

• 2-axle trucks: AMD 165,000.

• 3-axle trucks: AMD 760,000.

• >3-axle trucks: AMD 1,620,000.

95 The present schedule of Road Rees for Armenian-registered heavy goods vehicles is based on

gross vehicle weight (GVW), not number of axles, and ranges between AMD15,000/month to

AMD60,000/month (AMD180,000/year to AMD720,000/year). The schedule only applies to

trucks with a GVW of at least 20t, so it may be assumed that 2-axle trucks are excluded.

Allowing for the fact that Armenian-registered trucks do not run on local and foreign roads as

well as interstate and republican roads, an uniform increase of 50% would be easily

justifiable.

96 The data available to the Consultant do not support a more precise study, aimed at recom-

mending rationalization of Road Fees rather than a general increase. The data do not support

any meaningful analysis of the Road Fees applied to foreign-registered vehicles.

97 With a view to the longer term, the Consultant recommends making the necessary legislative

preparations for introducing tolls on roads, bridges and tunnels without the requirement

that alternative toll-free routes be available. Provision should be made to allow toll-free

access to homes, farms and businesses; and to exempt specified classes of vehicle. In TR1 it

was estimated that gross toll revenue of AMD35M/km/year might be expected from a road

carrying 10,000 vehicle per day, based on capturing 25% of computed RUC savings. More

specific recommendations would require a specialized toll study for a specific stretch of road

or item of infrastructure.

98 Instead of collecting a toll from each vehicle as it enters a stretch of road, vignettes can be

sold to the owners of vehicles that will then be allowed unlimited access to that stretch of

road for a specified period of time, which may vary from 1 day to 1 year. A vignette can take

the form of a windscreen sticker that can be checked by road police officers, or an electronic

card that can be read remotely when the vehicle passes a control point. The advantages and

disadvantages of vignettes compared to tolls are summarized in Table 14 below. Overall, the

Consultant sees no net advantage for Armenia.

Table 14 Vignettes Compared to Tolls

Criterion Advantages Disadvantages

Collection cost No need for roadside infrastructure and

staff.

Compliance

cost

No stopping and waiting at toll booths.

No in-vehicle equipment if vignettes take

the form of windscreen stickers

Investment in onboard electronic devices if

electronic vignettes are used.




P a g e | 4-4

Criterion Advantages Disadvantages

Avoidability Access to priced infrastructure does not

have to be restricted to enforce

payment.

The probability of being caught without

a vignette is proportional to usage.

Reliance on spot-checks by police. If these

are infrequent or predictable road users

may risk travelling without vignettes.

Risk of corruption of officers entrusted with

making spot-checks.

Risk of forgery.

Convenience Vignettes can be sold online and/or at

petrol stations and other retail outlets.

Road users who make infrequent use of

priced infrastructure have to predict that

usage and buy vignettes in advance.

Fairness Usage within the period of a vignette can

vary widely, whereas tolls vary in pro-

portion to distance travelled.

Depending on the system used to allow

them free access to their homes, farms and

businesses, residents may also gain free

access to other parts of the priced network.

Efficiency Low-cost investment and operation. Because of the variability of usage

mentioned above, vignettes must be priced

at a level that does not deter low-level

users from enjoying the economic

advantages of the priced infrastructure.

Potential revenue for high-level users will

therefore not be fully realized.

Flexibility Without associated toll collection

infrastructure and access restrictions the

extent of the priced network can be

changed easily when appropriate.

EFFICIENCY IMPROVEMENTS

99 Periodic maintenance is recommended to be included as part of the normal maintenance

cycle. The Consultant’s estimates of needed expenditure include routine maintenance,

periodic maintenance and rehabilitation. Experience worldwide has shown that, except for

cement concrete roads which should require only routine maintenance, inclusion of periodic

maintenance maximizes the ratio of benefits (to road users) to costs (born by road agencies).

100 Four initiatives are recommended to make less radical improvements to the efficiency of

road maintenance and rehabilitation:

• Inclusion of medium-term (at least 5 years) routine maintenance in contracts for road

rehabilitation.

• A 2-stage procedure for taking over projects on completion, the second being at the end

of the routine maintenance period, with realistic condition criteria at each stage.

• Revision of pavement standards and use of cheaper methods on low volume roads

(DBST, SBST); and for periodic maintenance on all roads after trials to ensure their

appropriateness to Armenian conditions.




P a g e | 4-5

• Amendment of Government Decree No.1419-N on road maintenance (on approving the

procedures for assessing levels of routine summer maintenance and routine winter

maintenance of general use roads of Armenia and acceptance of performed works) to

use IRI as a criterion for assessing road condition.

Details of these recommendations are included in the Consultant’s Second Technical Report.

101 ARD already has a powerful set of tools for maximizing efficiency, and is in the process of

enhancing it with additional equipment and a road asset management system (RAMS). By

the end of 2015 ARD will be have the capability to complete and continually update its

database of road condition, covering all three networks (IRN, RRN and LRN); to produce

economically optimal works programs to make the best use of available resources; and to

quantify the cost to the national economy of any funding shortfall below the levels that have

been estimated as necessary. It is recommended that this capability be fully used.

102 Performance-based maintenance contracts (PBMCs) have proved successful in other

countries and may prove successful in Armenia. It is recommended that one or more pilot

projects be implemented with a view to making PBMCs the norm if the pilot projects

demonstrate cost savings and/or improved cost-effectiveness.

103 The existing 5-year maintenance contracts are not ‘performance-based’ in the sense that the

term is used in this report. They are essentially input-based because the length of road to be

maintained each year under each contract depends on the funds available. It is significant

that the Serbian system, outlined in Appendix 3C, is described as ‘Output and Performance

Based Road Maintenance Contracting (OPBRMC) to emphasize its focus on output.

104 Under such a system a contractor would be paid a fixed fee in return for keeping a stretch of

road at or above a defined standard throughout the period of the contract. This is a true

PBMC as understood by the Consultant and as recommended in this report. Ideally the

acceptable standard should be defined in such a way that it is objectively measurable: IRI

values are normally used for this purpose.

105 The following key features of a true PBMC are lost under the existing system:

• With a guaranteed flow of work and income over a number of years a contractor finds it

worthwhile to invest in equipment, staff development and new methods.

• He is also able to submit competitive bids without an extra margin to cover the risk that

future budgets will fail to provide for fulfilment of the contract.

• Knowing that he will be required to maintain the whole road length every year, a

contractor has a strong incentive to use the most efficient methods and do as good a job

as he can in order to minimize his future expenditure.

106 The World Bank sponsored a recent study tour to Bolivia to see how local communities may

be involved in road maintenance activities, providing cost savings for the Government and

better roads for the communities. This approach has been rejected, but may be worthy of

reconsideration following the currently envisaged consolidation of small communities into

more viable administrative units, if it is carried out.

5. IMPLEMENTATION

Roughton International Limited Implementation



P a g e | 5-1

5. IMPLEMENTATION

EXPENDITURE

107 A policy decision should be taken to effect a substantial and enduring increase in the State

Budget allocation to road maintenance ad rehabilitation, guided by the three analyses of

needed expenditure referred to in this report.

108 Such a decision should be taken on the advice of the inter-ministerial Road Council, whose

activities are defined as:

• Presentation of proposals for road sector policy and united implementation of specified

standards for all general use roads (including local roads)

• Coordination of preparation of road construction, rehabilitation and maintenance yearly

programs.

• Coordination of preparation of MTEF for road sector.

• Coordination of adoption works of Road asset management system.

• Monitoring of road maintenance planning process.

• Monitoring of road construction, rehabilitation and maintenance implementation yearly

projects.

• Coordination of the implementation activities in road sector within the state, private

and international cooperation system.

109 This decision might be made public in the form of a decree, but this would not guarantee its

implementation. The ADS, which stated that “from 2015 contributions to the sphere [the

transport sector] from consolidated budget will comprise around 1.4–1.5% of GDP annually

on average, 85% of which will be aimed at the road network,” was issued as an appendix to

Decree No.442-N and has had no effect on the State Budget or the MTEF.

110 The announcement of the policy decision should be combined with an announcement of

revenue measures to support it. Ideally this should include a formal hypothecation of defined

revenues in order to give road users confidence that the extra taxes or charges will be used

for their benefit and that there will be no future withdrawal from the commitment.

111 In any case, there should be a parallel requirement that ARD use its data gathering and

analytical tools to determine the economically optimum deployment of the increased budget

allocation for recommendation to the Road Council.

REVENUE

112 Implementation of all revenue-related recommendations should be considered within the

context of the ongoing review of the Tax Code, due for completion later in 2015.

Fuel Taxation

113 The principal recommendation is to rationalize the taxation of fuel, making it more equitable

and increasing the average total incidence of tax by about AMD38 (US$0.08) per litre. For

minimal disturbance to the existing tax structure, it could be implemented in two stages.

The first stage would be the restoration of VAT on diesel fuel used in road vehicles. This can

be achieved by a) removing the blanket exemption that was given in 2010; b) applying




P a g e | 5-2

instead a zero rate of VAT at the point of importation; and c) applying the normal 20% rate at

the point of sale where diesel fuel is delivered to a road vehicle.

114 Off-road agricultural vehicles and machinery, mining equipment, industrial machinery etc

would continue to benefit from the present low tax rate, but delivered via the medium of

zero-rating rather than exemption. No new legislation would be required.

115 The second stage would be the introduction of a new levy, applicable at different rates to the

three types of fuel used for road vehicles. The Consultant believes that this too can be

achieved without new legislation, within the provisions of the Law on Taxes (Article 2 and

Article 12).

116 Article 12 allows for simplified taxes to replace profit tax, income tax, excise tax and VAT. At

present petrol is subject to excise tax and VAT; diesel fuel is subject to excise tax and

environmental tax; and CNG is subject to customs duty and VAT. Simplification is desirable

therefore, and offers an opportunity to increase revenue while also delivering equity by

bringing the total level of taxation of the three fuel types into line.

Road Fees

117 Road fees are defined in Decree No.203 (March 1998) in separate schedules applicable to

foreign-registered and Armenian-registered vehicles. In the latter case it applies only to

heavy goods vehicles with a gross weight of at least 20t. These schedules can be amended

under existing legislation.

118 The Consultants recommend that any amendment be preceded by an analytical exercise by

ARD, using HDM-4 to estimate the actual costs imposed on the road network by a vehicle of

each class travelling for 1km with a typical load. Because a road is designed for a total

number of equivalent standard axle loads (ESALs), each heavy vehicle that passes brings

forward the time when reconstruction of the road will be necessary. It also affects the rate

of surface deterioration and hence annual maintenance costs. The consultant’s own

estimate of maintenance costs attributable to each of the three classes of truck that are

distinguished in ARD’s data is presented and explained in paragraphs 92 to 96 above.

Vehicle Insurance Tax

119 New legislation would be required for the imposition of a tax on vehicle insurance premiums.

The Consultant recommends initiation of this process, in consultation with the insurance

industry and road users’ representative groups (the Association of International Road carriers

of Armenia and the Automobile Federation of Armenia).

Tolls and Vignettes

120 Under present legislation tolls cannot be applied to roads, bridges or tunnels unless a toll-

free alternative route exists. The Consultant recommends either amendment or replace-

ment by new legislation that also provides for:

• Franchising of tolled infrastructure under public-private partnership arrangements, such

as are already envisaged for the North South Corridor.

• Sale of vignettes as an alternative to roadside toll collection.

121 It was questioned at the Second Workshop whether tolls would be in compliance with the

Constitution’s guarantee of freedom of movement, where alternative toll-free routes do not

exist. Article 25 of the Constitution states that “Everyone legally residing in the Republic




P a g e | 5-3

Armenia shall have the right to freedom of movement and choice of residence in the

territory of the Republic Armenia.”

122 The Consultant sees a distinction between ‘freedom of movement’ and ‘free-of-charge

movement’, so does not consider this to be an insurmountable obstacle. The following is an

extract from the World Bank document ‘Toll Roads and Concessions’ accessible at http://

www.worldbank.org/transport/roads/toll_rds.htm:

Is it necessary to have a parallel free road? This will depend on the reasons for provision of

the new road. If the road is provided simply to add capacity in a constrained area, for

example, then leaving the existing network untolled should be appropriate. The argument in

favor of free parallel roads is one of social equity, to ensure that the poor can still have

access to the road network. However it also detracts from the effectiveness of the new tolled

road in alleviating congestion and may well cause problems for financial cost recovery if even

the revenue-maximizing toll cannot produce enough revenue. With a parallel road however

it is possible to provide for slower moving traffic (animal drawn vehicles for example) where

a toll road does not.

REDUCING COSTS AND IMPROVING EFFICIENCY

Maintenance Methods

123 The methods by which roads are constructed, maintained and rehabilitated are operational

matters, to be decided by MoTC with technical input from ARD and, in the case of projects

supported by donors or IFIs, in consultation with those agencies.

124 Such decisions should include the introduction of periodic maintenance into the normal

maintenance cycle, at least for interstate and republican roads.

Contractual Arrangements

125 Inclusion of 5 or more years of routine maintenance within the scope of rehabilitation

contracts can be done without any change to legislation but Decree 1419-N should be

amended or superseded to include roughness, as measured by the International Roughness

Index (IRI) as a performance indicator.

126 At present the ARD has limited capacity to measure roughness, so this is done only for

project hand-over purposes; for annual monitoring of the quality of the interstate road

network; and for monitoring of 20% of the republican network per year. But by the end of

2015 it will be equipped to make measurements over the whole network, making it possible

to enforce contracts that specify performance in terms of IRI.

Performance-Based Maintenance Contracts (PBMCs)

127 This is a more radical recommendation, and would ideally require legislative and procedural

changes to allow multi-year contracts to be written with assured annual payments for

achievement of performance targets. At present each year’s State Budget is subject to

availability of funds and decisions about relative priorities. Ongoing contractual commit-

ments must accommodate this flexibility, which explains why the present multi-year

maintenance contracts are based on unit prices (AMD per kilometre) with no guarantee of

the length of road that a contractor will be paid to maintain in any of the years during the

currency of his contract.




P a g e | 5-4

128 In the Consultant’s opinion the full benefits of multi-year PBMCs cannot be realized with

such a system. It is recommended that legal or procedural means be found to give

contractors a much greater degree of certainty about the revenue they can expect from a

multi-year contract. For example, the MoF might adopt and announce an internal policy to

honour multi-year fixed-payment contracts up to a defined ceiling in each sector, or in the

roads sector alone, irrespective of future budgetary restrictions.

