Urban Transport Sector in Developing Countries

There are critical differences in the urban transport problems that the cities in the developing countries face as compared to the industrialized countries. Urban transport systems of cities in the developing countries are characterized by premature congestion and deteriorating environmental standards and security c0nditi0ns. The mega cities of developing countries face road congestion at much lower levels of car ownership. Although most developing countries have less than 100 cars per thousand people as compared to 400 or more in the industrialized world but the relationship between income growth and car ownership is similar. Congestion in mega cities of developing counties is due to the concentration of population and income in the cities. In many African and Asian cities the capital city is more than 40 times as large as the second city. The primacy index for Malaysia was 0.29 in 2000 and a similar situation is prevalent in many other cities of Asia. Vehicle ownership and use is growing even faster than the population, with ownership growth rates of 15–20% per year not uncommon in developing countries. However, growth of road infrastructure has not been able to keep pace with the vehicle growth.

The most important feature of urban transport systems in developing countries is the absence of an efficient public transport system. Unlike the rich industrialize countries which are able to afford rail based mass transit systems; public transport is developing countries are mostly dependent on buses. Though buses are the main mechanized public transport mode, carrying 6.5 trillion (6.5 × 1012) passenger-km per year in 3 million vehicles, of which over 2 million operate in cities, the traditional local monopoly bus operators, whether private or publicly owned, have now mostly collapsed. (Gwilliam 2003)

Impact of urban transport activities on climate change
The growing energy needs that countries face in the transport sector, especially in urban transport in developing countries, present major challenges in terms of energy security and the environmental externalities associated with GHG emissions, which are growing at a faster rate than is population. In urban metropolitan areas the transport sector is estimated to account for a third or more of total emissions of the greenhouse gases. For example, in Malaysia transport sector accounts for 49% of the carbon dioxide emissions. In Lima transport accounts for about 37 percent of CO2 emissions, and in 2000 the sector was estimated to contribute 4.68 million tons of the city’s CO2 emissions. In Santiago emissions of CO2 from the transport system in 1994 were estimated at 4.2 million tons, about 68 percent of which was attributed to cars, taxis, and light trucks. In Mexico GHG emissions from transport accounted for an estimated 19.6 million tons of CO2 in 1998. (World Bank 2006)

Need for immediate actions
It is critical to address the issue of urban transport in developing countries because there is strong correlation between urban development and per capita energy consumption in the transport sector (World Bank 2006). The importance of transport sector in climate change mitigation action is well articulated by the fact that in the EU-15 all the sectors had a decreasing emissions trend from 1990 to 2005 except transportation where emissions grew by 26% (Silvestrini et al 2010).

With more than 300 cities in Asia expected to have over 1 million inhabitants by 2025, and many secondary cities growing rapidly, future economic growth will largely be driven by urban economic activity (World Bank 2006). Therefore, emissions from transport sector will grow fastest in the developing world as economies in Asia continue to experience high rates of growth.

Global best practices
A few cities in developing countries have implemented transport projects that have helped them reduce the climate change impacts of their transport sector. The case studies of two cities namely, Curitiba and Bogota are discussed in the following section.

Integrated land use and transport planning in Curitiba
Curitiba ranks first in the use of public transport system among all the Brazilian state capitals, with 75% of commuters using the system on weekdays. The fuel consumption of Curitiba is 30% lower than the fuel consumption of eight comparable Brazilian cities. Curitiba has emerged as a successful example of sustainable transport practices because it focused on improving the availability as well as the accessibility of buses in the city.

The transportation system of Curitiba evolved in the late 1960s with the formulation of the master plan for the city. The master plan of Curitiba focused on integrated land-use and transport planning as a tool to meet the challenge of growing urban limits rather than the policy of large scale highway construction followed by most other Latin American cities.

Curitiba’s Integrated Transport Network is managed by URBS (Urbanizao de Curitiba) which is a state owned company created in 1963. URBS monitors and coordinates the system, operates the bus lines and maintains the infrastructure of the system. The buses are owned and run by 16 private companies that receive licenses for specific lines and are paid on a per kilometer basis.

To increase convenience and boarding efficiency Curitiba developed boarding tube stations and low floor buses with turbo engines and wider doors. Provisions have been made for the convenience of disabled and elderly passengers. Regular maintenance and renewal of fleet in every ten years ensures that the buses are in good conditions and pollution level is under control.

A road hierarchy and land control system, assigning priorities to buses, and proper zooming laws were put into effect. Integrated systems with trunk and feeder routes, express lines and inter-district routes were introduced. The city also introduced automatic combined ticketing.

