The challenge of financing public transport

Public transport operation and capital investment costs have grown significantly in the
last decade due to increased demand, increased quality expectations from customers, and
growing cost of production factors (chiefly labor and energy).
Local or regional governments usually support most of the gap between commercial
revenue and operating costs. In developed economies, this represents on average about 50% of
public transport operating costs. In general, funding from local or regional governments for
public transport operation comes from their general budget.
In the context of slow economic growth and public debt crisis, there is increasing
pressure on the resources that public authorities may allocate, notably, to public transport. In the
long term, population aging and the related increase in pension and healthcare costs will
constitute additional funding challenges.
Existing urban public transport services need sufficient funding just to maintain current
service levels and quality. Meanwhile, large-scale investments will be required in the future to
upgrade and modernize existing infrastructure and fund new infrastructure projects.
This situation prompts a reflection on the modernization of the business model of public
transport, which should include, in addition to its reliance on public budgets, the earmarking of
charges and levies for public transport, the development of partnerships with private investors
and the development of a revenue strategy. In particular, fare regulation and adjustment should
be an integral part of any reflection on the development of a revenue strategy.
1. Earmarking Local charges
One innovative way of funding public transport operations and investment is to use the
proceeds from certain local taxes and charges.
One option could be to levy a charge on those who benefit most from public transport
supply, such as employers, retailers and real-estate owners. Meanwhile, charges can also be
levied on those whose mobility habits are most harmful to society. These charges can include
urban tolls, congestion and or/pollution charges, parking charges and fuel taxes. These
two concepts are commonly known as the polluter pays and beneficiary pays principles.
Fuel taxes
The most common form of user charges, which has been applied as fixed charges per gallon
of fuel sold. Fuel taxes have historically accounted for the bulk of the financing of the highway
system. However, there is no automatic adjustment for inflation and may be diminished by
increased energy efficiency and, since only specific fuels are taxed, by use of alternative fuels.

PRESIDENTIAL DECREE No. 1122

INCREASING THE SPECIFIC TAX ON GASOLINE, AVIATION TURBO JET FUEL,

DIESEL FUEL OIL, SOLVENTS AND THINNERS BY FURTHER AMENDING SECTIONS
142 AND 145 OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
Sec. 142. Specific tax on manufactured oils and other fuels. On refined and manufactured
mineral oils and motor fuels, there shall be collected the following taxes
Kerosene, per liter of volume capacity (0.07)
Lubricating oils, per liter of volume capacity (0.65)
Naptha, gasoline and all other similar products of distillation, per liter of volume
capacity, (0.50) ; provided, however, that on premium and aviation gasoline the tax shall
be (0.55)
Denatured alcohol (0.01 )
Process gas (0.02)
Thinners and solvents (0.40)
Liquefied petroleum gas, per kilogram (0.12)
Asphalts, per kilogram, (0.05)
Greases, waxes and petroleum, per kilogram(0.35)
Aviation turbo jet fuel (0.30)
Sec. 145. Specific Tax on diesel fuel oil. On fuel oil commercially known as diesel fuel oil, and
on all similar fuel oils, having more or less the same generating power, per liter of volume
capacity, SEVENTEEN AND ONE HALF centavos, which tax shall attach to this fuel oil as
soon as it in existence as such."
Pollution Charges
Pollution charges, fees, and taxes are payments required of sources for emitting pollution.
(The three terms are used interchangeably here.) Ideally, sources would pay for each unit of
pollution they emit.
Designing pollution taxes that minimize the total costs of pollution (damage costs plus
control costs) is difficult for a variety of reasons, including the lack of data on pollution
damages, the inability to precisely measure emissions, and political opposition to large revenue
transfers from pollution sources (companies) to the authority imposing the tax (government).
The Clean Air Act of 1999 (Republic Act No. 8749) explicitly provides for economic
incentives as part of environmental policy. The Declaration of Principles recognizes that
polluters must pay, and the Declaration of Policies encourages the use of market-based
instruments. Specifically, an emissions fee system is mandated for industrial dischargers as part
of the regular permitting system. The implementing rules and regulations remain broad enough
on this point to leave room for interpretation.
Section 13. Emission Charge System. - The Department, in case of industrial dischargers, and
the Department of Transportation and Communications (DOTC), in case of motor vehicle
dischargers, shall, based on environmental techniques, design, impose on and collect regular
emission fees from said dischargers as part of the emission permitting system or vehicle
registration renewal system, as the case may be. The system shall encourage the industries, and
motor vehicles to abate, reduce, or prevent pollution. The basis of the fees include, but is not

