Toll Road Fees and Willingness-to-Pay in the Crispin Emmanuel D. DIAZ Associate Professor School of Urban and Regional Planning University of the Philippines Diliman, Quezon City 1101, Philippines Telefax: +63-2-9206854 E-mail: [email protected]

Abstract: The charging of fees for the use of infrastructure facilities such as toll roads necessarily prices out potential users whose willingness-to-pay is exceeded by the toll fees that are charged. This means that economic gains, such as travel time and vehicle operating cost savings, may not be realized for those who have been priced-out. It becomes necessary to verify if the cost-recovery aspect does not adversely affect the project’s economic viability. A description of the current level of willingness Philippine motorists to pay for the use of toll roads is presented and the implication of the current toll fees structures is discussed. Some lessons from the Philippine case are presented.

Keywords: willingness-to-pay, toll roads,

1. INTRODUCTION

Public Private Partnerships (PPP) in roads have been in the Philippines since the 1970s. Yet since then, only six toll roads have become operational. Even after the enactment of the BOT (Build-Operate-Transfer) Law, as amended in 1994, which laid down rules for private sector financing and development of infrastructure, only six projects were completed, of which two were the rehabilitation and extension of the (NLE) and the (SLE). The other four deals included: • (under the Citra Metro Tollways Corporation) • Manila – Cavite Toll Expressway, MCE (under the Coastal Road Corporation) • Southern Tagalog Arterial Road, STAR (under the STAR Infrastructure Development Corporation) • Subic-Clark-Tarlac Expressway, SCTEx (under the BCDA)

During the same period, neighboring countries, like Malaysia and Indonesia, which started having PPP in toll roads later than the Philippines, have increased their number of toll roads to 29 and 24, respectively. Vietnam and Cambodia which only recently began their own programs have already 2 each. These figures reflect a relatively poor performance of the Philippines in attracting private investment to road infrastructure.

There have been several foreign funded studies that discussed the need for clearly process for developing a “pipeline” of toll road projects that take the business-worthiness of proposed toll road projects into account. Processes for business case have been recently gained more support, evidenced by specific funds being set aside for business case studies to be conducted under the auspices of the planning offices under the Department of Public Works and Highways.

1

Table 1 Regional Comparison: 1990 to 2007 – Private Investment in Toll Roads Infrastructure Year 2007 Number of Investment (US$ GDP per Country Population, Roads Capita (US$) Millions) (millions)

Malaysia 29 7,992 27 14,225

Indonesia 24 2,706 220 3,990

Philippines 5 1,509 90 3,539

Vietnam 2 143 87 2,774

Cambodia 2 13 14 1,995

Source: Derived from basic figures of the World Bank Public Private Infrastructure Advisor Facility (PPIAF) database

In relation to the development of new projects, it is necessary to have a clear view of the aspect that cuts through both the demand and supply side – the price (toll fees). This paper is to discuss the manner in which toll fees are set and adjusted in the context of the Philippines, the willingness of Philippine motorists to pay for the use of toll roads, a discussion of other issues affecting the setting of tolls, and finally discusses some lessons from the Philippine experience.

2. TOLL FEE STRUCTURE

The following table summarizes the current toll fee levels averaged on a per-kilometer basis. What it shows is that these rates vary among these expressways. The fees do have a common attribute in that the fee levels for Class 2 and Class 3 are, respectively, twice and thrice the level for Class 1.

Table 2 Comparison of Average Toll Fees (in Pesos/Kilometer)1 Expressway Description Class SCTE NLE STAR SLE2 Skyway MCE

(Cars, Motorcycles, SUVs, Class 1 2.00 2.2 0.73 0.56 8.50 3.33 Jeepneys)

Class 2 (Buses, Light Trucks) 4.00 5.49 1.68 1.12 17.00 6.52

Class 3 (Heavy Trucks) 6.00 6.59 2.59 1.68 25.50 9.85 Source: Compiled from recent toll fee matrices of the different toll roads

1 The current foreign exchange rate is 48.2 Philippine Pesos to 1 US Dollar

2 Alabang to Calamba section

2

Toll agreement documents are not very easy to obtain. Even the copy that the researcher was able to secure contained a specific clause stating that the contents of said contents were confidential and could not in whole or part be divulged to others without the express consent of all parties involved – and no divulgence would be allowed at “anytime, before or after expiry or earlier termination” of the agreement. While it can be understood that during negotiations and while there is competition between other prospective investors to win the project, once the selection has been made, the basis of the selection and the details of operational arrangements should be made public – in order to foster greater trust for the process of selection. Without this kind of track record, it is obvious that there will remain many private investors who would stay away from the business of providing toll roads.

