Efficient Organization of Highway Construction, Rehabilitation, and Maintenance

Abstract

Economic analyses of highway construction, rehabilitation, and maintenance have been rare because of the complexity of the industry's production process and because of its political sensitivity. Yet efficient organization of highway agencies necessitates information of economies of scale and scope; factor substitution possibilities; and separability of outputs, inputs, and management decisions. The production processes of highway construction and rehabilitation and maintenance are studied using cost function approach. The results show that, based on economies of scale, construction regions and rehabilitation and maintenance districts are far too numerous in Finland. The optimal number of construction regions would be four to five instead of the actual nine. The optimal kilometers of road that a rehabilitation and maintenance district should be responsible for would be 800 to 1000 km rather than the current 500 km. Further, the highway agency turned out to be a multiproduct firm; that is simultaneous construction of the narrowest and widest highways (less than 6.5 m wide and greater than 9 m wide) and specialization in the construction of the most common width class (7–8.5 m) and small lump-sum projects would be the most cost efficient. As to rehabilitation and maintenance, joint production and specialization are equally efficient. These findings have major implications for contracting out work and the eventual privatization of highway production. Finally, management decisions about contracting strategy, labor policy, and input use have a major impact on total costs.