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A procedure for estimating transit subsidization requirements for developing countries
Transpn Res.-A, Vol. 32, No. 8, pp. 599±606, 1998 # 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0965-8564/98 $Ðsee front matter
Pergamon PII: S0965-8564(98)00015-9
A PROCEDURE FOR ESTIMATING TRANSIT SUBSIDIZATION REQUIREMENTS FOR DEVELOPING COUNTRIES DOUGLAS O. A. OSULA*
Civil Engineering Department, Ahmadu Bello University, Zaria, Nigeria (Received 17 December 1996; in revised form 26 February 1998) AbstractÐThe paper presents a procedure that has been developed for estimating subsidization requirements for urban transit services in developing countries. The procedure is based on a subsidization policy of reducing transport expenditure burden on the average commuter, by maintaining his transport expenditureincome ratio at a reasonable level. It is designed for both regulated and deregulated transport markets. It requires, as input, historical data (previous year) on fare, productivity, and load factor for the transport service or mode concerned, the transport expenditure-income ratio distribution of the commuters, and the current level of commuter personal transport allowance. It is based on the premise that transport expenditureincome ratio is inversely related to income. The subsidization formula developed in the paper yields a level of subsidy that is commensurate with the level of control a government is able to exercise over transit operations. # 1998 Elsevier Science Ltd. All rights reserved Keywords: Subsidization, transit, estimation, developing countries 1. INTRODUCTION
The current trends in the economic climate in Nigeria (a developing country) with regard to the declining value of the national currency and the attendant high costs of vehicles, spares and consumable for their operation, mean continued decline in the ability of transit operators to provide enough supply to meet growing demand for transport. There is also bound to be continued increase in cost to the commuter as a result of the increasing cost of providing the service. The eect of these is that the transport expenditure-income ratio of the average commuter will continue to rise, to the detriment of his other commitments that also require spending money. More speci®cally, the low income earners may be forced to undertake essential journeys (work and shopping trips) only, if there has to be enough money for other essential items of expenditure. On a global scale, it has been shown that non-car owning households in developing countries spend considerably more on transport in relation to both total income and disposable income (total income less expenditure on housing, food, and other essential items of expenditure) than those in developed countries (Jacobs et al., 1979). This is invariably because the operating costs and fares for public transport in developing country cities are very high, resulting in high proportion of income being spent on transport (Jacobs et al., 1979). Furthermore, the much higher rate of population increase (in developing countries) if compared with the developed countries, coupled with a low level of car ownership, make more and more people rely on public transport every year (El-Reedy, 1982). This high public transport-captive nature of transportation and the high transport expenditure burden on the average commuter in the developing countries point to the need to evolve a subsidization estimation procedure which is not necessarily geared towards attracting private car users to public transport (i.e. to relieve or reduce trac congestion) as listed to be one of the main objectives of giving subsidy in developed countries (Sherman, 1972; Bly et al., 1980) or as a method of increasing the eciency of resource allocation (Frankena, 1973), but towards emphasising the social theme of public transport as the present poor conditions in developing countries demand. One objective of such a procedure should be to ease the travel expenditure burden on the average commuter (particularly the low income earners). *E-mail: [email protected]
599
600
D. O. A. Osula
Data on transit subsidy trends in developing countries such as Nigeria are unavailable. Data from developed countries such as Canada indicate that subsidization has been increasing and that such increase has been used to (i) prevent fares from rising rapidly as the cost of transport operations per vehicle mile; (ii) maintain and extend service at times and on routes for declining or low demand; (iii) help to eliminate higher fares on longer routes; and (iv) support fare reduction for elderly people and children (Frankena, 1973). An approach based on easing the travel expenditure burden on the average commuter such as is being proposed in this paper, apart from meeting its primary objective, is bound to satisfy many of these uses, as well as yield a subsidy level that can sustain the transport market and ensure enough supply in austere times. This paper reports the derivation and application of one such method that is proposed for use in developing countries in which transport allowances are given to workers as part of salaries, as is the case in Nigeria. 2. EXISTING SUBSIDIZATION ESTIMATION APPROACHES
There are two general criteria for subsidizing public transit, name; equity and economic eciency. Equity is viewed in terms of the ability-to-pay principle, in which users should contribute to the costs of services according to their income capacities (Cervero, 1981). The eciency criterion derives from the economist's eciency arguments such as economies of scale and external bene®ts (Else, 1992). Under this criterion, users should contribute to the cost of services in line with the bene®ts they receive. Thus, price eciency is achieved when transit users are assessed the marginal cost of transit services (Cervero, 1981). One very simple way of giving subsidy under equity is to give it purely unilaterally (by the rule of thumb) to oset all or a proportion of the dierence between service fare and service cost; the proportion oset being determined by how much a government is able to make available as subsidy at that point in time. This method, though requiring little or no mathematical rigors, may not give the desired results when the distribution of ridership weighs more to the side of low income earners than to the side of high income earners, since it has not taken the transport expenditure± income ratio of the ridership into consideration, It cannot, therefore, be said to be cost-eective in the light of developing country situations. On the other hand, transit subsidy estimation under the eciency criterion is usually done via the bene®t±cost ratio method of the conventional cost±bene®t analysis. Most of the objectives here, such as attracting patrons from private transport mode to public transport mode, do not seem cost-eective enough for developing country settings, which are known to be laden with low income earners or more rightly, poor people. Moreover, the bene®t-cost ratio method has