THE PATH TO SUSTAINABLE ROAD MAINTENANCE IN MOLDOVA

Transcription

1 Title Page THE PATH TO SUSTAINABLE ROAD MAINTENANCE IN MOLDOVA TRB Paper (for the 94 annual meeting) Final paper without line numbers Author: Chaim J. Poran, PhD, PE Director, Infrastructure Millennium Challenge Corporation th St, NW Washington, DC Tel: Fax: Words Count: Number of words including Abstract, text and References: 6,238 One (1) Figure Four (4) Tables

2 Poran, Chaim J. 1 THE PATH TO SUSTAINABLE ROAD MAINTENANCE IN MOLDOVA ABSTRACT The global financial crisis of 2008 and its aftermath exacerbated the critical challenges faced by many developing countries in securing external financial resources to rehabilitate and expand their road networks, at the same time when these countries have been struggling to improve road maintenance sustainability through obtaining more adequate funding from annually recurring domestic resources and improving operations and institutional capacity. This has been a special challenge to some lower income Newly Independent States (NIS) in Eastern Europe and former Soviet Union which, since the late 1990s, were facing high transport costs and constrains to economic growth associated with deteriorating conditions of their road networks. Most of these countries have been seeking assistance to plan and implement road investments from International Financial Institutions (IFIs) who provide financing for the road sector, where such financing, in most cases, include conditions related to sustainable road maintenance. The Republic of Moldova (Moldova) is the case in point for this paper focusing on the transformation of the road sector from a national road network in mostly poor to bad condition about a decade ago, without a coherent investment plan, and with inadequate road maintenance, to the present where an improved Moldovan road sector is managed under a comprehensive long term investment strategy including mostly road rehabilitation of the existing road network financed mainly by IFIs, coupled with special focus on continued progress to sustainable road maintenance based on policy, more adequate and stable funding, and improved operational efficiency and institutional capacity.

3 Poran, Chaim J. 2 BACKGROUND General Moldova is a landlocked NIS located in Eastern Europe between the Ukraine and Romania. It has an area of about 33,846 km 2 and a population of about 3.56 million (1). It is a low-income developing country with nominal GDP of $7.935 billion, and a nominal Per-capita- GDP of $2,229 (2), the lowest in Europe. Transport The transport sector infrastructure currently serving Moldova include 10,544 km of roads (both national and local), 1,156 km of rail road track, one main international airport, and one main international maritime river port (3). Considering the population, economy, and area of Moldova the existing capacity for transport and logistics is sufficient. However, it is the deteriorated conditions of the existing infrastructure which is one of the key challenges for Moldova since it requires major investments for its rehabilitation and modernization (3); Road Transport Using 2013 data (3), the metrics of the Moldovan road network, which is all public, include the following: National roads: about 3,677 km (about 93% paved) Local roads: about 6,867 km (about 47% unpaved) Road network density of 314 km per 1,000 km 2 and 2.6 km per 1,000 people Of these roads, the Ministry of Transport and Road Infrastructure (MTRI) is managing 9,344 km, of which 3,336 km are paved national roads, and 6,008 km are local roads about half of which are unpaved. Since 1995 there has been major privatization of road transport in Moldova to the present situation with freight and passenger transport privatization of 98% and 95%, respectively (3). Currently commercial road transport in Moldova includes about 1,824 business entities providing freight and passenger transport services nationally and internationally, of which there are about: 574 freight transport operators with about 6,000 vehicles; and, 1,250 passenger transport operators with about 29,000 vehicles. It is estimated that currently there are about 2.1 million commercial road trips per year in Moldova (including international trips) predicted to increase at an average rate of about 5% per year for the rest of the decade, with freight traffic currently moving about 35 million ton annually (90% of all freight movement), projected to increase to over 50 million ton by Additionally, there are an estimated 475,000 private passenger cars in Moldova (4) that in 2012 carried an estimated 60% of all long passenger trips estimated to increase to about 70% in While the existing road network is considered reasonable for a developing country like Moldova, in some areas of the country, where economic growth in expected to continue more robustly, the existing road infrastructure may need to be expanded to meet traffic requirements. Indeed, the Government of Moldova (GoM) is not planning to add significant new roads to the network in the foreseeable future since the focus in Moldova is rehabilitation of national roads which are generally in poor condition. More specifically, Moldova has to face the challenge of