The toll fees are set based on negotiations between the government and the tollway operators. The toll agreement documents reflect the initially agreed toll rates and the manner by which future adjustments would be made. Several consumer price indices and foreign currency exchange rates are cited as part of the basis for these adjustments. Another factor is a value that is tracked against whether the date is within 15 years of the start of operation, with a lower value indicated for the years from 16 up to the end of the franchise coverage.

With reference to the Metro Manila Skyway project in the Philippines, a toll rate adjustment formula was agreed upon which allowed for periodic adjustments based set escalation rates for particular years of operation. On the other hand, the agreement for the Manila-Cavite Expressway allowed for adjustments based on consumer price index and currency exchange rates. However, while these clearly stated arrangements make it very easy for regulators, the traffic volumes for the Skyway have not been high enough to generate sufficient revenues, partly because the revealed willingness-to-pay of motorists has not been very high. This is perhaps exacerbated by the fact that the Skyway is not very long, and therefore does not provide a very large amount of travel time savings. Also, it is in direct competition with the South Luzon Expressway which runs parallel underneath, and which has substantially lower toll rates

While these methods of adjustment seems to have some basis (such as in the use of consumer price indices) it is not clear exactly that these necessarily track the profit position of the investor. The risk for foreign exchange is borne mainly by the users, as evidenced by the tracking of the exchange rate as part of the adjustment factors.

What is the government policy for the project itself? Is the project meant to provide economic benefits in excess of the economic cost of doing it (as is common evaluation basis for “ordinary” government roads)? There is no mention of monitoring economic welfare in the areas served by the road. From other papers (Diaz, 2009 to be published) it is clear that not all toll projects are economically viable since the toll fees required to make them profitable are just too high – resulting in the pricing out of a good portion of the expected beneficiaries. This means that the resulting traffic numbers are lower than if the prices were lower.

3. TOLL WILLINGNESS-TO-PAY IN THE PHILIPPINES

Information on travel demand elasticities is an integral part of analyzing the potential revenue collection of proposed toll road projects. Not many studies have been made on this, and these 3

have tended to be kept confidential by the companies since these constitute a kind of trade secret. A number of studies do present some indication of the WTP aspect, and these are summarized below.

Data from a WTP survey conducted as part of study for the Manila North Tollways Corporation (MNTC) by the UP-Planades in 2003 indicated that a 900% increase in toll fees would result in a 1/3 reduction in traffic numbers, especially for shorter trips. This relatively small reduction indicated that the toll fees at that time for the North Luzon Expressway (NLEX) were somewhat low.

Using the data from the UP-Planades survey, the point at which the traffic would be maximum is extrapolated to a zero toll fee condition. In the opposite direction, the zero volume condition, or maximum toll fee after which no motorist will use the roads was extrapolated to be 5.584 pesos per km for a Type 1 Vehicle3. The traffic share within this range would be interpolated on this straight-line. Figure 2 shows this approximated demand (WTP) curve. The x-axis is the share of the maximum possible traffic, which is the traffic under the zero toll fee condition. This WTP curve is a very strong assumption and may not be exactly realistic for all project cases, since it is based on only one example of WTP in a location with its own peculiar road network and socio-economic condition. Also, this approximation does not account for the variation of WTP with the length or purpose of the trip, nor for the socio-economic characteristics of the respondents.