limited to, the volume and toxicity of any emitted pollutant. Industries, which shall install
pollution control devices or retrofit their existing facilities with mechanisms that reduce pollution
shall be entitled to tax incentives such as but not limited to tax credits
Tolls as Funding Source
"Stable" Source of Finance. Tolls provide an ongoing revenue source, which is not tied to the
annual Government budgetary process. This can be particularly important for raising debt
finance outside the national accounts and requires a Government Corporation or private sector
operator.
Dedicated Source of Finance. The funds from toll revenues can be dedicated to the support of
construction and maintenance for a particular road thereby ensuring that maintenance funds in
particular do not compete with the requirements of other roads in the network.
The Raising of Revenue. Traffic and toll levels may not be sufficient to cover all costs, including
construction, operation and maintenance. In developing countries where traffic levels are low or
where construction costs are high (particularly likely in urban areas because of land acquisition
and clearance costs), it is unlikely that the tolls will ever cover more than operation and
maintenance and perhaps a part of the construction cost.
The DpWH is tasked with the construction and maintenance of the national roads system.
It oversees the planning, programming and implementation of national road projects. The
DpWH BOT -project Management Office (BOT-PMO) is responsible for, among others, the
identification of potential BOI projects including toll roads. The TRB, an attached agency of
DPWH, has the primary function of granting authority for the operation of toll facilities and the
issuance of a toll operation certificate. It is also empowered to determine rind modify toll rates,
and to issue contracts for the construction, operation and maintenance of toll facilities.
NEDA is the economic planning body of the national government. Two Cabinet level
interagency committees under the NEDA Board are directly relevant to the infrastructure sector,
the Investment Coordination Committee (ICC) and the Infrastructure Committee (InfraCom).
Review and approval of major capital projects, including toll roads under the public investment
program fall within the purview of the two committees. With the passage of the BOT Law, the
ICC is given an additional mandate to: (a) approve national BOT projects costing up to p 300
million and LGU projects costing above P 200 million; (b) review and endorse for NEDA Board
approval national projects costing above P 300 million, and; (c) prescribe the reasonable rate of
return for projects implemented through negotiated contracts.
The Corporate Affairs Group of the Department of Finance (DOF-CAG) has
oversight functions on all government owned and controlled corporations (GOCCs). It reviews
the impact of BOT projects on the financial position of the proponent GOCC and on the
consolidated public sector financial position. The DOF-CAG review is usually a requisite for
project approval by the NEDA ICC. The Coordinating Council for Private Sector Participation
(CCPSP) coordinates and monitors the government's BOT program. The Board of Investments
(BOI) is responsible for granting fiscal incentives (e.g., income tax holiday, etc.) in accordance
with the Omnibus Investment Code

