Philippines - Transport sector review

Report No. 7098-PH Philippines Trarisport Sector Review March 31,1988 Intrastructure Division Country Department II Asia Region FOR OFFICiAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents rnay not otherwise be disclosed with out World Bank authorization.  CURRENCY EQUIVALENTS Year Pesos (P) per US DolLar 1983 11.1 1984 16.7 1985 18.6 1986 20.4 ApriL 1987 20.5 ABBREVIAT IONS BAT - Bureau of Air rransportation CAB - Civil Aeronautics Bureau CCT - Common Carrier Tax COA - Commission on Audit CTP - Commitcee on Transport Planning DLG - Department of Local Government DOTC - Department of Transport and Communications DPWH - Department of Public Works and Highways GVW - Gross Vehicle Weight LRT(A) - Light Rail Transit (Authority) LTC - Land Transportation Commission MARINA - Maritime Industry Authority MIA(A) - Manila International Airport (Authority) MMC - Metro Manila Commission MMTC - Metro Manila Transit Corporacion MTPIP - Medium-Term Public Investment Program NEDA - National Economic DeveLopment Authority NTPP - National Transportation PLanning Project O&M - Operation and Maintenance PIP - Public Investment Program PNR - Philippine National Railways PPA - Philippine Ports Auchority ICC - Traffic ControL Center TRB - ToLl ReguLatory Board 'JRPO - Urban Roads PrK,ect Otfice  JR OMCILu USE ONLY PHILIPPINES TRANSPORT SECTOR REVIEW Table of Contents Page No. EXECUTIVE SUMMARY Introduction .... .... ... ........ ..*. i Sector Issues and PoLicy Choices ...........................i Institutional Aspects and Issues . . iv Public Expenditure Programs in the Transport Sector ......... v Recomnendations ............................. . vii I. INTRODUCTION . . . 1 A. Role of the Transport Sector . .............1.............. I B. Previous Bank Sector Work .............................. 2 C. Objectives of the Present Sector Review . . 2 II. SECTOR ISSUES AND POLICY CHOICES . ................... 3 A. Introduction ....... .............................. ....... 3 B. Road Transport .. 3 Optimum Road Transport Technology . . 3 Regulatory Policies ................................... 4 Road User Charges . ................................ 7 Cost Recovery from Road Users ......................... 11 C. Transport in Metro Manila . . .o ........................ 14 Traffic Congestion ... 14 Public Transport ... . ........... 15 D. Interisland Shipping ..... ............. .................. 16 Market Structure . . . 16 Cost and Price of Shipping Services . . . 1 ' 7 Fleet Modernization and Quality of Service ... 19 Maritime Safety . . . 19 Public Policy Recommendations ..... ................... 20 E. Other Modes . ............................................ 21 This report is based on the findings of a transport sector mission thac visited the Philippines in May/June 1987 consisting of Lars Nordin (Mission Leader), Clell Harral (Economist), Cerhard Menckhoff (Urban Transport Specialist), Asif Faiz (Economist) and Mohua Mukherjee (YP Economist). Contribution has also been made by Lily Uy (Researcher). The report has been edited by Patricia Brereton-MilLer. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page No. III. INSTITUTIONAL A SPECTS AND ISSUES ......... .......... 21 A. Organizational Setup ................. ....... . ... ............. . 21 B. Major Sectorwide Issues ... .. ........ .......... . 23 C. Institutional Issues in the Subsectors .................... 25 Roads ......................... ................... * .......... 25 Urban . ........., 25 Ports . ... 0.. ... 28 Railways ............... .... . .............................. 28 Aviation . ............ 29 IV. PUBLIC EXPENDITURE PROGRAMS IN fHE TRANSPORT SECTCR ........ . 29 A. General ...... .... ..... ... ...... ............... 29 Investments . ................................... . 29 Operation and Maintenance..... ....................... 32 B. Roads ..... 33 Investments .............................. so. 33 Operation and Maintenance ................................ ................ 34 C. Ports ..... ....... o...... o ........ .............................. 34 Investments ........ -.............. ............ % ............ 34 Operation and Mainteadnc e ..................... ..... . 34 D. Railways .. .............. ..35 E. Aviation ... 35 F. Urban .. ..................................... .......... 35 V. FUTURE ROLE OF THE BANK IN THE SECTOR . ... 35 ANNEXES 1. Sumnaries of Selected Transport Policy Studies 2. Public Investment Program  EXECUTIVE SUMMARY Introduction 1. The purpose of this review is broadly to assess the impact of recent economic and public policy developments on the role of the transport sector in the Philippine economy. The report particularly focuses on policy, institu- tional, and public expenditure developments in the sector that have occurred since the previous Bank transport sector review in 1983. 2. In its consideration of sectoral policy issues, the report also reviews key planning and policy studies which have been recently undertaken by the Government but which have not always been acted upon. The report then identifies those recommendations which are stilL worthwhile in the current climate of decentralization and privatization. It is hoped that these recommendations will form the basis for a short- to medium-term action plan still to be developed. On the institutional side, the report identifies institutional constraints and inadequacies which have arisen over the past few years and which prevent the system from functioning as it should. Finally, the report reviews the 1987-92 Public Investment Program. Such a review is particularly well-timed, given the change in government and the consequent shift in priorities for public expenditures. The Philippine economy, despite its scarce resources, appears ;o be poised for a recovery after the difficult phase since 1983. Certain public expenditure questions, such as the balance between investment and maintenance in the various subsectors, merit atten- tion. These issues are tackled in the third section of the report. Sector Issues and Policy Choices 3. The objectives of public policy in the transport sector should be to promote a diversity of transport services, responsive to market demands and technoLogical innovations in the industry, at as low a cost and price as possible. An additional objective is the reduction in economic disparities across regions and income classes by proper pricing of transport services. In accordance with the Government's stated intentions, these objectives should be achieved through maximum reliance on the free market, with governmental intervention limited to the establishment of a policy environment which encourages the market to work mos; efficiently and to the provision of essential infrastructure which the private sector is not well placed to provide. 4. The existing policy environment comprises a mixture of diverse and sometimes ill-conceived laws, regulations and practices accumulated from the past, which, if rigorously enforced, would undermine the objectives stated above. From an economic perspective it is fortunate that the existing policies are often evaded. However, significant distortions exist and there is a danger that vested interests will seek enforcement of present policies to limit competition. 5. Despite a surprising dearth of quantitative information, a number of good sectoral policy studies have recently been completed. Their recommenda-  tions, if implemented, should substantially improve the functioning of transportation markets and lead to more efficient and less costly transporta- tion services. 6. Road Transportation. The National Transportation Planning Project's (NTPP's) "Study of Road Transportation Regulation" (December 1986) recommends economic deregulation (i.e., elimination of present restrictions on r-arket entry and regulation of prices) and emphasizes safety aspects. The present regulatory restrictions not only pose an enforcement problem, but are also economically inefficient. Furthermore, there is a clear risk that existing vested interests in the industry will seek to enforce the regulations in order to restrict entry and control as much of the market as possible. The Govern- ment would best protect the public interest by moving gradually but decisively to dismantle the existing franchise system. 7. Economies of scale in truck size and pavement construction warrant the development of strong pavements and bridges instead of building weaker infrastructure and legally restricting the size and axle loads of vehicles. In addition, enforcement of such restrictions is difficult in almost all countries. Fortunately in the Philippines, the majority of the primary roads have been constructed with rigid concrete pavements of high bearing strength. The proposal in the Department of Public Works and Highways' (DPWH's) "Pavement and Axle Load Study" (July 1986) to raise legal, limits from 8 to 13 tons therefore appears reasonable. 8. With respect to road user taxation and financing, the conclusions and recommendations of the NTPP "Road User Charges - National Policy Study" (January 1984) and an updating report in February 1987 are well founded. The methodology employed is consistent with the current state-of-the-art and commonly accepted economic principles of cost recovery in the roads sector. In the Philippines, it appears that two types of road users are paying less than the marginal costs they occasion by their use of the roads: (a) 2- and 3-axle trucks, and (b) all vehicles under congested conditions. The proposals of the study to increase the taxes (on ownership and usage) for 2- and 3-axle trucks are sound. In addition to cost recovery objectives, these measures would also contribute to improving efficiency of transport services by encouraging selection and usage of appropriate vehicles. 9. Congestion pricing is widely endorsed in principle by transport planners, but rarely applied due partly to practical administrative difficul- ties and partly to political opposition. The principal exception is road tolling, which is often implemented for financial reasons but also may serve the economic purpose of charging for scarce road space. Private automobiles, due to their numbers and low occupancy ratios, are major causes of conges- tion. If more specific congestion pricing schemes are not feasible, and because private automobiles may be viewed as "luxury goods," the current high taxes on private automobiles should be maintained. 10. Maritime Transportation. The principal concerns in the maritime sector, so important to economic integration of the country, are the high cost of interisland shipping and the poor safety record. There appear to be two principal causes for high shipping costs: (a) existing arrangements for  - iii - freight handling at ports, and (b) the presence of a cartel in the liner services indirectLy supported by governmental regulatory policies. The present policy of the Philippine Ports Authority's (PPA's) acting as Landlord and procuring stevedoring and Longshore ("arrastre") services by contract is sound. However, the manner in which this policy has been implemented, in effect granting quasi-monopolies, could be improved. PPA shouLd create a more competitive market with alternative suppliers of such services in each port. PPA port charges to non-PPA ports should also be related more closely to the services rendered by PPA. As PPA's cost accounting system is improved, consideration should also be given to gradually abandoning the uniform PPA charges in all ports in favor of more cost-related port tariffs. 11. The other major factor tending to inflate the costs of inter-island transport is the pricing practices of the Liner cartel. These are indirectly supported by the Government's regulatory policies, which limit competition by restricting market entry and price flexibility. In contrast to the recommendations of NTPP's "Interisland Shipping Regulation Study" (December 1986), which recommends a form of "seLf-regulation" by the shipping cartel in collaboration with the Maritime Industry Authority (MARINA) to restrict entry, it appears that gradual deregulation of the industry, with essentially free entry (subject only to safety requirements for vessels) and free market pricing would best serve the interests of the Philippine economy. Reduction in the various taxes imposed on the import of vessels would also serve to stimulate innovation and reduce costs of interisland shipping. 12. Safety concerns may be less related to the age and type of vessel thar to the size and the capabilities of the crews. Maritime safety is one of the few areas which may need further study to identify the fundamental determinants and appropriate governmental response. 13. RaiLways. The fundamental question of the financial viability of the PhiLippine National Railways (PNR) continues to be of concern, particularly in light of the extremely low volumes of traffic. At minimum, a radical restructuring of PNR to address those few sectors where it might possibly render a socially useful service at reasonably competitive costs appears indicated. The opportunity costs of assets not needed for such services should also be considered. 