Figure 2. Approximated WTP function for Type 1 vehicle (Source: Author’s estimate using data from UP-Planades, 2003)

Using survey data from a GHD Study, as part of a business case study on the Calamba-Los Baños bypass road for possible development as a 15 kilometer long toll road. This depicts a somewhat different picture, especially in terms of the 100 percent share toll fees – the GHD surveys show that there is a toll fee greater than zero wherein all respondents said they are willing to use the specified toll road. It is difficult at this point to say that one estimate is “more correct” than the other, since these surveys referred to different motorist groups and they did not cover the same area. What the surveys do show is that the manner in which questions are specified apparently does have a great impact on the kind of responses that are

3 Toll road companies in the Philippines use a revenue vehicle typology as follows: Type 1 corresponds to cars and small-sized vehicles; Type 2 corresponds to passenger buses, light trucks; Type 3 corresponds trucks, all types above light trucks 4

collected. On a more positive note, it appears that the WTP levels are in the same “ball park” and differ only by a number of pesos per kilometer.

Figure 2. Approximated WTP function for Type 1, 2 and 3 (Source: Author’s estimate using data from GHD, 2008)

4. CONSIDERATIONS IN THE SETTING OF TOLL FEES IN THE PHILIPPINES

4.1 Reasonable Rate of Return Interviews with officials from various private and commercial firms indicate that the private sector expects at least 20% per annum as reasonable rate of return. Initially, it was intended that this rate would be applied to the financial analysis from the viewpoint of the Private Sector Proponent. However, it was observed that this assumption would be in conflict with the provisions of the Public Service Act, an old law that governs some key aspects of undertakings of a “public service” nature. This law specifies that in no case shall this exceed 12% return on rate base. Thus, 12% was used in the calculation of the Financial Net Present Value of the Project (FNPV) from the viewpoint of the private proponent.

4.2 Opportunity Cost of Capital The National Economic and Development Authority (NEDA) currently uses fifteen percent (15%) as the hurdle rate in the economic analysis of government projects. While it has been argued by several experts that this value may be too high, this is the current value being used by the government at the moment. For projects which require the participation of the government, this aspect will still have to be examined.

4.3 Government Contribution By BOT Law, the government may not finance more than 50% of the project cost, through the General Appropriations Act (GAA) or Overseas Development Aid (ODA). This figure is contrasted to only 20% in countries like India, which refers to the contribution as a Viability Gap Funding (VGF).

5

4.4 Project Term The BOT Law allows contracts that last up to a maximum of 50 years. A good number of projects have terms of 30 years.

4.5 Political In the past, the collection of tolls has been stopped by court injunction. Toll rates have also been rolled back by Presidential Order (World Bank, 2005). In 2007, President Gloria Macapagal-Arroyo ordered at least a 10 percent reduction in toll fees at the North Luzon Expressway. With these precedents, only proponents with strong political backing would have the confidence to pursue toll projects, since these require large investments that need to be safeguarded.

More recently, President Arroyo ordered the Toll Regulatory Board to “implement the downward adjustment of NLEX toll rates as a result of the new toll rate formula to take effect on June 30th this year 2008.” While these adjustments are supposedly in line with rate adjustment formulas, the fact that the president is making a press statement regarding this means that it is considered as important to be associated directly with the decrease in the toll fees – which is considered as a way to gain public favour.

4.6 Social Acceptance Paying toll fees for the use of roads is still not a universally accepted practice, especially in the places in the Philippines where none yet exist. However, the main hurdle appears to be the lack of paying capacity of the populations in many areas of the Philippines, rather than a lack of respect for the Users-Pay-Principle.

5. LESSONS IN THE PHILIPPINE CASE

5.1 Not all Road Projects with substantial economic benefits are necessarily viable as Toll Roads Considering the difference between the objectives of the government (i.e. the public sector) and that of the private sector proponent (i.e. the private sector), it is clear that not all projects will satisfy the requirements of both sectors, in which case we would say the project may not be suitable for a PPP arrangement. Thus, in order to assure that a given project would be successful under a PPP arrangement, it is necessary to have a way of determining, a priori, the suitability of a given project for a PPP arrangement. Thus, roads being considered for implementation through a PPP arrangement should be subjected to integrated studies that check if the abovementioned requirements are satisfied. For any given PPP arrangement to be viable, it must satisfy all of the following requirements: • The project is economically feasible, meaning that the net contribution to public welfare is positive. In other words, the economic benefits brought by the project should exceed the economic cost of implementing it. • The project is financially viable to the private sector partner. This recognizes the basic consideration for the private sector to do business in the first place – to make a profit. • The arrangement provisions are legally and politically acceptable.