Dedicated public transport system in Bogota

In the 1990s, the urban transport system of Bogota, Columbia was characterized by long travel times, congestion, high occurrence of accidents and poor road network and high levels of pollution and high levels of pollution. With the aim of improving the transport system of Malaysia, the mayor of Bogota in 1998 decided to focus on reconstruction and maintenance of sidewalks, construction of cycle paths, campaign against the use of private motor vehicles and development of an efficient public transport system. As a result Transmilenio which is a bus rapid transit system was created in 2000.

The main features of the system include dedicated bus lanes, level loading and offloading of passengers, pre-selling of tickets and improvements in technology. The buses have a capacity of 160 passengers, are disabled friendly and meet Euro III emission standards. The system uses 165 articulated passenger buses and with clean diesel engines. A key advantage of Transmilenio is its low cost. Operating costs are also low because of the innovative Transmilenio partnership.
The system accounts for almost 1.3 million daily trips and the main line carries more than 40,000 passengers per hour. Transmilenio users save on an average save 223 hours of travel annually and 9 percent of Transmilenio users have been diverted from commuting by private automobile.

Urban transport in India
The Indian urban transport sector is characterized by the dominance of personalized modes constituting mainly two wheelers and cars. At the end of the fiscal year 2005 – 06, India had 89.6 million registered motor vehicles out of which the share of two wheelers and cars was 72% and 13% respectively (MORTH 2009). The share of buses in total registered vehicles has declined from 11.1% in 1951 to 1.1% during 2006 which indicates the slow growth in public transport modes (MORTH 2009). Most State Road Transport Undertakings (SRTUs) are sick and their fleet size has declined rather than grow to meet the demand. Consequently street congestion has increased tremendously in Indian cities and overall speeds on major corridors have dropped significantly.

The share of non motorized transport especially cycling has also declined in Indian cities. Congestion, increase in trip lengths due to urban sprawl, increase in purchase power of people and totally inadequate facilities for cycling have all contributed to reducing cycling to less than 11% of the mode share which is down from nearly 30% in 1994. And for pedestrians our city roads have simply forgotten they exist. The percentage of roads with pedestrian footpaths runs to hardly 30% in most cities. (MoUD …)

In the following section the case of Indore and Bangalore are discussed which are examples of a good model for urban bus system operations.


Indian best practices
Indore is a fast growing industrial city in the state of Madhya Pradesh. The population of Indore in 2001 was 1.6 million. Like many other metropolitan cities of India, Indore faces the twin challenges of a growing population and pressure on existing urban transport system. In order to improve the accessibility levels in the city, popularize public transport and reduce the dependence on private vehicles, it started the process of improving its urban services in 2005.

Indore Municipal Corporation, Indore Development Authority and the district administration jointly invested in the creation of an SPV called the ICTSL (Indore City Transport Services Ltd.). Under the aegis of the ICTSL, a PPP model for creating and expanding urban bus services in Indore was structured. The investment in common structures like bus stops and office space was contributed by the ICTSL and the investment in rolling stock was made by the bus operators. The ICTSL finalized the routes for operation of the city buses and initiated a tendering proves for inviting private bus operators to bid for operating buses on predefined routes. The ICTSL also involved private parties in the provision of services like provision of bus passes, installing and operating GIS/PIS and advertising in the buses. The performance parameters for all the private entities are prescribed and monitored by the ICTSL.

The ICTSL is also extending the PPP model for operating 100 luxury taxies for throughout the city. It is also looking for ways to expand its services to less profitable routes by
 planning the system integration of the tempo and mini bus operators into the system as feeders to the bus service;
 exploring the option of cross subsidizing the urban bus services on less commercially attractive routes by working out a negative premium mechanism, where ICTSL pays the operator to run the system.

Reforms to include bus services in Bangalore
Bangalore is India’s IT hub and the third most populous city of India. Its population was five and a half million in 2001 and the total number of registered motor vehicles was ….. out of which 80% were two wheelers. The public transport system in Bangalore faced the following problems:
 Irregular services
 Drastically reduced fleet services
 Low internal and external efficiency in terms of resource management
 Poor maintenance of vehicles
 Mounting losses

In order to improve the situation of public transport, BMTC (Bangalore Metropolitan Transport Corporation) was formed in 1997 as an independent corporation under the Road Transport Corporations Act 1950. It took over 13 depots, divisional offices and bus stations attached to the erstwhile Bangalore service divisions, with 2088 buses operating 1934 schedules and 13294 employees, a staff ratio of 6.9 per bus (TERI 2009). Routes under the BMTC are either allocated on the basis of demand from a group of commuters or successful implemental routes taken up by BMTC on its own initiative that result in high revenues (TERI 2009). It is the only profit-making public bus company in India.

