7.8 International lessons for managing fare evasion and cash risk

Evasion and cash management

both the private and public sectors can assume this risk. In advanced markets where governments have experience charging users and collecting fares, the government can assume this responsibility and risk. If the government is to collect the fares in addition to assuming the risk, then the private partner must view the public party as credible. Rampant nonpayment by bus users can make repayment difficult. The Transantiago project faced a fare evasion rate of 34 percent, which resulted in increased costs for the government due to higher-than-expected subsidy contributions.

In new or developing markets, it might be best to have the private sector procure and operate fare collection systems, provided the legal framework allows for a private party to collect fares from users and grants them the rights to enforce payment. An added benefit of transferring this risk to the private party is that it provides an opportunity to reduce government capture.

To mitigate this risk, the party responsible for fare collection systems must make payment points accessible to users and install systems at stations, at stops, and inside buses to reduce fare evasion. Furthermore, the government must put a legal framework in place that allows the bus operators (either public or private) to penalize riders who do not pay. shifting or retaining the risk of collection fraud is related to how mature the market is. If the market is mature, fraud is low, demand is stable and foreseeable, and macro conditions are not volatile, the private sector will likely be willing to take on this risk. but when the opposite is true in some or all of these situations, then the public sector will likely end up guaranteeing this risk as part of demand risk. Where markets are immature and fraud is rampant, private investors will likely not accept this risk; and if they do, their acceptance will be largely nominal. Private investors will require a minimum revenue guarantee that will be triggered often, turning risk transfer into a futile exercise. It is important to understand what is driving the retention and shifting of risks in cases like this. Transportation demand can be shifted from one party to another, but it might also end up being reflected in higher internal rates of return. box 7.8 presents lessons learned for managing fare evasion. For more guidance, see GTZ (2005); verougstraete and MacDonagh (2016); and World bank (2011).

Financial coordination

The government is in the best position to coordinate revenue distribution among various private parties and thus to assume the project’s financial coordination risk. since projects often involve several private partners, the government should manage the distribution of payment across all firms rather than having one firm manage payment distribution for all other firms. nevertheless, in a consortium, the lead firm might decide how to provide payments to its subcontractors, delivering the work according to different private agreements and subagreements. but if there are many different PPP contracts for each of the tasks, the role of government is to control payments and performance. This control is the essence of a government’s role in a concession.

BOX 7.8

International lessons for managing fare evasion and cash risk

• The government should require all stations and buses to have functioning fare collection systems to reduce fare evasion and improve financial performance (Acabús, Metrocali, Transantiago,

TransMilenio). • Making payment systems easily accessible through popular convenience stores and sites along feeder routes can increase ridership and decrease fare evasion (Ecovía).