4 Poran, Chaim J. 3 rehabilitating key corridors that connect with the European road networks and upgrading them to international standards in conjunction with its European association, focusing on road sections of international importance in coordination with its neighbors. In spite of the challenges facing the road sector in Moldova, commercial road transport has remained competitive, perhaps also, indirectly, due to the poor performance of the rail sector. The Road Sector Challenges Road Network Conditions The 2012 assessment of the national road network conditions was based on the International Roughness Index (IRI) using the following definitions for road condition and the respective IRI range: Very Good < 2; Good 2 to < 4; Fair 4 to < 6; Poor 6 to < 8; and, Bad (or Extremely Poor) > 8. The assessment concluded that 26% are in Good-to-Fair condition, 54% are in Poor condition, and 20% are in Extremely Poor condition. However, since 2012, based the Government of Moldova (GoM) approved the Land Transport Infrastructure Strategy for (LTIS) (5), MTRI has continued to invest in road rehabilitation and improved maintenance. As a result, road network conditions continue to improve with the rehabilitation and periodic maintenance of some 250 km paved national roads, thus current conditions may be Good-to-Fair in over 1/3 of the national road network. Notwithstanding these improvements, the main challenge is the majority of the network, about 60%, currently in Poor condition, and the remaining road sections that are in Bad conditions. Road Maintenance Problems In 2006 the GoM, working with the IFIs, recognized that the road maintenance is a major problem contributing to the dire and worsening condition of the Moldovan road network, identifying several interrelated causes among which were: (i) inadequate and inconsistent funding for road maintenance; (ii) inefficient road maintenance system and operations; and, (iii) technical standards and norms do not meet the current requirements. To address these problems, the GoM s LTIS for amended the Road Fund Law of 1996, allowing to significantly increase the revenue allocated to the Road Fund (RF), for road maintenance, from about $21 million in 2009 up to about $86 million in At the same time the GoM had begun to implement reforms in its maintenance operations. Other Road Sector Challenges Other interrelated road sector challenges in Moldova identified in 2012 (3) include: High rate of road accidents with number of people killed-or-seriously-injured (KSI) that far exceeds the European Union (EU) average; Need to be optimize the road network in terms of constructing bypass roads to avoid densely populated urban areas; and, Lack of transparent and systematic methodology for identification and prioritizing of road infrastructure investment needs. MOLDOVA S PATH TO SUSTAINABLE ROAD MAINTENANCE The First Moldovan Road Fund Law The GoM, a NIS, had established its first RF Law in 1996 (6) recognizing the need for systematic annual allocation for road maintenance to address the continued deterioration of its national road network. The first Moldovan RF law was generally modeled after the Second Generation RFs that have been

5 Poran, Chaim J. 4 adapted in many developing countries in the 1990s. In its RF, the GoM had entrusted road financing to the Ministry of Finance (MoF) who had to provide road maintenance funding to the State Road Administration (SRA), a semi-autonomous state agency under MTRI s oversight, who implemented road maintenance operations. The RF financing was specified to come from designated road user charges based on pay-for-use (and/or abuse) principle, including the following resources: Excise tax on gasoline and diesel oil; Road taxes collected in compliance with the tax legislation; Funds from issuing international road transport permits; Taxes for international road transport cross boarder movements; Penalties applied for non-observance of passenger road traffic regulations; Penalties applied on commercial traffic with excess axle loads; Tax on imported liquefied gas; and, Tax on the sale of natural gas used as fuel for cars. The RF Law created the mechanism for channeling the collected funds to the road sector. In addition, the law was supposed to significantly increase the overall funding level for road maintenance. To implement the law, the MoF set up a special account, to receive the revenues defined in the law. However, the RF Law, and road maintenance operations and institutional capacity had turned out to be inadequate to address the continued deterioration of the Moldovan road network. The LTIS General The LTIS (5) was approved by the GoM on February 1, The 10 year strategy developed for the LTIS ( ) was based on analysis of the conditions and constraints of the transport sector in Moldova including road, rail and urban transport with emphasis on the road sector. It defined the objectives, actions and measures which were needed in order to deal with the identified problems, in line with the broader strategic directions defined by the GoM, including the EU-Moldova Action Plan, through the implementation of the Financial Agreement entitled the Road Sector Program Support Project (RSPSP) signed between Republic of Moldova and the IFIs. Figure 1 shows the extensive deterioration road network conditions leading to the approval of the LTIS by the GoM.