also been proved to have inherent contradictions and to have restrictive limitations for the measurement of transit bene®t because it assumes that the bene®ts from a given mode of transportation are the cost savings from other modes due to the availability of the given mode (Becker and Talley, 1979). The shortcoming of this method has been stated more succinctly as the valuation of cost and bene®ts not being re¯ected or only partially re¯ected in market prices (Else, 1992). This, according to Else, has meant arbitrariness about the values of such things as time and accident costs. One that had been proposed by Becker and Talley to take care of the de®ciencies of the costbene®t approach is the demand approach, in which a consumer surplus algorithm for multiplicative and linear interzonal demand functions is evaluated with input data as fare, fare elasticity, number of trips, and revenue. Apart from the rigors that attend the eciency-based subsidy estimation methods and the uncertainty about the true value of transit bene®ts, they do not consider the paying capacities of the transit patrons. They are thus less favorable to the low income. Available literature (see, for example, Jamieson Mackay and Partners, 1981; Maunder and Banjo, 1988; Odagwe, 1989; Shimazaki and Rahman, 1995) show that many transit services in developing country cities charge ¯at or ®xed fares. This has been so for a long time (at least in Nigeria), and is very likely to remain so for a long time to come. According to Cervero (1981), not only do simple pricing systems (i.e. ¯at fare systems) possibly bene®t the rich, some argue, but potentially deprive needy persons the opportunity to even make a trip. Under these pricing systems also, low income earners are commonly thought to travel shorter distances and more often
A procedure for estimating transit subsidization requirements for developing countries
601
during o±peak periods (Rock, 1976). Thus the need for a subsidization estimation approach that favors the low income earners is what is desirable in developing country settings. 3. THE COMMUTER TRAVEL EXPENDITURE-INCOME RATIO METHOD
This approach, which belongs to the equity family, has been fashioned after the relatively new `travel budget' approach to travel demand modelling, the Universal Mechanism Of Travel (UMOT) due to Zahavi (1979 1982). This travel demand approach seems to be of promise to the developing country settings because it is based on the premise that the ability of an individual to avail himself of transport service depends on his ability to spend time and/or money on the service. This approach, which uses the current level of personal transport allowance given to workers and the productivity of the transport service, entails estimating an average transport expenditure± income ratio, R, `for the working class trip makers that use the transport service, and comparing with a reasonable transport expenditure±income ratio, RR , to determine whether or not subsidy is required in the ®rst instance. If subsidy is required, further calculations are carried out to determine the level required. The idea of using an average transport expenditure±income ratio is to evolve a subsidization level that gives greater bene®ts to the low income earners than to high income earners, because of the inverse relationship that exists between travel money expenditure-income ratio and income (Fig. 1). Data in Tanner (1981) have proved this inverse relationship to be so for developed countries, while data in works like those of Ojumu (1975), Heraty (1980), Eastman and Pickering (1981), Jacobs et al. (1981), and Maunder (1984) have proved it to be more distinctively so for developing countries especially for public transport (Fouracre and Maunder, 1987). Data from a very recent investigation on travel money expenditure in Nigeria (Osula and Adebisi, 1997) con®rms this negative correlation between travel expenditure±income ratio and income, for the present day. Using the function that relates transport expenditure±income ratio to commuter income, Ri f Ii (see Fig. 1), R can be obtained by dividing the area under the curve by the income range; n
f Ii dI R i1 In ÿ Il
1
where i is the ith income group, Ii is the average income of the ith income group, and n the total number of income groups. R is denoted by the horizontal line in Fig. 1. The policy advocated in this paper is to reduce or maintain the ratio at a reasonable level, RR . A value that is recommended by the present author for RR is the average transport allowance±gross income ratio. This
Fig. 1. Simpli®ed relationship between travel expenditure±income ratio and income.
602
D. O. A. Osula
is to say that transport subsidy is not required in the ®rst instance if RR is greater than or equal to R. Where subsidy seems required (i.e. RR less than R), the estimation of the required subsidy starts by ®rst estimating the fare, FR , that corresponds to RR . This fare may be called the average fare. FR can be estimated in several ways. One simple way is to equate the transport service revenue (based on this average fare) realised from all daily trips made by the working class commuters to the total daily transport expenditure (based on the reasonable transport expenditure-income ratio) on all trips incurred by the same class of commuters. This is: n FR TW
f Ii dI
2a
i1
For the simpli®ed linear relationship shown in Fig. 1, this equation may be written as; FR TW RR
n X Ni Ii
2b
i1
where N is the number of commuters in income group i and TW the total daily units of transport service (expressed as passenger-km) consumed by worker commuters. The estimation of FR is being based on the daily trips made by working class commuters (i.e. regular oce or site workers with regular incomes) alone because it is for this group of commuters that RR can readily be obtained. Where only average values of data are available, e.g. average worker daily income I, eqn (2b) may be expressed as; FR TW RR N I
2c
where N is the total number of worker commuters using the transport service, i.e. the summation of Ni over the interval i 1 to i n. Essentially, what is sought in this approach is to establish a total subsidy requirement as the excess of the actual fare, FA , over this average fare, FR , or an estimated pro®t fare, FP (based on a reasonable pro®t margin). In a deregulated transport market (free market) or poorly regulated market, the actual fare is ®xed by the operators, while in a regulated market, it is ®xed by government as pro®t fare. It is expected that a regulated market will attract lower subsidy than a deregulated one. Hence, a hidden objective of this approach is to ensure a subsidization level that is commensurate with a government's ability to control and regulate public transport operations to the bene®t of commuters without, however, jeopardizing pro®ts to the operators. Transport market regulation has been described as being in its infancy in developing countries (Department of Transport, 1985). Apart from being in its infancy, where attempts have been made at regulating public