14. Urban Transport. The Government's general decentralization poLicy will transfer many func~.ions from national agencies to the local level. While the details of the new policy have yet to be worked out, local decision-making on urban roads and transport regulations deserves support as it is likeLy to be more responsive to the needs of the peopLe. In Metro Manila, the sheer size of the population (equivalent to the next 30 largest cities in the nation) has raised a different set of complex issues. 15. Manila's traffic congestion seems to have improved in recent years. This is probabLy due to three major factors: (a) traffic engineering schemes implemented by DPWH's Traffic Control Center, (b) economic recession and a slight decline in private car ownership, and (c) the introduction of the Light Rail Transit (LRT), a 16-km long elevated rail line which began opera- tions in 1984-85. -With an economic recovery, the tra.fic situation could  - iv - worsen if the pent up demand for cars results in a rapid increase of new car registration. Moreover, while Metro Manila continues to grow, no major capacity expansion of the transport system can be expected for at least the next five years because of the lead time required for such works. 16. Another cause for concern is the weak financial situation of the Government-owned transport services. It would appear that public transport services could deteriorate substantially in the coming years if (a) the Metro Manila Transit Corporation (MMTC) is unable to modernize its aging fleet due to scarcity of funds; (b) private bus consortia continue to go out of business, and (c) the moratorium on issuing jeepney licenses is maintained. 17. To avert possible public transport shortages in Manila, a three- pronged approach should be considered. First, the current policy of bus and jeepney franchising should be revised to permit new services where the passen- ger market calls for them. The Department of Transport and Communications (DOTC) has requested NTPP to prepare a report on this subject by December 1987. Second, the restructuring of bus services to make them commercially more viable should be considered. Third, planning to substantially upgrade public transport in at least one high-volume corridor requires urgent attention. Since a study is currently envisaged for a second LRT line, this might provide an opportunity to also look at lower-cost alternatives, such as reserved bus/jeepney roads and, especially, separate busways which might include short elevated sections to avoid bottlenecks in the street system. SupporLt shuu'Ld aLso Ue given to the traffic engineering program and the construction of new road links as envisaged under a proposed Manila Urban Transport Project to be financed by the Japanese Government. 18. Effective coordination is required to implement a coherent transport improvement program. At present, most policy and investment decisions are taken independently by the individual urban agencies. Institutional coordina- tion will therefore be one of the key issues that must be resolved with regard to traffic and transport in Metro Manila. Institutional Aspects and Issues 19. A multitude of institutions collectively provide transportation services in the Philippines. It has become clear in recent years that a less- than-efficiently functioning transport system can often be traced to institu- tional constraints. These have been examined and are observed to fall broadly into three categories: coordination problems, delays in the processing of work, and inadequate staffing. 20. Coordination. Responsibility for construction and maintenance of transport infrastructure is vested in agencies which are not directly concerned with transport policy, regulation and administration. While there are merits to such a division of responsibilities, it is important noc to lose sight of the overall need for coherent planning. Although the National Economic Development Authority (NEDA) is the key agency carrying out inter- modal coordination between ports, railways, airports, highways and rural roads, projects are initiated and evaluated at the agency level, without regard to their impact on the development of other transport modes. At the  agency level, there is neither an incentive to coordinate activities nor a built-in mechanism to ensure coordination during the project preparation period. NEDA's function is, in effect, one of allocating resources for already prepared projects in all sectors. 21. Delays. Project implementation is often impeded by delays in the processing of contracts. This problem has be,:ome acute in recent years, when contract prices have had to be adjusted and price escalations recalculated due to currency devaluation and inflation. Approvals may take as long as two years to pass through the government bureaucracy. Part of this problem is due to a duplication of work by various agencies. The Commission on Audit (COA), for example, has mandated a review of all feasibility studies for contracts signed after March 1984, although the review is now done on a selective basis. Delays are also caused by the sometimes weak quality and competence of staff involved in the whole decision process. Some of the delays occur simpLy due to lack of technical expertise at certain management levels to make an appropriate decision within a reasonable length of time. Thus, the tendency is to retain documents for longer than required while clarifications are being sought. 22. Staffing. Staffing and management of the sector agencies is uneven. While low government salaries make it difficult to recruit and retain competent staff, this problem has been somewhat alleviated by the general economic slowdown, which has reduced the "brain drain" toward the private sector. As a result, working level staff have in large measure remained in many agencies. On the other hand, and potentially more serious, the number of managerial positions that have changed incumbents after the change in govern- ment in February 1986 appears to threaten the proper functioning and conti- nuity of some of the sector institutions. There is consequently a need for the Government to strike a proper barance between political and professionaL career appointments to remedy this situation. 23. Centralization of government authority has added to the inefficien- cies in project implementation caused by slow contracting processing. While this problem has been widely recognized, and Government has recently been moving toward decentralization, success so far has been limiced, owing to a number of factors. One important issue is the readiness of regional offices to take over some of the delegated responsibilities and authority. Decentralization will be successful only if local offices are adequately staffed with qualified officials. A technical training program for local staff should therefore be established at the regional/provincial Level. The quality of local officials also varies greatLy, and many regionaL offices of both the agencies and COA are reluctant co take on extra responsibiLities. Public Expenditure Programs in the Transport Sector 24. The October 1986 Medium-Term Public Investment Program (MTPIP) for 1987-92 represents a massive build-up to support economic recovery and agro- industrial development (82% in real terms) compared to the 1985-90 program, which was evaluated by the Bank two years ago. The highway subsector would receive the largest share of MTPIP funding, about 70%, followed by the ports subsector with about 15%.  - vi - 25. While it is unlikely that MTPIP .will be carried out in its entirety since there are doubts about both the level of financing available and the implementation capacity of the respective agencies, the Plan is valuable in setting implementation objectives. Many of the projects included have feasibility studies completed, showing economic rates of return sometimes substantially above the 15% level customarily used in the Philippines for transport projects. The projects that have not yet uee-i evaluared have been included in MTPIP based on prima facie viability which will be confirmed in due course. 26. Operation and Maintenance. Actual operation and maintenance (O&M) expenditures recorded by the Department of Budget for the period 1.982-86 and estimated for 1987 show relatively stagnant O&M expenditures up to 1985 (declining in real terms) followed by a substantial 53% increase in 1986. The Government's O&M expenditures in the transport sector account for about 35% of total expenditures in 1986 and 1987 co.?ared to about 28% in previous years. While this percentage increase in itself does not constitute a sufficient indication that O&M expeneitures are adequate, it does show the increased relative importance the Government attaches to maintenance. Since O&M expen- ditures are also increasing in absolute amounts and assuming that the increased levels can be maintained during the 1987-92 period, this would help reduce the backlog of deferred maintenance in the sector. 27. Subsectoral Issues. The majority of investments proposed for the road subsector seem justified. The only component to be watched is the program for "various locally funded feeder/secondary and national roads," which would require 38% of the P 44,590.2 million requested for the road program and is the principal reason for the large increase of MTPIP over the 1985-90 program. While the objectives are worthwhile, the concern is that substantial funds may be spent without corresponding physical assets being created due to capacity constraints in selecting, evaluating, designing and implementing the huge number of small projects involved. The Covernment intends to use reliable non-governmental organizations such as religious groups and the Red Cross to augment its own implementation and monitoring capabilities for this important program. If these efforts fail to produce the intended results, the program should be reduced to more manageable levels, say 10-20% of the total road program. 28. The MTPIP port program includes three new projects with a total cost representing 56% of the P 9,657.8 million port program. All three projects should be reduced in scope. the projects at issue are (a) the Port Cargo Handling Expansion Project, (b) the Manila South Harbor RehabiLitation Project, and (c) the Tertiary Ports Project. 29. The PPA share of the MTPIP ports program also exceeds PPA*s present investment projections and should be reduced accordingly. The port of San Vicente (Port Irene) remains questionable and should be postponed until ics justification has been established.  - vii - 30. PNR has embarked on a revitalization program to regain its opera- tional levels of the middle 1970s. While the financial viability of the railway is doubtful, the type of railway investments proposed under MTPIP, i.e., rehabilitation of motive power, rolling stock and the permanent way, seem appropriate if PNR's assets are to remain in operational condition. Expenditures on the northern line should be limited to that part of the line which is used for passengers commuting in and out of Manila. The rest of the northern line should be closed. The investment amounts needed depend on how much equipment can be saved as a result of general operational improvements being carried out by PNR's new management. Care should be taken against overinvesting in what has been and will likely continue to be a Loss-making enterprise, but the risk of underinvesting is not negligible and should be considered if the railways are indeed to remain in business. The alternative use of the railways' real estate assets for busways and industrial development should be an integral part of any discussion regarding the railways' future. 31. In the aviation subsector, the increase in investment is accounted for by the new Cebu International Airport Development Project which wculd provide better services for Cebu-bound traffic and would relieve Manila International Airport of unnecessary transit traffic. While there is no reason to question the project at this stage, its economic justification should be established before implementation. 