The ROAD BOARD is the governments steward for the objective utilization of the Motor
Vehicle Users Charge (MVUC). Since 2001, the agency is at the forefront in acting as the
supplemental source of funding for road maintenance all throughout our national and local roads.
As established by the law, the Board shall consists of no less than seven (7) members with
the Secretary of the Department of Public Works and Highways (DPWH) as the ex-officio
chairman and the secretaries Department of Finance (DOF); Department of Budget and
Management (DBM); Department of Transportation and Communications (DOTC) as ex-officio
members. The three (3) remaining appointed members shall come from the Motorist and
Transport Sector.
Republic Act 8794
Otherwise known as An Act Imposing a Motor Vehicle Users Charge On Owners of All
Types of Motor Vehicles and for other Purposes, provides for and ensures the adequate
maintenance of national and provincial roads through sufficient funding for the purpose and in
this light mandates the Road Board, to implement the prudent and efficient management and
utilization of the special funds earmarked solely for the purpose of road maintenance and
improvement of road drainage, installation of adequate traffic light and road safety devices and
air pollution control.
Fund Availment Process
The Motor Vehicle User's Charge (MVUC) is divided into four (4) Special Trust Account
Special Road Support Fund (SRSuF);
Special Local Road Fund (SLRF);
Special Road Safety Fund (SRSaF);
Special Vehicle Pollution Control Fund (SVPCF).
The MVUC collection is accumulated from all types of motor vehicles including "trisikad"
and "pedicabs" upon registration with the Land Transportation Office (LTO) and deposited to the
Bureau of Treasury (BTr). The proceeds also take account of the penalties from Overloading
imposed on trucks and trailers for loading beyond their prescribed gross vehicle weight.
The distribution of MVUC collections are as follow:
Special Road Support Fund
80.0%
Special Local Road Fund
5.0%
Special Road Safety Fund
7.5%
Special Vehicle Pollution Control Fund 7.5 %
The Special Road Support Fund, the Special Local Road Fund shall be under the
DPWH, whereas the Special Vehicle Pollution Control Fund shall be under the DOTC.

Special Road Support Fund

Maintenance of, and the improvement of drainage of national primary roads (70%)
Maintenance, and improved of drainage of national secondary roads throughout the country.
(30%)
The cost of installation of adequate and efficient traffic lights and road safety devices
throughout the country, where such traffic lights and safety devices are needed, shall be taken
from the Special Road safety devices.
The Special Local Road Fund shall be apportioned to provincial and city governments
in accordance with the vehicle population and size of the road network under their respective
jurisdictions, and shall be used exclusively for maintenance of local roads, traffic management
and road safety devices.
Civil Aviation Authority of the Philippines
The Civil Aviation Authority of the Philippines (CAAP} is the national aviation authority of
the Philippines and is responsible for implementing policies on civil aviation to assure safe,
economic and efficient air travel. The agency also investigates aviation accidents via its Aircraft
Accident Investigation and Inquiry Board. Formerly Air Transportation Office, it is an agency
of the Department of Transportation and Communications.
2. Building new partnerships with Private Investors
There is scope for public transport to develop new financial partnerships with long-term
investors, such as banks, private investors, urban developers and the business community.
Relevant frameworks need to be in place and risks must be clearly allocated for these
partnerships to be a success.
Working with property developers to share the value created by transport systems is
one path that is worth exploring. Carbon finance could also help support public transport
projects, mainly in developing economies.

2.1 Public-private partnerships (PPP)

Public transport is generally a sound investment and one that is as least as profitable
as other sectors with a similar risk profile. It benefits from a stable revenue and cash flow,
presents strong growth potential and is a provider of essential services.
PPPs are characterized by the relatively long duration of the relationship, involving
cooperation between the public partner and the private partner on different aspects of a
planned project, which can include design, completion, implementation and funding.
The public partner concentrates primarily on defining the desired outcomes in terms
of public interest, quality of services provided and pricing policy, and it takes
responsibility for monitoring compliance with these objectives.

PPPs are complex structures, so the decision to enter into such a partnership must not
be taken lightly. The PPP needs to be a real partnership that distributes risks and rewards
in such a way that the aspirations of both parties are met.
2.1.1

Optimizing debt financing

In the current economic climate, recourse to the financial markets can be complicated
and obtaining credit is increasingly difficult. Nevertheless, debt financing can be
considered as a source of funding for capital investment in public transport.
Various options are available to public transport companies in order to reduce the cost
of debt financing, although a sound and thorough understanding of the financial markets
and instruments is essential.
There are several ways to optimize debt financing, including:
Rating procedures;
Debt notes;
Fiscal leases;
Options and derivative instruments.