transport operations in developing countries, the exercises have been poor. From a review of intermediate public transport operation in developing countries, Fouracre (1977) found out that free enterprise is the rule, rather than the exception in the organisation of public transport, control being usually self±imposed by the operators while the municipality (government control agent) tends to play a minimal role. In Kuala Lumpur, Malaysia, minibuses were said to operate with almost complete disregard for the provisions of their franchise (Jamieson Mackay and Partners, 1981). According to Banjo (1986), many private public transport operators in Lagos, Nigeria, in reality operate according to demand, though licensed to operate de®ned routes, with the result that many de®ned routes are not operated whilst others not de®ned are operated where sucient demand emerges. This practice was earlier reported for Kingston, Jamaica, by Heraty (1980). A very recent literature on paratransit in developing countries of Asia (Shimazaki and Rahman, 1995) also speaks of non-existence or poor enforcement of some controls in regulation. The desirability of the objective of the subsidization estimation approach developed in this paper is, therefore, apparent since it promotes regulation. Subsization requirement is expected to be lower in a regulated market. For the average commuter that is expected to pay an average fare of FR , making him pay any fare above this will amount to increasing his transport expenditure burden. However, lowering the
A procedure for estimating transit subsidization requirements for developing countries
603
fare below this average fare reduces his transport expenditure burden, which is what subsidy should be for. It is to be expected that there will be a minimum and a maximum level of subsidy, Smin and Smax, respectively, between which the actual subsidy, S, will lie. In order to estimate Smin and Smax, FR , is compared with FA , and FP , for a deregulated market, and with only FP , for a regulated market. The presuppositions are that (i) in a deregulated or poorly regulated market, the actual fare charged is higher than the fare at reasonable pro®t (i.e. FA > FP ), because of the desire of operators to make very high pro®ts, and (ii) in a regulated market, the actual fare equals the pro®t fare (i.e. FA FP ), because fare is ®xed by government. With these in mind, Smin and Smax for dierent conditions are as follows; Deregulated market: for FP < FR < FA Smin FA ÿ FR
3a
Smax FA ÿ FP
3b
Smin FA ÿ FP
3c
Smax FA ÿ FR
3d
and for FR < FP < FA
Regulated market: eqns (3c) and (3d) are operative since the condition for subsidy is FR < FA FP . It is to be expected that Smin can assume a value equal to zero in eqn (3c) if FA FP as is always the case for regulated market, and occasionally for deregulated market. It is to be noted also that subsidy is not required when FR > FA > FP and FP < FR < FA for deregulated market. Similarly, the condition of no subsidy in a regulated market is FR < FP . As earlier stated, the actual subsidy, S, required will assume any value between Smin and Smax, both inclusive. One way that appears reasonable to the present author for choosing a value for S is to assume a linear relationship between subsidy and a measure of the relative use or patronage of the transport service by the commutes and the extent of the city coverage by the transport service. This is in recognition of the suggestion by Pucher et al. (1983) that subsidies should be related explicitly to output, instead of just giving subsidy to cover cost, so that there will be incentive to use subsidy eciently. A parameter which adequately represents these measures is the `load factor', L. It is measured as the ratio of passenger-km per day to the product of the vehicle rated seating capacity and the total distance travelled by the transport service. On this basis (see Fig. 2), the actual subsidy is obtained as; S Smin Smax ÿ Smin L ÿ 0:5=0:5
4
The maximum value of L that should be used in eqn (4) is 1.0. A value higher than 1.0 does not necessarily indicate that subsidy is required, but that the demand for transport is in excess of supply. This is to say that while L may exceed 1.0 in reality, subsidy may not be required unless it is proved ®rst and foremost that R is greater than RR. The 0.5 that appears in the equation is the minimum load factor (minimum level of patronage that is matched with the extent of city coverage or service rendered by the transport service) that is deemed reasonable by the present author to justify greater than the minimum subsidy. Equation (4) shows that S Smax when L 1, and S Smin when L 0:5. Finally, the subsidised fare, FS, for both regulated and deregulated markets is obtained as; FS FA ÿ S
5
The amount of money to be given as subsidy is the product of S and the appropriate daily, monthly, or annual productivity measure.
604
D. O. A. Osula
Dimensional consistency between the left hand and right hand sides of eqn (2a), (2b), or (2c) is ensured if the fare component, FR, is derived with respect to the measure of productivity, TW, used in assessing the transport service. This consistency is maintained throughout the calculations since other fare measures as well as the subsidy measures will automatically be in the same unit as the F R. 4. EXAMPLE OF THE USE OF THE APPROACH
Data obtained and derived from actual studies (Odagwe, 1989; Osula, 1991), supplemented, as deemed appropriate, by will now be used to demonstrate the use of this approach to estimate subsidy for a minibus service for a deregulated transport market in Nigeria. This seems to be the commonest case in developing countries. Number of minibuses in operation daily Daily units of transport service incurred by workers, TW Number of workers patronising the service Daily work trip rate Load factor, L Daily cost of operation per minibus Daily passenger-trips by the transport service Pro®t fare per passenger-trip, FP Actual fare per passenger-trip, FA
=350 =79,272 =14,413 =2.24 =0.83 =N114.26 =161,424 =N0.33 =N0.50
[FP is based on a normal pro®t of 30% return on investment, as was used in a previous work by Jamieson Mackay and Partners (1981).] Assume that the average transport expenditure±income ratio is R 0:12, and that the ratio of average transport allowance to gross income is RR 0:08, i.e. 8%. Subsidy, therefore, seems required since R is greater than RR. Assume also that the average monthly gross income of a working class commuter is N560.00 (i.e. I N18:67 per day). Then substituting values in eqn (2c), FR works out as; FR N 0:12 14413 18:67=79272 N0:41per passenger ÿ trip: This is the fare that the average commuter is expected to pay for a trip. It is greater than the pro®t fare, FP, but less than the actual fare, FA. Hence, subsidy is required. Using eqns (3a) and (3b), Smin and Smax work out to be N0.09 per passenger-trip and N0.17 per passenger-trip, respectively. Using eqn (4), the actual subsidy required is S N0:14 per passenger-trip. Using eqn (5), the subsidised fare is FS N0:36 per passenger-trip.
