REGULATION AND FINANCING OF PUBLIC TRANSPORT SERVICES The rich agenda of organization, regulation and finance of passenger transport in cities can be broken into four large sets. The first group of issues is related to the demand aspects of public transport services, specifically as regards quality-price relations. Passenger travel markets in developing cities are sometimes homogeneous, consisting of low-income captives keenly interested in low price. An increase in service quality may lead to prices difficult to bear by passengers and/or an increase in subsidies straining the budget of the subsidizing authority. In other cities, in the presence of economic growth, the market is heterogeneous, with “choice” travelers owing or aspiring to own a motorcycle or a car of their own but still interested in services offered by public transport modes. “Choice” travelers tend to be interested in both quality and price. The challenge for the regulating authority is to evolve a complement of service quality, price policy and funding mechanisms so as to balance equitably the demands of these different markets, those of the larger urban community, and its budget. The second set of issues has to do with pricing and financing public transport services relative to pricing and financing urban road infrastructure. The pressure for applying fully the user-pay principle has to be applied to all modes, and to consider the externalities involved. This means that public transport fares should reflect the extent to which road infrastructure is adequately charged. Given the prevalent undercharging of motor vehicles for road use in cities and the high level of interaction among modes, financial transfers between roads and public transport services- and between modes of public transport-are potentially consistent with optimal pricing strategy. Overall, pricing and financing regimes for individual transport modes should be designed within an integrated urban transport strategy. This in turn presupposes an institutional arrangement transcending traditional modal barriers and vertical integration from local to national levels. The third set of issues involves the organization regulation of the service supply. The debates about relative roles of the public and private sector and the degree of regulation have yielded a best-practice position that regulation and delivery of passenger transport services should be kept apart, with local governments retaining only the former of these functions. On the delivery side, the preference is for a system based on a for-market competition, since public-owned monopolies lack incentives for efficient performance and unregulated, in-market competition is strongly linked to increased problems of congestion, safety, security and exclusion. As practical experiences with the implementation of these principles accumulate, the trend is to transcend the public vs. private dichotomy in favor of an inclusive public-private framework, with emphasis on detailed features of partnership agreements, especially the inclusion of feed-back mechanisms. The fourth set of issues links the subjects of price subsidies and the regulation of the service supply. The past identification between subsidized operations and a public-owned, monopoly supplier of services has been removed. In the interests of efficient service supply, transport operators should operate competitively, with purely commercial objectives, independent of whether they are public or privately owned. Any noncommercial objectives imposed on them should be compensated directly and transparently by the government institutions at whose demand these objectives are imposed. The financial transfers are regulated through contracts between municipal authorities and operators for the supply of services. The difficulties with implementing these clear principles remain, especially under remaining public ownership, and require strong oversight institutions at the urban level. Above all, in the absence of appropriate contracting or other support mechanisms, the sustainability of public transport service should be paramount, and should generally have precedence over traditional price regulation arrangements. Back to Top REGULATION AND FINANCING OF URBAN ROADS The subject of urban road pricing was among the most prominent aspects of the early policy papers, with the Bank taking a strong stand in favor of locally-based, direct charges levied on motorists. It supported the pioneering experience in Singapore and attempted to pursue it within its lending operations in 1970s, but without success. The subject was downplayed throughout 1980s but revived in 1990s through a series of well-received research papers (by Timothy Hau with strong support by late William Vickrey), which layed out the basic principles and practical approaches. This coincided with the success of road charging experiences in some Norwegian cities and with a general revival of interest in this subject. The matter has gathered new momentum after London introduced entry charges in 2002. Congestion increases private transport costs and contributes to the decline of public transport service. While these two phenomena are logically connected, in most cities they are institutionally and financially separated. In principle, vehicular users of congested urban road space should be charged a price at least equal to the short-run marginal cost of use, including congestion, road wear and tear, and environmental impacts. Charging for road infrastructure is the core of a strategy for both efficient allocation of resources and sustainable finance. Cordon pricing and tolling of specific roads is a step in the right direction, the long-term solution lies in more systematic congestion charges.This said, it is recognized that introducing these charges is quite difficult, requiring policy maturity at both city and national levels, and careful technical, administrative and political preparation. In the absence of direct charging, national fuel taxation and local parking charges are the most common tools for urban road charging. Fuel taxation should be structured concurrent with