3. Developing a strong revenue Strategy

By taking a more commercial approach to their fares and products, public transport
companies can better cover their costs. Developing a successful revenue strategy will also
involve exploring new sources of income by tapping into non-fare revenue streams.
It is important to have an appropriate business and regulatory framework in place that leaves
room for business entrepreneurship in the public transport sector, whilst still ensuring the
provision of essential public transport services.
3.1 Enhancing revenue management
By adopting a more commercial approach to service provision, public transport
companies will be able to boost their fare revenues. Currently, public transport operators
tend to provide a single type of service, charging a flat fare for that service.
Smart fare and product strategies offer a wealth of untapped potential. This could
involve applying time-of-day pricing or distance-based pricing, or charging passengers
more to use premium services. Meanwhile, targeted discounts such as loyalty schemes
can increase the annual revenue per passenger and improve customer satisfaction.
Technological innovations can facilitate the design of sophisticated fare structures.
They can also help deliver tailor-made information and services, for which a higher price
could be charged.
3.2 Setting and adjusting fares
In many countries, the process of setting and adjusting public transport fares is carried
out on an ad-hoc basis.
A more regular, systematic and sophisticated fare review mechanism will make it
possible to sustain public transport services and enhance quality, whilst still keeping
services affordable. Good fare regulation needs to take many factors into account, such as
affordability for passengers, changes in service production costs, and the resources

needed to invest in capacity and service quality. In Germany, for example, there is a long
history of cooperation between operators and authorities within fare associations.
3.3 Secondary revenue sources
Public transport is typically a low-margin business. But by developing secondary
revenue streams, public transport companies can capitalize on their existing assets and
know-how. This will help them increase both their revenues and their margins.
Public transport operators assets include space for advertisement, retail, and property
development, telecommunication systems, and their companys brand. By tapping into
the potential of these various assets, public transport companies will not only generate
income, they will also be able to enhance the journey experience for passengers.
Traditional public transport companies have developed know-how in many areas over
the years and have applied this know-how for in-house purposes. This know-how ranges
from technical expertise to planning and project management. Although often
overlooked, this know-how could be an important source of revenue.
Institutional Arrangements
Provision of adequate institutional arrangements for the transportation system is also a challenge.
In most cases, new institutional arrangements have come about as a response to perceived
deficiencies in the existing system. Often they have been imposed by outside agencies (by
legislatures, or by federal government on the states) and in many cases they have been resisted
by established institutions. In the recent past, the most conspicuous and enduring areas of
institutional change have been (1) adjustments to the relationship between the public and private
sectors and (2) attempts to overcome modal and jurisdictional fragmentation.
Transport Policies
Policy Instrument
Administrative Order No. 254

Philippine Clean Air Act of 1999

Biofuels Act of 2006

Philippine Standardization Law

Coverage
Formulation of National
Environmentally Sustainable
Transport Strategy
Reduction of Emissions from
Motor Vehicles
Mandating the blending of
biodiesel and bioethanol in all
fuels sold in the market
Development of Philippine
National Standards on fuels and
related products

Investment Priorities Plan

(yearly)

Preferred Investment Activities

in the Transport Sector

Executive Order Nos. 290 & 396

Natural Gas Vehicle Program for Public

Transport

The BOT Law

Vehicle Emission Control, Standards, and Inspection & Maintenance
Emission control for new motor vehicles.
Emission control for in-use vehicles.
National Motor Vehicle Inspection & Maintenance Program
Roadside inspection of motor vehicles.
Regulation of fuels, additives and pollutants
Regulation of ozone-depleting substances and greenhouse gases.
Public Transport Planning and Travel Demand Management
Rail-based Mass Transit
Increasing the capacity of existing light rail systems
Construction of additional light rail lines in Metro Manila
Revival of the Manila Bicol train line
Construction of high speed railway from Manila to Clark economic zone
Vehicular Volume Reduction Scheme
Number Coding Scheme
Truck Ban during rush hours
Franchise volume management
Relocation and establishment of Central Bus Terminals (planned)
Lane Segregations
Non-Motorized Transport
Model Projects:
Manilas Pedestrianization Project.
UP Diliman Carless Scheme.
Marikina Bikeways Network Project.
Strengthening Knowledge Base, Awareness and Public Participation
National Energy Efficiency and Conservation Program
Fuel Economy Run
IEC on fuel efficiency and conservation
Promotion of alternative fuels and emerging vehicle technologies
Biofuels
Electric and Hybrid Vehicles
CNG Vehicles