BMTC went about carrying its operations with the aim of providing an efficient, adequate and economical transport system to the people. The rationalization of fares and operation of differential services in the city has helped make bus transport more attractive to the people. The occupancy ratio has improved over the years and the average route length has increased as well. Although Bangalore is not a decongested city, it is a good example of a city taking serious initiatives to promote public transport by improving the quality of services and accessibility.

Recommendations

Transport is a key infrastructure sector and an efficient transport system is a prerequisite for the achievement of the goal of continued economic growth. Sustainable transport system requires a sound and efficient public transport system. Therefore, there is an urgent need to stem the decline of public road transport systems in developing countries. Many developing countries have state run bus services which are highly inefficient and a drain on the exchequer. The performance of the state public transport system in terms of quality and efficiency should be improved and private sector resources should be utilized for expanding the network of bus services.

High costs of foreign exchange reserves

Globalization has been hailed by many as a remarkable system for more efficient global allocation of resources. However, financial globalization has been accompanied by frequent and painful financial crises. Since the debt crises of 1982, financial crises have occurred every now and then. Some of the most famous ones are Mexican crisis in 1995, East Asian crisis in 1997, Russian crisis in 1998, Turkish crisis in 1994 and 2001, Brazilian crisis in 1999, Argentine crisis in 2002 and the current crises which has the unique feature of having originated in the developed countries.

The developing countries found a way to protect themselves from such crises and the painful process of IMF conditionalities by accumulating reserves. Countries with higher level of liquid foreign assets are able to withstand panics and sudden reversal of capital flows. Therefore, developing countries including India started accumulating foreign exchange reserves on an unprecedented scale. The total foreign exchange reserve holdings in most emerging economies far exceed all the rules of reserves accumulation. However, accumulating excess foreign exchange reserves is a costly means of averting crisis.

There are essentially three ways in which the cost of holding excess foreign exchange reserves can be ascertained.

• The spread between the private sector’s cost of short-term borrowing abroad and the yield that the Central Bank earns on its liquid foreign assets.
• The spread between the interest on domestic government bonds and the yield on reserves. This is known as the fiscal cost of reserves.
• Lastly, reserves could have been alternatively used to augment the public capital stock of the economy, and the social opportunity cost of (public) capital can be used as the relevant benchmark for the cost of foreign borrowing.

The objective of this paper is to compute the first kind of cost i.e. spread between the private sector’s cost of short-term borrowing abroad and the yield that the Central Bank earns on its liquid foreign assets for India.

Phenomenal growth of Reserves

India’s foreign exchange reserves have risen dramatically since the crisis year of 1990-91 when reserves were barely sufficient to cover 3 weeks of imports. In the year 1991-92 total foreign exchange reserves were at US$ 9,220 mn whereas in the year 2007-08 India’s foreign reserves stood at US$ 309,723 mn. Reserves begin to increase steadily from 1991-92 which is identified with the onset of the era of globalization. Note that there is a decline in the reserve holdings in 2008-09 to US$ 251,985 mn. The decline in reserves can be attributed to the financial crisis in the developed world which led to the reversal of capital inflows.

Prior to the era of financial globalization, countries held reserves mainly to manage foreign exchange demand and supply arising from current account transactions. The traditional rule of thumb for Central Banks was that they should hold a quantity of foreign exchange reserves equivalent to three months of imports. However, in the age of financial liberalization when panics and sudden reversal of capital flows are very common this rule of thumb was clearly insufficient. All developing saw the advantage of holding a large stock of international reserves to protect their domestic financial system without IMF cooperation. Infact the policy guideline that the IMF provided to the developing countries with uncertain access to capital markets also encouraged the accumulation of reserves equal to short term debt. The rule that countries should hold liquid reserves equal to their foreign liabilities coming due within a year is known as the Guidotti-Greenspan rule.

India's short-term debt/reserve ratio was significantly above unity in the early 1990s. Since then, India has built up enough reserves to abide by the Guidotti- Greenspan-IMF rule, and the short-term debt/reserve ratio has stabilized at around 0.5 from 2.07 in the year 1991 – 92.

The Cost of Reserve Holdings

India like many other developing countries has been accumulating reserves far in excess of the conventional bench marks. For every $1 of reserve assets India accumulates in excess of the optimal level, it pays a cost equal to the spread between the private sector’s cost of short-term borrowing abroad and the yield that the Central Bank earns on its liquid foreign assets.

The natural question that arises in this exercise is what constitutes optimal amount of reserves. However, there is no clear answer to this question because even countries with sound macroeconomic policies can be hit by contagion from elsewhere in the world of liberalization. Hence the bench mark for optimal reserves keeps increasing. Keeping in mind the self – insurance motive it is assumed that the optimal amount of reserves equals the sum of short term debt, six months of imports and foreign portfolio investments. Reserves in excess of this amount are considered unnecessary. With this definition of optimal reserves, I find that excess reserves have been increasing steadily from negative levels in 1991 – 92 to a high of US$ 140,076 mn in India.

