Fair fares? Policy options to respond to bus owners' call for a 25% price increase
For many analysts, the point in the economic-policy road where the price-controlled transportation sector representatives would provide an ultimatum to the Government of Belize (GOB) was an inevitability, with it being only a matter of time before demands for subsidies or price-increase allowances were made. One could soon expect similar demands from other price-controlled sectors impacted one way or the other by heightened input costs.
This week, and somewhat on cue, the Belize Bus Association (BBA) publicized such an ultimatum to the government: Either provide some form of fuel-price subsidy to their members or authorize an increase in their fares by 25% to help their profit margins. In an interview with The Reporter, BBA's Secretary Ewart Metzgen explained that his "membership has decided" to strike if the government does not bend to either of the options.
Metzgen also explained that the decision follows meetings with Minister of Transport Hon. Rodwell Ferguson, wherein their request for a fare uprate was rejected, with the minister indicating that he needed at least two weeks before it could be brought before Cabinet. Metzgen, on that point, told The Reporter:
"We can't wait two weeks. By then the cost of fuel would be over 15 dollars a gallon. We need the relief now. ... We were the only industry that was never looked at by the previous administration or this one for any sort of relief. Still, we know that the fuel cost is no fault of the government, but we know that something can be done to alleviate the cost somewhere not only for the operator but for the country as a whole.”
Fiscal Space Tolerates Only A Targeted Response
The PolicyScape on all matters related to fuel prices, given the geopolitical backdrop and other factors serving to push up oil prices, has certainly become a perilous one for policymakers and politicians. The fact is that the constant increases at the pump at home are directly related to the price surges on the international market, with the sanctions associated with the Russia-Ukraine conflict accelerating the rate at which oil prices climb.
Last January, for instance, the acquisition costs accounted for roughly 40% of the final pump price. At the same time, GOB's largest tax on fuel (the excise duty) represented 49% of the pump price. A year later, the former and the latter represent 50% and 35%, respectively.
Proportionally, the excise-tax take has relatively declined given the nature of the impost. Belize's excise on gasoline is a per-unit tax, which signals that it is charged based on quantity as opposed to value (ad valorem). Consequently, since 2017, the same amount in excise is paid to GOB if the same quantities are imported and sold. Specifically, for regular gasoline, it is $3.95 per imperial gallon. For "Premium", Diesel and Kerosene it is $4.35, $3.57, and $1.27 per imperial gallon.
In 2021, data from the Statistical Institute of Belize (SIB) placed the quantity of the four fuel products at approximately 46 million gallons, which suggests a tax take of close to $151 million if an average of the four per-unit charges is used.
A one-dollar, "generalized" reduction in the excise duty would reduce the government's take by more than $40 million if applied on all products. Considering the toll the "Lockdown Recession" had on the country's public-sector finances, the Ministry of Finance (MoF) would likely find that size of a budgetary impact untenable.
Worse still is the fact that the clamor from the BBA is for at least a 25% reprieve, which--at the current price for Diesel (at the time of writing, PolicyScape's last check at a local gas station was at $13.59)--would suggest approximately $3.40 being shaved off the pump prices to bring Diesel into the $10.00 range. If only Diesel is reduced by $1.00, the public purse loses approximately $18 million (down to a total of $47 million from an overall intake off Diesel of $65 million in excise duty).
A full $3.00 off would cost GOB more than $50 million, a loss that Belmopan can hardly afford. Therefore, one can almost certainly rule out any "across-the-board" tax rate reduction on Diesel (or any fuel product for that matter). As a result, if there is any tax reprieve, it is likely that GOB would employ a targeted strategy with the BBA, with the goal of easing the impact on the national budget while at least partially appeasing the bus owners, without upsetting commuters.
A Targeted Subsidy?
Regarding a targeted approach, Metzgen told PolicyScape360 that BBA members (with a fleet of "close to 200 buses") use between "35,000 to 40,000 gallons of Diesel every two weeks." That translates, conservatively speaking, to about 840,000 to 960,000 gallons or (700,000 to 800,000 imperial gallons) for the year.
As stated earlier, the excise duty on diesel is $3.57 per imperial gallon, therefore, the Government's take from the BBA is between $2.5 million to $2.9 million. Of course, assuming US gallons are used, then the figures change to between $3 million and $3.43 million. For the purposes of this discussion, we shall work with the highest figure (i.e. $3.43 million for the 960,000 gallons estimate), which would represent about 5% of the total tax paid on diesel fuel.
If one recalls that the BBA is calling for a 25% price hike or matching subsidy, then--using the Belize-City to Belmopan route for instance--one is talking about a jump from $6.00 to $7.50. If the $1.50 difference is treated as the gauge for per gallon subsidy, that could cost GOB approximately $1.44 million.
Short- versus long-term solution?
Arguably, a subsidy of $1.44 million, appears mild when weighed against the prospects of an across-the-board cut in the excise charged on diesel (i.e. $40 million versus $1.44 million). However, the lingering question is how long would this serve as a viable solution, especially as diesel prices are expected to climb.
This, therefore, revives the debate regarding the value of bus fares being indexed to inflation. For example, if a straightforward inflation-indexed bus-fare formula was implemented in 2015 and tied to the Consumer Price Index (CPI)'s Transportation sub-index, our estimates show that an annual uprate over the last seven years would have produced a rate of approximately $0.17 per mile, up from the actual of about $0.12.
For illustrative purposes, that would be the difference between a Belize-City-to-Belmopan commuter paying $0.14 per mile or $7.16 (as of January 2021) instead of $6.00 for the 50-mile journey. Given that the demanded 25% increase for that route would be approximately $7.50, the difference here would have been a BBA demanding closer to a 5% increase as opposed to the 25% (see Table 1.0 above).
The true value of such an index is in its predictability as far as the commuters are concerned. Being an entrenched policy that operates independent of policymakers, it would, therefore, be more insulated from the politics of the day. Naturally, it is fair to say that under such a regime, the calls from the commuters to ease inflationary pressures would take center stage. This would have, once again, heightened pressures for GOB to subsidize the industry; however, this time, in response to the outcry from the demand side.
The Way Forward: The Inescapable Subsidy
In the end, the inescapable reality is that public transportation provides a positive net social benefit to society, and ultimately demands a careful blend between price adjustments and subsidization.
On the one hand, data suggests that bus fares--had they been indexed to transport-specific inflation--would have already been closer to $7.16 since last January. However, based on the social benefit of public transportation, can such increases fully be expected to have been borne by the general public, especially given the recent economic hit brought about by COVID-19? Simultaneously, however, the operators are business persons whose survival depends on being able to adjust prices in response to input costs.
The need to balance the business and the social benefits make subsidization an inescapable reality. The only lingering consideration is whether the subsidy demands would have come from the bus owners or from the commuters (or both). In Belize's case, the bus fares are not indexed to inflation, thereby, leaving it up to the operators to absorb the increasing operating costs, until the pressures on their margins make that "de facto" subsidy financed by the private sector an impossibility.
One possible remedy on the way forward is for a blend of both subsidy and inflation-indexed bus fare to be implemented in such a way to ease the impacts on both the general public and the public purse, while still allowing the BBA's members to, at least, break even. Granted! It is easier said than done, but then again, when is public policy ever simple and uncomplicated.
On a final note, administratively, one method of implementing the subsidy could be via the fuel-card regime, which would allow for the relevant private- and public-sector entities to be able to monitor the usage under the program. Furthermore, the monitoring system must also be effective at ensuring that the buses are indeed serving the public. Fundamentally, agreeing to the policy direction is one thing; the pivotal issue is the public administrative components which will determine how well any such initiative is implemented.