Fig. 2. Linear relationship between subsidization level and load factor.
A procedure for estimating transit subsidization requirements for developing countries
605
The total amount of money to be given daily as subsidy to the minibus transport operators amounts to about N22,600.00 (i.e. N(0.14161424). This works out as N8.3m per annum for 365 days of operation. [The number of days to be used depends on the situation on the ground, and hence will dier from place to place. For example, Jamieson Mackay and Partners (1981) used 300 days in the estimation of minibus users' and operators' bene®ts for Kuala Lumpur.] For the 350 minibuses in operation daily, the subsidy is an average of N65.00 per vehicle per day. This reduces daily cost of operation by 57%. The proportion of actual fare given as subsidy is 28%. It is to be noted that had the market been a regulated one (i.e. with lower fare ®xed by the government), the subsidy would have been lower. Hence, the level of subsidy given by the subsidization formula is commensurate with the level of control exercised by a government over public transport operations. 5. CONCLUSION
A case has been made herein for an approach for estimating transit subsidization requirements for developing country cities. The approach has been fashioned after the `travel budget' approach to travel demand modelling. The objective has been to evolve a formula than can be considered to be cost-eective in the light of developing county situations. The formula is simpler and more direct to use than previous ones that have been based on situations or conditions in developed countries. It uses as input the productivity and load factor of the transit service, and the transport expenditure±income ratio of workers and their level of personal transport allowance given as part of their incomes. These data can be obtained in a national transportation survey carried out annually, not only for subsidization estimation purposes, but also as a reappraisal study. The procedure can be described as one that yields an across-the-board subsidy, having been designed for the average trip maker. It can, therefore, still be re®ned to cater speci®cally for children and students, the aged, and the handicapped. It is suitable for use in countries in which personal transport allowances are given to workers in addition to their basic salaries, and in a situation where the travel expenditure±income ratio bears an inverse relationship with income. It has as a hidden objective the desire to ensure that subsidy is given to the extent that a government is able to control and regulate transit operations. AcknowledgementsÐThe author wishes to acknowledge the eorts of Mr A. O. Odagwe, whose Higher National Diploma project, carried out under the supervision of the author, provided data for deriving some of the data used in this work.
REFERENCES Banjo, G. A. (1986) Public transport services in Lagos: existing situation and future prospects. Proceedings of Planning Transport Research and Computation, 14th Summer Annual Meeting, University of Sussex, U.K, pp. 147±159. Becker, A. J. and Talley, W. K. (1979) Alternative methodologies of measuring bene®ts. Transportation Research Record 735, 15±17. Bly, P. H., Webster, F. V. and Pounds, S. (1980) Subsidization of urban transport. Department of Transport, Transport and Road Research Laboratory Supplementary Report 541. Transport and Road Research Laboratory, Crowthorne, U.K. Cervero, R. (1981) Eciency and equity impacts of current transit fare policies. Transportation Research Record 799, 7±15. Department of Transport (1985) Bus deregulationÐtwo diering views. J. Inst. of Highways and Transportation 32(1), 25. Eastman, C. R. and Pickering, D. (1981) Transport problems of the urban poor in Kuala Lumpur. Department of Transport, Transport and Road Research Laboratory Supplementary Report 683. Transport and Road Research Laboratory, Crowthorne, U.K. El-Reedy, T. Y. (1982) Application of bus allocation procedure in Cairo. J. Inst. of Highway Engineers 25(5), 16±22. Else, P. K. (1992) Criteria for local transport subsidies. Transport Reviews 12(4), 291±309. Fouracre, P. R. (1977) Intermediate public transport in developing countries. Department of Transport, Transport and Road Research Laboratory Report 772, Crowthorne, U.K. Fouracre, P. R. and Maunder, D. A. C. (1987) Travel demand characteristics in three medium sized Indian cities. Department of Transport, Transport and Road Research Laboratory Research Report 121. Transport and Road Research Laboratory, Crowthorne, U.K. Frankena, M. (1973) Income distribution eect of urban transit subsidies. J. Transport Economics and Policy VII(3), 215± 230. Heraty, M. J. (1980) Public transport in Kingston, Jamaica and its relation to low income households. Department of Transport, Transport and Road Research Laboratory Supplementary Report 546. Transport and Road Research Laboratory, Crowthorne, U.K. Jacobs, G. D., Maunder, D. A. C. and Fouracre, P. R. (1979) A comparison of bus operation in cities of developed and developing countries. Trac Engineering and Control 20(6), 306±310.