32. The proposed gubstantial. increase in urban investment is caused by the inclusion in MTrIP of new investr.Lnts in the light rail transport (LRT) system in Manila. Improvements to line I and design/construction of line 2 are understood to be included, subject to confirmation of their economic viability. Any study of this matter should also consider the option of providing lower-cost alternatives to upgrade public transport, such as dedicated busways. Recommendations 33. The main recommendations made in the report can be summarized as follows: Sectorwide - Develop a short- to medium-term action plan for the sector (para. 1.7) - Use explicit subsidies for essential, socially-justified services racher than implicit subsidies provided by hidden taxes on other services (para. 2.44) - Review the new sector organizational structure, which is currently being changed, in early 1988 (para. 3.1) - Institutionalize a capacity for transport planning and research (para. 3.2) - Improve coordination among sector agencies (para. 3.4) - Streamline procedures for approving contracts in order to eliminate duplicate reviews (para. 3.7) - Improve staff capabilities by carrying out a technical training program aimed particularly at the regional/provincial levels (para. 3.9)  - viii - - Balance political and professional career appointments (para. 3.Q) The Roads Subsector - Relate vehicLe taxation to the amount of road damage caused by a vehicle (paras. 1.5, 2.6) - Increase legal axle load limits (paras. 2.5, 2.13(g)) - Make adjustments in the road user tax structure (paras. 2.15, 2.18) - Clarify responsibility for rural roads development and involve local staff in maintenance activities (para. 3.11) - Reduce various road investment programs to manageable levels (para. 4.6) Road Transport Industry - Discourage controlled supply of road transport passenger services (para. 2.11) - Free entry into the road transport industry (para. 2.12) - Abolish the distinction between own-account (T Licenses) and for- hire (TH licenses) trucks (para. 2.12) - Decontrol prices of road transport services (para. 2.12) - Formulate and pursue a program to deregulate the industry (para. 2.13) - Encourage interisland road/ferry transport (paras. 1.4, 2.12) - Abolish the Common Carrier Tax which also affects maritime transport (paras. 2.15(e) and 2.43) Ports and Maritime Transport - Carry out a study of maritime safety (para. 2.3) - Continue efforts to privatize PPA activities (para. 2.32) - Consider abandoning uniform PPA charges in favor of cost-related port tariffs (paras. 2.32, 2.42) } - Move gradually but decisively toward free entry into the shipping industry and deregulation of prices (para. 2.42) - Introduce stricter inspection ot vessel sea worthiness (para. 2.39) - Remove the Bureau of Customs from involvement in domestic shipping (para. 2.42) - Review maritime freight rates and port charges (para. 3.22) - Reduce three proposed port projects (para. 4.9) The Railway - Restructure PNR (para. 2.45) - Maintain separace accounts for railway and non-railway operations (para. 3.24) - Restrict investments on PNR's north line (para. 4.12)  - ix - Aviation - Limit the responsibilities of the Manila International Airport Authority to operation of the Manila Airport (para. 3.27) - Establish the economic justification for the Cebu International Airport Development Project (para. 4.13) Urban Transport - Carry out studies of congestion pricing for road traffic in urban areas and of public transport in Manila (para. 2.3) - Expand the traffic engineering program for Metro Manila (para. 2.21) - Introduce a pricing mechanism for vehicle use in congested areas of Metro Manila (para. 2.21) - Maintain high cost of car ownership (para. 2.21) - Coordinate the activities of the agencies responsible for traffic management in Manila (para. 2.23) - Ease regulatory controls on bus and jeepney franchising and entry into Manila's passenger transport market (para. 2.24) - Restructure bus services to improve their financial viability (para. 2.24) - Plan to upgrade public passenger services in at least one high- volume traffic corridor in Manila (para. 2.24) - Clarify responsibilities for urban road construction and maintenance among DPWH, the cities and barangays (para. 3.12) - Strengthen traffic law enforcement in urban areas (para. 3.15) - Revive TRANSEC, a recently dissolved transport coordination agency for Metro Manila (para. 3.18) - Review the policy of giving public support to various bus companies operating in Metro Manila (para. 3.19) - Review the organizational set up for Manila's Light Rail Transit Authority and the Metro Manila Transit Corporation (para. 3.19) - Study the use of dedicated busways to improve mass transit (para. 4.14) 14. The task at hand is to establish priorities among the many possible actions that could be taken. While setting of priorities is clearLy the primary responsibility of the Government, the Bank would view the foLLowing as major concerns. On economic grounds, the priority policy actions would be expected to include the gradual deregulation of the trucking and interisland shipping industries and the restructuring of road user charges. Deregulation of trucking and shipping would lead to more efficient transport services which would yield economic benefits to the overall economy. During the impLementa- tion and adjustment phase, however, it would be necessary to protect both the industries and their customers from violent swings in the pricing of transport services. 35. As to priority institutional issues, measures are needed to: (a) institutionalize a capacity for transport planning and research;  (b) clarify responsibilities for rural roads development; (c) protect professional career appointments; and (d) streamline administrative procedures. Other policy and institutitional recommendations made in the report can be dealt with simultaneously with or subsequently to the above, depending on the relative difficulty of achieving the necessary national consensus and legis- lative agenda. 36. During the next five years, efforts should be made to gradually shift Bank assistance in the sector away from direct project loans and towards annual transport sector loans to the Government, with an emphasis on policy and institutional reform. Such annual sector loans would aLlow maximum flexibility to include project components for financing as they are developed, without having to wait for preparation of the next project loan cycle. The Government and the Bank, in embarking on the proposed new approach to sector cooperation, will use this report as a source document to catalyze and channel the sector dialogue and sector development. The extent and timing of the implementation of the report's recommendations would however, be subject to the economic, social and political realities in the Philippines.  I. INTRODUCTION A. Role of the Transport Sector 1.1 The Philippines transport system is composed of about 740 km of railways, over 161,000 km of roads, 131 national ports, 256 private ports, and some 400 toading points and 219 airports, of which 82 are national and 137 private. The system is basicaLLy bimodal. Road transport handles about 65X of freight movement and 90% of passenger movement, while maritime transport handles about 35% of freight and 7% of passengers. Air transport is very limited and almost entirely passenger traffic, while railways traffic, both passenger and freight, is negligible. Road and sea transport generally complement rather than compete with each other. 1.2 During the 1970s, the transport sector grew at about 9% p.a., faster than the GDP growth of about 6% p.a. As a result of the country's economic recession, the GDP growth rate for the 1980s has been negative (-0.3% r..a.), while the transport sector has been growing at only 1.0% p.a. Government transport outlays have been about P 4.0 billion p.a. 1.3 The transportation sector plays a significant role in the Government's macroeconomic goal of national economic integration. This is refLected in the statement of objectives included in the Medium-Term Philippine Development Plan (1986): The transport sector shall support nationwide efforts to stimulate agricultural production and increase rural incomes by orienting transport infrastructure towards rural areas. It aims to reduce interregional socioeconomic gaps and to strengthen interregional linkages by providing for the more efficient movement of products from excess production areas to deficit/market areas. A cransport system that achieves a desired hierarchicaL pattern of growth centers across the country shall be developed. Greater efficiency in the use and safety of existing transport facilities shaH. -a.so oe promoted. This includes a firmer commitment to maintenance activi- ties and the adoption of low-cost schemes that will enabie the most effective use of these facilities. This is a sensible statement of public objectives in the transport sector. How best to achieve these goals is the issue to be addressed. 1.4 As the Government Plan points out, a better functioning interisland transportation system is needed for an economy dispersed over 7,000 isLands, and a smoother movement of goods between farm and market is crucial for regional development. Due to the development patterns of towns along road corridors and the Government's poLicy of extending feeder roads to C>.e hinter- lands, road transport is likely to continue as the dominant mode in the foreseeable future. However, facilitating inter-island road and ferry trans- port could make a major contribution to closer economic integration, and would generate competitive pressures to weaken cartelization tendencies in the maritime sector.  -2 B. Previous Bank Sector Work 1.5 The Bank's last review of the Philippine transport sector was issued in September 1983, and the Government has, on its own initiative, implemented several measures similar to those suggested in that review. In particular, in the roads subsector, the Department of Public Works and Highways (DPWH) has increased its maintenance budget from 25Z to 30% of its total expenditures. In the railway subsector, the Philippine National Railway (PNR) has recently appointed a strong management team, improved morale, and is making an orga- nized marketing effort to attract passenger and freight traffic. Regarding ports, recommendations in the earlier sector review on the rehabilitation and development of secondary and tertiary ports will be implemented under the Bank-financed Provincial Ports Project (Loan 2823-PH, 1987). Problems at the Port of Manila will be addressed under an ADB-financed Second Manila Port Project. Other areas highlighted under the previous report but still to be corrected include Government's vehicle taxation system which fails to relate taxation levels to the amount of damage vehicles inflict on the roads, govern- ment regulation of the trucking industry which reduces the productivity of the fleet, and the questionable financial viability of the railway's northern line. C. Objectives of the Present Sector Review 1.6 The purpose of the present review is broadly to assess the impact of recent economic and public policy developments on the role of the transport sector in the Philippine economy. The report focuses on transport sector developments on three fronts--policy, institutional, and public expenditures-- that have occurred since the 1983 review. 1.7 In its three-part analysis, the report reviews the major transport planning and policy studies which have been undertaken recently by the Government but which have not always been acted upon. It then identifies the recommendations of those reports which are relevant to the Government's overall goals of decentralization and privatization. It is hoped that these recommendations will form the basis for a short- to medium-term action plan still to be deveLoped. On the institutional side, the report identifies the key insticutional constraints and inadequacies which prevent the transport system from functioning as foreseen. Finally, the report reviews the Government's Public Investment Program in the light of recently emerging priorities for public expenditures.  -3- II. SECTOR ISSUES AND POLICY CHOICES A. Introduction 2.1 As stated in the Medium-Term Philippine Development Plan, Govern- ment's objectives in the transport sector are to promote a diversity of transport services, responsive to market demands and technological innovations in the industry, ac as low a cost and price as possible. An additional objective is the reduction in income disparities across regions and income classes. In accordance with the Government's stated intentions, these objec- tives should be achieved through maximum reLiance on the free market, with governmental intervention limited to the establishment of a policy environment which encourages the market to work most efficiently and to the provision of essential infrastructure which the private sector is not weLl pLaced to provide. 2.2 Government's current policies for the sector reflect a mixture of diverse and sometimes ill-conceived laws, regulations and practices accumu- lated from the past, which, if rigorously enforced, would undermine the objectives stated above. From an economic perspective, it is fortunate that the existing policies are often evaded. However, significant distortions exist and there is a danger that vested interests will seek enforcement of present policies to suppress competition wherever possible. 