6 Poran, Chaim J. 5 Key LTIS Findings In approving the LTIS, the GoM accepted the following key findings: The conditions of local roads was even worse than the national road network, with only 2% of the surveyed length in good or fair condition. For each one dollar ($1.00) not spent in road maintenance in the 15 years since 1992, road user costs had increased by about $1.23. For the same period, road deterioration (road asset loss) was valuated at $2.47 billion. It was estimated that the losses to the Moldavian economy caused by the grossly inadequate road maintenance over that 15 years period totaled to nearly four (4) times the amount saved (not spent) in road maintenance. The Bad condition of the road network had significant negative impacts on trade, poverty (especially in rural areas), and the environment. There were several shortcomings identified in both in RF financing and in road maintenance operations using RF resources as follows. Specific RF Shortcomings Despite the fact that throughout the previous years, fuel excises as the main revenue source for the RF had been increasing, the funding for roads maintenance had not been increasing correspondingly, and the gap between allocated RF budgets and road maintenance need had significantly widened. The RF Law did not allow to plan for multi-year road maintenance funding, thus there was no medium- or longer-term planning of periodic maintenance works since the RF allocation was approved annually. There was no participation of road users in decision-making on the use of the RF budget. RF allocation was mostly used to finance annual allocations to State-controlled district road maintenance enterprises. Because of the inadequate annual RF funding level it was not possible to procure maintenance works by competitive biddings for most of the works funded by the RF. There was inadequate oversight and insufficient auditing of RF funds usage. Conclusions Pertaining to the RF As a result of the Strength, Weakness, Opportunity, Threat (SWOT) analysis performed for the preparation of the LTIS, the following conclusions were accepted in the LTIS pertaining to the RF: A reform of the RF was clearly necessary to address the continued serious deterioration of Moldova s road network and recover its lost asset value. The RF reform had to include significant increase in funding and improvements to enable medium and long term financial planning. A reform of road maintenance operations was needed including progress towards competitively-bid contract-based maintenance system which was required to

7 Poran, Chaim J. 6 rationalize road maintenance costs and to incentivize modernization of road maintenance companies. The Road Network Recovery and Maintenance Plan (RNRMP) The LTIS included a RNRMP which was based on a detailed Visual Road Survey that established the condition of Moldova s road network at the beginning of The survey provided SRA and MTRI with accurate, systematic, detailed data about roadway design, pavement structure, the condition of the road network, which was a prerequisite for the strategic planning. The RNRMP included the following actions: Recovery (rehabilitation) program for most of the network of national and local roads. Emergency repair and maintenance works on the roads in Bad condition until the recovery works take place. Normal maintenance (routine and periodic) of all recovered roads where periodic maintenance consists of an asphalt concrete overlay or surface treatment every eight (8) years or less where needed. The LTIS established a 10 year budget needed for the RNRMP and provide prioritization of the investments over the 10 year planning horizon. The total cost was estimated at $2,836 million over the 10 year strategy horizon (an average of about $284 million per year). However, the LTIS acknowledged that the RNRMP would need to be revised based on availability of financing. The total estimated cost of the RNRMP was broken down to three major components, each including works and construction supervision, as follows: Recovery of the national roads network: $1,129 million Recovery of the local roads network: $ 947 million Periodic and routine maintenance of entire network: $ 760 million The above estimated costs did not include project design and preparation estimated in the LTIS separately at about $209 million which is about 10% of the projected road network rehabilitation costs and about 7.4% of the RNRMP grand total cost, respectively. Also, the above costs did not include VAT (20%) since the financing source was not defined. The LTIS provided the GoM with investment prioritization over the 10 year RNRMP, to address two main objectives: (i) To generate a more balanced improvement of the network between national and local roads; and, (ii) In case that resources are insufficient, to set up a sequencing of individual investments in specific road sections which should be programmed as resources become available, resulting in a timeframe longer than 10 years for some road sections. For the prioritization of national roads included in the RNRMP, the LTIS included a multi-criteria approach where with the following criteria: (i) Technical: cost/km, present and projected traffic levels, safety, present conditions and short term risk of asset loss (urgency of needed repairs);