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Jacobs, G. D., Maunder, D. A. C. and Fouracre, P. R. (1981) Transport problems of the urban poor in developing countries. In Transport Research for Social and Economic Progress. Proceedings of World Conference on Transport Research, ed. J. S. Yerrel, London, pp. 1644±1655. Jamieson Mackay and Partners (1981) The minibuses and the public transport system of Kuala Lumpur. Department of Transport, Transport and Road Research Laboratory Supplementary Report 687. Transport and Road Research Laboratory, Crowthorne, U.K. Maunder, D. A. C. (1984) Trip rates and travel patterns in Delhi, India. Department of Transport, Transport and Road Research Laboratory Research Report 1. Transport and Road Research Laboratory, Crowthorne, U.K. Maunder, D. A. C. and Banjo, G. A. (1988) Urban public transport as a function of city size: the case of Nigeria. Proceedings of 4th Conference on Development and Planning of the Urban Transport. CODATU IV, Jakarta, Indonesia, pp. 103±111. Odagwe, A. O. (1989) Public transportation by minibuses in Benin City. Higher National Diploma Project Report, Department of Civil Engineering, Auchi Polytechnic, Auchi, Nigeria. Ojumu, J. O. (1975) A study of the journey to work of selected low income workers in Lagos. M.Sc. thesis, Department of Urban and Regional Planning, Ahmadu Bello University, Zaria, Nigeria. Osula, D. O. A. (1991) Development of trip generation model for land uses in Nigeria. J. Institute of Transportation Engineers 61(1), 28±31. Osula, D. O. A. and Adebisi, O. (1998) The eects of October 1994 fuel price increase in Nigeria on travel expenditures ASCE, submitted for publication. Pucher, J., Markstedt, A. and Hirschman, I. (1983) Impact of subsidies on the costs of urban public transport. J. Transport Economics and Policy XVIII(2), 155±176. Rock, S. (1976) Redistributive eects of public transit subsidies: framework and case study. Transportation Research Record 589, 1±7. Sherman, R. (1972) Subsidies to relieve urban trac congestion. J. Transport Economics and Policy VI(1), 22±31. Shimazaki, T. and Rahman, M. D. (1995) Operational characteristics of paratransit in developing countries of Asia. Transportation Research Record 1503, 49±56. Tanner, J. C. (1981) Expenditure of time and money on travel. Transportation Research 15A, 25±38. Zahavi, Y. (1979) The UMOT Project. Report No. DOT-RSPA-DPB-20-79-3. U.S. Department of Transportation, Research and Special Programs Administration, Washington, DC, and Federal Republic of Germany Ministry of Transport, Bonn. Zahavi, Y. (1982) The UMOT Travel Model II. Report No. DOT-RSPA-DMA-50-82-11, Mobility Systems Inc., Bethesda, M.D.
Pergamon PII: S0965-8564(98)00015-9
A PROCEDURE FOR ESTIMATING TRANSIT SUBSIDIZATION REQUIREMENTS FOR DEVELOPING COUNTRIES DOUGLAS O. A. OSULA*
Civil Engineering Department, Ahmadu Bello University, Zaria, Nigeria (Received 17 December 1996; in revised form 26 February 1998) AbstractÐThe paper presents a procedure that has been developed for estimating subsidization requirements for urban transit services in developing countries. The procedure is based on a subsidization policy of reducing transport expenditure burden on the average commuter, by maintaining his transport expenditureincome ratio at a reasonable level. It is designed for both regulated and deregulated transport markets. It requires, as input, historical data (previous year) on fare, productivity, and load factor for the transport service or mode concerned, the transport expenditure-income ratio distribution of the commuters, and the current level of commuter personal transport allowance. It is based on the premise that transport expenditureincome ratio is inversely related to income. The subsidization formula developed in the paper yields a level of subsidy that is commensurate with the level of control a government is able to exercise over transit operations. # 1998 Elsevier Science Ltd. All rights reserved Keywords: Subsidization, transit, estimation, developing countries 1. INTRODUCTION
The current trends in the economic climate in Nigeria (a developing country) with regard to the declining value of the national currency and the attendant high costs of vehicles, spares and consumable for their operation, mean continued decline in the ability of transit operators to provide enough supply to meet growing demand for transport. There is also bound to be continued increase in cost to the commuter as a result of the increasing cost of providing the service. The eect of these is that the transport expenditure-income ratio of the average commuter will continue to rise, to the detriment of his other commitments that also require spending money. More speci®cally, the low income earners may be forced to undertake essential journeys (work and shopping trips) only, if there has to be enough money for other essential items of expenditure. On a global scale, it has been shown that non-car owning households in developing countries spend considerably more on transport in relation to both total income and disposable income (total income less expenditure on housing, food, and other essential items of expenditure) than those in developed countries (Jacobs et al., 1979). This is invariably because the operating costs and fares for public transport in developing country cities are very high, resulting in high proportion of income being spent on transport (Jacobs et al., 1979). Furthermore, the much higher rate of population increase (in developing countries) if compared with the developed countries, coupled with a low level of car ownership, make more and more people rely on public transport every year (El-Reedy, 1982). This high public transport-captive nature of transportation and the high transport expenditure burden on the average commuter in the developing countries point to the need to evolve a subsidization estimation procedure which is not necessarily geared towards attracting private car users to public transport (i.e. to relieve or reduce trac congestion) as listed to be one of the main objectives of giving subsidy in developed countries (Sherman, 1972; Bly et al., 1980) or as a method of increasing the eciency of resource allocation (Frankena, 1973), but towards emphasising the social theme of public transport as the present poor conditions in developing countries demand. One objective of such a procedure should be to ease the travel expenditure burden on the average commuter (particularly the low income earners). *E-mail: [email protected]
599
600
D. O. A. Osula