129 Further detailed consideration of this matter would require in-depth analysis which falls

outside the scope of the present consultancy.. A consultancy will commence in September

2015 to review all contractual arrangements in the roads sector and is expected to address

the possibility of introducing PBMCs. Presumably this consultancy will also address questions

of implementation, including necessary legislative and procedural changes.

TRANSFERRING RESPONSIBILITY

130 If it is decided that Central Government cannot accept full financial responsibility for maint-

aining the national road network, there would have to be radical changes in the allocation of

legal responsibilities and powers, including revenue-raising powers.

131 Chapter 7 of the Constitution provides for local self-government. Article 106 states that:

• The community shall generate its budget independently.

• The law shall define the sources of the community revenues.

• The law shall define the sources of community finances that will secure the discharge of

their responsibilities.

• Responsibilities delegated to the communities shall be funded from the state budget.

• The communities shall establish local taxes and duties within the scope defined by law.

The communities can set forth fees for their services.

Article 107 states (in part) that:

• The Council of Aldermen of the community shall in conformity with the procedure

defined by the law manage the community property, approve the community budget

upon the submission of the Head of Community, oversee the community budget exec-

ution, envisage local taxes, duties and fees in conformity with the procedure defined by

the law and adopt legal acts subject to observance in the territory of the community.

The acts adopted by the community Council of Aldermen shall not contradict the

legislation; the law shall define the procedure for their publication and coming into

force

132 There appears to be no constitutional obstacle to giving Councils of Aldermen rights to

collect revenue from their residents. However, Article 107 requires funding from the State

Budget for any responsibilities that are delegated to communities. Therefore, if Central

Government wishes to devolve financial responsibility to local communities the law would

have to be worded to avoid the claim that ‘delegation’ of responsibility has occurred.

133 Abandonment of sections of the local road network may be a legally sound policy. Local

communities would be allowed to keep those roads open at their own expense, using their

powers to levy ‘local taxes, duties and fees’, but Central Government would have no legal

obligation to contribute.

134 Article 110 of the Constitution allows the National Assembly to merge or separate commun-

ities in the public interest. The Consultant understands that some consolidation of small




P a g e | 5-5

communities is under consideration at present. This may enhance the feasibility of devolving

some responsibilities and powers.

PRIORITIES

135 The top priority should be given to the following actions, which should be taken before the

end of 2015:

• A Government decision, on the advice of the Road Council, to increase the medium-

term and longer-term levels of financing for road maintenance and rehabilitation in

accordance with the recommendations contained in this report, which confirm those

from other sources.

• Include fuel taxation in the current review of the Tax Code, with a view to a) reducing

anomalies and inequities and b) raising more revenue from road users.

• Amendment of Decree No.1419-N to include roughness (as measured by IRI) as an

indicator of road quality and contract performance.

• Moves towards introduction of PBMCs, subject to the findings and recommendations of

the consultant due to come to Armenia in September 2015 to review the system of

contracting.

136 Within the same timeframe the following measures should be initiated for longer-term

implementation:

• Draft legislation to allow tolling of all roads and associated infrastructure, through road-

side toll collection and/or sale of vignettes, irrespective of the existence of alternative

toll-free routes and with the possibility of incorporating toll collection into PPP arrange-

ments. Such arrangements are already envisaged for the North-South Corridor.

• Consultations with insurance and road user representatives about the possible intro-

duction of a tax on vehicle insurance premiums, with an associated guarantee of

increased spending on road maintenance.

• Detailed review of road fee schedules by the ARD, using HDM-4 and enlarging on the

Consultant’s own analysis reported on above.

• Review of contractual arrangements, including the consultancy scheduled to begin in

September, with particular focus on the possible introduction of PBMCs.

6. SOCIAL AND ECONOMIC

CONSEQUENCES

Roughton International Limited Social and Economic Consequences



P a g e | 6-1

6. SOCIAL AND ECONOMIC CONSEQUENCES

‘BAD ROADS TAX’

137 In para.72 the point was made that HDM-4, the analytic tool used by WB, AARC and

Roughton in their analyses of needed expenditure on maintenance and rehabilitation, is

designed to help analysts to maximize net benefits to the community at large. If an

intervention does not produce benefits that represent a rate of return at least equal to the

social rate of discount, HDM-4 will not include it in a recommended works program. If a

budget constraint is included in the analysis, HDM-4 will select interventions that make the

most profitable use of the funds available.

138 In all three analyses summarized and compared in Chapter 2, the social discount rate was set

at 12%pa. It happens that the Government of Armenia is currently able to borrow domestic-

ally at 12%pa, but this is a nominal rate of interest. The social discount rate is a real rate,

which must be factored by the rate of inflation to arrive at a comparable interest rate.

Therefore, since the average general rate of inflation in Armenia has been 5.2%pa since

2008, a social discount rate of 12%pa may be compared with a nominal interest rate of

17.8%pa.

139 It was pointed out at the First Workshop that increasing the tax burden, for example by

rationalizing fuel taxation in a way that increases the average tax per litre (as proposed by

the Consultant), would reduce purchasing power and therefore have a depressive effect on

the economy. The Consultant’s proposal, as made in Chapter 4, would add about 3% to

vehicle operating costs (VOC): rather more for buses, less for trucks.

140 The counter-argument to this is that bad roads impose their own ‘tax’ on road users in the

form of higher vehicle operating costs and loss of time. These two cost components are

together referred to as ‘road user costs’ (RUC).

141 In principle there is no reason to suppose that the ‘bad roads tax’ has any less of a depressive

effect on the economy than a real tax. Indeed, since most of the additional cost burden

imposed by bad roads takes the form of maintenance parts and vehicle depreciation, both

with very high import components, the depressive effect is compounded by leakage out of

the economy and loss of foreign exchange.

142 An examination of RUC predicted by HDM-4 for each vehicle class and over a range of IRI

values shows that the benefits to road users from a 1 point reduction in IRI (form 7 to 6)

exceeds the additional fuel taxes proposed by the Consultant. This is true in every vehicle

class, as is apparent in Table 15 below. The last row of the table shows the average ratio of

RUC savings to proposed additional tax for each vehicle class, ranging from 6.1 to 16.0.

143 The average difference in IRI between the Consultant’s Scenario 2 (keeping the network-wide

average IRI about the same as now) and Scenario 3 (continuation of spending at present

levels) is predicted to be 1.1 (IRN) and 0.8 (RRN) in the first 5 years; and 4.4 (IRN) and 3.9

(RRN) in the following 15 years. This may be seen by comparing the graphs below (Figure 3

and Figure 4).




P a g e | 6-2

Table 15 Benefits to Road Users Compared With Proposed Tax Impact

Unit Passeng

er

car

Deliv

ery

veh

icle

Bus L

igh

t

Bus M

ediu

m

Bus H

eavy

Tru

ck L

ight

Tru

ck

Med

ium

Tru

ck H

ea

vy

Tru

ck

Art

icula

ted

Per litre of fuel AMD/litre 34.9 45.2 44.1 44.1 44.1 39.0 70.4 85.0 85.0

Per vehicle-km AMD/km 2.6 4.2 5.7 6.1 6.6 4.8 9.1 12.1 17.0

AMD/km 3.8 9.1 10.9 17.9 12.4 11.6 16.7 26.8 46.7

Average ratio savings/tax (2016-34) 7.3 8.7 10.1 16.8 17.1 9.5 7.6 9.9 13.7

Proposed

additional

tax

Saving per IRI point reduction

Figure 3 Projected Average Roughness (IRI): Interstate Road Network

4

5

6

7

8

9

10

11

12

13

14

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Scenario 2

Scenario 3

Figure 4 Projected Average Roughness (IRI): Republican Road Network

4

5

6

7

8

9

10

11

12

13

14

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Scenario 2

Scenario 3

144 These results will surprise some people. They come from HDM-4, which is the most used and

trusted research-based tool for predicting the effect of road condition on VOC and RUC,




P a g e | 6-3

using as input data the estimates and assumptions presented in TR1 (Chapter 5 and Appendix

4A) and the ARD’s road database.

145 Unless these results are disproved, it must be concluded that the potential negative impact

of the proposed changes to fuel taxation would be greatly outweighed by the positive impact

on other costs born by road users – provided that the proceeds of the proposed changes are

applied to preventing the steady deterioration in the interstate and republican road net-

works that will result from continued underfunding of maintenance and rehabilitation. That

deterioration is represented by the top lines in the above two graphs.

ECONOMIC EFFECTS

146 Road transport plays a role in all economic activities and accounts for about 5% of GDP. That

estimate is based on official statistics showing that the Transport and Communication sector

has accounted for 6.5–8.0% of GDP since 2000, and road transport accounts for about 60% of

freight tonnage and 90% of passenger numbers. In terms of turnover (tonne-kilometres) the

road share of freight transport is only 12% because of the dominance of pipeline and rail in

long-haul transport of oil, gas and other bulk commodities.

147 Directly, road transport costs constitute a small part of the Consumer Price Index. But in-

directly they effect all other components. The Consultant’s HDM-4 analysis suggests that

VOC could be reduced on average by about 15% by adopting Scenario 2 in place of Scenario 3

(which represents continuation of the present level of funding). Netting out the additional

fuel tax that could pay for the adoption of Scenario 2, the reduction would be 12%.

148 It is impossible to compute an overall average impact on prices, but the Consultant offers a

notional example as an illustration of the scale of impact that could be expected:

• The village of Bnorosh is supplied exclusively by road. The average distance over which

goods are carried to the village is 200km.

• Medium-sized trucks make the deliveries, carrying an average of 5 tonnes (including a

backload).

• The average value of the goods is AMD1M (US$2,100) per tonne.

• The freight rate is equivalent to the VOC, as predicted by HDM-4 (AMD418 per vehicle-

km with an IRI of 11, including taxes), factored by 1.30 to allow for the operator’s

overhead and profit.

• The freight cost is therefore AMD21,700 per tonne, adding 2.2% to the cost of the goods

to the people of Bnorosh.

• Assuming a competitive environment and no change in the operator’s overhead or

profit margin, a reduction of 12% in the VOC would allow a reduction in the freight rate

from AMD21,700 to AMD19,700 per tonne, equivalent to a 0.2% reduction in the cost of

goods in Bnorosh.

A similar calculation suggests an average 8% reduction in bus fares, again assuming a 30%

mark-up on existing VOC for overhead and profit.

149 In rural areas the biggest potential impact would be on agricultural production. Farmers

cannot be expected to invest in land, equipment, storage, seeds, fertilizers, pesticides,

animal feed, veterinary services and other inputs if they are faced with costly and uncertain

access to their markets on roads that are so uneven that fragile produce is likely to be

damaged in transit.




P a g e | 6-4

150 It is noticeable that much of the fresh produce for sale in Yerevan is imported. To a great

extent this is due to climate, seasonality and demand from an affluent middle class for exotic

foods. But the ADS points out that 32% of Armenia’s arable land is uncropped and it is

reasonable to speculate that poor access and high transport costs have contributed to this.

151 Official statistics suggest a clear trend. The share of the Agriculture, Forestry and Fishing

sector in GDP has declined from 24% in 2000-2002 to below 20% in recent years. At the

same time there has been a surge in food imports. In 2010 Armenia imported 73,000t of

Food, Beverages and Tobacco worth US$156M. By 2013 this had increased to 155,000t

worth US$388M. Over this period the Food, Beverages and Tobacco category increased its

share of total imports from 15% to 27% by value. The Consultant cannot prove a connection

between these statistics and Armenia’s poor roads, especially local roads, but the possibility

should not be ignored.

152 If there is a connection, the ADS (2014-25) gives two reasons for responding to the situation

with some urgency: “Firstly, agriculture is the key link of the food industry value chain, which

is one of the sub-branches with export potential. Secondly, development of agriculture is

critical for increase of productivity and creation of non-agricultural jobs in rural areas, thus

contributing to balanced regional development.”

153 Adding value to primary produce and developing export markets are key components of

Armenia’s economic development strategy. They depend on a range of conditions that

include:

• High quality transport infrastructure and services connecting primary producers to pro-

cessing facilities and markets.

• International competitiveness, in terms of both cost and quality.

The Consultant’s proposals would contribute to fulfilling both these conditions.

154 Tourism is another sector that depends heavily on transport infrastructure. The ADS has a

target of 2.7 million incoming tourists per year by 2015, requiring an annual growth rate of

8–9%. Achievement of this target will require investment in facilities and infrastructure. If

the benefits of increased tourism are to be spread throughout the country, with opport-

unities for rural producers of all kinds to earn a share of the tourism dollar, the republican

and local road networks cannot be allowed to fall into decay.

SOCIAL IMPLICATIONS

155 Any measures to increase Government revenues will directly affect the same people: those

with money, jobs, businesses and vehicles. Since most of the country’s wealth is con-

centrated in Yerevan, the people of Yerevan will always bear the largest share of the cost of

any policy or program, whether it is orientated towards economic development, social

improvement or strengthened security. This is certainly true of the Consultant’s proposals to

rationalize fuel taxation and road fees.

156 However, the benefits from spending the increased revenues on the roads would be enjoyed

throughout the country and by all inhabitants, urban and rural, rich and poor. In TR1 the

Consultant offered three reasons why the poor may suffer disproportionately from the

effects of poor or non-existent road maintenance:

• High transport costs reduce Armenia’s international competitiveness and so reduce

employment opportunities.




P a g e | 6-5

• Rural dwellers have little choice as consumers. They must either pay the retail prices of

goods delivered to their communities, which include transport costs, or incur the cost of

travelling to an urban centre to buy goods at lower prices.

• The LRN in particular gives access to markets for agricultural goods. Bad local roads not

only increase farm-to-market transport costs but also increase the risk of damage to

goods in transit, because of jolting and/or extended journey times for perishable goods.

In this context the word ‘goods’ includes livestock.

157 If the poor suffer disproportionately from poor road maintenance they will also benefit

disproportionately from good road maintenance. Therefore the Consultant’s proposals have

a redistributive effect. The urban rich will pay more and the rural poor will enjoy lower living

costs and enhanced economic opportunities.

