Setting up subsidies

the public authority waives some of its future income to ensure project viability. • In-kind contributions. The public authority can provide existing assets that are part of project components. • Other national or local assets. In some cases, countries own assets (toll roads) and manage the revenue generated by these assets. Mexico created the national Infrastructure Fund (FOnaDIn) to support infrastructure investments across the country with both nonrefundable and refundable financing instruments. Funding from FOnaDIn comes primarily from the national toll roads that the fund manages. PrOTraM, a program under the umbrella of

FOnaDIn, supports the development of urban mass transit. PrOTraM resources can be used for subordinated debt or guarantees for closing the viability gap.

Making the most of revenue sources by mobilizing funds for investment

Operating and nonoperating revenues can be managed strategically to mobilize further funds for investments. Sources of operating revenue—or at least a portion of the total revenue generated—can be directed to an independently managed trust fund for their future securitization. The trust fund can invest the securitized resources in strategic capital investments that would help to improve service provision and revenue generation. Given that most mass transit systems in low- and middle-income countries are managed by SOes, this securitization might be registered as public debt or might require a guarantee to access already tapped or untapped investors. regarding sources of nonoperating revenue, the challenge remains of how to earmark these revenue sources for the bus project or leverage them into more resources. Given that the nature of these nonoperating revenue sources is usually budgetary, they can be collected and used for purposes other than public transportation provision. The greater the size of these revenue sources, the more incentives governments have to redirect them toward other public services. This situation is often the case in low- and middle-income countries where the need to support other public services is critical. as in the case of sources of operating revenue, a trust fund will be needed to manage any additionally generated resources. This fund will provide confidence to investors that the revenues generated by securitization will be invested in projects that will improve the collection of nonoperating revenue. Moreover, investors will require a certain amount of newly generated nonoperating revenues to be set aside to repay their investments.

SETTING UP SUBSIDIES

regardless of their source of funding, setting up subsidies properly is a powerful risk mitigation mechanism and helps to ensure efficiency in the use of public resources. as discussed above, given the elusiveness of a project’s financial self-sufficiency, subsidies are often required to ensure the sustainability of urban bus projects. This section briefly discusses the justification for subsidies and describes a few experiences with their application.

Supply-side subsidies

There are three main theoretical justifications for offering subsidies for the supply of public transportation (operational subsidies). It is argued that such subsidies reduce the cost of environmental externalities, exploit economies of scale in users, and increase the cost-efficiency of public transportation systems.

The first argument is based on the idea that subsidies can reduce congestion by encouraging users of private vehicles to use public transportation instead. However, this modal shift depends on the attractiveness of public transportation for car users, and research has found the cross-elasticity of demand to be normally low.

The second argument, based on the so-called Mohring effect (Mohring 1972), points to the increasing returns to scale made possible by subsidized public transportation services. These returns can increase service frequency, which, in turn, reduces the waiting times of passengers and therefore saves users’ valuable time. This premise, however, is based on the presence of excess capacity.

Finally, the cost-efficiency argument in a multimodal system indicates that there could be greater economies of scale in rail-based systems than in land transportation systems. Train (1977) argues that cross-subsidies are needed from the means of transportation that has higher returns to scale and an optimal policy of cross-subsidies. empirically, under certain conditions, it has been found that supply subsidies may be socially desirable by helping to improve the quality of service and increasing its frequency (Dodgson 1987; Glaister 1987, 2001; Parry and Small 2009; Savage and Schupp 1997). However, the evidence is not conclusive, and some experts do not agree that supply-side subsidies benefit society overall, pointing to the adverse effects that they can have on operational efficiency.

Demand-side subsidies

Fiscal constraints in low- and middle-income countries constitute the main reason to advocate for efficient, targeted, demand-side subsidies. especially in these countries, arguments against operational subsidies criticize the fiscal burden that they generate and point out that direct subsidies need to benefit those social groups in greatest need of support. Therefore, to balance the needs of economic and social sustainability in public transportation, cities should try to establish rates that come as close as possible to recovering operational costs and should offer subsidies aimed at specific segments of the population.

The experience so far with demand-side subsidies has been limited, and their impact is questionable. These subsidies have not always produced the expected results due to difficulties in precisely identifying—and reaching—the populations to be covered (especially when they fall outside the formal sector), the potential abuse of the subsidy, and large errors of exclusion or inclusion. recently, two elements have supported the development of subsidies directed to demand. First is the development of more advanced instruments for identifying particular beneficiaries of social programs (that is, as used for conditional cash transfers); second is the progressive adoption of smart cards and other payment methods that enable the identification of users and the customization and execution of different subsidy structures (fixed subsidy, depending on the time of day or type of route; a certain number of free trips or trips with discounts).

In general, the design of these targeted subsidy plans must take into account the following considerations: efficiency of the system, in terms of targeting the