Public transportation and private industry

Q: Is public transportation the responsibility of government and a cost to the taxpayer, or does private industry, which benefits from these infrastructure projects, need to contribute more? What steps in particular can be taken to enhance this relationship?

A: Metro railways and indeed all rail-based mass transit systems yield high economic rates of return, though their financial rate of return is usually low. Despite this, they have an important social role and economic relevance to the city. Metro fares should be within the reach of ordinary citizens. However, unlike the road sector where the capital investment needed for the infrastructure is met wholly by government; or bus operators who have only to fund the acquisition and running costs of the road fleet; metro rail operators have to fund, not only the acquisition and operational costs of the rolling stock, but an entire infrastructure of tunnels, stations, signaling and traction. In addition to this, the peaking characteristics of urban traffic have to be taken into account. Train-sets for metro railways have to be procured, along with signaling and traction systems, with a view to meeting peak hour traffic demand. For rest of the day, these train-sets, signaling and traction systems, procured at considerable cost, remain grossly underutilized. These factors all combine to result in high investment costs.

As metros are so highly capital-intensive, it isn't always possible for governments to fund their cost entirely. This means there is a need for innovative financial tools, which can be used to generate funds and meet the investment needs of metro systems. It is rational to expect all the user/non-user beneficiaries of a city's metro system to contribute towards its capital cost. A balanced view would perhaps be for the government to fund 40-50% (possibly the cost of all civil works) of the metro's cost as an outright grant, and for the balance requirement of funds to be raised through debt routes where private participation can be encouraged. This is particularly relevant to developing countries where governments are often unable to fund metro costs entirely.

There are several ways in which governments can meet their metro-funding responsibilities. One option is to build up dedicated non-lapsable "transit funds" for metro projects. Pay roll tax has been used extensively in French cities for financing their mass transit projects. A tax like this can be levied at 1 per cent of the wage bill for major industries and commercial establishments within the metropolitan area or urban agglomeration. Restricted to companies with a roll of 20 employees or more, this becomes a feasible source of funding. Such companies rely on the metro for their employees travel to work and it follows that they should meet part of the project cost.

Another potential source of funding is road vehicle ownership charges. Road vehicles operate on petroleum fuels and are a major source of air pollution. Taxation on these vehicles can be justified on the principle that the polluter should help fund a transit system which is environmentally preferable. Vehicle ownership charge could come in the form of an additional levy on motor vehicles, at the time of first purchase or registration, in addition to the normal annual fee. This levy could also be charged on a graded basis should authorities want to attempt to restrict the use of a particular type of vehicle. A similar surcharge can be levied on the sale of tires and other motor parts. This option needs to be considered more seriously in view of the environmental impact of motorists in cities.

Another possibility is to levy a "transport surcharge" on property taxes within the city. Such a surcharge could be levied on properties located within a distance of one km either side of the transit route. The charge would be based on the premise that when a transit line is provided, property prices rise in areas served by the line. Capturing part of this increase in property prices is a viable way of raising funds for transit projects.

Metro authorities should also be encouraged in the commercial exploitation of land around stations/terminals and air spaces over their facilities. It is generally estimated that about 10-15% cost of a transit facility could be generated from such sources. This would work to provide revenues to the transit authority, as either a pre-sale source of capital financing, or as a post-sale rent to provide for loan servicing. Such revenues could go a long way in reducing metro fares and ensuring they remain within the reach of ordinary citizens. The transit authority should have the freedom to fix the fares so that the operation and maintenance costs are fully met, whilst ensuring fares do not become a serious burden to commuters.

Private industry participation is an option for covering the debt portion of the capital fund requirement. This could take the form of investments in the metro system, or in the supply of equipments and rolling stock on suppliers' credit or a leasing basis. The public-private partnership model could also be used with government fully funding the civil works (to the extent of 50% of project cost) and private industry funding the equipments, including the rolling stock and concessionary operation of the metro. At the end of a set period, say 25-30 years, the whole asset would return to the government at a pre-determined value. With this, the efficiency of private management is brought to the system, with the government having final control of the assets at the end of the concession period. To keep the initial construction cost low, governments could provide government lands free to the project, and waiver taxes and duties on equipments and services.

Through careful and innovative financial planning a balanced relationship between the contributions of government and private industry is entirely possible. A successful partnership of this kind would result in a more efficient and affordable public transport system for all.