8 Poran, Chaim J. 7 (ii) International Integration: location on the Pan-European corridors, connection to neighboring countries (roads to border crossings), network between major cities and trans-national axes; (iii) Socio-economic criteria: network between more important cities (core intercity network), roads to/from main population centers; (iv) Trade and business facilitation: intermodal connections (links enabling a change in transport mode), e.g. road to railway stations, or road to the Danube port; (v) Financial: availability of funding, degree of project preparedness The LTIS estimated that the Internal Rate of Return (IRR) for the entire RNRMP as a whole was about 18% using only direct benefits of savings in vehicle operating costs (VOC). The LTIS also included suggested monitoring and evaluation plan for the RNRMP. External Financing Projections for the Road Network Rehabilitation The LTIS included only a mid-term projection of estimated amounts that may become available from 2007 through 2011 from the IFIs including a total of about $466 million which consisted of credit from loans and grants by the World Bank (WB) through the International Development Association (IDA), European Bank for Reconstruction and Development (EBRD), European Investment bank (EIB), Millennium Challenge Corporation (MCC), and the EU. Financial Resources for the Road Fund The LTIS was very focused on long term sustainability of the road network. Therefore, there were specific targets set in the LTIS for RF financing, hence, the GoM was well aware of their obligations to increase funding from domestic resources for the RF to meet the LTIS road maintenance targets which were set as shown in Table 1 which also shows the targets for investments in road rehabilitation (external and domestic) for comparison. TABLE 1. LTIS Projected RNRMP Costs (costs are in millions of US$ rounded) Year RNRMP Project Road Network Rehabilitation Routine and Periodic Grand Total Preparation Works and Supervision Cost Maintenance (RF) for RNRMP Cost National Local Total Cost % of Total Cost % % % % % % % % % % 247 LTIS Total 209 1, , % 2,836

9 Poran, Chaim J. 8 RF projected allocations for road maintenance included significant investments in periodic maintenance to catch up with the increasing inventory of road sections in need of periodic maintenance attributed to lack of RF resources to perform the needed works. After the approval of the LTIS, generally, all agreements with the IFIs (EBRD, EIB, EU, and WB) for external financing of the RSPSP were conditioned on the GoM meeting the RF funding targets as per the LTIS. Sources of Domestic Funding for the RF Important domestic resources needed to be mobilized relying on the fuel excise tax as the main RF revenue source with additional designation of road uses fees, penalties, and taxes for the RF. Since fuel prices in Moldova were significantly lower than in its neighboring countries, and the lowest compared with the EU countries, it was planned in the LTIS that fuel excise tax would be gradually increased through 2011, after which it would remain constant through 2017 relying on economic growth and respective increase in fuel consumption. The LTIS included proposed fuel excise tax increases from an average of about ~$0.09/l in 2007 to ~$0.27/l in 2010 through 2017, with fuel prices at the pump that were estimated to practically remain about the same from 2007 to 2010 when projected in US dollars, but to significantly increase (~23% for diesel and ~12% for gasoline) when projected in Moldovan Lei (MDL) which is the domestic taxation currency, hence proving some hedge against domestic inflation and MDL devaluation in terms of RF revenues. The LTIS assumed that additional MDL revenues derived from both excise tax rate increases and domestic fuel price increases at the pump, could be mobilized as a result of this increase during the period, with further increases in the last seven years of the 10 year planning window due to increased fuel consumption of a growing economy, as shown in Table 2. TABLE 2. LTIS Projections of Fuel Excise Tax Collections (taxes are in millions of US$) Year Fuel Excise Taxes % increase over previous year Overall percentage increase = 774% Overall percentage increase = 371% Overall percentage increase = 188% % 167% 11% 11% 11% 11% 11% 11% 11% The Amended Road Fund Law Background Average annual increase = 52% Average annual increase = 195% Average annual increase = 11% In late 2009 the GoM had entered into negotiations with MCC of a Compact (7) that included a grant of $262 million to the GoM to fund, among other investments, a $133 million road rehabilitation project of the M2 national road (RRP). As part of its project preparation, MCC s due diligence of the RRP had included sustainability evaluation of the road sector in