Data on transit subsidy trends in developing countries such as Nigeria are unavailable. Data from developed countries such as Canada indicate that subsidization has been increasing and that such increase has been used to (i) prevent fares from rising rapidly as the cost of transport operations per vehicle mile; (ii) maintain and extend service at times and on routes for declining or low demand; (iii) help to eliminate higher fares on longer routes; and (iv) support fare reduction for elderly people and children (Frankena, 1973). An approach based on easing the travel expenditure burden on the average commuter such as is being proposed in this paper, apart from meeting its primary objective, is bound to satisfy many of these uses, as well as yield a subsidy level that can sustain the transport market and ensure enough supply in austere times. This paper reports the derivation and application of one such method that is proposed for use in developing countries in which transport allowances are given to workers as part of salaries, as is the case in Nigeria. 2. EXISTING SUBSIDIZATION ESTIMATION APPROACHES
There are two general criteria for subsidizing public transit, name; equity and economic eciency. Equity is viewed in terms of the ability-to-pay principle, in which users should contribute to the costs of services according to their income capacities (Cervero, 1981). The eciency criterion derives from the economist's eciency arguments such as economies of scale and external bene®ts (Else, 1992). Under this criterion, users should contribute to the cost of services in line with the bene®ts they receive. Thus, price eciency is achieved when transit users are assessed the marginal cost of transit services (Cervero, 1981). One very simple way of giving subsidy under equity is to give it purely unilaterally (by the rule of thumb) to oset all or a proportion of the dierence between service fare and service cost; the proportion oset being determined by how much a government is able to make available as subsidy at that point in time. This method, though requiring little or no mathematical rigors, may not give the desired results when the distribution of ridership weighs more to the side of low income earners than to the side of high income earners, since it has not taken the transport expenditure± income ratio of the ridership into consideration, It cannot, therefore, be said to be cost-eective in the light of developing country situations. On the other hand, transit subsidy estimation under the eciency criterion is usually done via the bene®t±cost ratio method of the conventional cost±bene®t analysis. Most of the objectives here, such as attracting patrons from private transport mode to public transport mode, do not seem cost-eective enough for developing country settings, which are known to be laden with low income earners or more rightly, poor people. Moreover, the bene®t-cost ratio method has also been proved to have inherent contradictions and to have restrictive limitations for the measurement of transit bene®t because it assumes that the bene®ts from a given mode of transportation are the cost savings from other modes due to the availability of the given mode (Becker and Talley, 1979). The shortcoming of this method has been stated more succinctly as the valuation of cost and bene®ts not being re¯ected or only partially re¯ected in market prices (Else, 1992). This, according to Else, has meant arbitrariness about the values of such things as time and accident costs. One that had been proposed by Becker and Talley to take care of the de®ciencies of the costbene®t approach is the demand approach, in which a consumer surplus algorithm for multiplicative and linear interzonal demand functions is evaluated with input data as fare, fare elasticity, number of trips, and revenue. Apart from the rigors that attend the eciency-based subsidy estimation methods and the uncertainty about the true value of transit bene®ts, they do not consider the paying capacities of the transit patrons. They are thus less favorable to the low income. Available literature (see, for example, Jamieson Mackay and Partners, 1981; Maunder and Banjo, 1988; Odagwe, 1989; Shimazaki and Rahman, 1995) show that many transit services in developing country cities charge ¯at or ®xed fares. This has been so for a long time (at least in Nigeria), and is very likely to remain so for a long time to come. According to Cervero (1981), not only do simple pricing systems (i.e. ¯at fare systems) possibly bene®t the rich, some argue, but potentially deprive needy persons the opportunity to even make a trip. Under these pricing systems also, low income earners are commonly thought to travel shorter distances and more often
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during o±peak periods (Rock, 1976). Thus the need for a subsidization estimation approach that favors the low income earners is what is desirable in developing country settings. 3. THE COMMUTER TRAVEL EXPENDITURE-INCOME RATIO METHOD
This approach, which belongs to the equity family, has been fashioned after the relatively new `travel budget' approach to travel demand modelling, the Universal Mechanism Of Travel (UMOT) due to Zahavi (1979 1982). This travel demand approach seems to be of promise to the developing country settings because it is based on the premise that the ability of an individual to avail himself of transport service depends on his ability to spend time and/or money on the service. This approach, which uses the current level of personal transport allowance given to workers and the productivity of the transport service, entails estimating an average transport expenditure± income ratio, R, `for the working class trip makers that use the transport service, and comparing with a reasonable transport expenditure±income ratio, RR , to determine whether or not subsidy is required in the ®rst instance. If subsidy is required, further calculations are carried out to determine the level required. The idea of using an average transport expenditure±income ratio is to evolve a subsidization level that gives greater bene®ts to the low income earners than to high income earners, because of the inverse relationship that exists between travel money expenditure-income ratio and income (Fig. 1). Data in Tanner (1981) have proved this inverse relationship to be so for developed countries, while data in works like those of Ojumu (1975), Heraty (1980), Eastman and Pickering (1981), Jacobs et al. (1981), and Maunder (1984) have proved it to be more distinctively so for developing countries especially for public transport (Fouracre and Maunder, 1987). Data from a very recent investigation on travel money expenditure in Nigeria (Osula and Adebisi, 1997) con®rms this negative correlation between travel expenditure±income ratio and income, for the present day. Using the function that relates transport expenditure±income ratio to commuter income, Ri f Ii (see Fig. 1), R can be obtained by dividing the area under the curve by the income range; n
f Ii dI R i1 In ÿ Il
1
where i is the ith income group, Ii is the average income of the ith income group, and n the total number of income groups. R is denoted by the horizontal line in Fig. 1. The policy advocated in this paper is to reduce or maintain the ratio at a reasonable level, RR . A value that is recommended by the present author for RR is the average transport allowance±gross income ratio. This
Fig. 1. Simpli®ed relationship between travel expenditure±income ratio and income.