2.3 Despite a surprising dearth of quantitative information, a number of good sectoral policy studies have recently been completed. Their recommenda- tions, if implemented, should substantially improve the functioning of trans- portation markets and lead to more efficient and less costly transportation services. An annotated bibliography of the major policy studies carried ouc since 1982 is provided in Annex 1. Most of the nationwide studies have been produced by the National Transportation Planning Project (NTPP), the Government's chief organization for sectoral planning, and DPWH, which over- sees the technical aspects of all sectoral projects. The studies focused on Manila were generally prepared by Australian and Japanese consultants and by the Department of Transportation and Communications (DOTC). In addition, the Philippine Chamber of Commerce and Industry has issued important commentaries on the functioning of the transport system-which provide a valuable perspec- tive independent of, and often at variance with, official government views. While the studies provide a solid basis for prompt, decisive action in most areas, further studies are still needed on: (a) maritime safety; (b) road use pricing to reduce congestion; and (c) public transport pLanning in Manila. B. Road Transport Optimum Road Transport Technology 2.4 Like studies in other countries (e.g., Sweden, the United States, Australia and Indonesia), the DPWH "Pavement and Axle Load Study" (July 1986) has found that, from the perspective of total costs to the society, it is optimal to employ a range of vehicles, including very large, heavy trucks operating over strong infrastructure. This is essentially due to economies of scale both in truck size and in the design and construction of pavements and  -4- bridges. Unlike many other countries, however, much of the existing infra- structure in the Philippines has already been dimensioned to a level which can sustain such heavy loadings. The DPWH estimates that, while the legal axle- load Limit is 8 tons, over 80% of inter-city freight in ton-km moves over infrastructure which could accommodate axle loads of 13 tons. 2.5 The practice in the Philippines of building many roads with rigid concrete pavements, to make use of the plentiful suppLy of local cement rather than importing asphalt, places the country in a good position to exploit the economies of large trucks without the necessity of large capital outlays required for pavement strengthening. NevertheLess, some existing asphaltic roads which carry high traffic volumes will need to be strengthened. Moderate outlays for bridge deck replacement will also be needed, although the extra cost necessary to accommodate very heavy vehicles is quite small. Conse- quently, support should be given to DPWH's proposal to increase legal axle load Limits from 8 to 13 tons for single axles, from 14.5 to 23 tons for dual tandem axles and to 30 tons for tridems, at least for high traffic density corridors (para. 2.13 (g)). 2.6 To some degree, this proposal merely legitimizes the existing situation, since economic forces long ago overwhelmed nominal legal restric- tions on axle loads. To go beyond this and capture further benefits of truck fleet modernization, road vehicle taxes should be structured so as to provide the transport industry with the correct relative prices for road use by different vehicLes (see paras. 2.14-2.17). With a change in taxation, the market can be trusted to determine the optimum vehicle types, sizes and fleet configuration. Regulatory Policies 2.7 Road Transportation. The NTPP's "Study of Road Transportation Regulation" (December 1986) recommends economic deregulation (i.e., elimina- tion of present restrictions on market entry and prices) and emphasizes safety aspects. The present regulatory restrictions not only pose an enforcement problem, but are also economically unsound. The market segments most affected are pubLic passenger transport, petroleum distribution and interisland truck- ing using ferries. Since existing vested interests in the industry are orga- nizing to enforce the regulations in order to restrict entry and control as much of the market as possible, Government would best protect the public interest by moving gradually but decisively to dismantle the existing fran- chise system. At the same time, however, it should strengthen its safety and pollution regulations. 2.8 Road Freight Services. About 95,000 trucks were registered in the Philippines in 1986, but less than lOZ held public utility (TH) licenses Legally entitling them to operate for hire. While most trucks have T-licenses, which are officially valid only for own-account haulage, many operate illegal ('colorum') for-hire services. The NTPP "Road Industry Study" estimates that possibly 75Z of trucking services (including own-account) are carried out by T license holders and 25% by TH licenses; the illegal 'colorum' operators are thought to provide perhaps half the public carrier services. This situation largely results from the distortionary effect of the Common Carrier Tax, as discussed further in para. 2.15(e) below.  -5- 2.9 The official trucking tariff is currently fixed at P 2.20 per ton- km, but rates are normally (though illegally) discounted substantially, with actual rates on the main Luzon routes currently in the range of P 0.60-1.10, i.e., half or Less of the official rates. Rates on the other islands are said to be mostly higher, but usually well below the official rate. The official rate is, however, applied for distribution of petroleum products, thus inflat- ing fuel costs to all users. Overall average kilometers traveled per truck are Low, about 40,000-50,000 km per year, reflecting in part the excessive size of the own-account fleet. 2.10 Road Passenger Services. Passenger transport is provided by (a) large buses (long-distance or urban services in Manila), (b) minibuses (medium and Long distance), (c) jeepneys (omnipresent and used not only for short hauls but also to connect with buses for Longer trips); and (d) motor- tricycles. The total number of public utility buses and minibuses is esti- mated at 11,000-12,000, predominantly large vehicles, of which about 7,000- 9,000 are in interurban service. The interurban bus services are operated by some 1,500 provincial bus operators, of which more than 75% field three or fewer units, although the 3% of bus operators who manage more than 20 units account for about 45% of the fleet. Legally licensed for-hire jeepneys (PUJ) outnumber buses by about 6:1, with PUJ licenses standing at about 66,000. Moreover, an unknown but highly significant proportion of the privately regis- tered jeepneys operate either 'colorum' or 'kabit' (by sharing a franchise) for-hire services. About 130,000 tricycles are also registered to provide for-hire services. They generally operate along fixed routes in small towns, rural areas and selected zones in Large cities; they serve short-distance trips and are commonly overloaded, with up to 10 passengers per vehicle. 2.11 The official tariff, which is tapered by distance, is the same for buses, minibuses and jeepneys, although each clearly offers a different stan- dard of service. rn reality, interurban fares charged are normally discounted (the minibuses more than Large buses, and jeepneys the most discounted). On some routes where large bus operators are able to agree with each other on tariffs, there is less discounting. Few routes are cartelized, although fran- chising practices (such as Route Measured Capacity) of the Government's Land Transportation Commission (recently spLit into the Land Transportation Office and the Land Transportation Franchising and Regualatory Board) have activeLv encouraged such developments, e.g., the route 'rationalization' in East Mindanao. This type of controlled supply should be discouraged in the future, as it is contrary to the public interest and leads to sustained high fares. 2.12 Recommendation. The NTPP reports provide a convincing case tor complete economic deregulation of the road transport industries (with the possible exception of urban passenger transport which is now also being studied by NTPP). By freeing market entry, abolishing the nominal distinction between T and TH licenses, and completely decontrolling prices, substanciaL gains to the Philippine economy should be realized from improvements in util- ization of the road transport fleet and reductions in the cost and price of  -6- transport. By also permitting nationwide operation and eliminating unwarran- ted stevedoring and warehouse-related "arrastre" charges at ferry crossings, it is likely that new interisland road services would emerge which could promote economic and political integration, as well as provide needed competi- tion in the area of interisland transport. 2.13 The Government would best promote the public interest by moving gradually but decisively to dismantle the existing regulatory regime. Although the Committee on Transport Planning (CTP) proposed that deregulation should initially be Limited to a pilot area, this may give vested interests the opportunity to marshall forces against deregulation. The Bank therefore supports the recommendation of the Road Transportation Regulation Study to implement deregulation nationwide. The key elements of any deregulation program should be as follows: (a) quantity licensing and route allocations on interurban bus routes should be phased out; (b) government-promulgated fares, rates, and tariffs should be decon- trolLed and transporters allowed to set their own rates; (c) entry into the road transport industry should be free and only subject to a few qualitative requirements; (d) the differentation in licensing requirements of for-hire (TH) and own-account (T) trucks should be abolished, and all trucks should pay the same registration and license fees and other road use taxes; (e) the importation of vehicles, spare parts, and tires should be liberalized; (f) the new Land Transportation Franchising and Regulatory Board should minimize its role in economic regulation of the road transport industry. It may be entrusted with anti-trust functions to ensure that cartels and monopolistic practices do not arise in the trans- port industry. The key role of the new Land Transportation Office should be to enhance safety regulations through inspection, testing, and training programs; and (g) the Government should review the existing vehicle weights and dimensions and axle-Load regulations and raise the axle load Limits progressively in order to more closely reflect actual traffic Loading conditions. An 11-ton single axle load limit is recommended for general application with provision of a 13 ton single axle load Limit on designated high-density corridors with strong pavements and adequate bridges.  Road User Charges 2.14 The term "road user charges" is used here to mean any indirect tax or charge levied on the purchase, ownership, and operation of motor vehi- cles. It includes "taxes" aimed at generating general revenue for the govern- ment, and "road use fees" to recover the cost of road wear or congestion. Road user charges in the Philippines may be divided into two broad classes as follows: (a) taxes and fees on vehicle ownership--various registration and license fees, import duties, and sales taxes; and (b) taxes on use--primarily fuel and sales taxes and import/excise duties on tires and spare parts. In addition, a 3% Common Carrier's Tax (CCT) is levied on the revenue of all for-hire carriers, and tolls are collected on about 130 km of expressways near Manila, constituting an additional tax on use. 2.15 The structure of the main road user taxes is summarized in Table 2.1. The various tax instruments serve a variety of objectives, includ- ing general resource mobilization, energy conservation, income distribution, and cost recovery from road users. Road user taxation in the Philippines has been guided by two primary objectives: raising general revenues for the Covernment and energy conservation. Efficiency considerations such as con- trolling pavement damage and easing congestion are not explicitly considered in the road user tax structure. Income distribution (ability to pay) and equity considerations are reflected in automobile and gasoLine taxes, which also serve to discourage private car ownership. Some of the anomalous features in the current road user tax structure are discussed beLow: (a) The Government's policy of taxing gasoline substantiaLly more than diesel has resulted in major shifts in the demand for these fuels and in supply and demand imbalances. However, the current excess production of gasoline and shortage of diesel can be corrected only marginally by changes in production. Since the current fuel price structure (Table 2.2) no longer reflects the relative scarcity of each product, there is a need to reaLign the prices of automotive fuels and to reduce the import of refined diesel fuel. In adjusting its policies, Government should also consider that dieseL engines have a higher initial cost and Life-cycle maintenance expenses which to some degree offset their greater fuel economy. (b) The structure of vehicle registration fees shows a generaL bias