Public Issues
Nº 882 -
www.lyd.org- Email:[email protected]
August 18, 2008
ISSN 0717-1528
Transportation Subsidy:
Who Benefits?
The Chamber of Deputies recently
Lowering Fares in Regions?
passed the legislative bill creating a Public
The Government has requested a subsiTransportation Subsidy in Chile. The bill was
dy of US$ 420 million annually to finance a refirst presented to replace the current student
duction in student bus fares; half of this amount
subsidy, which gives students reduced transit
is earmarked for regions outside of Santiago.
fares. However, ultimately this subsidy mixes
the problem of the Transantiago operating defThe allocation of these reicit with a subsidy mechanism
sources will not involve direct
for some public transportation
payment to those who use pubfares in Chile’s regions.
The law establishing
lic transportation but will be
public transportation
paid to operators with a certain
The Government has said
subsidies
does
not
provide
for
level of service and, where this
that this subsidy will prevent
incentives for operators to
is not possible, will be pumped
public transportation fares in
improve the system. Such
into the budget of the FNDR
Santiago from rising above
improvements presently
and other public funds to im$650, and will stop the rise in
fares that is occurring in other depend solely on the Ministry prove local transport infrastrucof Transportation, whose
ture and regional connectivity.
regions due to rising fuel and
teams
designed
a
defective
other public transport related
system, and brought it online But operators will only receive
costs.
without first ensuring the
funds under future service tenBut this new injection of basic conditions were in place der agreements and only in
fiscal resources into the public for its proper operation. And municipalities with more than
they have not been able to
50,000 inhabitants;1 in other
transportation system holds no
guarantees that fares will drop solve the problems that have words, it is not going to happen
arisen.
soon.
in regions nor that the subsidy
will benefit those who most
Between now and then,
need it. Neither does it ensure
allocations
of
these
funds
is not automatic and
that the quality of service of Transantiago will
will
depend
on
the
success
of negotiations beimprove and its deficit be controlled.
tween the Ministry of Transportation and current operators.
In practice, therefore, this subsidy seeks
to keep alive an inefficient system and a
Under the new bill, to receive the subsidy
scheme of supposed compensations for those
operators
have to meet conditions such as
living in regions, and may actually generate
“fare levels, service quality, control and other
more problems than it solves.
mechanisms, in the proposals they submit for
En esta edición:


Subsidio al Transporte: ¿A Quién Beneficia?
Semana Corrida, Mayores Costos para el País
1
Table 1: Benefits of Subsidy by Household Income Quintile
Population
Quintile Distrib.
1
2
3
4
5
24.20%
21.70%
20.60%
18.00%
15.60%
Subsidy distribution
Increase as % of income
Supply
Demand
Supply
Demand
21.30%
48.00%
5.00%
11.40%
22.80%
52.00%
3.10%
7.00%
24.00%
0.00%
2.20%
0.00%
20.70%
0.00%
1.30%
0.00%
11.20%
0.00%
0.30%
0.00%
Income distribution
Current
Sup. Sub. Demand Sub.
5.40%
5,60%
5.90%
9.20%
9,40%
9.80%
13.50%
13,60%
13.30%
20.00%
20,00%
19.80%
51.90%
51,40%
51.30%
Source: INE, Encuesta de Presupuesto Familiar 2006-2007
Percentage of total spending on on bus and subway: Encuesta de presupuesto Familiar 1996 -1997
through the establishment of
operating conditions. The same
thing occurred in Santiago, where services
were tendered afterwards, and the risk exists
that the results will be the same as with
Transantiago, with an escalating round of deficits that will require ever higher subsidies and
deliver every poorer service to public transit
users.
tender for specific routes, within set perimeters,
and for cases where operating conditions are
established for non-tendered services.”
In other words, the fare reduction is not
automatic or mandatory and funds transferred
may be used to improve other aspects of service.
In areas where the operator chooses not
to negotiate or does not reach an agreement
with the Ministry, as well as in
all towns with less then 50,000
In municipalities with more
inhabitants, the subsidy will be
than 50,000 inhabitants, where unSimply
throwing
allocated to the FNDR to fund
regulated services are present,
more
and
more
money
at
investments in infrastructure,
there are also exclusion perimeters
the system will only cover management and/or improvethat establish where the subsidy will
the deficit without
ments in transit systems, repavand will not be in force.
correcting the system’s
ing and minor works. Considerdefects.
Once these terms are agreed
ing that current forecasts indiupon, the Ministry must issue an
cate that the Government is at
invitation to tender or enter into dithe limit in regard to achieving
rect negotiations with those firms presently opthe structural budget surplus rule, it follows that
erating. This process will establish a series of
the funds earmarked for the FNDR will be takconditions making operators provide service
en from other pubic programs (ultimately the
with certain features at an agreed upon fare
FNDR itself).
level, in exchange for the transfer of funds that
In sum, the fare reduction announced by
will compensate for that fare reduction or imthe Government for regions is not guaranteed
proved service.
and must be negotiated with current transit opThis could be the first step towards reguerators. It also includes exclusion zones where
lating public transport across the country,
the subsidy will not be in effect.
Infecting the Regions with Transantiago?