10 Poran, Chaim J. 9 Moldova with special focus on the LTIS, and on actual road maintenance funding and implementation progress. Recognizing the continued challenges with the RF and road maintenance in Moldova, the GoM and MCC agreed to include in the Compact a Condition Precedent (CP) to assure more adequate funding for road maintenance. Prior to its inclusion in the Compact, the CP was coordinated with the IFIs Joint Group for Transport in Moldova including EBRD, EIB, EU, MCC and WB (IFIs Joint Group), and with the International Monetary Fund (IMF). Moldova s economy had suffered significantly from the global recession and the IMF which had been involved in a three year program supporting Moldova (8) (May May 2009), was preparing a second phase extended credit facility of about $588 million. The objective of that second phase facility was to support macroeconomic stabilization, economic recovery and increased social spending to protect the poor on the basis of a framework of economic and financial policies for As such the IMF had generally not been favorable with earmarked budgetary obligations such as the RF. However, the IMF had also concurred with the IFIs Joint Group that it is the GoM s prerogative to decide about its expenditure priorities on infrastructure, including the funding of the RF, within the general framework of its budgetary obligations. The Compact with MCC The Compact acknowledged that the GoM, with the assistance of the IFIs Joint Group, had adopted the LTIS, which, along with other matters, addressed deficiencies in road maintenance funding and execution. In particular, the GoM had committed to amend the 1996 Road Fund Law to ensure that an adequate percentage of the revenue from the fuel excise tax, would be automatically allocated to the Road Fund for road maintenance. To increase the likelihood of sustaining the benefits of the MCC-funded RRP, and to prepare a more sustainable basis for future investments in the roads sector, the GoM agreed with MCC to the specifics of the CP which required that prior to the earlier of (a) the release of invitations for bids for road rehabilitation work to be funded under the Compact for the RRP, or (b) the date which is one (1) year following the Entry into Force of the Compact, the GoM was to provide evidence that an amended RF Law was in full force and effect, ensuring that a minimum of 50 percent in calendar year 2011, 65 percent in calendar year 2012, and 80 percent in calendar year 2013 and thereafter, of revenue from the fuel excise tax is automatically allocated to the RF. Furthermore, to monitor actual RF allocations and expenditure, the CP stipulated that prior to signing any construction contract for the RRP, the GoM was to provide evidence acceptable to MCC that the actual funding allocation to the RF required by the amended RF Law had been achieved for the previous calendar year, and that the funding was expended for maintenance of the road network. Enactment of the Amended RF Law Remarkably, the GoM then passed the amended RF Law on December 29, 2009 (9) even before the Compact was signed in January of 2010, with the implementation provisions of the amended law exceeding MCC s Compact CP requirements by one (1) full year, stipulating that the percentage to be allocated to the RF for road maintenance shall not be less than: 50% in 2010, 65% in 2011 and 80 % in 2012 and following years, from the excise duty on petrol derivates.