against for-hire commercial vehicles which pay abouc 20-50% more in annual registration fees than own-account commercial vehicles. This difference may derive from a perception that for-hire vehicles are used more intensively and therefore cause more road damage and congestion than own-account vehicles. However, most own-account trucks are used for-hire in any case, and there is no evidence that they are used less intensively. On the other hand, utility vehicles for private transport (pickups, vans) are taxed at a rate two to  -8- Table 2.1: STRUCTURE OF ROAD USER CHARGES IN THE PHILIPPINES (1987) A. Import Duties, Sales and Other Taxes Import Duties Trucks and ouses 30% Import duties in 1986 about the same level Unassemble6 trucks 20% or as much as 50% lower than in 1980. Unassembled cars, jeeps and vans 30% Higher duties on assembled cars and motor- (6 cylinders or less) cycles to support Progressive Car Manufac- Assembled cars, jeeps and vans and 50% turing Program and domestic assembly of unassembled with 8 cylinders or motorcycles. Protection margins, however, more declined from 40-70% in 1980 to 20-30Z in Motorcycles (Unassjmbled) 20% 1986. Imports of used trucks are restric- (Assembled) 50% ted to 40,000 gross vehicle weight (GVW) CKD components, parts, accessories 30% or above to protect domestic truck Tractors for semitrailers 10% assembly. New trucks of 20,000-40,000 GVW may be imported but are subject to higher import duties than the corresponding, completely knocked down (CKD) units. Spare parts 20-30% Quantity restrictions (licenses) on im- Tires (new) 50% or ports have led to scarcity and exorbitant P 22/kg prices of spare parts and tires. Locally Tires (retread), tubes 30% manufactured tires sold at world market prices are of pocr quality. Crude oil 20% Lower duties on refined diesel to encour- Gasoline 30% age energy conservation and to minimize Diesel 20% externalities. Lubricating oil 20% Sales Taxes Automobiles 30% The main purpose of these taxes is to gen- Trucks, jeeps and utility vehi- 20% erate revenue for the treasury. Higher cles, buses, motorcycles rate on automobiles, which are considered Spare parts and accessories 10% nonessential goods. Tires 20% Other 20% Ad Valorem Taxes Au omobiles 1201 to 1600 cc (gasoline) } 5% Special tax on medium to large automobiles 1851 to 2050 cc (diesel) (over 1,200 cc engine displacement), which 1601 to 1800 cc (gasoline) } 10% are considered luxury items. 2051 to 2250 cc (diesel) 1801 or over (gasoline) 20% 2251 or over (diesel) Gasoline (premium) P 0.967/1 Most important tax on use; lower rate on Gasoline (regular) P 0.873/1 diesel mainly to encourage energy conser- Diesel f 0.787/1 vation. An important source of revenue Kerosene P 0.539/1 for the Treasury. Specific Tax Gasoline (premlum) P 2.489/1 Lower tax on diesel to minimize externali- Casoline (regular) P 2,604/1 ties related to nontransport use of diesel Diesel P 0.523/1 and to prevent substitution between kero- Kerosene P 0.628/1 sene and diesel. Important source of gov- ernment revenue, particularly taxes on gasoline.  Table 2.1: (cont'd) B. Vehicle Registration Fees Automobiles: There is a single annual registration fee which is based on the age of the vehicle as shown in the following table (in Pesos): Age of vehicle Over Type of vehicle Current I yr 2 yrs 3 yrs 4 yrs 5 yrs 5 yrs Light (1,600 cc and below) 1,000 1,000 1,000 1,000 1,000 1,000 800 Medium (1,601-2,800 cc) 2,000 2,000 2,000 2,000 1,600 1,600 1,200 Heavy (2,801 cc and above) 4,000 4,000 4,000 4,000 4,000 4,000 2,800 Utility Vehicles: Private utility vehicles which include private jeeps, pickups, etc., with GVW of 2,700 kg and below, are levied P 1,000 for the private motor vehicle tax, regardless of the age of the vehicle. Vehicles with GWV from 2,701 kg to 4,500 kg are charged a flat rate of P 1,000 for the first 2,700 kg, and an additional amount based on the following formula (1980 and earlier regulations): Private Gas Diesel GVW x 0.05 GVW x 0.075 On the other hand, public utility vehicles, i.e., public utility jeepneys (2,701-4,500 kg) are required to pay a registration fee (in pesos) calculated on the following basis (1981 and later regulations): For hire Gas Diesel GVW x 0.30 GVW x 0.15 Trucks and Buses: Motor vehicles with GVW of 4,501 kg and above (including trucks and buses) pay a fee based on the following rates: Private For hire Gas Diesel Gas Diesel GVW x 0.20 GVW x 0.12 GVW x 0.30 GVW x 0.15 The registration fees paid for trailers are computed as follows: Private/government For hire per 100 kg of GVW x 0.10 per 100 kg of GVW x 0.12 Source: (1) NTPP. Update of 1984 Road User Charges - A National Policy Study. February 1987. (2) Executive Order No. 36, Malacaffang Manila, August 1986. (3) Tariff and Customs Code of the Philippines, 1986.  - 10 - Table 2.2: PRICE BUILDUP FOR PETROLEUM PRODUCTS (FOR METRO MANILA) EFFECTIVE MARCH 1, 1987 (Pesos per liter) Direct Ad Oil price Wholesale company Specific valorem stabiliza- posted Hauling Dealer's Pump recovery tax tax tion fund price charge markup prices Premium gas 3.8688 2.489 0.967 (0.709) 6.6158 0.0463 0.2343 6.90 Regular gas 3.4928 2.604 0.873 (0.714) 6.2558 0.0463 0.2249 6.53 AVTURBO 3.8968 2.567 0.974 (0.844) 6.5938 Kerosene 3.8498 0.628 0.539 (0.465) 4.5518 0.0463 0.2102 4.81 Diesel 3.5778 0.523 0.787 (0.404) 4.4838 0.0463 0.2299 4.76 Fuel oil 2.8895 0.511 0.202 (1.098) 2.5045 LP gas 2.5214 0.697 0.353 (0.005) 3.5664 Asphalts 3.3488 0.581 r.469 (0.752) 3.6468 Solvents 3.8118 2.472 0.953 (0.777) 6.4;94 Feedstock 2.8895 0.511 0.202 (1.098) 2.5045 Source: Board if Energy.  - 11 - three times higher than jeepneys, although the latter contribute as much or more to traffic congestion than private utility vehicles. There is also a discrimination in favor of diesel-powered units-- registration fees are 15-20Z lower for light vehicles and 40-50% lower for trucks and buses than for comparable gasoline-powered vehicles. The only exception is in the case of diesel-powered private utility vehicles which have higher registration fees than do gasoline vehicLes. The structure of registration fees is also unduly complex and needs simplification for ease of administration. (c) Taxes on automobiles are also discriminatory since, for the same engine size, diesel-powered cars are taxed at a Lower rate than gasoline-powered cars. If automobiles are considered a Luxury item then they should be subject to a progressive tax based on the vaLue of the vehicle rather than its engine displacement or the type of fuel powering it. (d) Import duties and sales taxes on tires and spare parts are dispro- portionately high and, combined with import restrictions, have Led to either the very high cost or scarcity of these items essential to maintaining the nation's vehicle fleet. This may be one of the factors contributing to the country's low vehicle utilization rates of 40,000-50,000 km per year for trucks, perhaps onLy half the achievable level. (e) From a legal standpoint, the CCT has the structure and administra- tion of a business tax rather than a road user charge. It is collected quarterly on all for-hire vehicles, on the basis of a pre- determined estimate of gross receipts, differentiated by type of vehicle and by area of operation--urban vs. suburban and ruraL. The CCT is discriminatory and, for example, favors jeepney )wners who can evade the tax more easiLy than bus operators. Licensed for-r.ire trucks subject to CCT account for less than 25% of commercial trucking services; the rest comprises own-account vehicles. The CCT distorts the transport market by encouraging the uneconomic use ot own-account trucks as for-hire vehicles. It shouLd therefore be abolished or repLaced with a tax instrument that applies equalyv to all for-hire passenger transport and alL types of trucking. Cost Recovery from Road Users 2.16 As shown in Table 2.3, taxes paid by the road sector have exceeded Government's total capital and recurrent expenditures on roads.  - 12 - Table 2.3: ROAD USER REVENUES AND ROAD EXPENDITURES (P million) 1980 1981 1986 Revenues /a Fu-el 3,888 3,897 5,997 Vehicles, parts, tires 822 927 430 Fees and charges 351 736 1,181 Total 5,061 5,560 7,608 Ex enditures Administration 318 249 237 Maintenance 1,107 1,139 1,809 Construction /b 2,228 2,948 3,941 Total 3,653 4,336 5,987 /a CCT and tolls excluded. 7b Provincial expenditures for road construction, estimated to be less than P 200 million per year, are not included. Source: NTPP and DPWH. In order to achieve a rational balance between road costs and road user charges, each vehicle should pay a sum at least equal to the additional cost that it imposes on the rest of the society, in terms of either road damage or traffic congestion. This issue has been very well studied in NTPP's "Road User Charges-National Policy Study" (January 1984) and its updating in February 1987, which found that two types of road users are paying less than the marginal costs they occasion by their use of the roads: (a) 2- and 3-axle trucks, and (b) all vehicles under congested conditions. All other vehicles, including tractor-trailers and buses, produce a surplus of variable revenue over variable maintenance cost. The road damage caused by vehicles dep'ends primarily on their axle loads and not on total weight, as shown in Table 2.4 for typical truck axle configurations and loads in the Philippines.  - 12 - Table 2.3: ROAD USER REVENUES AND ROAD EXPENDITURES (P million) 1980 1981 1986 Revenues /a Fu-elr- 3,888 3,897 5,997 Vehicles, parts, tires 822 927 430 Fees and charges 351 736 1,181 Total 5.061 5,560 7,608 Extenditures Administration 318 249 237 Maintenance 1,107 1,139 1,809 Construction lb 2,228 2,948 3,941 Total 3,653 4,336 5,987 /a CCT and tolls excluded. 7T Provincial expenditures for road construction, estimated to be less than e 200 million per year, are not included. Source: NTPP and DPWH. In order to achieve a rational balance between road costs and road user charges, each vehicle should pay a sum at least equal to tbe additional cost that it imposes on the rest of the society, in terms of either road damage or traffic congestion. This issue has been very well studied in NTPP's "Road User Charges-National Policy Study" (January 1984) and its updating in February 1987, which found that two types of road users are paying less than the marginal costs they occasion by their use of the roads: (a) 2- and 3-axle trucks, and (b) all vehiclas under congested conditions. All other vehicles, including tractor-trailers and buses, produce a surplus of variable revenue over variable maintenance cost. The road damage caused by vehicles depends primarily on their axle loads and not on total weight, as shown in Table 2.4 for typical truck axle configurations and loads in the Philippines.  - 14 - (b) the current structure of license fees based on GVW should be recali- brated to an equivalent axle load (EAL) per ton scale, in line with NTPP recommendations. The schedule of import duties and taxes should also be modified to promote the use of multi-axle, articu- lated trucks. Vehicle registration and license fees (road tax) should be adjusted periodicaLly for inflation and price changes as well as changes in the structure of the vehicle fleet. The tax rate should be the same for both for-hire and private trucks; (c) the structure of road tolls should be reviewed to ensure that toll administration costs are reasonable and that tolls are contributing to efficient use of road space; (d) imports of spare parts and tires should be Liberalized (by removal of quantity restrictions and Lowering of duties) to avoid distortion of vehicle replacement choices and increases in vehicLe operation and maintenance costs; and (e) the rates of import duties and sales taxes on diesel-powered automo- biles, pickups, and jeeps should be set higher than those for comparable gasoline-powered units to minimize the switch from gasoline to diesel-powered vehicles. C. Transport in Metro Manila 2.19 The Government's general decentralization policy will transfer many functions from national agencies to the local Level. While the details of the new policy have yet to be worked out, local decision-making for urban roads and transport regulations deserves support as it is LikeLy to be more respon- sive to the needs of the people. In Metro Manila, the sheer size of the population (7.3 million or 13Z of the national population and equivalent co the next 30 largest cities) has raised some particularly complex issues. Traffic Congestion 2.20 While regulations and institutional responsibilities Eor transport in Metro Manila are similar to the national pattern, the sheer concentration of people and activities poses unique problems such as severe traffic conges- tion, and requires special solutions such as computerized craffic signals or exclusive-use transitways like the recently compLeted Light Rail Transit (LRT), a 16-km Long elevated rail line. Traffic congestion in Manila does seem to have improved in recent years, due to (a) traffic engineering schemes implemented by DPWH's Traffic Control Center, as well as the rehabilitation and widening of some urban highways, W4) economic recession and a sLight decline in private car registrations,- and (c) the introduction of LRT in 1984/85. However, with an economic recovery, traffic couLd easiLv worsen in the coming years if the pent-up demand for cars results in a rapid increase of new car registrations. Moreover, while Metro Manila continues to grow by 1/ From 36 cars per 1,000 inhabitants in 1983 to 32 in 1986.  - 15 ^ about 200,000 persons per year, no major capacity expansion of the transport system can be expected for at least the next five years because of the lead * time required for such works. 2.21 To address the probable worsening of traffic conditions, support should be given to expanding the successful traffic engineering program and the construction of new road links as envisaged under a proposed Manila Urban Transport Project to be financed by the Japanese Government. It would also be timely to consider a pricing mechanism such as tolls or licensing schemes for driving in congested times and areas, which would charge vehicle users for the congestion they cause. Unfortunately, experience elsewhere has shown that it is extremely difficult to gain public acceptance for congestion pricing on urban streets and, although well-conceived s Pemes have been designed for several major cities, only two such schemes - have actually been introduced while the others have been shelved for the time being. Thus, while the con- cept of pricing vehicle use should be actively pursued at the technical and political levels (because of its enormous economic benefits), it is suggested that, because private automobiles are the major causes of congestion due to their numbers and low occupancy ratios and may be viewed as luxury goods, traffic growth should be restrained through high pricing of car ownership, at least until a major congestion pricing scheme is introduced in ManiLa. Public Transport 2.22 Prospects for public transport in Manila are, under prevailing conditions, not good. In 1986, LRT had a deficit of P 240 million, of which about 75Z was interest charges, and the Metro Manila Transit Corporation (MMTC), which operates the city's largest bus fleet, had an estimated operat- ing loss of P 39 million (if bus depreciation is revalued to account for exchange rate shifts since 1980 when the present fleet was acquired). In addition, three of the ten private bus consortia operating at the beginning of 1987 have since gone out of business and others are expected to follow. It thus appears that public transport services could deteriorate substantially in the coming years if (a) MMTC is unable to modernize its aging fleet due to scarcity of funds, (b) private bus consortia continue to withdraw services, and (c) a current moratorium on issuing jeepney licenses is maintained and enforced. 2.23 Transport in Manila is also constrained by the policy of jeepney franchising which aims to balance supply with estimated passenger demand along any given route. While the economic rationale for this regulation is unclear, a restrictive franchising policy can be justified on the grounds that an oversupply of relatively space-consuming jeepneys (compared to buses) should be avoided to reduce traffic congestion. This would imply that franchising should depend on the spare traffic capacity along any given thoroughfare--a criterion that, surprisingly, is not currently considered in jeepney franchis- . 2/ Operating since 1)75, the Singapore Area Licensing Scheme is widely regarded as a major success. More recently, the city of Bergen, Norway, has implemented a congestion pricing scheme.  - 16 - ing regulations in Manila. At present, the emphasis is on the commercial aspects of jeepney operation rather than jeepney-caused congestion. This is due to a division in institutional responsibilities. DOTC regulates jeepneys, as other vehicles, to achieve global objectives and is thus not well equipped to investigate traffic congestion at the local level. DPWH is responsible for providing an adequate road infrastructure and has therefore created its Traffic Control Center which has been successful in checking Manila's traffic congestion. An effective public transport policy requires close integration of route franchising and traffic engineering, and thus a close coordination (if not merging) of the agencies responsible for those functions. 2.24 To avert possible public transport shortages in Manila, a three- pronged approach might be considered. First, revise the current policy of bus and jeepney franchising, probably by easing the regulatory controls to perm;t new services where the passenger market calls for them; DOTC has already requested NTPP to prepare a report on this subject by December 1987. Second, restructure the organizational and financial framework of bus services to make them commercially more viable and reverse their current decline. Third, begin pLanning for a substantial upgrading of public transport in at least one high- volume corridor or preferably in a metropolitan system of such corridors. A study currently envisaged for a second LRT line should be expanded to also consider lower-cost alternatives, such as reserved bus/jeepney roads and, even better, separate busways which might include short elevated sections to avoid bottlenecks in the street system. Support should also be given to the traffic engineering program and the construction of new road links as envisaged under the proposed Manila Urban Transport Project. D. Interisland Shipping Market Structure 2.25 While data on interisland shipping are somewhat inadequate with respect to the induscry's structure, scope and functioning, the key features seem to be as follows. Scheduled liner services seem to account for about half of total domestic freight movements by water. The remainder are carried by the largely unreguLated, unscheduled contract carriers (trampers) and private (own-account) bottoms. Large shippers can use the competitive services, but smaller shippers must normally rely on the liners. The regu- lated liner services also provide substantial passenger services, which in 1984 accounted for 36Z of their reported gross revenues, and for which there appear to be no other competing sea services, although some competition is provided by bus-cum-ferry services and air services. 2.26 The liner services are dominated by five Large companies although data on the degree of concentration are not available. These and several other companies are organized into a shipping conference, CISO (Conference of  - 17 - Interisland Shipowners) 3" which functions as a cartel with varying degrees of control. The industry is connonly said to be subject to chronic excess capacity, which was one factor responsible for the introduction of govern- mental route licensing in 1972. There has undoubtedly been some excess capacity in recent years due both to the introduction in 1976 of container technology which left much of the fleet redundant and to the economic downturn of 1983-86. The liner industry would probably have been more seriously weakened during this period had it not been for the simultaneous decline in the barge industry. As it was, three liner companies left the industry, and others coped by deferring vessel replacement, mothballing a substantial portion of the fleet and stretching out route schedules. More recently, with the apparent economic upturn in 1987, an expansion of shipping services and an initiation of fleet renewal have begun. 2.27 Two NTPP reports have been prepared on the maritime subsector and its critical importance to the economic integration of the country: the "Interisland Shipping Regulation Study" and "A Ship Replacement Program" (both dated December 1986). The principal issues highlighted in the reports are the high cost of interisland shipping and the poor safety record. Cost and Price of Shipping Services 2.28 At present, both the costs of interisland shipping to the shipping industry and the prices charged to the industry's clients are higher than tney should be. The major factors driving up costs are as follows: (a) The cost of port stevedoring and longshore "arrastre" services (which rarely comprise less than 20% of total shipping costs and sometimes as much as 60% on short hauls) tend to be inflated. These charges are incurred even where the shipping company provides the port handling equipment and labor. This appears to be due LargeLy to the manner in which the Philippine Ports Authority (PPA) adminis- ters stevedoring and arrastre services, in effect granting quasi- monopolies. These practices, which apparently stem from poLitical favoritism under the previous regime, are well recognized and are likely to be modified in the near future. (b) PPA has been able to enforce charges on private ports equal to about one half the charges for use of PPA facilities. Aside from inflat- ing the costs of private shipping, these practices also tend to dis- courage investments in and use of private facilities which wouLd compete with PPA. (c) The Bureau of Customs is unnecessarily involved in pureLy domestic movements, which not only causes unnecessary costs and deLays, but also may encourage corrupt practices. 3/ There also exists a broader association, PISA (Philippine Interisland Shipping Association), which includes barge and tramp operators as well.  - 20 - 2.38 One of the few facts which can be ascertained, however, is that Philippine maritime accidents have not been positively correlated with vessel age. Indeed, 621 of the accidents in 1984 (among vessels over 50 CRT) invoLved vessels 15 years old or less while only 30X involved vessels of 21 years or more. 2.39 In July 1986, MARINA implemented mandatory classification of all newly acquired imported liner and ferry vessels. The full effect of this action, however, will not be felt for five years, since it was introduced as a requirement for the Certificate of Public Convenience License renewal, and outstanding licenses have a validity of up to five years. At Least three recognized classification societies are now operative in the Philippines so that it should be possible to expedite this process. The rigorous scrutiny exercised by the classification societies is a much less costly and probabLy surer process to maintain vessel safety than is forcing the pace of fleet renewal. 2.40 As in road accidents, however, human error is more to blame than failures in equipment, and there is apparently a need to strengthen the educa- tion of merchant marine staff as well as the surveillance thereof, a function exercised by the Philippine Coast Guard. Public Policy Recommendations 2.41 The objective of public policy in the sector should be to promote a diversity of shipping services, responsive to market demands and technological innovation in the industry, at as low a cost (and price) as possible. Other than for ordinary cyclical factors, there is a tendency to excess capacity only because prices for ship services are held above suppliers' costs. 2.42 The appropriate policy prescription is gradual economic deregulation and a refocusing of the Government's limited regulatory powers on to safety considerations. Prices should be set free and new entrants should be welcomed in order to break the price-fixing powers of the cartel (at present price levels, no artificial encouragement should be required). Attention also needs to be given to revision of the PPA port handling and charging practices as well as to removal of Bureau of Customs involvement in domestic shipping. 2.43 With respect to fleet modernization, government intervention, other than to promote safety, is not needed. While the NTPP "Ship Replacement Program" suggested that government intervention would also promote fuel savings, chis factor would ordinarily be incorporated in the shipowners' own financial calculations to determine replacement timing. The Government, how- ever, may wish to consider whether taxes, particularly those on the import of vessels, spare parts and supplies, as well as the CCT, might be reduced or eliminated; this obviously would need to be considered in the context of overall public finance and taxation policies. 