158 The rich will also benefit directly from lower costs as road users, but only when they take

their vehicles outside the municipal boundaries. Urban roads, especially in Yerevan, are

already in good condition. Private cars are used mostly on those roads and their owners will

notice little improvement as a result of increasing the road maintenance budget. Their

benefits will take the form of lower transport costs for the goods that they consume and for

the businesses from which their incomes are derived.

159 In most countries the population is becoming more urbanized, with rural communities

shrinking and being populated mainly by the elderly. This is not the case in Armenia. The

rural share of the population has risen from 31% in 1989, just before the demise of the USSR,

to 37% now. This has happened while the national population has declined by 12.5%. The

proportion of the rural population over 60 years of age is 13% compared to 17% in urban

areas. The proportion of under-20s is higher in the rural areas: 28% compared to 25% in

urban areas. The proportion of people in the prime working age group (20-59) is about the

same in both populations.

160 These statistics are significant if one considers a strategy of selective depopulation, allowing

abandonment of sections of the local road network and other economic and social infra-

structure such as schools and medical centres. The villages are not dying. In general they are

poor and their young people have meagre prospects for higher education and employment,

but closing down whole communities and progressively concentrating their populations at

locations that are easier to provide with access and essential services would not be an easy

option, nor a cheap one.

Roughton International Limited

APPENDICES

Appendix 1A

NETWORK DATA SUPPLIED BY MOTC

Road Network Length (km)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Interstate highways 1,561 1,561 1,561 1,561 1,686 1,686 1,686 1,686 1,686 1,686 1,759

Republican roads 1,832 1,832 1,832 1,832 1,747 4,056 4,056 4,056 4,056 4,056 1,966

Local roads 4,236 4,122 4,111 4,122 4,271 1,962 1,962 1,962 1,962 1,962 3,805

Total 7,629 7,515 7,504 7,515 7,704 7,704 7,704 7,704 7,704 7,704 7,530

Lifeline Roads Network Length (km)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Republican roads N/A N/A N/A N/A N/A 4,056 4,056 4,056 4,056 4,056 1,966

Local roads N/A N/A N/A N/A N/A 0 0 0 0 0 2,090

Total 4,056 4,056 4,056 4,056 4,056 4,056

Republican Roads Length (km)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Managed by ARD 1,832 1,832 1,832 1,832 1,747 1,747 1,747 1,747 1,747 1,747 1,955

Managed by Marzes 0 0 0 0 0 2,309 2,309 2,309 2,309 2,309 0

Manged by Yerevan 0 0 0 0 0 0 0 0 0 0 11

Total 1,832 1,832 1,832 1,832 1,747 4,056 4,056 4,056 4,056 4,056 1,966

Road Network Condition (km)

2010 2011 2012 2013 2014 2014

Interstate highways %

Good/Fair 88 88 89 90 145 8

Fair 1,240 1,212 1,155 1,121 1,093 62

Poor/Bad 274 301 355 387 426 24

Bad 84 85 87 88 95 5

Total 1,686 1,686 1,686 1,686 1,759 100

Republican roads %

Good 514 493 473 436 397 20

Fair 1,026 1,185 1,136 1,110 523 27

Poor 1,011 1,103 1,135 1,121 611 31

Bad 1,505 1,275 1,312 1,389 435 22

Total 4,056 4,056 4,056 4,056 1,966 100

Local roads %

Good 359 529 633 690 691 18

Fair 180 220 278 330 938 25

Poor 483 471 420 442 873 23

Bad 941 742 631 500 1,303 34

Total 1,962 1,962 1,962 1,962 3,805 100

All roads %

Good 961 1,110 1,196 1,216 1,233 16

Fair 2,446 2,617 2,569 2,561 2,554 34

Poor 1,768 1,875 1,910 1,950 1,910 25

Bad 2,530 2,102 2,029 1,977 1,833 24

Total 7,704 7,704 7,704 7,704 7,530 100

Road Network Descriptions

2008 2009 2010 2011 2012 2013 20142015

(planned)

US$M US$M US$M US$M US$M US$M US$M US$M

1 State budget 25.2 23.9 14.8 10.9 14.4 8 11.6 7.4

2IFIs Loans plus RA Government

co-financing0.0 61.6 21.4 20.8 13 16.8 3 7.8

25.2 85.5 36.2 31.7 27.4 24.8 14.6 15.2

2008 2009 2010 2011 2012 2013 20142015

(planned)

km km km km km km km km

1 State budget 192.0 112.0 126.0 63.0 75.0 32.9 63.3 46.6


co-financing0.0 299.0 224.0 173.0 112.0 101.0 12.0 45.0

192.0 411.0 350.0 236.0 187.0 133.9 75.3 91.6

2008 2009 2010 2011 2012 2013 2014 2015

(planned)



co-financing0.0 0.0 0.0 0.0 16.6 19 52.2 162 73

0.0 0.0 0.0 0.0 16.6 19.0 52.2 162.0 73

2008 2009 2010 2011 2012 2013 20142015

(planned)


1 State budget 11.4 11.6 12.4 12.2 12.6 12.4 12.6 14.4

11.4 11.6 12.4 12.2 12.6 12.4 12.6 14.4

2008 2009 2010 2011 2012 2013 2014

2015

(planned)

km km km km km km km km

1 State budget 3,246 3,246 3,246 3,159 3,184 3,298 3,298 3,465

3,246 3,246 3,246 3,159 3,184 3,298 3,298 3,465

2008 2009 2010 2011 2012 2013 20142015

(planned)


Total: Maitenance

Total

(2012-

2015)

km

Expenditures on Roads (only MoTC programs), 2008-2015

No Source of financing


Source of financing

Total: Roads rehabilitation

3.Roads Routine maintenance


2.Roads New Construction (North-South Road Corridor)

No

Total: New construction

No

Total: Roads rehabilitation

1.Roads rehabilitation

Source of financing

GRAND TOTAL (MoTC programs)

Total: Maitenance

56.6 56.2 79.4 191.643.9

Grand Total: Roads Rehabilitation,

New Construction and Routine

Maintenance

36.6 97.1 48.6

Appendix 2A

TECHNICAL DETAILS OF HDM-4 ANALYSIS OF NEEDED EXPENDITURE

Road Inventory, Geometrics and Condition

Interstate and Republican road network survey data were provided by ARD. For Interstate road network

condition by the end of 2014 and for republican road network condition of different sections for the

years 2014, 2012, 2011, 2010. In total ARD has provided about 1,660km road survey data for Interstate

roads and 801km for republican roads (41% of the republican roads network).

Minister of transport and communication has previously approved a decree named «guidelines for

implementation of collecting data on road pavement condition, traffic counts, state road rehabilitation

project development, traffic management and safety improvement works» №239-A dated 5 of May

2011. According which the existing equipment allows to investigate 30-40km/per day road and taking

into consideration the methodology used it is possible to implement the annual measurement for

almost all interstate roads network and some of the republican roads. The investigation of total

republican roads network shall be done within 4-5 years.

Existing Traffic, Forecast and Vehicle Operating Costs

The traffic data for economic evaluation of Interstate and republican road networks and each road

section were provided by ARD.

The vehicle operating cost (VOC) and fleet input to HDM-4 is summarized in Tables below covering

vehicle characteristics, VOCs and vehicle utilization respectively. These are a combination of values

derived from recent research in Armenia and used in recent road studies. The fuel costs for each vehicle

type have been evaluated within current study.

Table 4A.1 Basic Vehicle Characteristics

Vehicle type

No Basic characteristics

Pa

sse

ng

er

car

Ve

hic

les

1.5

-3.0

t

Min

i bu

s

Bu

s

Big

bu

s

Tru

cks

2 a

xle

s

Tru

cks

3 a

xle

s

Tru

cks

4 a

xle

s

Physical

1 Passenger car space equiv. 2 1 1.4 1.5 1.6 1.4 1.6 1.8

2 Number of wheels 4 4 6 6 6 6 10 18

3 Number of axles 2 2 2 2 2 2 3 5

Utilization

4 Annual km 25,000 30,000 47,000 70,000 70,000 40,000 86,000 86,000

5 Working hours 550 1,300 2,100 1,750 2,500 1,200 2,600 2,050

6 Average life, years 10 8 8 7 12 12 14 14

7 Private use, % 90 75 10 10 0 30 10 0

8 Passengers, persons 2 2 12 25 40 0 0 0

9 Work related passenger trips % 75 90 75 90 95 0 0 0

2

Table 4A.2 Economic Unit Costs of Vehicles (US$)

Vehicle type

No Basic characteristics

Pa

sse

ng

er

car

Ve

hic

les

1.5

-3.0

t

Min

i bu

s

Bu

s

Big

bu

s

Tru

cks

2 a

xle

s

Tru

cks

3 a

xle

s

Tru

cks

4 a

xle

s

Vehicle resources

1 New vehicle cost 15,000 25,000 25,000 35,000 50,000 35,000 60,000 100,000

2 Replacement tyre 75 120 120 200 350 350 350 350

3 Fuel cost per litre 0.45 0.61 0.44 0.44 0.44 0.82 0.84 0.84

4 Lubricating oil cost per litre 3 3 3 3 3 3 3 3

5 Maintenance labour cost per

hour 3 3 3 3 3 3 3 3

6 Crew wages cost per hour 4 4 4 4 4 4 4 4

7 Annual overhead 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

8 Annual interest, % 12 12 12 12 12 12 12 12

Time Value

9 Passenger working time cost

per hour 2 2 2 2 2 2 2 2

10 Passenger non-working time

cost per hour 1 1 1 1 1 1 1 1

11 Cargo cost per hour 2 2 2 2 2 2 2 2

Traffic growth is primarily driven by economic development and reflects the increasing prosperity of

society and the attendant increases in vehicle ownership and vehicle usage. National economic growth

is best represented by growth in real Gross Domestic Product (GDP). A set of national economic growth

forecasts has been developed for the study to reflect the expected growth in the national economy of

Armenia.

The IMF`s forecasts for Armenia over the period to 2016 have been used as starting point for the

development of central or best estimate, growth forecasts for the national economy.

For the remainder of the evaluation period to 2035 reference has been made to wider international

development studies, including work by Scott Wilson, which predict the longer term economic growth of

Eastern European and former Soviet countries in terms of catch up periods to growth rates experienced

by European Union members, and work by Roughton International1, which predict the longer term

economic growth of Armenia.

The strong relationship between economic growth and traffic growth is widely recognized and in the

developing stage of an economy, cars and other passenger vehicle traffic are generally considered to

grow slightly faster than GDP while goods vehicle traffic, being driven directly by the economy, is

commonly in line with GDP growth.

Accordingly, 1.2 for car and passenger traffic has been adopted until 2020 with 1.1 thereafter and 1.0

for goods vehicles throughout the evaluation period. These values are in line with TRACECA guidance.

1 PREPARATION OF DESIGN AND EMP FOR THE AF2-LRIP YEAR 2011 ROADS REHABILITATION WORKS, PHASE 1 ROADS, FINAL

ECONOMIC ANALYSIS REPORT, #DDAS-AF2-LRIP-2011, AUGUST 2011, Roughton International

3

The growth rates are summarized in table below.

Table 4A.3 Projected Normal Traffic Growth Rates (% per annum)

Year Passenger

vehicles Goods Vehicles

2014 - 2020 4.8% 4.0%

2020 - 2025 3.9% 3.5%

2025 - 2035 3.3% 3.0%

Source: Roughton International

Improvement Alternatives, Maintenance Strategies and Costs

When construction, maintenance, and rehabilitation costs are considered, the single most costly

element of our nation`s road system is the pavement structure.

HDM-4 compares a base alternative situation (Do Minimum) with one or more with section alternatives.

This enables the net economic impact of the proposed option(s) to be rank.

Do Minimum Situation

A realistic do minimum situation has been assumed for each of the study roads of the network. The do

minimum strategies reflect current maintenance standards and practices in Armenia and consist of

routine summer and routine winter maintenance, pothole patching and crack sealing for roads in fair

condition.

These have been based upon the Consultants’ experience of road maintenance projects in Armenia and

the values provided by ARD.

Applied alternatives

Applied alternatives are summarized in table below.

Table 4A.4 Applied Alternatives

Alternative Work items Condition

Base Routine maintenance (roads in fair condition)

Option 1 Routine maintenance (roads in good condition) + Reconstruction Reconstruction @8m/km IRI




Option 5 Routine maintenance (roads in good condition) + Overlay 50mm Overlay 50mm @4m/km IRI




Option 9 Armenian Road Directorate used alternative





The estimated costs of the options are summarized in table below.

• The average maintenance costs for interstate and republican roads have been calculated using

current routine summer and routine winter maintenance contract prices.

4

• The reconstruction and overlay cost per square meters are back calculated from the similar

recent rehabilitation projects.

Table 4A.5 Costs of Options

Interstate roads Republican roads

Alternatives Economical Cost/km US$

Financial Cost/km US$

Economical Cost/km US$

Financial Cost/km US$

Routine Maintenance

(roads in fair condition) 2,850 3,420 2,500 3,000

Routine Maintenance

(roads in good condition) 2,250 2,700 2,250 2,700

Cost/m2 US$ Cost/m

2 US$ Cost/m

2 US$ Cost/m

2 US$

Reconstruction (width 8m) 31.20 37.44 26.00 31.20

Overlay 50mm 20.80 24.96 20.80 24.96

Overlay 40mm 18.75 22.50 18.75 22.50

Economic Evaluation Parameters

A discount rate of 12% has been adopted for this program in line with the requirements of the ToR.

The discount base year has been taken to be 2015.

An evaluation period of 20 years has been adopted, commencing with base year of 2015 and with

program opening year expected to be 2016 for each of the road sections. Final evaluation year is 2034.

Results of Economic Analysis

The output files are available for inspection. Year-wise summaries are presented below for the first

three scenarios. They show total expenditure on non-routine maintenance (Total ex RM) disaggregated

into reconstruction/rehabilitation and periodic maintenance, and routine maintenance. RRN results

have been scaled up to allow for the incomplete coverage, assuming that the road sections for which

data are unavailable are similar to those for which data are available.

The fourth scenario (routine maintenance only) involves uniform annual expenditure of US$6.0M for the

interstate road network and US$5.9M for the republican road network.

5

Scenario 1 (Unconstrained)

Interstate Road Network

km US$M km US$M km US$M km US$M

2015 939 193 939 193 820 2

2016 62 13 62 13 1,697 5

2017 51 11 51 11 1,708 5

2018 105 26 105 26 1,654 4

2019 120 26 120 26 1,639 4

2020 104 24 104 24 1,655 4

2021 64 15 64 15 1,695 5

2022 48 10 48 10 1,711 5

2023 190 40 190 40 1,569 4

2024 16 3 16 3 1,743 5

2025 96 18 96 18 1,663 4

2026 143 32 143 32 1,616 4

2027 111 22 111 22 1,648 4

2028 144 30 144 30 1,615 4

2029 167 37 167 37 1,592 4

2030 181 39 181 39 1,578 4

2031 33 7 33 7 1,726 5

2032 38 8 38 8 1,721 5

2033 128 28 128 28 1,631 4

2034 60 14 60 14 1,699 5

Total 2,801 595 2,801 595 32,379 87

Average per year

Overall 140 30 140 30 1,619 4

Yrs 1-5 256 54 256 54 1,503 4

Yrs 6-20 102 22 102 22 1,657 4

Total ex RM Recon. Periodic Routine

Republican Road Network

km US$M km US$M km US$M km US$M2015 722 151 0 0 722 151 1,243 3

2016 21 4 0 0 21 4 1,945 52017 19 4 0 0 19 4 1,946 5

2018 113 24 0 0 113 24 1,853 52019 134 33 0 0 134 33 1,832 5

2020 87 15 0 0 87 15 1,879 52021 135 27 0 0 135 27 1,831 5

2022 203 40 0 0 203 40 1,762 52023 174 42 22 5 151 37 1,792 5

2024 14 3 0 0 14 3 1,952 52025 150 30 74 16 76 14 1,816 5

2026 55 10 0 0 55 10 1,910 52027 197 40 25 5 172 35 1,769 5

2028 272 59 0 0 272 59 1,694 52029 115 25 0 0 115 25 1,851 5

2030 65 12 0 0 65 12 1,901 52031 16 3 0 0 16 3 1,950 5

2032 182 44 0 0 182 44 1,784 52033 196 42 0 0 196 42 1,770 5

2034 121 24 0 0 121 24 1,844 5Total 2,992 632 121 26 7,041 606 36,325 98

Average per year

Overall 150 32 6 1 352 30 1,816 5

Yrs 1-5 202 43 0 0 202 43 1,764 5Yrs 6-20 132 28 8 2 124 26 1,834 5


Legend

ՊայմանականՊայմանականՊայմանականՊայմանական նշաններնշաններնշաններնշաններ

Total ex RM

Total expenditure excluding routine maintenance

Ընդհանուր ծախսերը,

բացառությամբ ընթացիկ

սպասարկումը

Recon.

Reconstruction / Rehabilitation

Վերակառուցում /

Վերականգնում

Periodic

Periodic maintenance

Պարբերական

սպասարկում

Routine

Routine maintenance

Ընթացիկ սպասարկում

6

Scenario 2 (Keep IRI within 1.5 of now)



2015 154 30 154 30 1,605 4

2016 129 30 20 8 109 22 1,630 4

2017 114 25 26 9 88 17 1,645 4

2018 139 30 23 8 116 22 1,620 4

2019 115 30 45 16 70 14 1,644 4

2020 128 29 52 15 76 15 1,631 4

2021 107 29 57 19 50 10 1,652 4

2022 79 28 79 28 1,680 5

2023 95 28 79 25 16 3 1,664 4

2024 77 24 71 23 6 1 1,682 5

2025 87 18 19 6 68 13 1,672 5

2026 133 24 133 24 1,626 4

2027 81 16 81 16 1,678 5

2028 59 12 59 12 1,700 5

2029 61 12 61 12 1,698 5

2030 47 10 47 10 1,712 5

2031 21 6 10 4 11 2 1,738 5

2032 75 22 44 15 31 6 1,684 5

2033 95 18 95 18 1,664 4

2034 64 16 31 10 33 6 1,695 5

Total 1,860 438 557 185 1,302 253 33,320 90

Average per year

Overall 93 22 28 9 65 13 1,666 4

Yrs 1-5 130 29 23 8 107 21 1,629 4

Yrs 6-20 81 20 29 10 51 10 1,678 5



km US$M km US$M km US$M km US$M2015 128 22 14 4 114 18 1,838 5

2016 85 17 37 8 48 9 1,881 5

2017 82 21 52 13 30 7 1,884 5

2018 101 21 0 0 101 21 1,865 5

2019 100 20 34 8 66 12 1,866 5

2020 93 21 37 12 56 10 1,873 5

2021 99 19 39 9 60 11 1,867 5

2022 86 19 23 8 63 11 1,880 5

2023 88 20 88 20 0 0 1,878 5

2024 92 17 32 8 60 10 1,874 5

2025 90 22 47 13 43 9 1,876 5

2026 80 19 38 10 42 9 1,886 5

2027 86 16 56 12 29 3 1,880 5

2028 118 22 19 4 99 18 1,847 5

2029 102 21 14 4 87 18 1,864 5

2030 67 17 47 12 19 5 1,899 52031 0 0 0 0 0 0 1,966 5

2032 85 19 30 8 54 11 1,881 5

2033 93 21 37 12 56 10 1,873 5

2034 86 18 34 8 52 9 1,880 5

Total 1,760 372 678 172 0 200 37,557 101Average per year

Overall 88 19 34 9 0 10 1,878 5

Yrs 1-5 99 20 27 7 72 13 1,867 5

Yrs 6-20 84 18 36 9 48 9 1,882 5


7

Scenario 3 (Continue spending as now)



2015 69 13 69 13 1,690 5

2016 62 13 3 1 59 12 1,697 5

2017 62 13 12 4 50 9 1,697 5

2018 71 13 71 13 1,688 5

2019 45 13 28 9 18 4 1,714 5

2020 52 13 23 7 29 6 1,707 5

2021 49 12 30 8 19 4 1,710 5

2022 41 12 41 12 1,718 5

2023 41 12 37 11 4 1 1,718 5

2024 38 12 38 12 1,721 5

2025 50 11 6 2 44 10 1,709 5

2026 45 10 20 6 25 4 1,714 5

2027 58 10 58 10 1,701 5

2028 57 11 57 11 1,702 5

2029 46 10 6 2 40 8 1,713 5

2030 4 1 4 1 1,755 5

2031 13 3 10 3 3 1 1,746 5

2032 26 5 3 1 23 5 1,733 5

2033 22 6 11 4 11 2 1,737 5

2034 39 9 10 3 29 6 1,720 5

Total 889 202 277 84 612 118 34,291 93

Average per year

Overall 44 10 14 4 31 6 1,715 5

Yrs 1-5 62 13 9 3 53 10 1,697 5

Yrs 6-20 39 9 16 5 23 4 1,720 5




2015 44 8 0 0 44 8 1,921 5

2016 40 7 25 5 15 2 1,926 52017 25 6 14 4 10 2 1,941 5

2018 30 8 12 3 18 4 1,935 5

2019 21 6 21 6 0 0 1,945 5

2020 39 8 22 5 17 3 1,927 52021 35 8 6 2 29 5 1,931 5

2022 37 7 27 5 10 2 1,929 5

2023 29 6 29 6 0 0 1,936 52024 32 8 32 8 0 0 1,933 5

2025 46 8 0 0 46 8 1,920 5

2026 29 6 29 6 0 0 1,936 5

2027 32 6 17 4 15 2 1,934 52028 39 7 0 0 39 7 1,927 5

2029 30 6 20 4 10 2 1,936 5

2030 40 8 40 8 0 0 1,926 52031 28 5 0 0 28 5 1,938 5

2032 20 5 14 4 6 1 1,945 5

2033 36 8 21 6 15 2 1,930 5

2034 22 5 12 3 10 2 1,944 5Total 656 134 344 79 0 54 38,661 104Average per year

Overall 33 7 17 4 0 3 1,933 5Yrs 1-5 32 7 15 4 18 3 1,934 5

Yrs 6-20 33 7 18 4 15 3 1,933 5


Appendix 2B

REVENUE ESTIMATION (FROM THE FIRST TECHNICAL REPORT)

The following text and tables are repeated from the Consultant’s First Technical Report (TR1),

paragraphs 70–97.

INTRODUCTION

70 The Ministry of Finance has been unable to provide full information about revenue raised

from road users, so the consultants have made their own estimates based on whatever information

was available from other sources.

71 The approach may be summarised as follows:

• Estimate the level and incidence of all significant taxes and charges payable by road

users in 2015.

• Identify those which may considered ‘service fees and general taxes’ as meant in the

consultants’ TOR (paragraph 13(iv)).

• Consider which other taxes and charges might be considered as proxy charges for road

use and therefore be candidates for hypothecation to the roads budget or to an auto-

nomous agency with responsibility for road network management.

• Consider the scope for increasing existing taxes or charges and/or introducing new

ones.

• Assess the potential revenues which increased or new taxes and changes would yield.

• Assess the wider economic and social implications of such measures.

72 Special attention was paid to the taxation of fuel, as required by the TOR. Fuel is the most

obvious taxable good that is necessarily bought by road users, and it has been observed in previous

studies that Armenian fuel taxes are low by world standards.

TAXES ON IMPORTED GOODS

73 Four taxes and four categories of imports are included in this analysis:

Taxes

• Customs duty.

• Excise tax.

• Value added tax (VAT).

• Environmental tax.

Imports

• Vehicles.

• Tyres.

• Parts.

• Fuel (petrol, diesel fuel, gas).

74 Foreign trade statistics are available for most goods in 2014, but for fuel the latest data

relate to 2013 and the published statistics do not differentiate between petrol and diesel fuel. The

consultants sought advice from private business sources and have constructed a set of estimated

import volumes and values for 2015, presented in Error! Not a valid bookmark self-reference..

75 Tax laws were consulted to find the appropriate tax rates and estimates were made of the

gross mark-ups (value added) in Armenia as a basis for computing VAT at the point of retail sale. See

Table . Taxation of petrol and diesel fuel is complicated by the application of ad valorem customs

duty and excise tax but subject to minimum collections per tonne. The results of this analysis are

presented in Table .

2

Table 15 Road-Related Imports

Pe

tro

l

Die

se

l

CN

G

Import volumes '000t 2 132 39 361

'000 items 52 665

Import values US$M 361 38 13 100 32 110 653

AMDbn 171 18 6 48 15 52 310

Unit values AMD'000/t 3,223 361 382 144

AMD'000/item 3,320 27

Unit

Fuel

To

tal

Ro

ad

ve

hic

les

Tyre

s

Pa

rts

Table 16 Rates of Tax on Road-Related Imports

Pe

tro

l

Die

se

l

CN

G

Customs duty % 10% 10% 10% 5%

Excise tax, ad valorem % 10%

Excise tax, volumetric AMD/tonne 25,000

Excise tax, minimum AMD/tonne 32,500

VAT, minimum AMD/tonne 87,000

Environmental tax % 2%

VAT at the border % 20% 20% 20% 20% 20%

VAT at final point of sale % 20% 20% 20% 20% 20%

Assumed gross mark-up % [a,b] 10% 20% 25% 20% 20% 40%

[a] Used to compute VAT revenue from value added after importation.

[b] A low mark-up is assumed on vehicles because many are imported for own use.

Fuel

Ro

ad

ve

hic

les

Ty

res

Pa

rts

Unit

76 The results of the analysis are presented in Error! Not a valid bookmark self-reference..

Total estimated taxes amount to AMD102.6 billion (US$216.0M). Taxes on imported vehicles

account for 57% of this total and taxes on fuel account for 36%. Looking at the breakdown by type

of tax, VAT accounts for 75% and customs duty 22%. Excise tax and environmental tax – the only

taxes shown here that are not general in nature – account for only 3.5%.

3

Table 17 Estimated Taxes on Road Related Imports

Pe

tro

l

Die

se

l

CN

G

Customs duty AMDbn/year 17.1 1.8 0.6 2.6 22.2

Excise tax, ad valorem AMDbn/year 1.5

Excise tax, volumetric AMDbn/year 3.3 3.3

Excise tax, minimum AMDbn/year

VAT, minimum AMDbn/year 11.5 11.5

Environmental tax AMDbn/year 0.3 0.3

VAT at the border AMDbn/year 37.7 4.0 1.3 10.9 54.0

VAT at final point of sale AMDbn/year 3.8 0.8 0.3 2.1 4.4 11.4


US$M/year [a] 123.4 14.0 4.7 35.6 3.8 37.7 216.0


Unit Ro

ad

ve

hic

les

Tyre

s

Pa

rts

Fuel

To

tal

INCIDENCE OF FUEL TAXES

77 Many assumptions underlie the consultants’ estimates of the incidence of fuel taxes, by

vehicle class and by type of tax. These assumptions are presented in full in Before making the crude

estimates of fleet composition shown in Error! Not a valid bookmark self-reference.18, the

consultants examined fleet statistics for Georgia, Macedonia and Moldova, these being countries

that are similar to Armenia in population and per capita GDP and, in the case of Macedonia and

Moldova, landlocked. The proportion of fuel usage in each vehicle class, annual kilometrage and

rates of fuel consumption were based on information obtained in meetings or online together with

the consultants’ own knowledge and experience. The figures were adjusted in an iterative process

to match total consumption of each type of fuel with estimated import volumes.

78 Table . No Government agency has been able to provide information on the size and

composition of the national fleet of road vehicles, but from insurance industry sources the

consultants found that there were 464,000 insured vehicles in Armenia at the end of 2014. Since

motor insurance is compulsory, this may be taken as a reasonable estimate of the number of

registered vehicles. Allowing for imports during 2015 and a small number of unregistered or illegally

uninsured vehicles, the consultants have estimated the total average fleet in 2015 to be 480,000.

79 Before making the crude estimates of fleet composition shown in Error! Not a valid

bookmark self-reference.18, the consultants examined fleet statistics for Georgia, Macedonia and

Moldova, these being countries that are similar to Armenia in population and per capita GDP and, in

the case of Macedonia and Moldova, landlocked. The proportion of fuel usage in each vehicle class,

annual kilometrage and rates of fuel consumption were based on information obtained in meetings

or online together with the consultants’ own knowledge and experience. The figures were adjusted

in an iterative process to match total consumption of each type of fuel with estimated import

volumes.