2
It will be hard to make this scheme work
Graph Nº1: Montly Subsidy per Household by
25000
21711
23200
20000
15000
10000
9504
10241
10764
Table 1 shows that this mechanism delivers
one third of the subsidy amount
Income Quintile
to the wealthiest 40% of inhabitants of Greater Santiago, a segSupply Subsidy
ment that concentrates 72% of
Demand Subsidy
total income, while the poorest
20% will receive only 21% of the
resources earmarked for the
subsidy.
9310
5012
5000
0
0
0
0
1
2
3
4
5
If a subsidy based on demand
was used and targeted the poorest 40% of transit users, then the
poorest 20% would receive 48%
of the subsidy.
Moreover, as Graph I
shows, the proposed subsidy scheme will increase the monthly income of the two poorest
population quintiles by $ 9,584 and $ 10,241,
respectively, while delivering these resources
directly to the poorest users through a demand
subsidy would raise the income of these segments by $21,700 and 28,200 respectively.
in the short run, and therefore there will be
pressure to expand the exclusion zones, while
operators scramble to obtain the largest slice of
the pie possible. And while any fare reduction
should not affect operator revenue, neither will
it necessarily translate into better service for
users, especially students, the supposed beneficiaries of the subsidy. Operators will receive a
subsidy equal to the difference between the
adult and student fare, regardless of the number of students they transport, which will do
little to change the currently poor treatment that
students receive from transit operators.
In Chile’s regions, the distribution of the
subsidy should be similar, although the impact
on the income level of poor users will be less,
as long as the operators receiving the subsidy
are not obligated to use it to reduce fares.
Subsidy for the neediest?
Contrary to what happens with a supply
side subsidy, a demand subsidy enables resources to be focalized on the poorest users.
In the case of Transantiago, this could be
achieved by loading BIP cards for students and
poor users from the lowest income segments.
Since in the best case scenario the subsidy will be handed over to transit operators,
the eventual fare reduction in regions or the
upholding of the current fare in Santiago, will
not benefit the poorest users.
Improving Quality of Service?
Based on data from the Presupuestos
Familiares (Family Budgets) poll of 20062 and
the percentage of total expenditure spent on
mass transit in 1996,3 we calculated the average monthly amount that Santiago transit users
would save on transit as a result of the fare reduction4.
Although the number of buses in the
Transantiago system has risen from 4,500 initially to 6,400 today, kilometers traveled have
increased by 43% and there has been a drop
in transit accidents and a slight reduction in
waiting times, the system’s deficit has not been
reduced (on the contrary, it has risen) and the
quality of service has not improved as much as
expected.
Focalization of this subsidy is very weak, since
a supply side subsidy causes a reduction in
fares for all users.
3
From the users’ perspective, improving
the quality of service is measured in terms of
shorter trip times (time spent walking, waiting,
and traveling on board), as well as the level of
comfort and price of trips. According to the
Ministry of Transportation, the equilibrium fare
is $650 today, 71% higher than the current
fare. For this reason it is necessary to correct
the system’s inefficiencies (underutilization of
fleets, dead kilometers, etc.) and distortions
(paying operators per passenger, fare levels,
etc.), in order to reach financial equilibrium and
reduce the need for subsidies.
This means establishing
incentive schemes such as
payment for real demand and
giving operators power to decide how they will operate,
making them responsible for
the quality of service and its
associated costs. This will use
the know how of those who
know the public transport system best to optimize the system, and will reduce costs and
increase revenue by involving
operators in inducing demand
and controlling fare evasion.
Simply throwing more and more money
at the system will only cover the deficit without
correcting the system’s defects.
Conclusions
The passing of the law establishing a public
transportation subsidy for the entire country will
not improve the quality of service of Transantiago. Neither will it guarantee a reduction in
transit fares in regions, while one third of the
entire subsidy will end up benefiting the wealthiest 40% of citizens.
To overcome the need to
continue subsidizing such
inefficiency, the Ministry of
Transportation must revamp
its technical teams and seek
out expert assistance that can
assess the technical and
economic feasibility of
Transantiago and recommend
changes that must be made to
the public transport system to
enable it to deliver decent
service to the inhabitants of
Santiago at a reasonable price.
Operators must also be
competent enough to guarantee that users
have transportation at all times, and operators
that do not provide good service should be at
risk of losing their passengers, who today have
no alternative.
1
To overcome the need to continue subsidizing such inefficiency, the Ministry of Transportation must revamp its technical teams and seek out expert assistance that can assess
the technical and economic
feasibility of Transantiago and
recommend changes that must
be made to the public transport
system to enable it to deliver
decent service to the inhabitants of Santiago at a reasonable price.
Not including the Metropolitan Region, the country has
42 municipalities with more than 50,000 inhabitants,
which account for 75% of the regional population.
2 www.ine.cl
3 The 1996 survey was used because this data is not
available for 2006 and only bus and Subway costs were
included as these are the two modes currently subsidized
4 Including a permanent subsidy of US$ 210 million annually and a US$135 million annual subsidy from
2009 to 2011.
Without making these demands, the level
of service users deserve will not be achieved.
Unfortunately, the law establishing public transportation subsidies does not provide for
incentives for operators to improve the system.
Such improvements presently depend solely
on the Ministry of Transportation, whose teams
designed a defective system, and brought it
online without first ensuring the basic conditions were in place for its proper operation. And
they have not been able to solve the problems
that have arisen.
4