2.44 The pricing practices currently followed result in cross- subsidization of both the nine essential foodstuffs and low valued commodi- ties, as well as low-volume routes serving the less developed islands. The Government may wish to subsidize such services as a matter of social policy,  - 21 - and, in the case of the outlying islands, also for purposes of economic integration, which could be defended partly on "infant industry" grounds. Free competition in the shipping industry would undermine current practices, since new entrants would be attracted to those services where tariffs were held high, and, by thus "skimming the cream," would eliminate the revenue base for subsidizing other traffic. However, free competition would create greater efficiency in the whole industry and reduce the costs of all services, which could result in a lower cost even for those goods and routes which are presently being cross-subsidized. This would possibly include greater techno- logical adaptation to cope with the nature and scope of the secondary routes. Finally, to the extent that subsidy of these services was still desired, an explicit subsidy from the general treasury, in lieu of an implicit subsidy based on hidden taxes on the users of other transport services, may be preferred, so that social decisions could be explicitly determined. E. Other Modes 2.45 Domestic aviation is an essential transport mode in an archipeLago country like the Philippines, especially for passenger traffic and perishable and high-value cargo traffic. Nevertheless, this report does not cover the aviation sector in detail since there are no outstanding issues and few policy reports. Concerning the railway, the issue is the financial viability of the Philippine National Railways (PNR), particularly in light of the extremely low volumes of traffic, which, excluding some 3 million commuters, dropped from 416 million pass-km and 43.5 million ton-km in 1980 to 173 million pass-km and 19.4 million ton-km in 1986. At minimum, a radical restructuring of PNR to address those few sectors where it might possibly render a socially useful service at reasonably co.npetitive costs appears indicated. The opportunicy costs of assets not needed for such services should also be considered. III. INSTITUTIONAL ASPECTS AND ISSUES A. Organizational Setup 3.1 A multitude of agencies are engaged in the direct or indirect provi- sion of transport services in the Philippines. The organization of the sector may be divided into two broad categories, one dealing with infrastructure construction and maintenance, and the other with policies governing transport operation. Table 3.1 gives an overview of the transport agencies, their area of responsibility, size and annual budget.  -22- Table 3.1: INSTITUTIONS IN THE SECTOR Staff 1986 Budget Reports Agency Responsibility (Number) (P million) to BAT Air traffic control, airport infrastructure, safety and operation 3,507 157.8 DOTC CAB Economic regulation of aviation 84 4.8 DOTC CTP Overall transport planning (Cabinet level) 8 - Cabinet DLG Rural roads 5,562 269.9 DOTC All transport matters except roads 289 38.7 DPWH National and barangay roads 18,788 2,386.4 LRTA Light rail transport system in Manila 33 1,541.2 DOTC LTC Road transport regulation 2,732 53.2 DOTC MARINA Maritime regulation 285 11.2 DOTC MIAA Manila airport 1,408 141.0 DOTC MMC Manila transportation coordination n/a n/a HHTC Manila bus service 1,954 38.0 DOTC NEDA Overall transport planning and coordination 1,618 117.6 NTPP Transport planning and research 40 2.2 CTP,DOTC,NEDA PNR Railways 5,667 173.9 DOTC PPA Ports 1,963 1,211.0 DOTC TCC Manila traffic control n/a n/a DPWH TRB Toll roads regulation 15 1.0 DOTC The Government has initiated a major reorganization effort for all departments and agencies, which is expected to be completed by end-1987. The purpose of the reorganization is to clarify objectives, streamline operations, facilitate decision making and detail responsibilities. While there will be no major changes to the basic functions of the various governmental entities, the internal workings of many of them will be materially changed. The new organi- zational structures and staffing should therefore be reviewed in earLy 1988. 3.2 Infrastructure projects for the various transport modes are handled by the subsectoral agencies concerned. Investment planning for national and barangay roads is done by DPWH while the Department of Local Government (DLG) through local government units handles provincial, city and municipal roads. Port, railway, and airport infrastructure are handled, respectively, by PPA, PNR, and the Bureau of Air Transportation (BAT). 3.3 The DOTC is responsible for transport policy, regulation and administration. The National Economic Development Authority (NEDA) plays a coordinating role in the planning process. NEDA is making good use of the NTPP group which has full-time representatives from NEDA and DOTC, and liaison representacives from DPWH, PNR, PPA and KARINA. NTPP prepares five-year transport programs, listing priority projects by mode and their Investment requirements. It submits the programs to the Committee on Transport Planning  - 23 - and NEDA for consideration and inclusion in the Public Investment Program (PIP). Optimally, the transport program should be updated annually to accom- modate interim changes. The benefits to be derived from NTPP participation in planning have sometimes been limited due to NTPP's late invoLvement in projects and the occasional commitment of project financing before NTPP's review of the project. NTPP's links with the modal agencies should aLso be strengthened to facilitate intermodal and interagency coordination. NTPP will terminate as a project in December 1987 and, unless urgent measures are taken, its staff may be scattered and its capacity for medium- and Long-range planning and research lost. It is therefore recommended that the functions of NTPP be institutionalized within DOTC, or possibly NEDA, and that as Large a group as possible of NTPP's trained staff be kept together. This will, lessen the risk that the valuable expertise built up over the last ten years may be lost or diluted to the point of becoming ineffective. B. Major Sectorwide Issues Planning Coordination 3.4 Intermodal coordination in the transport planning process is weak. At present, project planning starts with the individual subsectoral agencies which are not required to consult or coordinate with agencies in other modes. Project development is based solely on past trends and the current economic situation, without regard to the impact of other transport deveLop- ments. As a result, highways have been built parallel to railway upgrading projects, and ports investments have been undertaken without considering that traffic would be diverted to highways. The lack of coordination arises, first, because the individual agencies function in isolation from one another, each with a mandate to provide transport services to the economy, though not necessarily the most economic and efficient services. Second, there is no coordination mechanism at the subsectoral agency Level; all coordination is done by NEDA and NTPP. NEDA is more involved in allocating resources to projects than in prioritizing them, while NTPP evaluates individual project proposals but has no authority over decisions affecting intermodal coordina- tion. As long as resources are available, alL projects are funded. This poses the risk of overinvestment in some projects which, when evaLuated individually, show good economic return, but, when considered in the context of other modes, may not be justified. Coordination shouLd instead be done at the planning stage when projects have been identified but are stilL tLexi- ble. In this case, if duplicate projects are discovered, uneconomic invest- ments may be avoided more easily than when the project is presented to NEDA. Better coordination among agencies couLd aLso heLp in the formuiation of a more realistic overall investment pLan. Contract Approval Procedures 3.5 The cumbersome procedures for reLease of payments reLated to contracts have aroused compLaints from various contractors and agencies. The bottleneck occurs both within and outside the agencies. Within an agency, the approval of contracts has to pass through the management hierarchy. Since no fixed time is prescribed for each LeveL of approvaL, the process is often unduly time consuming. Outside the agency, other management procedures  - 24 - exacerbate the process. For PPA and PNR, for example, additional approval from DOTC is needed for contracts above P 50 million (P 5 million for nego- tiated contracts) and Presidential approval is needed for all contracts above P 100 million (P 10 million for negotiated contracts). Further review of contracts by the Commission on Audit (COA) and NEDA creates additional delays outside the agencies. Starting in April 1986, COA mandated a review of all feasibility studies for which contracts were signed after March 1984. Some of these projects had already started, but had to stop until COA approved the feasibility study. The seriousness of the problem prompted a meeting with COA, at which COA agreed to review feasibility studies on a selective basis. COA will, however, continue to pre-audit and post-audit contractors' billings. Thus, approvals that could be undertaken in two weeks may require months and sometimes years to obtain. 3.6 Delays in contract processing became particuLarLy long during the past few years when contract prices have had to be adjusted and price escala- tions recalculated due to currency devaluation and inflation. To demonstrate the seriousness of the problem, both DPWH and DLG have prepared estimates of the extra costs incurred due to unnecessary procedures and Lengthy processing time. To cite a few examples: (a) In DPWH, 21 months were wasted over a period of four years due to work stoppage by contractors not able to secure funding. The delay was caused by a lengthy process for approving contract price adjust- ment and price escalations. Extra costs amounted to P 276 million for price escalations. (b) A project at Lahug was delayed for 13 months because the contract was not approved in time. Extra costs were estimated P 7 million Eor price escalation. (c) A project at Dumangas was delayed for 10 months, leading to addi- tional costs of P 6.2 million in price escalations. 3.7 Another cause of delays is the sometimes weak quality and competence of staff invoLved in the whole decision process. Some of the delays occur simply due to Lack of technical expertise at certain management Levels to make an appropriate decision within a reasonable length of time. The tendency is to retain documents for longer than required while clarifications are being sought. It is therefore recommended that the procedures for contract approvals should be streamlined in order to eliminate duplicate reviews. Staffing and Management 3.8 Staffing and management of the sector agencies is uneven. WhiLe Low government salaries make it difficuLt to recruit and retain competent staff, this problem has been somewhat alLeviated by the general economic sLowdown, which has reduced the "brain drain" toward the private sector. As a result, working Level staff have in large measure remained in many agencies. On the other hand, and potentially a more serious problem, the number of managerial positions that have changed incumbents after the change in government in February 1986 appears to threaten the proper functioning and continuity of  - 25 - some of the sectoral institutions. For example, DLG appears to have suffered so many changes that its ability to carry out well-conceived provincial roads projects in the short run is uncertain. There is a need for the Government to strike a proper balance between political and professional career appointments to remedy this situation. 3.9 Centralization of government authority has added to the ineffici- encies in project implementation caused by slow contract processing. While this problem has been widely recognized, and Government has recently been moving toward decentralization, success so far has been limited. One impor- tant issue is the readiness of regional offices to take over some of the delegated responsibilicies and authority. A technical training nrogram for local staff should therefore be established at the regional/provincial level. The quality of local officials also varies greatLy, and many regionai offices of both the agencies and COA are reluctant to take on extra responsi- bilities. COA's i.egional offices, for exampLe, would not approve anything that has not first been reviewed by COA headquarters, thus making their review redundant. C. Institutional Issues in the Subsectors Roads 3.10 DPWH is responsible for national and rural (barangay) roads, while provincial, city and municipal roads are under DLC. The secretaries of DPWH and DLG submit their highway and rural road projects directly to NEDA for inclusion in the Public Investment Program. A separate process is initiated simultaneously for budget approval by the implementing agencies. 