Classification of Transit Subsidies

Type and classification of subsidies differ from many studies. In Best (2007) subsidies are classified by “incidence” and by “mode”. The term “incidence” refers to who or what initially receives the subsidy. Meanwhile, Pounds (1980) stated that subsidies are generally classified according to whether they are provided to assist in general operation of a transport undertaking (operating subsidy), or to pay for replacement or extension of the infrastructure involved (capital subsidy). Both of this studies are based on the recipient. Moreover, Gómez‐Lobo et al.

(2009) provides a more extended classification of subsidies. The research explains that subsidies can be classified along many dimensions according to who receives the financial transfers, the targeting mechanism used to distribute benefits and how they are funded. This information allow us to conclude that transport subsidies can be classified according to the following questions: Who is the beneficiary of the financial aid? Who bears the cost of financing the transport subsidies? What is the strategy used to target and distribute the subsidies? And what are the different funding sources? The following part of our study will provide the answer of these questions, using two main subsidy categories: Supply and demand side subsidy, both categories based on the principal recipient.

2.2.1 Demand Side and Supply Side Subsidy

Based on the main recipient or beneficiary of the grant we can identify two categories of subsidy, as it was mention before (Gómez‐Lobo et al., 2009). The first category identified as demand side subsidies, are those provided directly to public transport users. These grant are targeted to benefit the users by group, providing direct financial support.

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Supply side subsidies, are those financial aids channeled to transport suppliers (operators). This category is divided into capital and operating subsidies. Capital subsidies are those delivered to support cost of infrastructure or equipment purchase, meanwhile operating subsidies are directed to cover expenses related to the operation (revenue losses and reduce fare). These types of subsidies are based on the direct and indirect beneficiaries of these grants, it is important for the policy maker to identify to whom target the subsidy. In both cases, the objective is to lower the cost of service to final users either by lowering the proportion of cost that must be funded from fares (supply side subsidies) or by lowering the monetary outlays of users (demand side subsidies) (Gómez‐Lobo et al., 2009).

2.2.2 Subsidy Distribution

Subsidies can also be classified according to the method used to target beneficiaries. The description of some of this method can be encounter in Gómez‐Lobo et al. (2009). For example, demand side subsidies can be mean tested, if some type of welfare instrument is used to gauge the socioeconomic condition of potential beneficiaries. Or they can be given to certain categorical groups, such as students or the elderly. Another method may be to use certain self-selection mechanisms. Along the same lines, geographical targeting could also be used, targeting benefits and services to areas where the less well-off households are overrepresented.

Supply side subsidy are usually given to operators who usually do not discriminate between different types of users, therefore are less target than demand side subsidies. A solution to this problem could be the implementation of conditioned operating subsidies based on the performance or specific services. Distribution of subsidies among the population or modes are commonly used by policy makers to obtain the most beneficial subsidy scheme.

2.2.3 Subsidy Funding

The last classification is based on the methods used to finance subsidies. In most countries, support for public transport has traditionally been financed from general taxation. The federal or local authorities collect the revenues from various taxes, individual and corporative taxes being the biggest sources. One of this funding methods described by both studies is

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subsidy. This type of subsidy occurs when revenues in excess of cost for one group are used to finance deficits incurred for other groups (Nijkamp, 2002).

Table 2 provide examples of supply side and demand side subsidies based on the previous classification. The Following part will provide a description of each subsidy.

• Subsidies to cover operating cost

Public transport operators receive a direct transfer from the government to maintain low fares.

Funded by general taxes, this type of supply side subsidy can be conditional or unconditional.

In a conditional subsidy the levels of subsidy will depend on the patronage and performance of the transportation system. The performance measures most commonly used in the allocation process of these subsidies are: ridership, efficiency (cost per some service unit), local support and service expansion (Marshment, 1998). This is taken as a measure to motivate operators to maintain or improve their service quality. On the contrary, an unconditional subsidy is given to operators, with scant performance conditions in which deficit is covered by governmental aid.

• Capital Subsidies

Capital subsidy can by direct or indirect. This supply side subsidy can be provided has an assistance with land acquisition for operators, vehicle replacement and fleet expansion. A report conducted by Marshment (1998) implies that capital subsidies have the purpose of increase capacity.

• Fuel tax rebate

Operators receive a rebate on tax paid for fuel from the government. The measure is taken as a form of operating subsidy to reduce the price of fuel, since it represents a significant portion of the total operating cost. This subsidy is not conditioned on specific performance targets (Gómez‐Lobo et al., 2009).

• Concessionary fares

Directed to certain groups of people such as children, pensioners, disables, and occasionally even unemployed people, are usually entitled to discount, in some cases zero, fares on most forms of public transport. Provided to enhance social distribution, reduce exclusion and improve accessibility of transportation systems to low income users.

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Offering concessionary fares to certain groups of passengers is likely to result in additional trips being made. “The trip generation factor” used to measure the ratio of the number of trips made at concessionary fares with the number of trips which would be made by the dame people if they were charged full adult fares, explains that generation factors for bus travels vary between 1.2 to 1.9 for flat fare and 1.2 to 1.5 for half fare schemes (TRL, 2004). However, in some cases the implementation of these schemes may lead to a large increase in public expenditure. The impact on the operator vary according to the change of behavior of the users using the new discount (Baker and White, 2010).

• Infrastructure Grant

Subsidy commonly used in systems implementation and expansion of transportation projects.

Is provided directly from government budget without users having to pay for this investment through fares. This subsidy is applied for rail or metro projects and road infrastructure.

Table 2 Classification of Transit Subsidies

Transit subsidy Definition Study

Subsidies to cover operating

cost

Supply side subsidy, founded by general taxes. This type of subsidy can be provided with a condition such as:

ridership, efficiency, subsidy per revenue mile, cost per revenue mile and subsidy per passenger.

(Gómez‐Lobo et al., assistance for land acquisition for operators, vehicle replacement and fleet expansion. subsidy is not conditioned on specific performance targets.

(Gómez‐Lobo et al,.

2009)

Concessionary fare

Demand side subsidy directed to a specific groups for a social purpose. It can affect: trip generation, equity, affordability, and an increase in public expenditure and revenue forgone for operators.

(Cees van Goeverden, 2006), (TRL, 2004), (Jackson, 1975), Baker and White, 2010).

13 Infrastructure

subsidies

Used in systems implementation and expansion of transportation projects. Provided directly from government budget without users having to pay for this investment through fares. Involves large expenditure on state budget.

(Muñoz and de Grange, 2010), (Tisato, 1998).