11 Poran, Chaim J. 10 During the subsequent IFIs Joint Group semi-annual visit to Moldova in May 2011, the GoM s commitment to provide sustainable funding to for road maintenance was reaffirmed to meet the greater of (a) funding allocation target amounts in the LTIS, and, (b) its obligation under the amended RF Law. Performance of the GoM in RF Allocations As shown in Table 3, for the period the GoM substantially met its obligations to allocate RF funding for road maintenance under both the LTIS and the amended RF Law. However, during the IFIs Joint Group semi-annual visit to Moldova in June 2012 there was a concern that the GoM may not be able to meet in LTIS obligations for 2013 and This emphasized the importance of the sustainable road maintenance evaluation included in the ongoing studies to prepare a more comprehensive Transport and Logistics Strategy (TLS) for Moldova (3), intended by the GoM to update and replace the LTIS. TABLE 3. Projected Compliance of Road Fund Financing with the LTIS # Item Year (a) MOF projected Fuel Excise Tax Revenues (MDL millions) 1,013 1,119 1,200 1,258 (b) MOF projected % of Fuel Excise Tax allocated to the Road Fund 65% 80% 80% 80% (based on current Road Fund Law) (c) MOF projected Road Fund Revenues from Fuel Excise Tax ,006 (MDL millions) = (a) x (b) (d) MOF projected additional Road Fund revenues (MDL millions) (e) Road Fund Revenues as projected by MOF 788 1,025 1,090 1,136 (MDL millions) = (c) + (d) (f) Road Fund Revenues as committed in LTIS 800 1,025 1,245 1,334 (MDL millions) (g) Gap between LTIS commitments and MOF projections (MDL millions)= (e)-(f) (h) Gap between LTIS commitments and MOF projections (%) -1.5% % -14.9% In the Aide memoire from June 2012 the IFIs Joint Group and the GoM noted that the reform of road maintenance financing and a large increase of funding for road maintenance has been a key condition for the financing of road investments by the IFIs including of the amendment of the RF Law, specifically noting, among other points, the following key observations that: According to the LTIS the fuel excise tax should have been increased to a level of MDL 3 per liter of both gasoline and diesel by However, in 2012 the fuel excise tax level was still below the level envisaged in the LTIS for 2010; and, Road maintenance costs in the LTIS were based on 2007 level costs. Therefore, it was expected that the new TLS will consider appropriate adjustment to update the LTIS road maintenance targets. The Road Maintenance Reform The LTIS included a plan to reform the road maintenance system in Moldova. One of the key objectives of that plan was to expeditiously consolidate the 38 State-controlled district road

12 Poran, Chaim J. 11 maintenance enterprises into 12 new companies. Based on that the GoM has approved an action plan (10) which forms the legal basis for the reorganization and provides detailed scheduled activities for Currently the reorganization is nearly completed with 11 of the 12 new companies fully operational, and where the 12 th company is expected to be operational by the end of Another key objective of the road maintenance reform was to assure that both routine and periodic road maintenance works are procured through competitive bidding. Based on MTRI s data, 75% and 88% of all maintenance works were competitively bid and contracted in 2012 and 2013, respectively. The action plan also included adjustments of the legal and regulatory framework and adaptation of new technical specifications and standards for road maintenance. Other foreseen actions included multiple-year routine maintenance contracts, introduction of modern road maintenance technologies, development of Pavement Management System (PMS) and Bridge Management System (BMS), and training of staff. MTRI had requested technical assistance (TA) from the IFIs Joint Group for implementing the reform action plan and EBRD agreed to finance it (now being procured). The Transport and Logistics Strategy Background The LTIS for the period , was prepared by the MTRI with WB support and formally adopted by the GoM on February 1, In 2012, while the LTIS was still valid, the GoM and the IFIs Joint group agreed that there is a compelling need for Moldova to prepare and adopt a broader and more detailed TLS. It was also established that, as it pertains to the road sector, the new TLS would have to update the LTIS as it pertains to investments in roads and road maintenance and rehabilitation (M&R) to assure that Moldova remains on the path to sustainability of its road infrastructure which remained the top priority in infrastructure investments for the planning horizon of 10 years from 2013 to The TLS Preparation The TLS preparation was supported by the WB. The studies were performed by a group of consulting firms and were managed by the MTRI. The GoM s existing Inter-ministerial Steering Committee of the RSPSP had the overall responsibility for guiding and reviewing the work which was also reviewed by the IFIs Joint Group. The studies started in November 2011 and were completed in 12 months after which a draft TLS was prepared by the consultants under MTRI s management. The draft was reviewed and discussed in two widely attended stakeholder workshops followed by and final summary consultation and discussion workshop, which was also attended by the IFIs Joint Group, to review the proposed specific action plans and prioritized investment programs for each of the four transport modes, and on cross-cutting themes such as Customs and Trade Facilitation, before the GoM finalized the TLS and approved it.

13 Poran, Chaim J. 12 Road Sector Objectives in the TLS The TLS established its overall goals related to the road sector to ensure an appropriate and sustainable road infrastructure, and provide quality and safe road transport services, listing its specific objectives as follows: Minimize the total road transport costs; Ensure proper rehabilitation, modernization, repair and maintenance of the priority roads from identified specifically in two priority groups as follows: - Network of 1 st priority National Roads (1,730 km) by 2018; and, - 2 nd priority National Roads (1,360 km) by Ensure proper M&R of local roads (6,008 km) by 2022; Continue the implementation of the Action Plan for the Reform of the Public Roads Maintenance System; Ensure throughout the entire year access to the national roads network from the local/rural roads from all areas of the country; Reduce the number of road accident by 50% by 2020; Ensure the legal and institutional framework for road network planning, operation and maintenance; Integrate the road network of the Republic of Moldova in the European network; and, Ensure safe transportation of cargo and passengers. Road Sector Financial Plan in the TLS To accomplish these challenging objectives the TLS included specific target for financing of road M&R as shown in the summary outlined in Table 4, segregating between road rehabilitation investments from external sources (IFIs) and road maintenance expenditures form domestic resources. Column (a) in Table 4 represents projected increasing allocations for periodic maintenance expected from the GoM, from domestic resources. These amounts also include resources planned to catch up with the accumulating periodic maintenance funding gap, which, if not addressed, would lead to further significant degradation of the road network and to related asset loss. It is noted the GoM fulfilled its obligation under the TLS with its actual 2013 allocations to the RF, and is on track to meet or exceed its 2014 obligations, a significant achievement in tight budgetary environment with other competing priority expenditures such as education reform, underscoring the high priority of the road sector in the GoM economic growth and European integration strategy.

14 Poran, Chaim J. 13 TABLE 4. The TLS Financial Plan Summary for Road Maintenance and Rehabilitation Year Projected Financing (in Millions of MDL or US$ as indicated) TLS Projected RF Allocations for Road Maintenance Millions MDL Routine Periodic (a) Total Total (~US$ millions) TLS Projected External IFIs Financing for Road Rehabilitation (~US$ millions) , , , , ,095 1, ,275 1, ,495 2, ,735 2, ,995 2, ,280 2, SUMMARY AND CONCLUSIONS The Transformation of the Road Sector in Moldova The paper describes the notable transformation of the road sector in Moldova from a national road network in mostly Poor condition about a decade ago, to the present where an improved Moldovan road network is managed under a comprehensive long term investment strategy on a path to sustainable road maintenance. The focus of this paper is on the coupled policy and financial aspects of this transformation that include the following. The Decade-Old Legacy The main problems of last decade are described in this paper, chief among were: A national road network mostly in poor condition, unable to support economic growth; Lack of a coherent investment plan for the road sector; Lack of resources both domestic and external for road sector investments; and, Grossly inadequate road maintenance both in terms of funding and operations. Identifying the Problems and Developing a Fix In close cooperation with the IFIs, the GoM has embarked on comprehensive analysis of the problems in road, rail, and urban transport with a goal to establish a comprehensive land