Using the earlier mentioned WTP data, it is estimated that as much 33 percent of traffic is suppressed due to toll fees in range of 2.2 pesos per kilometer. While the 50 percent traffic 6

mark can be argued mathematically to correspond to maximum revenues for the operator, it is clear that this would also correspond to a situation where the economic benefit derived by the toll road project would be roughly 17 percent less than for the 33 percent traffic mark. When compared to the Economic Internal Rates of Return, ranging from 22.9 to 38.9 percent for some proposed DPWH road projects (DPWH, 2003), this reduction of economic benefits may cause the project to become economically unviable.

5.2 Lack of transparency in institutional processes is an obstacle to greater private sector participation

Like other infrastructure in the Philippines, roads suffer from low cost recovery. Efficient pricing has not been the norm, mainly because of political intervention, with tariffs based on social and political considerations instead of commercial ones (World Bank, 2005). This situation shows that the quality of institutions and how they interact with one another is of utmost importance in assuring that good infrastructure is put in place.

While the BOT Law provides a generally transparent process in this regard, other processes that relate to GOCCs are not offering a transparent process to the market, such that, potential investors must be “in the know” to engage in a joint venture for a Toll Road Project (PEGR, 2007). This sets the backdrop for an unclear and inconsistent regulatory environment that can be expected to discourage the development of truly competitive toll road projects that would enable the private sector to make a reasonable profit (Benson, 2008). Past PPPs were mostly initiated through unsolicited proposals, which escaped proper planning process and as a result may have had a poor fit with development strategies. It has been proposed that project preparation should be shifted from private proponents to the relevant government planning agencies (KBR, 2008). In doing so, government agencies would also have to expand their project evaluation process to include financial viability (from the private partner’s viewpoint) on top of the evaluation of the project’s economic feasibility (net gain to public welfare).

6. CONCLUDING REMARKS

There is no substitute for proper project preparation in ensuring that the success of the project. It is important that road planning agencies have a good understanding the impact of the willingness-to-pay on the resulting net economic benefit of toll road projects. At the same time, a clear consideration of the profit motive of private sector participation in the provision of toll roads is integral to packaging good projects to offer to the private sector. Recent reforms have instituted processes that support the conduct of Business Case studies by the DPWH wherein prospective toll road projects are subjected to market-based analysis wherein the response of the users to pricing is accounted for in calculating both economic viability of the project as a whole, as well as the financial viability for the private sector partner. This process still needs to be further strengthened in terms of its fit into the existing decision processes of DPWH, as well as other relevant agencies and offices. At the same time, the private sector and all relevant government agencies and offices need to be made aware that such a process has been established, how that process works and what their roles are, in order for that process to work well and ultimately result in sustainable toll road projects being made available to the motoring public.

7

REFERENCES

Asian Development Bank (2008) Public-Private Partnership Handbook, ADB, Manila, September 2008 Benson, Peter (2008) What the Philippines can do to Attract Private Investment in Badly Needed Infrastructure Projects – Focusing on Toll Roads: A presentation made at the American Chamber and the Joint Foreign Chambers 6 November 2008 Congress of the Philippines (1990) Republic Act 6957 - An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes, July 1990 Congress of the Philippines (1993) Republic Act No.7718 – An Act Amending Certain Sections of Republic Act No. 6957, Entitled “An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes”, 26 July 1993 Diaz, Crispin Emmanuel (2009) A Framework for Determining the Viability of Public- Private Partnerships for Toll Road Projects in the Philippines, Submitted to EASTS 2009. DPWH (2003) JBIC Special Assistance for Project Formation (SAPROF) for Road Network Capacity Expansion (Bypass) Project, Vol. 1, September 2003 GHD (2008) Business Case: Calamba-Los Baños Bypass Road, Laguna, December 2008 KBR (2008) Final Report on the PEGR-funded Reform Agenda on RA 008-01: Developing a Methodology and Framework for National Transport Policy and Planning Philippines-Australia Partnership for Economic Governance Reforms, PEGR (2007) Policy Improvement and Capacity Enhancement for Infrastructure Development – PPP Framework for Toll Roads, May 2007 World Bank (2005) Philippines – Meeting Infrastructure Challenges, World Bank, Manila, 2005

8