4

Table 18 Estimation of Fuel Consumption by Class of Vehicle, 2015

Lig

ht

Me

diu

m

He

av

y

Se

mi-

tra

ile

rs

Vehicle population, 2015 Number 460,000 8,000 6,000 3,000 2,000 1,000 480,000

Petrol % [a] 26% 10% 40% 20% 26% Diesel % [a] 10% 20% 80% 100% 100% 2% CNG % [a] 74% 80% 40% 73% Petrol Number 119,600 800 2,400 600 123,400

Diesel Number 800 1,200 2,400 2,000 1,000 7,400

CNG Number 340,400 6,400 2,400 349,200

Average distance travelled km/year 17,500 40,000 40,000 45,000 50,000 50,000

Petrol consumption km/litre [b] 13.3 7.5 7.5 6.5

Diesel consumption km/litre [b] 16.0 9.0 9.0 7.8 7.0 5.0

CNG consumption km/litre [b] 13.3 7.5 7.5 6.5

Petrol consumption Ml/year 157.4 4.3 12.8 4.2 178.6Diesel consumption Ml/year 3.6 5.3 13.8 14.3 10.0 47.0CNG consumption Ml/year 447.9 34.1 12.8 494.8 Total fuel consumption Ml/year 720.4

To

tal

Trucks

[a] Many cars use predominantly CNG but also petrol, especially in winter. The proportions shown here

relate to usage and the computed numbers below are 'equivalent vehicles'. Fuel usage percentages have

been derived from snippets of information from various sources, together with some general knowledge

and guesswork.

[b] These are the consultants' estimates. It is assumed that diesel-powered vehicles achieve 20% more

kilometres per litre than petrol-powered vehicles, and CNG-powered vehicles achieve the same. CNG is

sold by the cubic metre, which has almost exactly the same calorific value as 1 litre of petrol. Therefore in

this analysis 1 litre of CNG means 1m3.

Unit Ca

rs

Bu

se

s

80 By combining the data, estimates and assumptions in the preceding tables it is possible to

estimate the total amount of fuel tax paid by owners of each vehicle class, differentiating the three

types of fuel and four types of tax. These results are presented in Table . It is immediately apparent

that car owners bear the great majority of the fuel tax burden, but it is not out of proportion to the

number of cars (96% of the fleet) or the number of kilometres that they travel (91% of the total for

the fleet).

Table 19 Incidence of Fuel Tax by Class of Vehicle and Type of Tax

Lig

ht

Me

diu

m

He

av

y

Sem

i-

tra

ile

rs

Petrol: Excise tax AMDbn/year 2.9 0.1 0.2 0.1 3.3

Petrol: VAT at the border AMDbn/year 10.1 0.3 0.8 0.3 11.5

Petrol: VAT at point of sale AMDbn/year 1.8 0.0 0.1 0.0 2.1

Diesel: Excise tax AMDbn/year 0.1 0.2 0.4 0.5 0.3 1.5

Diesel: Environment tax AMDbn/year 0.0 0.0 0.1 0.1 0.1 0.3

Diesel: VAT at point of sale AMDbn/year

CNG: Customs duty AMDbn/year 2.4 0.2 0.1 2.6

CNG: VAT at the border AMDbn/year 9.9 0.8 0.3 11.0

CNG: VAT at point of sale AMDbn/year 4.0 0.3 0.1 4.4


US$M/year 65.5 3.7 4.0 1.9 1.1 0.8 77.1

% 85% 5% 5% 3% 1% 1%

TrucksT

ota

l

Unit Cars

Bu

se

s

5

81 It is also apparent that the fuel tax burden is not uniform across the three types of fuel. The

following facts stand out:

• Although CNG powers 73% of vehicle usage, it contributes only 49% of the tax revenue.

This is because customs duty and excise tax (the only taxes applied to CNG) are ad

valorem taxes – ie they are calculated on the value of goods not the tonnage – and gas

is a much cheaper source of energy than refined petroleum products.

• In contrast, petrol powers 26% of vehicle usage and contributes 46% of tax revenue.

• No VAT is levied on diesel fuel, it having been exempted in 2010, but diesel fuel is the

only one to bear the environmental tax.

• CNG bears no excise tax, it being produced from natural gas which is (unlike petroleum

gas) explicitly exempt.

• VAT accounts for 79% of all tax on fuel, excise tax 13% and customs duty 7%.

The net result is that diesel fuel and CNG are taxed at about the same level, coincidentally,

while petrol is taxed 2.3 times more heavily; see Table .

Table 20 Total Fuel Tax Per Litre of Fuel

Petrol 95

Diesel 38

CNG (1 litre = 1 m3) 36

Fuel type AMD/litre

82 The reasons for such anomalous and inequitable taxation of fuel are not mysterious. Petrol

is used almost exclusively to power road vehicles, whereas only 25-30% of diesel fuel and 15-20% of

natural gas is used for this purpose. Diesel fuel is used predominantly for vehicles and equipment in

the agriculture, mining, manufacturing and military sectors that make little or no use of the roads.

Gas is used for heating homes, businesses and water, and for cooking. These are purposes which the

Government does not wish to tax highly.

83 But the inconsistent way in which taxes have been used to penalise or favour certain goods

calls into question the meaning of ‘general taxation’. As mentioned earlier, the consultants’ TOR

suggest that ‘service fees and general taxes’ should be excluded from consideration of additional or

new hypothecated sources of revenue for the roads sector. VAT would normally be considered a

general tax, but exempting diesel fuel from VAT because it is used for purposes that do not involve

use of the roads, or that merit subsidy, suggests that VAT is available as a policy tool. The same

argument can be made about customs duty, which is levied on natural gas but not on petrol or diesel

fuel.

ROAD FEES

84 Road fees are levied in quite different ways on foreign-registered and Armenian-registered

vehicles. In summary:

• Foreign-registered vehicles pay between AMD10,000 and AMD150,000 for using Arm-

enian roads for a period of up to 15 days.

• Foreign-registered heavy vehicles (≥36t) also pay a minimum of AMD110/km travelled

within Armenia, increasing with gross vehicle weight (GVW).

• Foreign-registered heavy vehicles with axle-loads exceeding specified limits (depending

on axle configuration) also pay a minimum of AMD45/km.

• Armenian-registered heavy vehicles (≥36t) pay between AMD15,000 and AMD60,000

per month, depending on GVW. If a vehicle is not operated on Armenian roads for a

period, its owner does not have to pay road fees during that period.

• There are also fees for oversized vehicles and harmful emissions.

6

85 According to data provided by the MoF, foreign-registered vehicles paid road fees totalling

AMD4.4bn in 2012, AMD3.64bn in 2013 and AMD3.82bn in 2014. The consultants estimate revenue

from this source of AMD4.0bn in 2015.

86 No official data are available on road fee revenue from Armenian-registered vehicles. An

annual estimate of AMD1.5bn is derived from the consultants’ own assumptions about the

composition of the national fleet.

PROPERTY TAX ON VEHICLES

87 Armenia is unusual in levying a property tax on vehicles, based on a vehicle’s rated horse-

power (or power expressed in kW). This tax is paid directly to local governments with no monitoring

by any central agency. Table shows the consultants’ estimation of the scale and incidence of

property taxation applied to vehicles, based on the assumed composition of the national fleet, the

assumed distribution of vehicles by horsepower and the rates of tax prescribed by the relevant law.

88 Car-owners bear an even higher proportion of this tax burden than of fuel taxation: 97.8%.

It is clearly a proxy wealth tax, affecting the owners of powerful private cars rather than the owners

of the HGVs that do most of the damage to the roads. Moreover the revenue from this tax makes an

important contribution to local governments budgets. So although it cannot be considered a

‘general tax’, neither is it a realistic candidate for hypothecation to the roads sector.

Table 21 Estimation of Property Taxes on Vehicles

Lig

ht

Me

diu

m

He

av

y

Se

mi-

tra

ile

rs

Cars 1-120 60%

121-150 15%

151-250 20%

251+ 5%

Other vehicles 1-200 67% 100% 50%

201+ 33% 50% 100% 100%

Tax rates for cars 1-120 200

AMD/horsepower 121-150 300

151-250 1,300

251+ 1,500

Tax rates for other vehicles 1-200 100 100 100 100 100

AMD/horsepower 201+ 200 200 200 200 200

Average discount for age % 30% 30% 30% 30% 30% 30%


US$M/year 30.8 0.3 0.1 0.1 0.1 0.1 31.5

% 97.8% 0.9% 0.4% 0.4% 0.4% 0.2%

Trucks

To

tal

Horsepower

range Ca

rs

Bu

se

s

OTHER TAXES AND CHARGES

89 There are fees for vehicle registration and technical inspection, for driving licences, and for

registration of transport businesses. And there are traffic fines. Information from Government

agencies about the revenue from these sources has been supplemented by the consultants’ own

estimates.

90 Registration of a vehicle in Armenia costs AMD23,000, irrespective of its type or size. This is

a once-only payment. According to published foreign trade statistics, 41,000 vehicles were imported

into Armenia in 2013 and 47,000 in 2014. Assuming a volume of 51,600 vehicles in 2015 (see

Foreign trade statistics are available for most goods in 2014, but for fuel the latest data relate to

7

2013 and the published statistics do not differentiate between petrol and diesel fuel. The

consultants sought advice from private business sources and have constructed a set of estimated

import volumes and values for 2015, presented in Error! Not a valid bookmark self-reference..

91 Tax laws were consulted to find the appropriate tax rates and estimates were made of the

gross mark-ups (value added) in Armenia as a basis for computing VAT at the point of retail sale. See

Table . Taxation of petrol and diesel fuel is complicated by the application of ad valorem customs

duty and excise tax but subject to minimum collections per tonne. The results of this analysis are

presented in Table .

92 Table above), the revenue from vehicle registration this year may be estimated at AMD1.2

billion (US$2.5M).

93 Vehicles must undergo technical inspection every year, for which the fee is AMD10,000 for

cars and up to AMD35,000 for bigger vehicles. Assuming an average fee of AMD10,500 (since cars

are estimated to account for 96% of the national fleet) the revenue in 2015 would be AMD5.0 billion

(US$10.5M).

94 The total cost of applying for a driving licence, taking the theoretical and practical tests and

having the licence issued is AMD28,000. However, allowing for some applicants’ having to take the

test more than once, the consultants have assumed an average cost of AMD35,000 paid by 1% of the

total population each year. This gives an estimated annual revenue of AMD1.1 billion (US$2.3M).

95 MoTC is responsible for licensing certain businesses, including taxi services, and collecting

fees. These amount to AMD200–250 million per year, say AMD225 million (US$0.5M).

96 The consultants assume, very crudely, an average payment of AMD10,000 (US$21) in traffic

fines per vehicle per year, giving an estimated annual revenue of AMD4.8 billion (US$10.1M).

97 If the consultants’ estimates are approximately correct, these taxes and charges generate

total annual revenue of about AMD12.3 billion (US$25.9M).

98 There are no tolls on roads, bridges or tunnels, but the possibility of introducing tolls has

been considered by Government and is thought by some people to be inevitable eventually.

99 Nor are there the means to weigh vehicles and impose fines for overloading, but this

situation is being corrected with the purchase of mobile weighbridges and the passing of a new law.

Fines for overloading will be EUR200/t of GVW in excess of 40t, or EUR100/500kg of axle-load in

excess of 11.5t. Overloaded vehicles will not be allowed to proceed until the load is reduced to the

legal limit. (There are already weighing devices at the international borders, to allow determination

of road fees, referred to in paragraph 84 above.)

SUMMARY OF EXISTING REVENUES

100 Table summarises the revenues from all the sources discussed in this chapter. The total of

AMD136.8 billion is close to 3% of Armenia’s GDP, which is broadly in line with observations in other

countries. However, if one disregards customs duties and VAT (as general taxes) and property tax

(as an important source of revenue to local governments) only AMD22.9 billion remains for possible

hypothecation to the roads sector.

8

Table 22 Summary of Existing Identifiable Revenues from Road Users

Source of revenue Unit Cu

sto

ms

du

ty

Ex

cis

e t

ax

VA

T

En

vir

on

-

me

nta

l ta

x

Oth

er

tax

es

Fe

es

an

d

fin

es

To

tal

Taxes on fuel AMDbn/year 2.6 4.8 28.9 0.3 36.6

Taxes on other imports AMDbn/year 19.6 47.9 67.5

Road fees AMDbn/year 5.5 5.5

Property tax on vehicles AMDbn/year 14.9 14.9

Other levies AMDbn/year 12.3 12.3


US$M/year [a] 46.7 10.1 161.8 0.6 43.0 25.9 288.1


Appendix 3A

NOTES ON THE FIRST WORKSHOP, 28 APRIL 2015

Introduction

The workshop was held between 1000 and 1600 on Tuesday 28 April at the Metropol Hotel, Yerevan. Representatives of ministries, international financial institutions, the freight haul-age industry and a related consultant team were invited to attend. Mr Gagik Grigoryan, MoTC Head of Staff, was the moderator.

The purpose was to discuss the Roughton International Ltd (RIL) consultants’ First Technical Report and decide which of its proposals should be pursued in the second phase of the consultants’ study, in which implementation issues are to be addressed and specific measures recommended.

In addition to the RIL Team Leader’s, there were presentations from MoTC on ongoing up-grading and rehabilitation activities, and from a representative of a team of consultants assisting MoTC to finalise a roads financing strategy in compliance with an ADB loan covenant.

Attached are:

• A list of participants.

• The agenda.

• Photographs of the event.

• The RIL Team Leader’s presentation slides.

Overview

Discussion was open and lively, focusing on:

• The necessary level of expenditure “to keep the road network in a stable long-term condition” as stated in the consultants’ TOR. Estimates were available from the World Bank (2011), the ADB’s consultants and the RIL consultant team showing the need for ongoing expenditure substantially higher than currently budgeted. Only the RIL team had estimated needed expenditure on local roads.

• The potential for achieving the same result for less money, by changing road agency practices or improving efficiency.

• The consultants’ proposal to establish a Road Fund, with a degree of autonomy and assured revenue.

• The consultants’ proposal to hypothecate certain revenues to the roads sector, giving road users confidence that increased taxes or charges would translate into better roads and hence lower operating costs to themselves.

• The consultants’ various proposals to increase revenues; impose new road user taxes or charges; and pass some responsibility for road maintenance to local communities.

Representatives of the Ministry of Finance (MoF) and the Ministry of Transport and Com-munication (MoTC) were the most vocal, but there were also significant contributions from the representative of Ararat Marzpetaran and the World Bank.