15 Poran, Chaim J. 14 transport strategy. The result of these studies led to the LTIS for laying the basis for policy, operational, and financial reforms of the road sector, which while posing significant challenges to the GoM, were coherent, well planned, and attainable, including: A long term financial plan for road rehabilitation of the existing road network financed by external resources from the IFIs; Prioritization of road rehabilitation projects for both the national and local road networks; Selection of M&R intervention methods and designs based on technical feasibility and cost-effectiveness analysis; and, Action plan to achieve more sustainable road maintenance based on policy reform, more adequate and stable funding, and improved operational efficiency and institutional capacity. Working with the IFIs Joint Group Only through close cooperation with the IFIs Joint Group for Transport in Moldova, the GoM has been able to enact necessary policy reform and obtain the necessary domestic resources in tight budgetary environment, to sustain progress in the road sector by implementing the LTIS action plan. That cooperation which has transcended political changes in Moldova, has been based on semi-annual visits to Moldova of the IFIs Joint Group to meet with the GoM and jointly follow up on progress, challenges, problems and solutions on the path to a sustainable road sector as part of the comprehensive transport and logistics strategy of Moldova. Milestones described in this paper such as the Road Fund Law Reform of 2009 in conjunction with the MCC Compact, and the adaptation of the TLS for to update and replace the LTIS would not have been possible without the partnership and close collaboration between the GoM and the IFIs Joint group. Lessons Learned Many developing countries can apply lessons learned from the challenging path of Moldova to sustainable road maintenance including, among others: Government should foster formal, meaningful and continuous cooperation with IFIs interested to invest in its transport sector and jointly develop a long terms TLS which realistically defined investment priorities; Government should be prepared to make tough political choices and implement reforms required to assure long term, adequate resources necessary for sustainable road maintenance as part of such comprehensive TLS; Such policy and operational reforms should transcend political changes to assure continuity and consistency on the path to sustainable road maintenance; TLS should be updated about every (5) years; Funding for sustainable road maintenance should preferably come from domestic resources based on pay-for-use principles such as fuel excise tax, road use fees, penalties collected from road use violators such as axle over-weight, etc.; Road maintenance funding should be allocated through a dedicated RF and professionally managed by a dedicated agency using efficient maintenance technologies, and effective competitive procurements including contracting modalities such as multi-year and/or performance based contracts, where appropriate; and,

16 Poran, Chaim J. 15 RF expenditures should be periodically (at least annually) subject to independent technical and financial audits. ACKNOWLEDGEMENTS Many people who have been directly and indirectly involved in the work of assuring that Moldova get to and remain on the path to sustainable road maintenance, including the policy and operational reforms referenced in this paper, should be acknowledged. In particular, the political leadership of MTRI and its technical managers, the General Director and the International Manager of SRA, and the dedicated experts serving on the IFIs Joint Group which is coordinated by the author since 2011, including, alphabetically, the EBRD, EIB, EU, MCC, and WB. REFERENCES (1) Wikipedia The Free Encyclopedia. Moldova. Accessed July 25, (2) World Bank Search. Moldova Country at a Glance. Accessed July 25, (3) The Government of the Republic of Moldova. Transport and Logistics Strategy for Government Decision no. 827, October 28, Accessed June 23, (4) World Bank Search. Moldova Data Passenger Cars. Accessed July 25, (5) The Government of the Republic of Moldova Ministry of Transport and Road Infrastructure. Land Transport Infrastructure Strategy for Report and Government Decision nr. 85, February 1, 2007 (6) The Parliament of the Republic of Moldova. The Road Fund Law. Law Nr. 720-XIII, February 2, Official Bulletin of Republic of Moldova, no.14-15, art. 147, 1996 (7) The Millennium Challenge Corporation. Compact between the United States of America Acting Through the Millennium Challenge Corporation and the Republic of Moldova. Accessed June 25, (8) The International Monetary Fund. Extended Credit Facility/Stand-by Arrangements for Moldova. Accessed June 25, (9) The Parliament of the Republic of Moldova. The Road Fund Law no.138-xviii (Amending Road Fund Law no.720-xiii dated February 2, 1996). December 29, Monitorul Oficial no.i 1-12, January 26, 2010.

17 Poran, Chaim J. 16 (10) The Government of the Republic of Moldova Ministry of Transport and Road Infrastructure. The Reform of Road Maintenance System. Government Decision Nr. 244, April 19, 2012.