Targeted Subsidies in Public Transport: Combining Affordability with Financial Sustainability

Public transport systems have to balance financial sustainability with a need to provide affordable services, in particular to lower-income populations. In reality, meeting both goals is difficult, with transport systems either relying on high levels of subsidies or charging transit fares that are too expensive for the city’s poor. This note describes the opportunities associated with the use of targeted subsidies, which would allow operators to set prices at a level needed for cost recovery, while ensuring that services remain affordable for carefully targeted beneficiaries. Today, a new generation of targeted subsidies can take advantage of the increased use of electronic fare systems and “smartcards,” as well as sophisticated methodologies for defining who is poor and needs support. Key aspects related to the design and implementation of targeted subsidy schemes are (i) defining who needs the support, (ii) understanding how people travel, (iii) analyzing the impacts of the new scheme in terms of both financial sustainability and accessibility, and (iv) avoiding fraud and unintended consequences. Based on recent experiences with World Bank projects in Buenos Aires, Bogotá, and other Latin American cities, this note presents some early experiences and a five-step framework for cities to get started.