Subir Gokarn: Keeping cities moving

Last week, the ministry of urban development presented its draft National Urban Transport Policy to an audience of chief ministers. Like many people, I find myself spending an increasing proportion of my time stuck in traffic. I'm sure some of my comrades-in-traffic spend some of that time dreaming up solutions to the urban transportation problems. I certainly do. So, I was pleased to see that somebody in government was thinking about a policy for this sector.

The draft policy document is available on the ministry website. It makes interesting reading for a number of reasons, both negative and positive. The first thing that strikes one is that it was put together quite some time ago. Data presented on city-wise vehicle populations, for example, end in 1997.

Some other statistics go a year beyond that. 2001 is the most recent date referred to in the text. It appears, then, that the document has been around for three years or more. The previous government apparently did not see fit to initiate a public debate on the issues addressed. The present government apparently thought it was too important an issue to wait for an update of the draft to incorporate the latest available data, if not some more recent thinking on the issues.

Not that this matters a great deal, though. The problems emphasized in the draft have certainly not gone away. On the contrary, they have intensified many times over. The one major exception is the Delhi metro, a major segment of which began services yesterday.

This apart, the dominant trend in urban transport has been the increasing dependence on private solutions. As the document points out, this goes directly against two legitimate objectives of any urban transport policy""improving the environment and reducing congestion.

The Delhi Metro is projected by the draft as an attractive model for larger cities to follow. As the coverage of its network expands, it seems to be living up to the high expectations of the ministry, which holds 50 per cent of the equity in the venture on behalf of the central government.

It is perhaps a little too early to judge the financial viability of the project; user acceptance can only be gauged once the full network is operational. However, in designing its fare structure, it adopted a formula that embodies various attributes considered essential to the feasibility of infrastructure investments in any sector.

The fares are structured so as to cover operation and maintenance costs, interest obligations and provisions for depreciation. There is no explicit provision for "profit", or return to shareholders, who are the central and state governments.

This is, strictly speaking, a subsidy, but is perhaps a bit more palatable than our typical subsidy, because it doesn't involve a cash payout. In any event, this foregoing of returns by government shareholders can be justified by the positive externalities that the metro generates in terms of environmental quality and less congestion.

The draft document offers to extend the Delhi model to other large cities by way of financial involvement of the central government. It does address the issue of pricing and its key role in determining financial viability, but the principles need to be articulated much more explicitly as the policy takes shape.

In fact, pricing issues of various kinds receive a lot of attention. One is the perceived trade-off between pricing for financial viability and the sustainability of service provision and the compulsion to cater for "poor" users.

We should have learned by now that most subsidies in the name of the poor never get to them. Either they are usurped or the subsidised service just isn't delivered. The poor often end up paying far higher prices to unregulated private providers.

Covering cash costs and depreciation is not inconsistent with providing services which are affordable, and most importantly, reliable. It is not just the price of the service but also the certainty of it being there that benefits the poor.

The other pricing issues relate to the old favourites, fuel and private vehicles. The most newsworthy comment during the discussion of the policy with chief ministers was a suggestion by the chief minister of Delhi that a punitive tax be levied on a second car. The main text of the draft does concede the aspirational aspects of vehicle ownership and is relatively guarded on punitive taxes.

It does, however, present the Singapore approach in an annexe, suggesting that such an instrument is still in play. Of course, the ways in which the average Indian car buyer can evade such levies are many. The cardinal rule for a new tax is that most people who are expected to pay it cannot evade it.

On fuel prices, the draft appears to fall into a common trap, viewing the petrol-diesel differential as though it is cast in stone. The cause of the differential is an entirely discretionary tax imposed on petrol. Both manufacturers and buyers are exploiting obvious arbitrage opportunities in offering and buying diesel models.

The real solution to this lies in reducing, even eliminating, the price differential between fuels. Several well-intentioned attempts to run dual pricing schemes or price-differentiate between close substitutes have demonstrated the futility of this approach and new policies must take this learning into account.

The draft addresses a significant institutional dimension of the urban transport scenario. Every component of the system is administered and regulated by a separate authority. Co-ordination in terms of both operations and investment planning is difficult, if not impossible, and many failures on the ground are a direct consequence of separate jurisdictions. The policy proposes that cities set up a unified transport authority to execute new investments.

The Centre's ability to push this through will be critical in the success of the policy. The difficulties in restructuring rigid bureaucratic structures are immense and both carrot and stick have to be liberally used. Come to think of it, the central government's transportation strategy is also constrained by the multiplicity of ministries that implement it. It could show the way by attempting a functional integration between these ministries at its own level.

It is virtually impossible to find enduring solutions to problems without placing them in a conceptual framework. Despite its limitations, the draft document is a reasonable attempt to create such a framework. It should focus the debate on problems and solutions. It should also induce state and local governments to start designing solutions, which will garner financial support from the Centre. Anything that can keep cities moving is welcome.

The writer is chief economist, Crisil. He was associated with the design of the fare structure for the Delhi Metro. He operates two cars, one of which runs on diesel. The views are personal.