Financing Road Construction and Maintenance after the Fuel Tax Reform
In December 2008, the State Council of the People's Republic of China (PRC) issued the Notification of the Implementation of the Reform of the Oil Products Price and Taxation, which authorized the implementation of a fuel tax reform initiative beginning in January 2009. The reform reflects a major step toward achieving several important policy objectives in the PRC, including lowering oil consumption; reducing vehicle emissions; improving the efficiency, simplicity, and equity of road tax mechanisms; increasing central government influence over spending; and supporting transition to market-based pricing of oil products.
Since its implementation, the reform appears to have made significant progress toward many of its objectives. The new fuel taxes have effectively centralized road funding; they provide a simpler, more efficient road taxing system and better economic incentives that promote efficiency; and road user charges are now better tied to system use. Additionally, some of the initial concerns on reform impacts have not come to fruition - the cost impact on low-efficiency vehicles and high-mileage users has been fairly minor, and because of other government policies, there has not been a significant increase in total fuel prices.
The issues and challenges identified in this study include matters that are a direct result of the design and implementation of the fuel tax reform initiative - loss of direct local and provincial funding sources and a declining purchasing power - and other broader program considerations, such as inadequate funding and weak program administration. Recommendations include:
- Division of Roles and Responsibilities.To provide the central government with greater means to direct investment on national priorities and improve accountability, it is recommended that it establish a target share for its contribution to road funding, inclusive of funding from the fuel tax and other central government sources.
- Funding Allocation.The approach for determining the allocation of funding is now a critical concern of provincial and local road agencies.
- New Funding Options.To raise additional revenues for roads, the PRC should either increase existing taxes or establish new revenue-raising mechanisms.
- Adjusting Current Funding Sources.The fuel tax reform established a fixed-rate excise tax on motor fuels.
- Rationalizing Use of Debt Financing.Historically, the use of bank loans to finance ordinary road programs has largely occurred at the discretion of provincial and local governments.
- Fund Management.The lack of a well-defined accounting mechanism for road funding, such as a road trust fund, leads to reduced clarity and greater uncertainty on whether all user charges will be allocated for road purposes, and what level of annual funding will be available.
- Organizational Capacity.The current organizational structure and institutional capacities of the Minister of Transport (MOT), relevant sections of the Minister of Finance (MOF), and provincial and/or local road agencies, were established to support a highly decentralized, locally funded highway program.
- Executive Summary
- Road Programs in the People's Republic of China
- The Fuel Tax Reform
- Future Revenues and Needs
- Fuel Tax Reform Policy Issues
- Policy Options and Recommendations