While the workshop served to improved mutual understanding among the parties, it did not produce a consensus that gave the consultants an unambiguous basis for the second phase of the study: formulation of measures to implement a broadly-supported strategy to close the gap between existing and necessary levels of expenditure.

2

Discussion

The case for increased expenditure was made strongly, but MoF representatives retained the belief that significant savings could be made to achieve more within the existing and planning budget.

As examples of possible cost reduction measures, MoF representatives suggested more appropriate maintenance methods and improved procurement practices. MoTC represent-atives mentioned reforms to tendering and contracting procedures, including the new 5-year contracts, that had already reduced malpractices on the part of contractors and delivered more value for money. The consultants drew attention to the cost reduction proposals made by the World Bank in 2011 and summarised in their First Technical Report (Chapter 7).

MoF representatives stated that increased budget allocations might be available after 2017, but that did not preclude the need to explore ways to use existing allocations as efficiently as possible.

The point was made from the MoTC side that the budget process was top-down in practice, whereas the formal process was designed to allow more bottom-up influence on the alloc-ation of resources between sectors and progams, based on analyses such as those performed by the Armenian Roads Directorate (ARD).

The Road Fund proposal was rejected outright, as an unnecessary new institution. MoF representatives pointed out that the present arrangements embody rigorous financial control, transparency and the flexibility to adjust allocations to different sectors as needs arose. It was also argued that Armenia, as a small and relatively poor country could not afford a multiplicity of institutions with associated overheads.

Likewise, the principle of hypothecation was rejected on the grounds that it reduced budget-ary flexibility and would open the way for other sectors to claim similar treatment. In defence of the principle it was pointed out that the roads sector was unusual in that road users contributed substantial and identifiable revenue to the budget.

With respect to additional and new revenues, the consultants’ chief proposal was to ration-alize the taxation of fuel, bringing the total tax per litre into line for all three fuel types, adjusted to recognise their differential contributions to CO2 emissions. If adopted in full, the proposal would yield additional estimated revenue of AMD27 billion at the current level of fuel consumption and increase average tax from AMD51 to AMD89 per litre

The consultants also proposed rationalizing and increasing existing road fees on foreign-registered vehicles and Armenian-registered heavy goods vehicles; taxing motor insurance premiums; and tolling selected trunk road sections, perhaps through a franchising system to encourage private investment in road construction/rehabilitation and maintenance; and

MoF representatives pointed out that increased taxes or charges of any kind would have an adverse multiplier effect on the economy. The consultants added that higher transport costs, occasioned by underfunding of road maintenance, have a similar multiplier effect and are much larger.

Extending the existing reliance on borrowing was also considered, but the World Bank representative said that Armenia’s indebtedness was at a level where further borrowing, beyond existing commitments, would be imprudent, whether on concessional or commercial terms.

The consultants suggested the possible transfer of some or all responsibility for local roads to the communities that they serve or to the Marzpetarans. The representative of Ararat Marzpetaran pointed out that the Marzpetarans have no independent revenue and rely solely on allocations from the State Budget, which have always fallen far below the necessary level for proper road maintenance. The consultants mentioned that communities collect property tax on vehicles estimated to yield almost AMD15 billion per year, some of which might be devoted to road maintenance.

It was stated that 40% of the local road network had been rehabilitated and only 10% was being maintained. The Ararat Marzpetaran represntative added that accidents due to poor

3

maintenance sometimes led to legal claims against government. MoF representatives said that local authorities were reluctant to allocate more than a small proportion of their State Budget subventions to road maintenance.

Conclusion

The consultants conclude from the workshop that there is no possibility of an early increase in budgetary allocation to road maintenance; establishment of a Road Fund; or revenue hypothecation to the roads sector.

However, a full review of the Tax Code is under way and should be completed “within a few months”. MoF representatives could say nothing of the work that had already been done on the review or the likely outcome, but it is fair to assume that it will include an examination of anomalies and inequities in the present system with a view to correcting them. If that is the case, the anomalous taxation of fuel is very likely to be addressed. Accordingly, the consultants will include this in the scope of their second phase of work.

The consultants will also address legal and other implementation issues associated with amending road fees, taxing motor insurance premiums and, at some stage, introducing road tolls.

They will also consult with MoTC about further possible cost-cutting and efficiency improve-ments that might be made, and the specific measures that would be needed to put them into affect.

The balance of responsibilities and allocation of revenue-raising powers among the different levels of Government is a political matter that lies beyond the scope of this consultancy.

4

Participants in the First Workshop, in Alphabetical Order of Organizations

Organisation Name

AARC (Consultants to ADB) Tim Yates

Apaven company Suren Nersesyan

Armenian Roads Directorate SNCO Karapet Barseghyan

International Freight Association of Armenia Herbert Hambardzumyan

Marzpetaran of RA Aragatsotn Hovhannes Ghonakhchyan

Marzpetaran of RA Aragatsotn Hrachya Gevorgyan

Marzpetaran of RA Ararat Ashot Muradyan

Ministry of Economy Astghik Saghatelyan

Ministry of Finance Artak Karapetyan

Ministry of Finance Arthur Matevosyan

Ministry of Finance Hayser Gasparyan

Ministry of Finance Vahagn Arshakyan

Ministry of Territorial Administration and Emergency Situations Arthur Shahinyan

Ministry of Territorial Administration and Emergency Situations Hayk Galstyan

Ministry of Transport and Communication Armine Astvatsatryan

Ministry of Transport and Communication Gagik Grigoryan

Ministry of Transport and Communication Gohar Mikayelyan

Ministry of Transport and Communication Kajik Kababyan

Ministry of Transport and Communication Kristine Beglaryan

Ministry of Transport and Communication Lilit Harutyunyan

MoTC Transport PIU Emil Sargsyan

MoTC Transport PIU Karen Badalyan

North-South Road Corridor Investment Program Bagrat Badalyan

North-South Road Corridor Investment Program Karen Jeyranyan

Road Police Kostanyan Konstantin

Roughton International Limited David Anderson

Roughton International Limited Edin Begovic

Roughton International Limited Hasmik Gharibyan

Roughton International Limited John Standingford

World Bank Tigran Kostanyan

5

Selected Photographs of the First Workshop

11

Armenia Lifeline Roads Network Improvement ProjectArmenia Lifeline Roads Network Improvement Project

Roads Financing StudyRoads Financing Study

FIRST WORKSHOPFIRST WORKSHOP

ՀայաստանիՀայաստանի ԿենսականԿենսական ՆշանակությանՆշանակության ՃանապարհայինՃանապարհայինՑանցիՑանցի ԲարելավմանԲարելավման ԾրագիրԾրագիր

ՃանապարհներիՃանապարհների ֆինանսավորմանֆինանսավորմանուսումնասիրությունուսումնասիրությունԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆԱՌԱՋԻՆ ՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐ

John John StandingfordStandingford

RoughtonRoughton International LtdInternational Ltd

Yerevan, 28 April 2015Yerevan, 28 April 2015

ՋոնՋոն ՍթենդինգֆորդՍթենդինգֆորդՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթն ԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլ ԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԵրևանԵրևան, 2015, 2015թթ..--իի ապրիլիապրիլի 2828

22

Purpose of the StudyPurpose of the StudyՈւսումնասիրությանՈւսումնասիրության նպատակընպատակը

• Estimate current and recent road expenditure.

• Estimate revenues from road user taxes/charges.

• Estimate needed road expenditure.

• Propose ways to meet those needs.

• Գնահատել ընթացիկ և վերջին ճանապարհայինծախսերը:

• Գնահատել ճանապարհից օգտվողիհարկերից/վճարներից ստացվող եկամուտները:

• Գնահատել անհրաժեշտ ճանապարհային ծախսերը:

• Առաջարկել ուղիներ այդ կարիքները բավարարելուհամար:

33

Financing Needs:Financing Needs: World Bank Projection, 2011World Bank Projection, 2011

ՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորմանՖինանսավորման անհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունըանհրաժեշտությունը՝՝՝՝՝՝՝՝ ՀամաշխարհայինՀամաշխարհայինԲանկիԲանկի կանխատեսումկանխատեսում, 2011, 2011թթ..

US$MՄիլիոն ԱՄՆ դոլար

AMDbnՀՀ դրամ միլիարդ

44

Terminology Terminology ՏերմինաբանությունՏերմինաբանություն

• Routine maintenance

• Periodic maintenance

• Rehabilitation

• Ընթացիկսպասարկում

• Պարբերականսպասարկում

• Վերականգնում

• Winter maintenance

• Summer maintenance

• Capital repair

• Ձմեռայինսպասարկում

• Ամառայինսպասարկում

• Հիմնանորոգում

55

Actual/Planned Expenditure (AMD billion)Actual/Planned Expenditure (AMD billion)ՓաստացիՓաստացի//ՆախատեսվողՆախատեսվող ծախսերծախսեր ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ))

0

10

20

30

40

50

60

70

80

2009 2010 2011 2012 2013 2014 2015 2016 2017

Upgrading (Loans)

Rehabilitation (Loans)

Rehabilitation (Budget)

Routine maintenance

ԱրդիականացումԱրդիականացում((ՎարկերՎարկեր))

ՎերականգնումՎերականգնում((ՎարկերՎարկեր))

ՎերականգնումՎերականգնում((ԲյուջեԲյուջե))

ԸնթացիկԸնթացիկսպասարկումսպասարկում

66

Needed Expenditure (AMD billion per year)Needed Expenditure (AMD billion per year)ԱնհրաժեշտԱնհրաժեշտ ծախսերծախսեր ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ տարեկանտարեկան))

0

5

10

15

20

25

30

35

40

45

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Interstate Roads ՄիջպետականՄիջպետականՄիջպետականՄիջպետական ճանապարհներճանապարհներճանապարհներճանապարհներ

Republican Roads ՀանրապետականՀանրապետականՀանրապետականՀանրապետական ճանապարհներճանապարհներճանապարհներճանապարհներ

Local Roads ՏեղականՏեղականՏեղականՏեղական ճանապարհներճանապարհներճանապարհներճանապարհներ

77

Scenario 2: Scenario 2: Interstate Road Interstate Road

ConditionsConditionsՏարբերակՏարբերակ 2`2`ՄիջպետականՄիջպետականճանապարհներիճանապարհներիպայմաններըպայմանները

Average IRIՄիջին ՄԱՑ

Average km/hՄիջին կմ/ժ

88

Scenario 2: Scenario 2: Republican Road Republican Road

ConditionsConditionsՏարբերակՏարբերակ 22

ՀանրապետականՀանրապետականճանապարհներիճանապարհներիպայմաններըպայմանները

Average IRIՄիջին ՄԱՑ

Average km/hՄիջին կմ/ժ

99

Revenue from Road UsersRevenue from Road Users

(AMD billion)(AMD billion)

ՃանապարհիցՃանապարհից օգտվողներիցօգտվողներիցստացվողստացվող եկամուտեկամուտ((ՀՀՀՀ դրամդրամ միլիարդմիլիարդ))

1010

Fuel Taxes Fuel Taxes ՎառելիքիՎառելիքի հարկերհարկեր

• Taxation of fuel is inconsistent, irrational, inequitable and inefficient. There is wide disparity between the 3 fuels.

• Վառելիքի հարկումը կայուն չէ, անտրամաբանական է, անհավասար և անարդյունավետ: 3 վառելիքների միջևառկա է անհավասարություն:

1111

Additional and New RevenuesAdditional and New Revenues

ԼրացուցիչԼրացուցիչ ևև նորնոր եկամուտներեկամուտներ

• Rationalization of fuel taxation.

• Increased road fees.

• Tax on insurance premiums.

• Tolls.

• Վառելիքի հարկման հիմնավորումը:

• Ավելացված ճանապարհային վճարներ:

• Ապահովագրավճարների հարկ:

• Տուրքեր:

1212

Rationalization of Fuel TaxationRationalization of Fuel Taxation

ՎառելիքիՎառելիքի հարկմանհարկման հիմնավորումհիմնավորում

1313

Issues to be ConsideredIssues to be Considered

ՀարցերՀարցեր, , որոնքորոնք պետքպետք էէ հաշվիհաշվի առնելառնել

• Social and distributional implications.

• Increased costs for heavy goods vehicle operators.

• Evasion, avoidance and leakage.

• Սոցիալական և բաշխիչ հետևանքները:

• Ավելացված ծախսեր ծանրաքաշ տրանսպորտայինմիջոցներ շահագործողների համար:

• Խուսափանք, խուսափում և արտահոսք:

1414

Five Options Five Options ՀինգՀինգ տարբերակներտարբերակներ

1. Increase State Budget allocation to roads.

2. Create a Road Fund.

3. Continue to rely on borrowing.

4. Reduce road maintenance costs.

5. Reduce Central Government’s responsibility.

1. Ավելացնել պետական բյուջեի հատկացումներըճանապարհներին:

2. Ստեղծել ճանապարհային հիմնադրամ:

3. Շարունակել հիմնվել փոխառության վրա:

4. Նվազեցնել ճանապարհային սպասարկման ծախսերը:

5. Կրճատել Կենտրոնական կառավարությանպատասխանատվությունը:

1515

Implementation: Options 1, 2 and 3Implementation: Options 1, 2 and 3

ԻրականացումԻրականացում՝՝ ՏարբերակներՏարբերակներ 1, 2 1, 2 ևև 33

1616

Implementation: Option 4Implementation: Option 4

ԻրականացումԻրականացում՝՝ ՏարբերակՏարբերակ 44

1717

Implementation: Option 5Implementation: Option 5

ԻրականացումԻրականացում՝՝ ՏարբերակՏարբերակ 55

Appendix 3B

NOTES ON THE SECOND WORKSHOP, 26 MAY 2015

Introduction

The workshop was held between 0900 and 1200 on Tuesday 26 May at the Metropol Hotel, Yerevan. Representatives of ministries, international financial institutions and the freight transport/logistics industry participated. Mr Gagik Grigoryan, MoTC Head of Staff, was the moderator.

The purpose was to discuss the Roughton International Ltd (RIL) team’s Second Technical Report (TR2) and Draft Final Report (DFR); and to provide guidance to the Consultant on preparation of the Final Report, due by the end of June.

Attached are:

• The agenda.

• A list of participants.

• Photographs of the event.

• The RIL Team Leader’s presentation slides.

Overview

The presentation and discussion took place in two sessions, the first dealing with TR2 and the second with the DFR. However, the discussion focused on the same key issues in both sessions:

• The Consultants’ proposals to increase revenue from road users by rationalizing fuel taxation, taxing vehicle insurance premiums and introducing tolls.