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is to say that transport subsidy is not required in the ®rst instance if RR is greater than or equal to R. Where subsidy seems required (i.e. RR less than R), the estimation of the required subsidy starts by ®rst estimating the fare, FR , that corresponds to RR . This fare may be called the average fare. FR can be estimated in several ways. One simple way is to equate the transport service revenue (based on this average fare) realised from all daily trips made by the working class commuters to the total daily transport expenditure (based on the reasonable transport expenditure-income ratio) on all trips incurred by the same class of commuters. This is: n FR TW
f Ii dI
2a
i1
For the simpli®ed linear relationship shown in Fig. 1, this equation may be written as; FR TW RR
n X Ni Ii
2b
i1
where N is the number of commuters in income group i and TW the total daily units of transport service (expressed as passenger-km) consumed by worker commuters. The estimation of FR is being based on the daily trips made by working class commuters (i.e. regular oce or site workers with regular incomes) alone because it is for this group of commuters that RR can readily be obtained. Where only average values of data are available, e.g. average worker daily income I, eqn (2b) may be expressed as; FR TW RR N I
2c
where N is the total number of worker commuters using the transport service, i.e. the summation of Ni over the interval i 1 to i n. Essentially, what is sought in this approach is to establish a total subsidy requirement as the excess of the actual fare, FA , over this average fare, FR , or an estimated pro®t fare, FP (based on a reasonable pro®t margin). In a deregulated transport market (free market) or poorly regulated market, the actual fare is ®xed by the operators, while in a regulated market, it is ®xed by government as pro®t fare. It is expected that a regulated market will attract lower subsidy than a deregulated one. Hence, a hidden objective of this approach is to ensure a subsidization level that is commensurate with a government's ability to control and regulate public transport operations to the bene®t of commuters without, however, jeopardizing pro®ts to the operators. Transport market regulation has been described as being in its infancy in developing countries (Department of Transport, 1985). Apart from being in its infancy, where attempts have been made at regulating public transport operations in developing countries, the exercises have been poor. From a review of intermediate public transport operation in developing countries, Fouracre (1977) found out that free enterprise is the rule, rather than the exception in the organisation of public transport, control being usually self±imposed by the operators while the municipality (government control agent) tends to play a minimal role. In Kuala Lumpur, Malaysia, minibuses were said to operate with almost complete disregard for the provisions of their franchise (Jamieson Mackay and Partners, 1981). According to Banjo (1986), many private public transport operators in Lagos, Nigeria, in reality operate according to demand, though licensed to operate de®ned routes, with the result that many de®ned routes are not operated whilst others not de®ned are operated where sucient demand emerges. This practice was earlier reported for Kingston, Jamaica, by Heraty (1980). A very recent literature on paratransit in developing countries of Asia (Shimazaki and Rahman, 1995) also speaks of non-existence or poor enforcement of some controls in regulation. The desirability of the objective of the subsidization estimation approach developed in this paper is, therefore, apparent since it promotes regulation. Subsization requirement is expected to be lower in a regulated market. For the average commuter that is expected to pay an average fare of FR , making him pay any fare above this will amount to increasing his transport expenditure burden. However, lowering the
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fare below this average fare reduces his transport expenditure burden, which is what subsidy should be for. It is to be expected that there will be a minimum and a maximum level of subsidy, Smin and Smax, respectively, between which the actual subsidy, S, will lie. In order to estimate Smin and Smax, FR , is compared with FA , and FP , for a deregulated market, and with only FP , for a regulated market. The presuppositions are that (i) in a deregulated or poorly regulated market, the actual fare charged is higher than the fare at reasonable pro®t (i.e. FA > FP ), because of the desire of operators to make very high pro®ts, and (ii) in a regulated market, the actual fare equals the pro®t fare (i.e. FA FP ), because fare is ®xed by government. With these in mind, Smin and Smax for dierent conditions are as follows; Deregulated market: for FP < FR < FA Smin FA ÿ FR
3a
Smax FA ÿ FP
3b
Smin FA ÿ FP
3c
Smax FA ÿ FR
3d
and for FR < FP < FA
Regulated market: eqns (3c) and (3d) are operative since the condition for subsidy is FR < FA FP . It is to be expected that Smin can assume a value equal to zero in eqn (3c) if FA FP as is always the case for regulated market, and occasionally for deregulated market. It is to be noted also that subsidy is not required when FR > FA > FP and FP < FR < FA for deregulated market. Similarly, the condition of no subsidy in a regulated market is FR < FP . As earlier stated, the actual subsidy, S, required will assume any value between Smin and Smax, both inclusive. One way that appears reasonable to the present author for choosing a value for S is to assume a linear relationship between subsidy and a measure of the relative use or patronage of the transport service by the commutes and the extent of the city coverage by the transport service. This is in recognition of the suggestion by Pucher et al. (1983) that subsidies should be related explicitly to output, instead of just giving subsidy to cover cost, so that there will be incentive to use subsidy eciently. A parameter which adequately represents these measures is the `load factor', L. It is measured as the ratio of passenger-km per day to the product of the vehicle rated seating capacity and the total distance travelled by the transport service. On this basis (see Fig. 2), the actual subsidy is obtained as; S Smin Smax ÿ Smin L ÿ 0:5=0:5
4
The maximum value of L that should be used in eqn (4) is 1.0. A value higher than 1.0 does not necessarily indicate that subsidy is required, but that the demand for transport is in excess of supply. This is to say that while L may exceed 1.0 in reality, subsidy may not be required unless it is proved ®rst and foremost that R is greater than RR. The 0.5 that appears in the equation is the minimum load factor (minimum level of patronage that is matched with the extent of city coverage or service rendered by the transport service) that is deemed reasonable by the present author to justify greater than the minimum subsidy. Equation (4) shows that S Smax when L 1, and S Smin when L 0:5. Finally, the subsidised fare, FS, for both regulated and deregulated markets is obtained as; FS FA ÿ S
5
The amount of money to be given as subsidy is the product of S and the appropriate daily, monthly, or annual productivity measure.
