OPINION: The price of the Silk Road

OPINION: The price of the Silk Road
Georgia’s major highway, the East-West Highway (EWH), a backbone of the Silk Road.
By Kakha Baindurashvili in Tbilisi June 18, 2018

The Chinese One Belt One Road (OBOR) initiative may have been accused by its critics of being politically motivated, but the Central Asian and Caucasian countries — among them Georgia — are competing to find their places in the reinvented Silk Road. Roads play the key role in OBOR, and Georgia’s major highway, the East-West Highway (EWH), is technically part of the Eurasian route connecting Atlantic shores to the Chinese borders. EWH can become a backbone of the Silk Road, but at what price?

The total length of Georgia’s national highways (transit routes and roads with domestic significance) is approximately 7,000 km; that equals 0.1 km of such roads on each square metre of Georgian territory, which is not bad at all. Besides, in the last few years Georgia has joined the group of countries that have modern high-speed highways, which include no more than half of the world’s nations. As trade and tourism become the systemic drivers of the Georgian economy, the importance of the roads increases, and the existence of such roads is the basic precondition for development of the country’s strategic economic sectors.

Road construction and rehabilitation is one of the priority directions for investment of public finances. According to the 2018 state budget, GEL1.28bn (€440mn) has been allocated for the improvement of road infrastructure, which is nearly double the financing in 2016, GEL529.8mn. The amount allocated for the improvement of roads makes up nearly 10% of the whole state budget, which is twice as much as the finances of the Ministry of Internal Affairs, more than the expenses for healthcare of around GEL1bn and slightly more than the total budget for the Ministry of Education and Science, around GEL1.18bn. 

These numbers show that the development of road infrastructure is the priority for the government. However the overall condition of the country’s roads is not satisfactory — this is the assessment of the World Economic Forum (WEF), as the country’s score is worsening on the WEF Global Competitiveness Index’s Roads quality sub-component.  Georgia occupies 82nd place among 137 countries with 3.8 points (countries are rated on a scale of 1-7 with 1 being extremely poor, and 7  extremely good). Azerbaijan is a way ahead (in 36th place) and Armenia (85th) a little bit behind. Among some of the other countries with the same past and development path are Estonia in 38th place, Slovakia in 73rd and Russia in 114th. Georgia’s closest trading partner Turkey takes 30th place. 

Georgia has nearly the same position in the World Bank Logistics Performance Index (scores range from 1 - low to 5 - high), where it has 2.35 points, which is lower than average. The highest score is Germany’s 4.23 points; the lowest is Syria with 1.60. 

According to the WEF Competitiveness Index, countries with the best quality roads are spread across various different geographic areas, among them are: Austria, France, the Netherlands, Portugal and Switzerland in Europe, the United Arab Emirates in the Middle East, and Hong-Kong, Japan, Singapore and Taiwan in the Far East. It is therefore obvious that climate and geographic features correlate little to road quality, and nor is having oil a decisive factor.

For sure Georgia can have the same quality road infrastructure as Austria, when we have the possibility to spend more money — but when will this be and is it worth it or not? Generally, it is worthwhile because it will support the development of trading and tourism, but this is not a direct profit on the money invested in the roads. Currently, the only direct return from public investments in roads is received from one source in the Georgian budget, fees for road usage. The fee paid by each transit cargo truck is just GEL200, which is not a counter-weight for the money which needs to be invested in the road infrastructure – according to an Asian Development Bank (ADB) study, a truck crossing Georgia, traveling about 400 km, will cause $200 of damage per trip, meaning that the current toll equal to $80 covers only 40% of the damage caused. 

The Austrian example 

It is remarkable that the establishment of toll roads in Austria from the 1960s was also closely connected to the historic necessity to improve road quality. In this period the government of Austria was attracting big loans to increase the potential of its road infrastructure, which has many similarities to the current Georgian situation. In the 60s the government recognised that without establishing a toll for using the roads its investments into road infrastructure could not be sustainable and Austria’s budget couldn’t endure the rising maintenance costs. As a result, the modern toll road history in Austria began exactly at this point, and nowadays Austria has one of the best quality transit and tourist road infrastructures in the world, in spite of its difficult geographic conditions. The income from the road toll makes up a significant part of the financing for road infrastructure protection. In 2016 the revenues received from road tolls were around €2bn (ASFiNAG, 2017), of which €1.3bn was received from cargo and passenger vehicles, and the rest was money paid by light vehicles. And that happened in a country where, as in most European countries, only the main motorways and expressways are paid.

It is clear that road tolling cannot meet all the road development financing needs, however, it can cover the maintenance costs, which are heavily underpaid in Georgia. Besides tolling is a necessity for Tbilisi’s traffic and environmental policies.

The introduction of road tolls has never affected traffic volume negatively; on the contrary, traffic has increased since the fee is institutionally directly connected to investment in road infrastructure. Designed correctly, tolls do not make people living along the roads dissatisfied. 

It must be noted that the road toll puts an additional financial burden on trucks, however, according to the European experience, cargo forwarders pass on more than 70% of a toll to their clients and thus there is very little impact on the road transportation industry. Despite that, according to the European Federation for Transport and Environment, the road toll is not reflected in aggregated consumer price statistics, because transport costs are estimated at only between 1% and 5% of total manufacturing expenses.

It is also interesting that, according to the association, 20% of trucks on European roads are empty and in some countries this exceeds 40%. Establishing a road toll increases transport effectiveness because it decreases the movement of empty and partly loaded trucks, thereby bringing down transport charges per cargo through consolidating them. This positively impacts the transportation sector, slows the decline of road infrastructure and has a protective effect on the environment through lowering pollution. 

Road tolls are an important tool for upgrading the vehicle stock (mostly the stock of trucks) too, as they support the replacement of old high exhaust vehicles with new low exhaust vehicles (euro 5, euro 6), by establishing a relatively low fee for them, which is possible through the well designed ETC tolling system.

Exactly those indirect financial factors have given rise to the positive attitude of some European countries toward toll roads, which is also very relevant for Georgia, especially considering the heavily polluting impact of transport on the country’s ecology. Tourism is becoming the leading economic sector and it is fully connected with nature; thus, maintaining a healthy environment is paramount for the Georgian economy.

To sum up, toll roads positively affect the auto transportation industry through increasing its effectiveness, and also protect the environment. Further improving the quality of Georgia’s road infrastructure and maintaining it in good condition is essential in order to participate in the OBOR’s highly competitive environment.

Clearly, the Silk Road is not humanitarian aid and it involves a heavy price — a direct price as well as an indirect price (for example on the environment) — and thus Georgia needs a very pragmatic approach coupled with smart policies so as to achieve the most benefits for itself.

Kakha Baindurashvili is an economist and former minister of finance of Georgia. Currently, he provides professional advice through the Silk Road Outlook consulting platform. He tweets as @kbaindur