Public transport fares are regulated in most developing countries, and enforcement is often more stringent than for any other regulation. The regulations may specify actual fares to be charged, a maximum permitted charge, or a charge for a basic service that operators are permitted to exceed at their own discretion for premium services. Different fare levels may be authorized to reflect different service standards.
Justifying fare control
Several reasons may be given for controlling bus fares. The stated objective is often that it ensures that fares are affordable. Where an operator has a monopoly, the objective may be to prevent the abuse of monopoly powers.
If there are many operators on one route, the objective may be to prevent the stronger operators from forming cartels to force the weaker ones out of the market by charging uneconomically low fares. And then exploiting their oligopoly. Where there are several operators it may also be desirable to ensure that fares are consistent on each route.
The high cost of fare control
There is considerable disagreement about whether fare control is necessary to protect passengers from exploitation by unscrupulous operators, or whether it distorts the market to the passengers’ disadvantage.
In fact, fare control, while designed to protect passengers’ interests by preventing operators from charging fares which they cannot afford, often has the opposite effect. Inappropriate control of bus fares has caused numerous problems, and has brought about the demise of bus companies in many parts of the world.
In cases where an operator folds after a government, with the best of intentions, prevented it from increasing fares to a sufficient level to sustain services, passengers may ultimately pay more. This can occur when a new service operating in the underground economy fills the void left by the regulated operator. Higher fares, often for inferior service, are often the result.
Fare control and subsidies
Where bus services are subsidized, if fare levels do not keep pace with increases in operating costs, the subsidy requirement increases.
If there is no subsidy, operators are forced to reduce expenditure. Fleet maintenance and replacement begin to suffer almost immediately. Vehicle availability and service reliability deteriorate, and the level of service falls. This leaves a shortfall in the supply of transport.
Where, as is often the case in developing countries, demand is also increasing due to population growth and urban migration, the gap between supply and demand widens rapidly. It is usually filled by illegal operators entering the market, charging fares which are sufficient to cover their costs, and these are usually higher than the established bus operator would have charged had permission been granted. Passengers have little choice but to pay the higher fares.
Illegal operators tend to concentrate on the most profitable main route corridors. The established bus operator often attempts to maintain the less profitable services, making reductions in the services on the profitable routes, since these are now well covered by competitors and can stand a reduction in frequency. However, the ability to cross-subsidize is progressively eroded and the operator may be forced into insolvency, leaving all services in the hands of the informal operators.
Fare control and responding to market demands
Another common effect of fare control is to force operators to wait considerable time before a fare increase is approved by a cumbersome bureaucracy. The effect of the time lag between cost increases, such as an increase in the cost of fuel or wages, and implementation of a fare increase, can be serious. Where inflation is at a high level, this may eventually ruin an operator, since revenue will rarely, if ever, be sufficient to fully cover all costs.
Ideally fare increases should be authorized at regular intervals, preferably on a similar date each year, and be based on a formula which links bus fares to an appropriate price index. It is also preferable for fare increases to be relatively frequent, and small, rather than infrequent and large.
Large, infrequent fare increases are not uncommon where governments are reluctant to authorize increases in fares. However, it not only causes adverse passenger reaction each time the fare increases, but under conditions of inflation will result in continuously deteriorating financial performance by the transport operators over the long periods between fare increases.
It’s important that operators are able to predict with reasonable accuracy how fare levels will change, so that they may budget accordingly. But the uncertainty often inherent in fare regulation discourages investment. If operators cannot be confident that they will be able to adjust fares to compensate for changes in the cost of inputs, investing in a bus becomes risky and unattractive to potential investors.
Lifting fare control
Regulation of bus fares can create serious problems if not administered sensibly. There may be political obstacles in some countries to deregulating bus fares. Nevertheless in most situations the objective should ideally be the eventual lifting of all restrictions over the level of bus fares.
Operators are aware that there is a limit to what passengers can afford or are prepared to pay, and in a competitive situation this will prevent them from attempting to impose unreasonably high charges. Those who do will lose business to those charging less.
Allowing operators more scope to determine their charges will give them the opportunity to explore different markets, and adjust charges in line with variations in demand. In a monopoly situation, however, there must be measures to ensure that fares are reasonable. But it is still desirable that fares should be set by the operator rather than by the regulatory authority.
Flexible fare control
If bus fares are regulated, it’s important that the regulations allow operators a degree of flexibility in their charging policies. For example, an operator might wish to charge different fares at different times of the day to reflect variations in demand, offering cheaper travel to many users, or to introduce a higher quality service in addition to the basic service, at a higher fare level.
If superior services are offered at higher fares, there should be a mechanism to ensure that these fares are not charged on ordinary services, and that operators do not restrict the level of operation on ordinary services in an attempt to force passengers to use the superior services. This may be achieved by attaching appropriate conditions to the licenses for the related services.
Appropriate fare control
An appropriate fares policy is essential to sustain affordable services that meet demand, while providing the operator with an adequate return on investment. There may be a need for a degree of control to ensure that riders know in advance how much they will have to pay, to avoid the confusion which might arise if several operators were to charge different fares for the same journey. This can be resolved by a requirement for operators to notify the authority of their fare scales, and to observe a specified notice period before any changes are made.