vehicle license duties to give a proxy charge for road use and its external impacts. In practice, a range of direct and indirect mechanisms is used to charge for road use. The most common of these mechanisms-the fuel tax-reflects global warming impacts well, but is a poor surrogate for either congestion or road-maintenance impact pricing. Nevertheless, if it is the best proxy there is, the fuel tax should be structured to reflect its relative contributions to urban air pollution, again in conjunction with the structuring of vehicle license duties. Parking charges should be related to an overall infrastructure pricing strategy. Although they are also a poor proxy for congestion charges, parking charges should, in any case, always cover the full opportunity-cost of land used for parking. Where parking policy is the only available proxy for congestion, pricing controls need to cover all forms of parking space (including that provided privately by employers for their employees). URBAN TRANSPORT FINANCE Given the interaction among modes, there is a strong case for treating the urban transport system as an integrated whole. Because neither congestion nor environmental impacts are currently subject to direct charges in many countries, optimizing the performance of the sector as a whole might left using revenues raised from private automobile users to fund improvements in public transport. This poses major challenges on the institutional side, cutting across traditional local and national arrangements. Challenges are even greater regarding the sources of funds, since road user charges typically go into nationally-based funds. “Cities on the Move” cites examples of unitary urban authority, such as in Singapore, where the fungibility of funds is assured through the normal budgetary process. In more complex, multi-tiered administrative systems, urban transport financial resources may be pooled within an urban transport fund administered by a strategic transport authority at the municipal or metropolitan level. Under such an organization, all local transport-user charges, including congestion charges and any allocations of local taxes or intergovernmental transfers for transport, should normally be made to the fund. While earmarking taxes has the advantage of a stable basis needed for long-range planning, the value of having an integrated urban transport fund does not depend on earmarking but on the clarity and coherence of its objectives, and the rigor and transparence of fund allocations. Recognizing the burden of investments in major roads and rapid transit systems on municipal budgets, many large cities are seeking private capital, most often through competitive tendering of concessions with various degrees of private and public participation. Experience so far has shown that private entrepreneurs are attracted by very high demand for faster movement in given corridors, and look for a realistic stance by government on the relationship between price controls and commercial profitability. Experience has also shown opportunistic development on an ad hoc basis to be damaging, and usually costly to the public purse. Essential conditions for the success of public-private partnerships in cities include the existence of an overall transport planning and policy framework, within which the partnerships can be “nested” to mutual satisfaction, based on a fair allocation of risks and responsibilities. The private sector brings funds and the know-how in construction and operations management. The public sector must set a strategy; identify infrastructure projects and describe them in some detail; and confirm the acceptability of environmental consequences, fares, and any contingent changes to the existing transport system. It must acquire the necessary land and rights-of-way, ensure development permissions, commit funding, and provide some necessary guarantees. Back to Top
TRN-3: Regulation of Taxi Markets in Developing Countries: Issues and Options
(PDF, 80KB)
Kenneth M. Gwilliam, February 2005
Taxis perform an important function in urban transport markets in both developed and developing countries. Because of the perceived vulnerability of passengers to exploitation by operators, entry to the market and fares have been tightly regulated in many industrialized countries. This has typically produced high premium values for licenses, implying some monopoly profit for operators at the expense of users. Curiously, however, total deregulation has often increased fares. This note considers the reasons for increased fares despite deregulation, the regulatory options available, and the relevant considerations in applying this experience to developing countries. The Limits of Competition in Urban Bus Services in Developing Countries. World Bank Policy Research Working Paper # 3207Antonio Estache and Andres Gomez-Lobo, February 2004
During the past three decades urban public transport policy worldwide has gone through several phases. From public ownership and monopoly provision, the eighties and nineties were characterized by a strong liberalization of the sector. This experience showed the limits of liberalization of the sector in terms of safety, prices and accountability. The paper discusses the market failures that left this claim and the regulatory options available in this emerging new role of government, illustrating how they are being used in practice in some countries. The Rail Decentralization and Modernization Program in Brazil: Lessons Learned(PDF, 50KB)Jorge Rebello, November 2003
In the 1990s, urban portions of the Brazilian national railways were transferred from the federal to state and municipal authorities under a program in which the World Bank invested more than US$1 billion to rehabilitate and modernize these networks. This move revitalized important trunk corridors in the metropolitan regions, permitted better integration with the existing bus systems and land use planning, and was expected to enhance mobility in the region, especially for low-income travelers. Fuel Prices and Taxation, 3rd Edition, May 2003