• Ways to reduce costs and improve efficiency, in particular by using performance-based maintenance contracts (PBMCs) as a way to save money and deliver better outcomes.

• The possibility of involving local communities in road maintenance, or even devolving responsibility to local authorities.

• The potential impact of increased taxation on the economy.

• The need to explain in detail the arguments for and against each option, means of implementation, and the implications of choosing one option over another.

Discussion

The need for increased expenditure on maintenance and rehabilitation was not disputed but the tightness of budgetary constraints, now and in the foreseeable future, was restated.

The Consultant’s recommendation that fuel taxation be rationalized, with an overall average increase of AMD38 (US$0.08) per litre, was discussed at length. The main concern was the impact of restoring VAT on diesel fuel would have on the economy, in particular the agri-cultural and mining sectors. It was suggested, however, that the low taxation of diesel fuel merely allowed importers and distributors to make excessive profits. It was also pointed out that diesel fuel contains 12% more energy per litre than petrol or CNG; therefore, with a level playing field, it should be more expensive (as it is in Belarus and Georgia, for example).

The RIL Team Leader expounded the concept of ‘bad roads tax’, explained in Chapter 6 of the DFR, and presented new material showing the potential savings to road users as a multiple of the recommended additional tax burden. He argued that under-spending on road maintenance was an obstacle to economic growth and social progress, which could be alleviated by a tax increase that amounted to a small fraction of the resulting savings – provided that all the incremental revenue was devoted to the roads.

2

The proposal to tax vehicle insurance premiums had a mixed reception. There was concern about its impact on vehicle owners. The Consultant’s representative said that a low tax rate (2.5% to 5%) was proposed, which would yield no more than AMD1 billion per year. However, this revenue would be inflation proofed and likely to rise at faster than GDP as vehicle ownership become more widespread.

A representative of the North-South Corridor project pointed out that tolls were already envisaged on three sections of that road, under PPP arrangements where IFI funding would not be sought; but strongly supported the present law forbidding tolls where there is no alternative toll-free route. A representative of the Ministry of Finance cited the Constitution’s guarantee of freedom of movement. The Consultant’s representative questioned whether freedom of movement necessarily meant free-of-charge movement. Two IFI representatives supported in principle the idea of payment for road use.

It was generally acknowledged that Armenia had little room for more public borrowing. So that option for closing the gap between existing and needed levels of expenditure, presented but not favoured by the Consultant, should not be considered.

The was much interest in the idea of performance-based maintenance contracts (PBMCs). A representative of MoTC explained the existing 5-year contracts, under which contractors tender fixed unit prices for maintenance works that are specified annually in accordance with needs and available funds. The Consultant’s representative described the advantages of a fundamentally different system which allows contractors to tender for a fixed payment for maintaining a section of road at a measurable standard, by whatever means he chooses, accepting the risk that in some years he may lose money. It was agreed that the Consult-ant’s Final report should include details of PMBCs and experience of them in other countries.

An important step towards PBMCs would be the amendment of Decree 1419-N to include IRI as a performance criterion, allowing a more rational and objective approach to asset management and contract management.

A representative of MoTC informed the meeting that a consultant was due to come to Armenia in September 2015 to review existing contractual arrangements and make recom-mendations that may include the introduction of PBMCs.

The same representative also informed the meeting that initiation of a community-based road maintenance scheme had been considered by MoTC and rejected. This followed a study tour to Latin America sponsored by the World Bank and careful study by experts in Armenia. However, it was also mentioned that a process of consolidating small communities is under consideration, which may allow reconsideration of this decision.

There was no support, from the Consultant or from any other agencies represented at the meeting, for devolving financial responsibility for road maintenance to local communities or abandoning parts of the network. One IFI representative stated, “We will not leave people without roads.”

With regard to the content of the Final Report, it was agreed that the Consultant should:

• Present all options and their implications, irrespective of the degree of support that had been shown at the two workshops.

• Clearly state his own recommendations.

• Provide concrete advice on measures to implement those recommendations.

Conclusion

The Consultant will proceed to finalise his report on the basis of these discussions, meeting the end-June deadline.

3

Armenia Lifeline Roads Network Improvement Project (LRNIP) Consulting Services for Roads Financing Study

Agenda for Second Workshop

Metropol Hotel, Yerevan

26 May 2015

Time Session Scope Minutes

0930 Opening by the Chairman • Progress since First Workshop

• Developments in Government Policy

20

0950 Presentation by Roughton Team Leader: ‘Overview of the Second Technical Report’

• Policy Options for Consideration

• Outcome of First Workshop

• Implementation measures

20

1010 Questions and discussion

50

1100 Tea/coffee break 20

1120 Presentation by Roughton Team Leader: ‘Draft Final Report’

• Findings

• Conclusions

• Recommendations

• Social and economic consequences

20

1140 Questions and discussion

60

1240 Chairman’s summary of conclusions

• What was agreed

• What was not agreed.

• Final Report Preparation – Guidance for

Consultant

15

1255 Chairman’s closing remarks

5

4

List of Participants at the Second Workshop

Organisation Name

Apaven company Suren Nersesyan

Asian Development Bank Bagrat Badalyan

Asian Development Bank Grigor Gyurzyan

Eurasian Development Bank Armen Poghosyan

Marzpetaran of RA Aragatsotn Hovhannes Ghonakhchyan

Ministry of Economy Astghik Saghatelyan

Ministry of Finance Artak Karapetyan

Ministry of Finance Arthur Matevosyan

Ministry of Finance Hayser Gasparyan

Ministry of Territorial Administration and Emergency Situations Hayk Galstyan

Ministry of Transport and Communication Armine Astvatsatryan

Ministry of Transport and Communication Artak Papyan

Ministry of Transport and Communication Gagik Grigoryan

Ministry of Transport and Communication Gohar Mikayelyan

Ministry of Transport and Communication Kristine Beglaryan

MoTC Transport PIU Karen Badalyan

North-South Road Corridor Investment Program Karen Jeyranyan

Road Police Simonyan Armen

Roughton International Limited Hasmik Gharibyan

Roughton International Limited John Standingford

World Bank Tigran Kostanyan

5

Selected Photographs of the Second Workshop

vv

11

Armenia Lifeline Roads Network Improvement ProjectArmenia Lifeline Roads Network Improvement Project

Roads Financing StudyRoads Financing Study

SECOND WORKSHOPSECOND WORKSHOP

ՀայաստանիՀայաստանի ԿենսականԿենսական ՆշանակությանՆշանակության ՃանապարհայինՃանապարհայինՑանցիՑանցի ԲարելավմանԲարելավման ԾրագիրԾրագիր

ՃանապարհներիՃանապարհների ֆինանսավորմանֆինանսավորմանուսումնասիրությունուսումնասիրությունԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴԵՐԿՐՈՐԴ ՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐՍԵՄԻՆԱՐ

John John StandingfordStandingford

RoughtonRoughton International LtdInternational Ltd

Yerevan, 26 May 2015Yerevan, 26 May 2015

ՋոնՋոն ՍթենդինգֆորդՍթենդինգֆորդՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթնՌաֆթն ԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլԻնթրնեյշնլ ԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԼիմիթիդԵրևանԵրևան, 2015, 2015թթ..--իի ՄայիսՄայիս 2626

22

Purpose of the StudyPurpose of the Study

ՈւսումնասիրությանՈւսումնասիրության նպատակընպատակը• Estimate current and recent road expenditure.

• Estimate revenues from road user taxes/charges.

• Estimate needed road expenditure.

• Propose ways to meet those needs.

• Գնահատել ընթացիկ և վերջին ճանապարհայինծախսերը:

• Գնահատել ճանապարհից օգտվողիհարկերից/վճարներից ստացվող եկամուտները:

• Գնահատել անհրաժեշտ ճանապարհային ծախսերը:

• Առաջարկել ուղիներ այդ կարիքները բավարարելուհամար:

33

Milestones Milestones ԿատարողականԿատարողական

• 1st Technical Report

• 1st Workshop

• 2nd Technical Report

• Draft Final Report

• 2nd Workshop

• Final Report

• 1-ին Տեխնիկականհաշվետվություն

• 1-ին սեմինար

• 2-րդ Տեխնիկականհաշվետվություն

• Վերջնական հաշվետվությաննախագիծ

• 2-րդ սեմինար

• Վերջնական հաշվետվություն

44

2nd Technical Report2-րդ Տեխնիկական հաշվետվություն

• 1st Workshop: Issues and options.

• Discussion and conclusions.

• Implementation of favoured proposals.

• 1-ին սեմինար՝ հարցեր և տարբերակներ• Քննարկում և եզրակացություններ• Նախընտրելի առաջարկների իրականացում

55

Funding Level Ֆինանսավորման մակարդակ

• Expenditure on road maintenance & rehabilitation has been about half of what is needed.

• Road users contribute 3-4 times the needed amount in taxes and charges, mainly in general taxation.

• But there is scope to increase revenue.

• Ճանապարհների սպասարկման և վերականգնմանծախսերը եղել են պահանջվածի մոտ կեսը:

• Ճանապարհից օգտվողները 3-4 անգամ նպաստում ենանհրաժեշտ գումարին հարկերում և վճարներում, հիմնականում ընդհանուր հարկման մեջ:

• Սակայն առկա է եկամուտներն ավելացնելու շրջանակ:

66


0

5

10

15

20

25

30

35

40

45

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034




�

77

5 Options 5 տարբերակներ• Adjust budget priorities in favour of roads.• Raise more revenue and hypothecate it to roads.• Continue reliance on borrowing.• Reduce road maintenance costs.• Reduce Central Government responsibility for roads.

• Կարգավորել բյուջեի առաջնահերթություններըճանապարհների օգտին:

• Ավելի շատ եկամուտ ստանալ և դրանք գրավ դնելճանապարհների համար:

• Շարունակել հիմնվել փոխառության վրա:

• Նվազեցնել ճանապարհների սպասարկման ծախսերը• Նվազեցնել կենտրոնական կառավարությանպատասխանատվությունը ճանապարհների համար:

88

Conclusions 1 Եզրակացություններ 1

� Re-prioritize in favour of roads.

� Hypothecate selected revenue to roads.

� Establish Road Fund.

� Extend reliance on borrowing.

�Reduce costs.

� Improve efficiency.

� Վերաառաջնայնավորելճանապարհների օգտին

� Գրավ դնել ընտրվածեկամուտները ճանապարհներիհամար

� Ստեղծել ճանապարհայինհիմնադրամ

� Երկարաձգել հիմնվելփոխառության վրա

�Նվազեցնել ծախսերը�Բարելավել արդյունավետությունը

99

Conclusions 2 Եզրակացություններ 2

�Rationalize fuel taxes.

�Rationalize road fees.

�Tax vehicle insurance premiums.

� Introduce tolling.

�Reassign responsibility.

�Abandon some roads.

�Ռացիոնալացնել վառելիքիհարկերը

�Ռացիոնալացնել ճանապարհայինվճարները

�Մեքենաներիապահովագրավճարների հարկում

�Ներկայացնել տուրքերի գանձում�Պատասխանատվությանվերաստանձնում

�Որոշ ճանապարհներ բաց թողնել

1010

Costs & Efficiency 1 � Ծախսեր և արդյունավետություն 1

� Include routine maintenance in rehabilitation contracts.

� Introduce periodic maintenance.

�Use alternative surface treatments for low-traffic roads.

�Ընթացիկ սպասարկումն ընդգրկել վերականգնմանպայմանագրերում

�Ներկայացնել պարբերական սպասարկումը�Կիրառել մակերեսի այլընտրանքային մոտեցումներչծանրաբեռնված երթևեկությամբ ճանապարհներիհամար

1111

Costs & Efficiency 2 � Ծախսեր և արդյունավետություն 2

�Revise Decree 1419-N to include IRI as a criterion.

�Test Performance-Based Maintenance Contracts.

�Test community-based local roads maintenance.

�Վերանայել 1419-Ն Որոշումը ՄԱՑ որպես չափանիշներառելու համար

�Փորձարկել Իրականացման վրա հիմնվածսպասարկման պայմանագրերը

�Փորձարկել համայնքի վրա հիմնված տեղականճանապարհների սպասարկումը

1212

Immediate 1 � Անհապաղ 1

� Include fuel taxation and road fees in current review of the Tax Code.

�Regulate to restore VAT selectively to diesel fuel.

�Regulate for ‘Fuel Equalization Levy’.

�Ներառել վառելիքի հարկումը և ճանապարհայինվճարները հարկային օրենսգրքի ընթացիկվերանայման մեջ

�Կարգավորել ԱԱՀ ընտրողաբար դիզելային վառելիքիվրա վերականգնելու համար

�Կարգավորել ‘Վառելիքի հավասարեցման գանձումը’

1313

Immediate 2 � Անհապաղ 2

�Review road fee schedules and amend as necessary.

�Legislate for new tax on vehicle insurance premiums.

�Վերանայել ճանապարհային վճարներիժամանակացույցերը և փոփոխել ըստանհրաժեշտության

�Օրենք հրապարակել մեքենաներիապահովագրավճարների վրա նոր հարկի համար

1414

Longer term 1 � Երկարաժամկետ 1

�Legislate for tolling and franchises.

�Legislate for vignettes as alternative to tolls.

�Օրենք հրապարակել տուրքերի գանձման ևֆրանչայզինգների համար

�Օրենք հրապարակել անցագրերի համար որպեստուրքերի այլընտրանք

1515

Longer term 2 � Երկարաժամկետ 2

�Draw up criteria for selecting roads for abandonment.

�Legislate for devolution of responsibility for local roads to local authorities.

�Մշակել չափանիշներ բաց թողնվող ճանապարհներնընտրելու համար:

�Օրենք հրապարակել տեղական ճանապարհներիպատասխանատվությունը տեղականիշխանություններին հանձնելու համար:

1616

Discussion of

2nd Technical Report

2-րդ Տեխնիկական հաշվետվությանքննարկում

1717

Draft Final ReportՎերջնական հաշվետվության նախագիծ

• Findings.

• Conclusions.

• Recommendations.

• Արդյունքներ• Եզրակացություններ• Առաջարկներ

1818

Expenditure & Revenue Ծախսեր և եկամուտներ• Expenditure on road maintenance & rehabilitation is

AMD19bn/year (average 2010-17). • 43% of that is borrowed money.• Needed expenditure is AMD42bn/year to 2020, then

AMD31bn/year.• Revenue from road users is over AMD140bn/year.