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Dimensional consistency between the left hand and right hand sides of eqn (2a), (2b), or (2c) is ensured if the fare component, FR, is derived with respect to the measure of productivity, TW, used in assessing the transport service. This consistency is maintained throughout the calculations since other fare measures as well as the subsidy measures will automatically be in the same unit as the F R. 4. EXAMPLE OF THE USE OF THE APPROACH
Data obtained and derived from actual studies (Odagwe, 1989; Osula, 1991), supplemented, as deemed appropriate, by will now be used to demonstrate the use of this approach to estimate subsidy for a minibus service for a deregulated transport market in Nigeria. This seems to be the commonest case in developing countries. Number of minibuses in operation daily Daily units of transport service incurred by workers, TW Number of workers patronising the service Daily work trip rate Load factor, L Daily cost of operation per minibus Daily passenger-trips by the transport service Pro®t fare per passenger-trip, FP Actual fare per passenger-trip, FA
=350 =79,272 =14,413 =2.24 =0.83 =N114.26 =161,424 =N0.33 =N0.50
[FP is based on a normal pro®t of 30% return on investment, as was used in a previous work by Jamieson Mackay and Partners (1981).] Assume that the average transport expenditure±income ratio is R 0:12, and that the ratio of average transport allowance to gross income is RR 0:08, i.e. 8%. Subsidy, therefore, seems required since R is greater than RR. Assume also that the average monthly gross income of a working class commuter is N560.00 (i.e. I N18:67 per day). Then substituting values in eqn (2c), FR works out as; FR N 0:12 14413 18:67=79272 N0:41per passenger ÿ trip: This is the fare that the average commuter is expected to pay for a trip. It is greater than the pro®t fare, FP, but less than the actual fare, FA. Hence, subsidy is required. Using eqns (3a) and (3b), Smin and Smax work out to be N0.09 per passenger-trip and N0.17 per passenger-trip, respectively. Using eqn (4), the actual subsidy required is S N0:14 per passenger-trip. Using eqn (5), the subsidised fare is FS N0:36 per passenger-trip.
Fig. 2. Linear relationship between subsidization level and load factor.
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The total amount of money to be given daily as subsidy to the minibus transport operators amounts to about N22,600.00 (i.e. N(0.14161424). This works out as N8.3m per annum for 365 days of operation. [The number of days to be used depends on the situation on the ground, and hence will dier from place to place. For example, Jamieson Mackay and Partners (1981) used 300 days in the estimation of minibus users' and operators' bene®ts for Kuala Lumpur.] For the 350 minibuses in operation daily, the subsidy is an average of N65.00 per vehicle per day. This reduces daily cost of operation by 57%. The proportion of actual fare given as subsidy is 28%. It is to be noted that had the market been a regulated one (i.e. with lower fare ®xed by the government), the subsidy would have been lower. Hence, the level of subsidy given by the subsidization formula is commensurate with the level of control exercised by a government over public transport operations. 5. CONCLUSION
A case has been made herein for an approach for estimating transit subsidization requirements for developing country cities. The approach has been fashioned after the `travel budget' approach to travel demand modelling. The objective has been to evolve a formula than can be considered to be cost-eective in the light of developing county situations. The formula is simpler and more direct to use than previous ones that have been based on situations or conditions in developed countries. It uses as input the productivity and load factor of the transit service, and the transport expenditure±income ratio of workers and their level of personal transport allowance given as part of their incomes. These data can be obtained in a national transportation survey carried out annually, not only for subsidization estimation purposes, but also as a reappraisal study. The procedure can be described as one that yields an across-the-board subsidy, having been designed for the average trip maker. It can, therefore, still be re®ned to cater speci®cally for children and students, the aged, and the handicapped. It is suitable for use in countries in which personal transport allowances are given to workers in addition to their basic salaries, and in a situation where the travel expenditure±income ratio bears an inverse relationship with income. It has as a hidden objective the desire to ensure that subsidy is given to the extent that a government is able to control and regulate transit operations. AcknowledgementsÐThe author wishes to acknowledge the eorts of Mr A. O. Odagwe, whose Higher National Diploma project, carried out under the supervision of the author, provided data for deriving some of the data used in this work.
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