3.11 The principal institutional issue affecting the subsector invoLves the responsibility for construction and maintenance of rural roads, which has been shifted between the former Ministry of Public Works and the Ministry of Local Government a number of times and is presently with DPWH. Despite the official emphasis placed on rural roads, the frequent shift in responsibiLity for the roads has resulted in unclear direction and the lack of a coherent rural roads program. This issue deserves priority attention since ruraL r'oads are the most important factor in lowering costs for farm-to-market transporta- tion. As a first step in improving rural road maintenance, it is recommended that local staff be involved in this work not only to simplify work fo-ce arrangements, but also to boost local awareness of the importance of .oad maintenance. Urban 3.12 FunctionaL Responsibilities. At present, there is a substantial amounc of jurisdicational overlap and corresponding uncertainty of -esponsi- bility in almost all critical urban transport functions. At tne nationaL level, national policy development, assiscance to local units of Government for transport planning and traffic management, and traffic enforcement need particular attention. At the Local Level, road construction and maintenance responsibilities among DPWH, the cities, and the barangays need to be clari- fied. The main agencies involved in urban transport services are discussed below.  - 26 - 3.13 DOTC oversees virtually all aspects of urban passenger transport, including the licensing of private cars and other motorized vehicles, the issuing of route franchises for buses and jeepneys, and overall public trans- port planning. In addition, it is responsible for three government agencies providing passenger services in Metro Manila: the Light Rail Transit Authority (LRTA), MMTC, and PNR which in 1986 carried about 171 million suburban cormnuter trips. 3.14 DPWH is responsible for the planning, design, construction and maincenance of practically all urban thoroughfares, since they usually form part of the national road system. In Manila, two special DPWH agencies play an importanc role in managing and improving the road system. (a) The Traffic Control Center (TCC) was created in the Late 1970s to implement the Traffic Engineering and Management (TEAM) project in Metro Manila. Under the ongoing reorganization of DPWH, it is proposed to establish this office on a permanent basis. Renamed the Traffic Engineering Center, it would continue to be responsible for traffic planning, design and engineering, including installation, operation and maintenance of traffic signals and other traffic control devices. While the focus of its activities would remain in Metro Manila where it now plays a key role, it would also provide specialized services to secondary cities such as Davao, Bacolod and Iloilo. (b) Created in 1972, the Urban Roads Project Office (URPO) has been responsible for the planning, design and construction supervision of new roads, bridges, flyovers and road widening projects. It is also involved in supervising civil works executed under the TEAM project, and generally works in close coordination with TCC. While most of URPO's activities are concentrated in Metro Manila, it is also responsible for extending the North and South Luzon expressways and for civil engineering aspects of the Metro Cebu improvement project. 3.15 Several other agencies are also involved in important aspects of urban transport. Traffic law enforcement for aLl cities is carried out by the Integrated National Police, supported by the Constabulary Highway Patrol Group for major thoroughfares, and by craffic aides employed by cities and munici- palities. Traffic Law enforcement is widely regarded as one of the weakesc links in the urban transport chain due to: (a) the unclear definition of institutional responsibilities, (b) severe undermanning, and (c) widespread corruption. 3.16 Cities and municipalities are responsible for the planning, con- struction and maintenance of secondary streets under their jurisdiction (primary traffic arteries are under DPWH). The cities may also be consulted by DOTC on regulatory aspects of uE7an transport, and by the police on traffic enforcement aspects. Some cities _ in Metro Manila have established Traffic 4/ Metro Manila consists of 4 cities and 13 municipalities.  - 27 Coordination Councils which meet about three times a year and include repre- sentatives of the City Engineer's offices, DOTC, DPWH, TCC, the police and civic organizations. In addition, the municipal and city engineers of Metro Manila confer about once a month, primarily to review issues concerning the roads and drainage system. 3.17 The Metro ManiLa Commission (MMC) was created in the early 1980s to coordinate, on a metropolitan-wide basis, the planning for such urban develop- ment aspects as hou.ing, environmental management and transport. Besides its overall, planning role, MMC has also been involved in some operational func- tions (including solid waste management and, in the transport field, the collection of curb parking charges and the deployment of traffic aides). rt is generally expecced that MMC's importance may decline somewhat under the on- going reorganization of government agencies. 3.18 As the plethora of agencies and their intermingling responsibilities would indicate, the magnitude and complexity of Manila's transport issues require special Government attention--and in general this attention is being given. However, regulations and such aspects as jeepney licensing (done by DOTC) are usually treated separately from the management (police) of street space, even though all are functionally interrelated. While it is, for example, recognized'that jeepneys contribute substantially to traffic conges- tion in certain corridors, the current licensing rules (applied by DOTC) do noc take into account the traffic capacities (determined by DPWH) of those corridors. Bus lanes delineated in the 1970s by DPWH were poorly enforcea (by the police) and were not coordinated with (DOTC's) public transport licensing policy. In the past, these and other problems of interagency coordination would have been dealt with by TRANSEC, a transport coordination mechanism established for Metro Manila. Recently, however, TRANSEC became inactive, and iC is strongly recommended that TRANSEC be revived (or some other, similar organization created) and be given high-level support to improve mobility and transport efficiency in Metro Manila. 3.19 Agency-Specific Issues. DOTC's two urban operating agencies, i.e., LRTA and MMTC, are heavily subsidized, and their organizational set-tit shoiK be reviewed. With regard co LRTA, the Authority owns and establishes potLcies for the rail line but actual train operations are run under contract by METRORAIL, a subsidiary of the private electrical utility company, MERALCO. This type of operating arrangement is unusual, and the high electricity costs of the LRT make it appear likely that the current arrangement primarily bene- fits the contractor at the expense of the Government-owned LRTA. LRT services are complemented by the bus system run by MMTC, which in 1986 carried 75 million passengers compared to the LRT's 93 million. MMTC also manages a lease-purchase arrangement for about 700 buses that are currently operated by seven qrivate bus consortia. In view of MMTC's worsening financial posi- tion,5 Government should review its policy of providing bus services both 5/ The estimated net Loss per bus-km has increased steadily from P 0.39 in 1983 to P 1.65 in 1986, or from a total of P 11.8 million (1983) to P 38.7 million (1986).  - 28 - through a government company and through the artificially stimulated consortia of private bus operators. Ports 3.20 PPA is responsible for planning and implementing ports projects. After establishing a list of suitable projects on the basis of economic criteria, PPA goes through an internal approval process, rhen submits the approved projects to DOTC for review and coordination. Thereafter, the plans are forwarded to NEDA to be included in the Public In-estment Program. 3.21 Institutional problems in the subsector have led to coordination problems between the users and providers of port- and port-related services. According to some users, refrigerated storage facilities at ports are misallo- cated or nonexistent. Disincentives to building storage facilities at loading and unloading points arise from (a) the requirement of a license to construct and operate a private port facility; and (b) the requirement to pay the Government a certain percentage of throughput value. Partially as a result, refrigerated trucks are in effect "converted" to storage facilities, thereby lengthening their turnaround time and adding to costs. 3.22 Another problem between users and providers comes from an archaic law which specifies that interisland maritime cargo with a value over P i,000/ton may be classified under ad valorem races. This contributes to the chronic problems of high cost for farm-to-market transportation. Nowadays, most cargo is worth over P 1,000/ton, and the law results in identical shipping costs between Manila and Cebu and Manila and Davao, for exampLe. The Cebu Chamber of Commerce has prepared a position paper containing suggested legislation to remove the P 1,000 cutoff point. The level of port charges are also being questioned by the users. MARINA, which has the power to set and approve freight tariffs, and PPA, which determines port charges, clearly have a roLe to play in this regard. Railways 3.23 PNR has recently been experiencing many changes. A strong manage- ment team was put in place in early 1987, and the new General Manager has been given the difficult task of turning the company around. His presence at PNR has made discussion of previous institutional issues obsolete, since, with the help of PNR staff, he is attempting to correct the major problems which formerly threacened PNR's viability. 3.24 A fundamental cleanup of PNR's books is also taking place. Since PNR is unfairly burdened by heavy debt service obligations on loans which brought no real assets for the company, attempts will be made to exclude these obligations from PNR's financial statements. Separate accounts should also be kept for railway and non-railway operations. Tariffs will be computed to cover only those costs which can be fully accounted for by PNR.  - 29 - Aviation 3.25 The Bureau of Air Transportation (BAT) is the national regulatory body responsible for safety and operations in the aviaLion sector. Routes and fares are regulated by the Civil Aeronautics Board (CAB). However, under current institutional arrangements, BAT can take no direct action on safety problems at the Manila International Airport (MIA) but must work through the Manila International Airport Authority (MIAA) which concroLs all expenditures for the airport. MIAA, however, has been very slow in reacting to BAT complaints, citing Lack of funds. 3.26 Airline operators and charter and piLots associations have presented position papers favoring the return of MIA to the controL of BAT. At present, responsibiLities for the airport are split between the two agencies. Naviga- tional aids at MIA are manned and maintained by BAT personnel, but the pro- curement of instruments is done by MIAA. BAT pays for the training and salaries of air traffic controllers, but is not reimbursed for these services by MIAA. MIAA also receives alL iicome from MIA Landing fees and concess- ioners, and about 35% of airport income; the remaining 65% is passed on to the National Treasury. MIAM claims that 35% of income is sufficient to cover only personnel expenditures, and therefore continues to receive a subsidy from the Treasury. 3.27 BAT's own source of revenue is the Landing fee charged in outlying airports around the country. If BAT were to absorb MIAA, the current subsidy received by BAT from the Treasury could be cut by an estimated 50%. MIAA requested a widening of its authority to cover the four international airports at Cebu, Davao, Zamboanga and Laoag, but this request was not granted and should not be entertained in the future. IV. PUBLIC EXPENDITURE PROCRAMS IN THE TRANSPORT SECTOR A. General Investments 4.1 The transport sector investment plan prepared by the Government in 1984 for the period 1985-90 represented a considerable effort at reducing and/or delaying transport investments commensurate with the Likely funding available under the then-prevaiLing economic situation in the PhiLippines. Every transport project estimated to cost more than P 300 milLion (about USS15 million) was individually reviewed and possibiLities for further cut- backs and rescheduling were openly explored. The pLan represented high priority investments with high estimated rates of return and often consider- able social benefits. The 1983 Level of investments was not expected to be attained during the plan period. 4.2 The October 1986 Medium-Term Public Investment Program (MTPIP) for 1987-92 (Annex 2) represents a massive build-up to support economic recovery and agro-industrial deveLopment compared to the 1985-90 program, which was  - 30 - evaluated by the Bank two years ago. A comparison of the two programs is shown in Table 4.1, based on adjusted inflation assumptions for MTPIP and the recalculation of both programs in January 1987 prices (Table 4.2). The highway subsector would receive the largest share of MTPIP funding, about 70%, followed by the ports subsector with about 15Z. Table 4.1: COMPARISON OF MTPIP (1987-92) AND INVESTMENT PROGRAM FOR 1985-90 1985-90 program MTPIP 1987-92 Increase