• Ճանապարհների սպասարկման և վերականգնմանծախսերը 19 մլրդ/տարեկան (միջինը 2010-17) ՀՀ դրամ է

• Դրա 43%-ը փոխառված գումար է• Անհրաժեշտ ծախսերը 42 մլրդ/տարեկան ՀՀ դրամ էմինչև 2020թ.-ը, այնուհետև 31 մլրդ/տարեկան ՀՀ դրամ

• Ճանապարհից օգտվողներից ստացվող եկամուտները140 մլրդ/տարեկան ՀՀ դրամից ավել է

1919

0

5

10

15

20

25

30

35

40

45

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034





��

2020

• These estimates are lower than those shown earlier.

• They result from HDM-4 analyses.

• They exclude upgrading projects.

• Այս հաշվարկները ավելի ցածր են, քան ավելի վաղներկայացվածները

• Դրանք առաջացել են HDM-4-ի վերլուծություններիարդյունքում

• Արդիականացվող ծրագրերն ընդգրկված չեն:

2121

• Annual figures are erratic – averages for 1st 5 years and subsequent years are a simplification.

• Proposed efficiencies may reduce estimates further, but not enough to change basic conclusions.

• Տարեկան թվերը սխալ են-1-ին 5 և հետագա տարիներիմիջինը պարզեցում է:

• Առաջարկվող արդյունավետությունը կարող էնվազեցնել հաշվարկները հետագայում, բայց ոչ այնքան, որպեսզի հիմնական եզրակացությունները փոխվեն:

2222

Fuel Taxation 1 Վառելիքի հարկում 1

• Taxation of fuel is irrational and inequitable. Petrol is taxed 150% more than diesel fuel or CNG.

• Rationalization could raise almost AMD30bn/year.

• Վառելիքի հարկումն իռացիոնալ է և անհավասար: Բենզինը 150% ավել է հարկվում, քան դիզելայինվառելիքը կամ ՍԲԳ-ն:

• Ռացիոնալացումը կարող էր կուտակել գրեթե30մլրդ/տարեկան ՀՀ դրամ:

2323

Fuel Taxation 2 Վառելիքի հարկում 2

• This would pay for the rehabilitation backlog and keep the network in stable condition.

• Road users’ savings would far exceed this extra cost.

• Դրա միջոցով հնարավոր կլիներ վճարելվերականգնման չիրականացված աշխատանքներիհամար և ցանցը պահպանել կայուն վիճակում:

• Ճանապարհից օգտվողների խնայողություններըբավականին կգերազանցեին այս լրացուցիչ ծախսերը:

2424

Average Roughness: Interstate Roads Difference between existing & recommended expenditure levelsՄիջին անհարթություն` Միջպետական ճանապարհներՏարբերությունն առկա և առաջարկվող ծախսերի մակարդակների միջև

4

5

6

7

8

9

10

11

12

13

14

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Scenario 2

Scenario 3

2525

Average Roughness: Republican Roads Difference between existing & recommended expenditure levelsՄիջին անհարթություն` Հանրապետական ճանապարհներ

Տարբերությունն առկա և առաջարկվող ծախսերի մակարդակների միջև

4

5

6

7

8

9

10

11

12

13

14

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Scenario 2

Scenario 3

2626

Other Revenues Այլ եկամուտներ

• Rationalization of road fee schedules.

• Tax on vehicle insurance premiums.

• Tolls and vignettes, perhaps with franchising.

• But any extra revenue must result in extra spending.

• Ճանապարհային վճարների ժամանակացույցերիռացիոնալացում:

• Մեքենաների ապահովագրավճարների հարկ:

• Տուրքեր և անցագրեր, հավանաբար ֆրանչայզինգով:

• Սակայն, ցանկացած լրացուցիչ եկամուտ պետք էառաջանա լրացուցիչ ծախսերի արդյունքում:

2727

Social and Economic Consequences 1Սոցիալական և տնտեսական հետևանքներ

• ‘Bad Roads Tax’ is already being paid by road users.

• Poor roads increase costs and hurt the economy.

• ‘Վատ ճանապարհների հարկն’ արդեն վճարվում էճանապարհից օգտվողների կողմից:

• Անորակ ճանապարհներն ավելացնում են ծախսերը ևվնասում տնտեսությանը:

2828

Social and Economic Consequences 2Սոցիալական և տնտեսական հետևանքներ

• Rural dwellers and the poor are affected most.

• Growth in agriculture and tourism is restricted.

• Ամենաշատն ազդեցության են ենթարկվում գյուղիբնակիչները և աղքատները:

• Գյուղատնտեսության և զբոսաշրջության աճըսահմանափակված է:

2929

Unit Pa

ssen

ge

r ca

r

Deliv

ery

veh

icle

Bu

s L

igh

t

Bu

s M

ediu

m

Bu

s H

ea

vy

Tru

ck L

igh

t

Tru

ck

Me

diu

m

Tru

ck H

eavy

Tru

ck

Art

icula

ted

Per litre of fuel AMD/litre 34.9 45.2 44.1 44.1 44.1 39.0 70.4 85.0 85.0

Per vehicle-km AMD/km 2.6 4.2 5.7 6.1 6.6 4.8 9.1 12.1 17.0

AMD/km 3.8 9.1 10.9 17.9 12.4 11.6 16.7 26.8 46.7

Average ratio savings/tax (2016-34) 7.3 8.7 10.1 16.8 17.1 9.5 7.6 9.9 13.7

Proposed additional

tax

Saving per IRI point reduction

Savings vs Tax Proposals

Միավոր Թեթև մարդատար

մեքենա

Առաքման մեքենա

Թեթև ավտոբուս

Միջին

չափի

ավտոբուս

Ծանրաքաշ

ավտոբուս

Թեթև բեռնատար

Միջին

չափի

բեռնատար

Ծանրաքաշ

բեռնատար

Կցորդով

բեռնատար

Վառելիքի յուրաքանչյուր լիտրի համար

ՀՀ դրամ/լիտր 34.9 45.2 44.1 44.1 44.1 39.0 70.4 85.0 85.0

Յուրաքանչյուր տրանս-պորտային միջոցի-կմ-ի համար

ՀՀ դրամ/կմ 2.6 4.2 5.7 6.1 6.6 4.8 9.1 12.1 17.0

ՀՀ դրամ/կմ 3.8 9.1 10.9 17.9 12.4 11.6 16.7 26.8 46.7

7.3 8.7 10.1 16.8 17.1 9.5 7.6 9.9 13.7

Խնայողություն յուրաքանչյուր ՄԱՑ-ի կետի կրճատմամբՄիջին հարաբերական խնայողություններ/հարկ

(2016-34)

Առաջարկ-վող լրացուցիչ հարկ

Խնայողություններնընդդեմ հարկայինառաջարկների

3030

Discussion of

Draft Final Report

Վերջնական հաշվետվության նախագծիքննարկում

Appendix 3C

CASE STUDY: OUTPUT AND PERFORMANCE-BASED ROAD MAINTENANCE CONTRACTING (OPBRMC) IN THE REPUBLIC OF SERBIA

The following is derived from a PowerPoint slide presentation by Dr Nebojsa Radovic of Roughton International Limited in Chisinau on 23-24 April 2015.

Description of OPBRMC

Under the OPBRMC, most of the payments to be made to the Contractor are based on measured “outputs” reflecting the target conditions of the roads under Contract, expressed through “Service Levels’’.

These Service Levels are defined in the Contract.

Contractor is fully responsible for the design of the works which are necessary to reach the required Service Levels.

OPBRMC within the road sector can be "pure" or "hybrid“.

“Hybrid” contract combines features of both method unit price - and performance-based contracts. Some services are paid on a unit rate basis, while others are linked to meeting performance indicators.

The Contract also allows for the execution of:

• Rehabilitation Works to be carried out in order to bring the Roads up to pre-defined standards.

• Improvement Works aiming at adding new characteristics to the Roads in response to new traffic, safety or other considerations.

• Emergency Works comprising of activities needed to reinstate the Roads after damage resulting from unforeseen natural phenomena.

An OPBRMC may cover either only individual assets (e.g., only traffic signs, only bridges) or all road assets (from right-of-way to right-of-way) within a road corridor.

The level of complexity of a OPBRMC can range from “simple” to “comprehensive”.

Short History of Performance-Based Contracting

The first PBC of road maintenance was piloted in British Columbia, Canada in 1988.

Later, PBCs were introduced and adopted in two other Canadian provinces: Alberta and Ontario.

In 1995 Australia launched its first PBC to maintain urban roads in Sydney. Since then New South Wales, Tasmania, and Southern and Western Australia have started using performance-based and ’’hybrid’’ approaches.

In 1998 a PBC was introduced in New Zealand to maintain 405 km of national roads.

A PBC was first introduced in the USA in Virginia State in 1996.

Since then, Alaska, Florida, Oklahoma, Texas) and Washington D.C. have started applying a PBC approach to maintain highways, bridges, tunnels, rest areas and urban streets.

In the developing world Latin America was the pioneer in developing and adopting its own PBC model.

In 1995, Argentina introduced PBCs which cover 44% of its national network.

2

Argentina refers to it as ‘’CREMA’’, which stands for ‘’Contrato de REcuperation y Mantenimiento’’ in Spanish or ‘’Contract for Rehabilitation and Maintenance’’.

Gradually, this trend has spread to other developed and developing countries in Europe, Africa and Asia, e.g., UK, Sweden, Finland, Netherlands, Norway, France, Estonia (63% of national roads), Serbia (8% of national roads), South Africa (100% of national roads), Zambia, Chad (17% of all season roads), the Philippines (231 km of national roads.

At present, many PBC programs are underway in Albania, Cape Verde, Chad, Mada-gascar, Tanzania, Burkina Faso, India, Cambodia, Thailand, Indonesia, Vietnam, Yemen and Georgia.

Contract duration ranges from 1 year (in several US states and the Netherlands) to 10 years (in British Colombia [Canada], New Zealand and Western Australia). The median duration is 5 years.

Cost savings from using performance-based contracts range from 10% to 40%, with a median of 20% (estimated by road agencies).

Pilot Project in Serbia

Pilot OPBMC Project was realized within Transport Rehabilitation Project (TRP) financed by World Bank Loan, 2004-2008.

The World Bank Project included implementations of two Pilot Contracts for Output Performance-based Maintenance Contract (OPBMC) for routine road maintenance on about 1,200km of road network in Macva and Kolubara District for 3 years + additional 2 years (2004-2008).

The agency responsible for the implementation was the Serbian Road Directorate, i.e. Public Enterprise “Roads of Serbia” (PERS).

Main characteristics of the Pilot Project:

• Procurement of routine road maintenance works by international bidding procedures – the first routine maintenance contracts in Serbia awarded on competitive procedure.

• Introducing into practice service quality level, lump sum payments and demerit points for non-compliance with the requested standards, for the certain types of routine maintenance items.

• Appliance of new winter maintenance service organization, winter maintenance performing and payment model based on RWIS (Road Weather Information System.

• Training (Twining Agreement between PERS and SRA under donation of SIDA – 1.5 million SEK).

Selection of Pilot territories:

• Length of the road network under the jurisdiction of the Directorate of Roads (PERS) is approximately the same (about 600 km per one area, or 1,200 km for both areas).

• Macva region with its geographical position presents flat terrain, while the Kolubara region presents mountainous terrain.

• Both areas are close to PERS’s head office in Belgrade allowing evaluation of the project, monitoring and supervision.

• In the previous period, the regular maintenance works are not carried out in a satisfactory way by road maintenance companies in charge for road maintenance on these territories.

• A comprehensive road asset data had to be collected to form adequate road information system and issue the tender documentation.

3

Legal and Technical Aspects

It was necessary to re-define road categories for routine and winter road mainten-ance in accordance of existing road classification, Public Road Law and Rulebook for road maintenance.

The categories of roads for routine and winter road maintenance are defined.

The technical specifications for the routine maintenance of roads and bridges are defined.

The desired Service Level (quality of construction) and how to measure and control is defined.

Penalties (demerit points) are defined.

The minimum set of construction machinery for the execution of maintenance works is defined.

The main differences comparing to previous ‘’classic’’ contracts:

• Maintenance categories are defined.

• Application of ‘’demerit points’’.

• Using RWIS in the process of road winter maintenance.

• Self control of the contractor (the introduction of the Internal Control Unit).

Penalties (Demerit Points)

If during the execution of the Contract the Contractor reaches 175 demerit points, the Contractor shall forfeit its right to participate in any tender of the Roads Directorate (PERS) in the next 2 years.

If during the first year of the Contract the Contractor will be allocated to more than 100 demerit points, the Investor has the right to terminate the Contract.

If, during the second year of the Contract, the Contractor is awarded a total of more than 160 demerit points, the Investor has the right to terminate the Contract.

If in the third year of the Contract the Contractor is awarded a total of more than 200 demerit points, the investor has the right to terminate the Contract.

In the Pilot Project 57% of demerit points were awarded for poor maintenance of drainage; 14% for road marking and equipment maintenance; and 13% for cross-section maintenance.

Preparation of Tender Documentation

Standard Bidding Documents are prepared by the procedures of the World Bank

February 2002.: The World Bank announced: “Sample Bidding Document for PMMR - Performance-based Management and Maintenance of Road Networks”

September 2005.: Revised edition “Sample Bidding Document, now called OPRC - Output-and Performance-based Road Contract”

October 2006 (November 2009 Revision): “Sample Bidding Document, now called OPRC - Output-and Performance-based Road Contract and Sample Specifications” (which can be downloaded from the WB Procurement Website http://www.worldbank .org/procure/

Cost Savings in Serbia

Routine maintenance costs were compared for roads within the Pilot Project and other roads. During 2005-09 Pilot Project roads cost 46% less to maintain.

4

Quality (Before and After Performance-Based Contracts)

Lessons Learned

After initial problems in adapting to new concept of road maintenance in the first year of the implementation, the Pilot project is completed successfully

Engagement of Consultants on Pilot project, especially through continuing education contractors, as well as the establishment of procedures and records, has significantly contributed to its successful completion.

Consumption of material for pavement maintenance is significantly reduced and the savings achieved total costs particularly with respect to the parameters for the rest of the road network in the Republic of Serbia

The most significant savings are made in the winter maintenance