No Free Lunches, No Free Roads

We get the kind of transport system we pay for – so what are we paying for?

With what seems to be ever-worsening traffic in the Philippines, many speak of the need to invest more in our transportation system. Indeed, the mantra of the government has been to “build, build, build!” And what should we build? Everything in sight, it seems. More roads, more trains, more of everything – it doesn’t matter what we build, as long as we build more of it. But before we visualize the transport system of the future, let’s look at how we invest in the transport system of today:Who pays for Roads1

I’ll explain the chart here. Warning – my calculations are very quick and very dirty:

First, I looked up some reported figures from the national budget that correspond to spending on roads. This only covers road spending in the national budget, so whatever is spent for by local governments will bring the figure higher. It is not clear if this budget covers construction of new roads only or if it also covers maintenance of existing roads – if either activity is not accounted for in these budget items, the figure will be higher.

Next, I looked up what our collection figures looked like for Petroleum Excise and Motor Vehicles’ Tax, which most closely correspond to “user fees” for driving on roads. For Petroleum Excise, the BIR so far only has disaggregated data available for Jan-Sep 2016, so I arrived at an annualized estimate by assuming (maybe wrongly) that the last quarter of the year would be similar to the average of the first three.

To get 2017 estimates for all figures, I assumed growth of 6.6%, which corresponds to the Philippines’ GDP growth in Q4 2016. Summing everything up, the government spends at least P182 billion more on roads than it gets from Petroleum Excise and Motor Vehicle’s Tax.

It’s clear here that the government spends much more on roads than it gets back from the revenues we can class as “user fees.” Road user costs are effectively subsidized by the revenue generated by the rest of the country’s economic activity. Meanwhile, road use – primarily in the form of driving – directly contributes to external costs faced by all of society, even non-drivers. More driving leads to more pollution; worsened safety conditions; and most visibly, congestion that drains economic value from all other activities and inhabitants in a city.

While some will argue that these roads generate so much wealth that they pay for their own construction and operation costs plus all external costs, that higher-order income argument is indirect, and requires a good deal of quantitative chops to argue rigorously. Also, if that were the case, that would be a very strong argument for all roads to be tolled (more on this in a bit) because if they indeed generate all that wealth, people should be happy to pay for them directly.

On the other hand, here is what the National Government provides to public transport in the budget:Public Transport Subsidy

For this table, I looked up the official subsidy to the Light Rail Transit Authority (LRTA) and Philippine National Railways (PNR) on the Bureau of Treasury Website. These are the Government Owned and Controlled Corporations (GOCCs) that operate passenger rail in the Philippines. MRT3’s website quoted Capital and Operating outlays in the National Budget at a total of P5.8 billion. This gives us a total budgeted subsidy to our rail projects of P8.25 billion. No budget is laid out to subsidize the operations of the PUV sector, which includes jeepneys and buses. Neither is any subsidy listed for transport by tricycles or taxis.

Some would argue that there is more government support at work here – the National Government lends money to GOCCs, including LRTA and PNR, for them to pay outstanding obligations. LRTA and PNR’s payables to the National Government from advances are below:

 (in PhP billions) 2015 2014 change
LRTA Advances Payable 57.79 55.4 2.39
PNR Advances Payable 1.92 2.17 -0.25

One note about these advances is that they are carried on the books of the GOCCs as a liability. LRTA and PNR are expected to pay the national government back for these advances, and their management teams are incentivized to pay back advances faster and keep the balance from growing. This policy has led to cost-cutting with respect to service, as fare revenue that would otherwise go towards maintenance and capital investment must service debt. Meanwhile, there is no expectation, let alone obligation, that drivers will ever cover the costs of roads that have to be built.

While drivers (and non-drivers) pay taxes above drivers’ user fees for roads to be built, public transport riders do, too, yet they use far less road space, and cost much less in road depreciation and external costs than drivers do. It’s tempting to assume that people in cars, who are likely to be wealthier, pay more in taxes and thus justify the expenditure, but that argument requires making many (probably unrealistic) assumptions along the way.

The basis for public subsidy of economic activity is often the measurement of how much the activity benefits or harms society beyond the direct participants. In this framework we should subsidize activities that have external benefits and tax (or negatively subsidize) those that have external costs. What we do in reality is backwards – there is a huge subsidy from the public to drivers, and a comparative pittance to public transport.

Is there a better way to pay?

It’s often argued that a form of road pricing or congestion charging in Metro Manila will further burden the “overtaxed” middle class. This is only true in a very narrow sense. Road pricing shifts the burden from the general fund to the drivers who proportionately benefit more from roads. Not only that, road pricing actually reduces congestion unlike schemes like number coding, which give the illusion of reducing congestion but make traffic worse.

Let’s finish this off with UCLA’s great infographic on Road Pricing / Congestion Charging. This does a great job breaking down the fairness issue between different types of road funding: