Persian Highway Trust Fund Economic and Finance Research Institute The Ministry of Roads, and Urban Development French-Iranian Seminar on   Public-Private Partnership and Intermodal Transport 25 & 26 October 2016

Road Financing System in Iran Outline Introduction / goal Road Financing System in Iran Economic Principles of Financing Road Projects Road Financing System Worldwide Proposal 1: Fuel tax Proposal 2: Highway Trust Fund Complementary notes Summary

The Goal Question: HOW to finance road projects in Iran? And WHY? Proposal: Fuel tax through A Highway Trust Fund

Financing Road Projects Introduction Financing Road Projects Maintenance costs Construction costs

Financing the road projects in Iran (As is) Construction costs: Annual budget Public-Private Partnership (PPP) BOT (Toll) Maintenance costs: Own Incomes (of Road Maintenance and Transportation Organization, RMTO)

Caveats of Current Funding System Characteristics: Medium- and Long-term road plans vs. short-term budget High volatility of the Government revenue Misallocation of funds through the process of approving (and modifying) the budget The negative effects of current funding system on road plans: Prolonging the projects Idle national/public capital Weakening the bargaining power of Govt in PPP projects Burdening more costs due to insufficient maintenance (Up to 3 times, according to The World Bank)

Approved Budget (1394/2015) vs. Funds Required Current Funding System Potentials Approved Budget (1394/2015) vs. Funds Required Expected costs: IRR 295 trillion Budget approved: IRR 34 trillion

Economic Requirements of Financing Road Projects The ideal solution (charges) should be: Financially effective and stable Economically efficient Equitable Cost little to collect Not easy to evade Politically feasible

Funding the road projects: Worldwide Experiences Annual budget Public-Private Partnership (PPP) Fuel tax Road tax Toll Vehicle license Vehicle distance travelled charges Vignettes Charges for non-standard/overweight vehicles Other alternatives: e.g. VAT

Fuel tax To certain extend satisfies all criteria Financially effective and stable Economically efficient The more you drive, the more you consume Externalities of fuel consumption Equitable User pays Cost little to collect About 1% of total revenue/wholesale collection Not easy to evade Not paid at retail Politically feasible Within Iranian targeted subsidy plan The main source of funding road projects worldwide 87% of income of the US Highway Trust Fund (2014)

Proposal Fuel tax On Gasoline, 10% On Diesel, 15% On CNG/LPG, 10% Via Iranian targeted subsidy plan

Share of Revenue that goes to the Govt (OCED) Fuel tax: Cross country Share of Revenue that goes to the Govt (OCED) Source: Calculations based on International Energy Agency (May 2015) Country Diesel Gas US %18 %17 Canada %27 %34 France %47 %61 Germany %44 %60 Italy %51 %63 Spain %37 %52 UK %58 %67 Japan 15

Establishing a Trust Fund Implementation Establishing a Trust Fund A popular and common approach (IMF and The World Bank) Independent No authority over other organizations Main goals: Financing road development projects Including: the share of Govt in PPP projects Funding the maintenance costs

SWOT Corruption (in case of insufficient supervision and transparency) Significant resources Long-term planning Efficient /sustainable allocation of resources Simple to implement Cost little to collect Corruption (in case of insufficient supervision and transparency) Relating consumption to payments Simple structure of the Fund Automatic inflation compensation Establishment by the law Supervision Expectation of fuel price increase (Iranian targeted subsidy plan) Public resistance Inefficiency of current funding system Technological progress (progresses in or obsoleteness of internal combustion engines) Financial problems of the Govt (low oil price/low economic activity) Low oil prices in the long-term

Financial calculations A sensitivity analysis Establishment by the law What else? Financial calculations A sensitivity analysis Establishment by the law Role of Parliament Supervision Deciding on the total borrowing, guarantees, and financing limits The organization The formality (Fund vs. other frameworks) Proposal of the bill Proposal of the statute

Proposed financing system Current financing system Summary Proposed financing system Current financing system Main source: Fuel tax Framework: A highway trust fund Mainly through Budget Global experience More resources Long-term planning Relating usage to payment Budget fluctuations Shortage of funding Budget approval mechanism No real long-term planning 24

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