This publication provides an overview with comparative tables for over 165 countries and has special section: Fuel Taxation and State Financing. Urban Transport in ECA: World Bank Experience and StrategySlobodan Mitric, Report #25188, December 2002
Retrospective look at a decade’s worth of WB involvement with urban transport problems in ECA, and proposal for a policy-driven sector strategy for the next decade. The paper provides a common thematic basis for urban transport inputs into the making of country-specific assistance strategies, and thereafter to guide urban transport project and sector work included in the business plans agreed under these strategies. PRWP-2353. The São Mateus-Jabaquara Trolleybusway Concession in Brazil
Jorge Rebelo and Pedro Machado, May 2000
To replace a diesel bus busway operated under a management contract by the state with an electric trolley busway, São Paulo State in Brazil designed and implemented a 20-year concession to the private sector. This may be the only "busway" concession undertaken so far worldwide. According to independent user surveys, service under the concession has been satisfactory. Review of Public Transport Competition
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David Bayliss (Halcrow Fox), May 2000
One of key background papers for “Cities on the Move” it contains an exhaustive typology of regulatory options, a summary of experience from case studies, and a discussion of key design issues, including poverty implications of transport regulation. Private Participation in Public Transport in FSU
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Kenneth M. Gwilliam, Discussion Paper TWU-40, April 2000
Private buses carry the majority of passengers in Russian secondary cities and in Kyrgyzstan, and a growing proportion in most countries from the former Soviet Union. The prospects for this trend to continue hinge on the strength of the political commitment to divest the remaining public sector operators and on evolution of the regulatory regimes in the direction of fair competition and realistic fare/subsidy policies. Public Transport in the Developing World: quo vadis?
Kenneth M. Gwilliam, Working Paper 27041, April 2000
A comparative analysis of public transport problems in various parts of the world discloses key issues to be those involving jurisdiction over public transport services, regulatory institutions, ownership and competition in the market, fare and subsidy regulation, and the role of mass rapid transport systems. Innovative Solutions for Public Transport; Curitiba, Brazil
Lars Friberg, Uppsala University, Sweden, 2000
Curitiba, capital of the Brazilian state Paraná 400 km south east of São Paulo, has over the last 30 years developed a non subsidised, private owned, public transport system. Today it stands as a model recognised worldwide. Insightful, long term planning with several innovative solutions has provided the citizens with an effective system that gives priority to public instead of private transport. It has the highest user rates of all Brazilian state capitals, 75% of all weekday commuters. All this during an unprecedented city growth. Automated Ticketing Systems: The State of the Art and Case Studies
Jorge M. Rebelo, May 1999
The objective of this exercise is to learn about the state-of-the-art in automated ticketing systems, in particular, the new generation of smart cards and how they can be applied in the LAC countries. How can multimodal passes such as the "vale-transporte" Vale-Transporte, which is a federally mandated monthly pass in Brazil which employers must provide to employees whose home-to-work trip costs exceed 6% of their base salary, be transformed into smart cards? How would the operators establish revenue clearing systems? Should the smart cards be just for transport? Price and Subsidy Policies for Urban Public Transport and Water Utilities in Transition Economies Working Paper #19884
Slobodan Mitric, March 1999
The paper reviews the difficulties faced by urban water services and public transport agencies in countries of Eastern Europe, Russia and Central Asia after the collapse of the former Soviet Union. Experience under recent Bank projects, initiated to help troubled urban utilities, points at the need to consider pricing and funding issues not only from the supply side but to include the household point of view, across the full range of essential services. PRWP-1859. Revisiting the Busway Concessions Program in the São Paulo Metropolitan Region: Lessons for the Future
Jorge Rebelo and Pedro Benvenuto, December 1997
Lessons learned from an imaginative pioneering effort to give busway concessions to the private sector—which ultimately failed to materialize for the municipality but resulted in one major concession for the state. TWU-26. Road Funds, User Charges and Taxes
(PDF, 76KB)
Kenneth M. Gwilliam, Zmarak Shalizi, September 1997
This note sets out some general principles and indicators for determining when a Road Fund might be an appropriate instrument; what activities it should be responsible for, what revenue sources it should employ, and key features for its governance. Detailed design of Road Funds and associated institutions is dealt with elsewhere. TWU-27: Concessions in Transport
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L. Nicola Shaw, Kenneth M. Gwilliam, Lou Thompson, November 1996
This paper considers world wide experience with a restricted range of the spectrum of options for private participation in the supply of transport infrastructure and services. The fundamentals of the concession process considered here include prequalification requirements, performance specifications, bid evaluation methods, the treatment of public service obligations and termination arrangements. The role of government in the process is analyzed, with particular emphasis given to means of ensuring that the limited duration of the concession does not produce inefficiencies in operation or interruptions in the continuity of service or investment supply. A list of countries with transport concessions is provided (PDF, 180KB) TWU-24. Constructing a Competitive Environment in Public Road Passenger Transport.
Kenneth M. Gwilliam and Richard G. Scurfield, October 1996.
Summary - Full Document (PDF, 109KB)The paper states the argument for intervention in market processes and provides a critique of the traditional, non-competitive, public-sector monopoly franchising in urban public transport services. It argues for separation of political and operational responsibilities, and the introduction of effective competition to increase its operational efficiency. In-the-market method of provision is compared with for–the-market competition (through subcontracting, management or service franchising). The latter is put forward as the recommended practice, subject to establishing effective regulatory framework and institutions. TWU-23: Transport in the City of Tomorrow: The Transport Dialogue at Habitat II
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Kenneth M. Gwilliam, Zmarak Shalizi, October 1996
The main issues covered in the dialogue were the meaning of the concept of sustainability for urban transport systems, and the roles of urban form, technological development and public transport respectively in contributing to sustainable urban transport systems. The dialogue concluded that the essence of the problem was as cities grow bigger and richer there is an inevitable tendency for the demand for road space for vehicles to outstrip its availability. Given the impossibility of rectifying the imbalance by increasing the amount of road space sufficiently, other strategies would be necessary, including structured densification of land use, use of cleaner transport technologies, and greater use of public transport. In all of these strategic areas, establishing the appropriate policy context is critical. This required careful attention to getting the economics right, to getting the institutions right, and to a clear and realistic setting of priorities for action, including attention to life and health threatening environmental impacts, and to sustainable measures for protection of the interests of the very poor. PRWP-1546. Lessons from São Paulo's Metropolitan Busway Concessions Program
Jorge M. Rebelo and Pedro P. Benvenuto, November 1995
A pioneer project in São Paulo, Brazil (and in the world) demonstrates that private companies are ready to go deeper into public transport than they have gone before. Private implementation and operation of "trunk-line bus corridors" in São Paulo illustrates a mechanism for financing capital investments in public transport that São Paulo's state and municipal governments would otherwise have been forced to postpone because of tight budgets. Options for Bus Transport: The Overseas Experience.
John Flora, October 1995
Summary - Full Document (PDF, 64KB)
The paper surveys the policy changes seen in the organization and regulation of street bus companies worldwide. From the starting position of public sector ownership and direct provision of services, possible changes range from making public-sector company more efficient and better financed to a complete takeover by the private sector. Separation of regulatory function from operating responsibilities, fare and finance regulation, and the treatment of bus vehicles in the street traffic are singled out as key policy decisions. TWU-1: Economic Fundamentals of Road Pricing: A Diagrammatic Analysis
Timothy Hau, December, 1992
(PDF, 4KB)
This paper presents a conceptual framework for road pricing based on a rigorous diagrammatic - but non-mathematical - framework derived from first (economic) principles. It throws light on congestion pricing systems and issues surrounding short-run and long-run marginal cost pricing, scale economies and diseconomies, indivisibilities, road durability, the peak-load problem in urban transport and the financial viability of the public provision of road services.
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