Auto-LPG
Cleaner Fuels
Natural Gas Vehicle Program for Public Transport (NGVPPT)
Auto-LPG for Taxis and Jeepneys
Strengthening Roadside Air QualityMonitoring and Assessment
DENR-EMB Total Suspended Particulates (TSP) Monitoring Stations
12 TSP Stations in Metro Manila
52 TSP Stations in major provinces
DOST-PNRI TSP Stations:
7 TSP Stations in Metro Manila
DOTC Anti-Smoke Belching Program
Environment & People Friendly Infrastructure Development
Promulgated 11 sets of Philippine National Standards (2008)
Estimated 560 electric vehicles operating in major cities
Promotion of Hybrid Engine Vehicles
Demonstration of Honda Civic Hybrid Technology in schools and exhibits
City and provincial test runs
Section 20, Article II of the 1987 Philippine Constitution provides that The State
recognizes the indispensable role of the private sector, encourages private
enterprise, and provides incentives to needed investments. In recognition of this
role in sustainable development, Congress enacted two primary laws to implement
the same: the Government Procurement Reform Act (RA 9184) for the procurement
of goods, supplies and services, and the RA 6957 as amended by RA 7718 or the
Philippine BOT Law which provided a more focused framework in PPP infrastructure
development.
The enactment of RA 6957 allowed LGUs to enter into contractual arrangements
with the private sector to implement infrastructure projects through two variants
Build-Operate-and-Transfer (BOT) and Build-Transfer-and-Operate (BTO). RA 7718
enhances the provision of RA 6957 by broadening the list of PPP government
implementing agencies such as government owned and controlled corporations
(GOCCs), government financing institutions (GFIs) and state universities and
colleges (SUCs); putting in place incentives for attracting private sector investments
to venture into PPP projects; and allowing negotiated unsolicited proposals provided
that these comply with conditions outlined in the Law. More importantly, RA 7718
provided for the inclusion of other contractual arrangements or schemes to
implement PPP projects.
Declaration of Policy

RA 6957

Recognizes
the
indispensable role of the
private sector for national

RA 7718
Recognizes
the
indispensable role of the
private sector for national

Private Initiative in
Infrastructure

Priority Projects

growth and development

Provides incentives to
mobilize private resources
for
the
purpose
of
financing the construction,
operation
and
maintenance
of
infrastructure
and
development
projects
normally financed and
undertaken
by
the
Government
Emphasizes
the
solicitation of expertise
from a dully prequalifies
private contractor through
build-operate-and-transfer
or
build-an-transfer
scheme

Provides
that
local
projects funded and
implemented by the local
government
units concerned shall be
submitted
to the local development
councils for
confirmation or approval

growth and development

Clarifies the provision of
incentives in mobilizing
private resources with the
inclusion
of
minimum
government regulations,
procedures and specific
government undertakings
for the private
sector as the need arises

Emphasizes
the
solicitation of expertise
of individuals, groups or
corporations in
the private sector who
have extensive
experience in undertaking
infrastructure
or development project
Enhances the provision of
RA 6957
by citing all concerned
government
agencies,
GovernmentOwned Controlled
Corporations (GOCCs) and
LGUs shall
identify
priority
development programs
for PPP
Provides that local
projects shall follow
the approval process for
different
cost ceilings, to wit: (a)
Three Hundred
Million
Pesos
(PhP300,000,000) for
approval
of
the
Investment Coordination
Committee
(ICC)
of
National Economic

Eligible Projects

Infrastructure

Implementation
Schemes

BOT and BTO

and
Development
Authority (NEDA); and
(b)
more
than
PhP300,000,000 for the
approval of the NEDA
Board
Clarifies the acceptance
of unsolicited
proposals provided that
such comply with
the conditions set forth in
the Law
Cites infrastructure or
development
projects, and emphasizes
the inclusion of
non-traditional
infrastructure sectors such
education, health, and
agriculture
Includes other variants BOT, BT, BOO,
BLT, BTO, CAO, DOT, ROT,
ROO, and other
variants
as
may
be
approved by the
President

These are the Investment Coordination

Committee (ICC), Infrastructure Committee (INFRACOM), Regional
Development Councils (RDCs), the NEDA Secretariat, and the PPP Center.
The National Economic and Development Authority

Table 1-3: National Agencies and Committees for PP