Subsidy benefits mainly nonpoor riders

We support not just the current fare hike, which is overdue, but also periodic fare adjustments to reduce subsidies to urban commuters and regain balance in the pricing of the various public transport modes.

The numerous deficiencies of the relatively small MRT and LRT train system corroborate the unsoundness of a policy that keeps fares below their economic value and marginal cost. Consider the following:

Train fares have stayed the same since 2003, even with prices in general nearly doubling since 2000, while fares for other public transport modes (buses and jeepneys) have been adjusted periodically. However, train travel offers shorter and more predictable travel times, and thus should cost more. (See chart.)

As a policy, fares should be set, as much as possible, based on full recovery of costs (operations and maintenance or O&M) and the “users pay” principle. This is a matter of, respectively, efficiency and equity.

Nonetheless, a certain level of subsidy cannot be avoided in mass transportation. New York City Transit prides itself on recovering the highest percentage of costs from rider fares in the United States, but it is still only 53 percent.

But when the subsidy exceeds that difference between full-cost recovery and economic value, it becomes misplaced. Demand is distorted and unintended consequences abound. For example, a 2010 study showed that minimum wage earners accounted for one-third of Metro Manila train riders. The subsidy ends up benefiting the other two-thirds. More than 90 percent of daily trips in Metro Manila are not on the trains and are not subsidized.

We acknowledge that the public has every right to worry that the fare increase would not solve train overcrowding immediately—given the record of myopic management. It would have been more palatable, if this fare increase came after noticeable improvements, especially on safety. Public confidence needs to be restored by undertaking the following:

Set up a multisectoral oversight body—to include civil society, the business sector and international experts—as an additional resource for the evidently inadequate DOTC.

Reinstitute a single point of responsibility in the maintenance of our rail systems, with the choice of service provider governed by competence rather than pecuniary motives.

Agree on clear rehabilitation and maintenance milestones with corresponding rewards and sanctions for over-and underperformance.

Find innovative ways of generating additional revenue and cost savings in order to minimize fare hike requirements. Other transit systems in the world are doing this.

For the long term, policy reforms must be instituted so that future fare setting is insulated from political grandstanding, system management is professionalized and the train network can expand from its current size of 79 kilometers to more than 200 km by the year 2030.

In the end, misplaced subsidies do the biggest damage to those among us who have the lowest tolerance for wasted resources namely the poor and economically disadvantaged. Good ideas, like train fare hikes, must not be dragged down by bad managers, bureaucrats and politicians. Sound economic policy must not be held hostage by unsound governance.
For more information, please check our website: www.fef.org.ph.