To ascertain the loss in income associated with holding excess reserves, potential investment rate has been calculated by adding excess reserves as a percentage of GDP to the actual rate of growth of investment. Once this potential investment rate has been calculated, the potential rate of growth of GDP can be calculated by dividing potential investment rate by the incremental capital output ration. The loss in growth is the difference between the potential growth rate and the actual growth rate (Table 1.).

Table 1.

Year	Rate of NDCF	ROG of GDP at FC	Excess Reserves/ GDP	Potential Growth Rate	Loss of Growth
1991-92	12.7	1.4	-4%	0.98	-0.45
1992-93	13.5	5.4	-2%	4.57	-0.79
1993-94	13.7	5.7	2%	6.51	0.83
1994-95	17.1	6.4	3%	7.51	1.12
1995-96	17.2	7.3	1%	7.71	0.42
1996-97	15.2	8	0%	7.97	-
1997-98	16.9	4.3	1%	4.56	0.25
1998-99	15.3	6.7	2%	7.56	0.87
1999-00	18.3	6.4	2%	7.14	0.7
2000-01	16	4.4	3%	5.17	0.81
2001-02	13.8	5.8	6%	8.34	2.53
2002-03	16.6	3.8	9%	5.92	2.08
2003-04	19	8.5	14%	14.81	6.29
2004-05	22.7	7.5	14%	12.08	4.61
2005-06	25.8	9.5	11%	13.57	4.05
2006-07	27	9.7	14%	14.8	5.05
2007-08	28.9	9	19%	14.94	5.93

Source: Calculated from Reserve Bank of India data

*Figure in parentheses indicate negative values

The loss of GDP growth has been increasing with the increase in reserve holdings. The percentage loss in GDP growth was 5.93% in 2007 – 08 and the loss was highest in the year 2003 – 04 at 6.29%.

The above analysis proves that India is paying a very heavy price to play by the rules of financial globalization. In the year 2003 – 04 India lost out above 6% of GDP due to its policy of accumulating reserves in excess of what is justified by all rules of reserve accumulation. The amount of excess reserves held by the Reserve Bank of India could have been alternatively used to augment the public capital stock of the economy. In a country like India which is characterized by inadequate expenditure on infrastructure and social sector, this is indeed a great loss. The social rate of return would have been much higher if these excess reserves could be invested in infrastructure which is the focus area of the government during the Eleventh Five Year Plan.

A study (Fan, Hazell and Thorat, 1999) carried out by the International Food Policy Research Institute on linkages between government expenditure and poverty in rural India has revealed that an investment of Rs. 1 million in roads lifts 165 poor persons above the poverty line. The number of people who would have moved out of poverty if the entire amount of excess reserves had been invested in roads has been calculated in Table 3.

Table 2. No. of people out of poverty with investment in Roads equivalent to Excess Reserves

Year	Inv. In Roads/Excess reserves	Number of people out of poverty
1991-92	-9,886.25	-16,31,231
1992-93	-6,213.25	-10,25,186
1993-94	4,686.20	7,73,223
1994-95	9,263.90	15,28,544
1995-96	2,325.80	3,83,757
1996-97	130.79	21,581.17
1997-98	3,578.76	5,90,494.6
1998-99	6,908.65	11,39,926
1999-00	9,233.97	15,23,605
2000-01	13,384.78	22,08,488
2001-02	25,654.36	42,32,969
2002-03	40,384.93	66,63,513
2003-04	69,453.45	1,14,59,818
2004-05	78,226.29	1,29,07,337
2005-06	68,343.14	1,12,76,617
2006-07	94,340.38	1,55,66,163
2007-08	140,076.00	2,31,12,539

In 2007 – 08 the amount of excess reserves held with Reserve bank of India was US$ 140,076 mn. According to the Uniform recall period distribution data of NSSO 61st round the number of people living below the poverty line is 3017.20 lakh in 2004 – 05. If the entire excess reserves (US$ 140,076 mn) in 2007 – 08 had been invested in road infrastructure then according to the study by Fan, Hazell and Thorat approximately 231.12 lakh people or 8% of the people living below poverty line would have moved out of poverty.

India has responded to financial globalization in a manner that is far from optimal. By accumulating reserves far in excess of its short term debt obligations India has lost approximately 2% of GDP every year during the period 1991 – 92 to 2007 - 08. Moreover the investment of the excess reserves in social and infrastructure sector would give a higher social rate of return. The sudden reversal of capital flows due the crisis in developed countries reduced the foreign exchange reserves in 2008 – 09 but now India is again accumulating more reserves. Therefore, the loss in GDP growth and the opportunity lost in domestic investment is likely to rise in future.