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tortillaconsal punto/dot com
By Karla Jacobs
June 16th 2010
When Daniel Ortega came to power in January 2007, his government was faced with the reality of a financially unsustainable public transport system. While the Nicaraguan authorities do regulate public transport fares, there was not, until recently, any attempt to protect transport providers from the harsh reality of constant increases in the cost of inputs (gasoline, spare parts, lubricants, etc.).
As a result of this complete lack of financial support from the three previous governments, public transport providers (the vast majority of whom own one or two vehicles and are organized in transport cooperatives) had been unable to give their vehicles proper maintenance or replace faulty ones. Consequently, by 2007, a large proportion of Nicaragua's public transport fleet was obsolete.
In an attempt to turn this situation around, the FSLN government has been implementing a transport policy which aims both to ensure accessibility of public transport by keeping fares low and to create financial sustainability for transport providers. This policy has been based on two main components: the periodical provision of subsidized fuel and the reduction of input prices.
Reduced priced inputs and vehicles for transport cooperatives
This second strategic line of action - reducing the price of transport sector inputs - is made possible via tax free, bulk importation of items like tyres, batteries, lubricants, electronic passenger meters, and others which transport cooperatives are able to access with low interest rate credits which they can pay back over two years.
The government has also been able to significantly reduce the price of new vehicles thanks to the donation of 130 new buses from Russia in 2009. These buses, worth US$60,000 each, are being made available to transport cooperatives in Managua for US$25,000 in an attempt to gradually replace Managua's obsolete public transport fleet. Credit to purchase these buses is being provided by ALBA-Caruna with an 8 year pay back period and a 2% annual interest rate.
During the recent visit of a high level Russian government delegation to Nicaragua (June 2010), an agreement was signed in which Russia committed to donating a further 250 buses to replace obsolete veh icles in the rest of the country. Additionally 500 Ladas will be provided under preferential payment conditions to replace ageing taxis throughout Nicaragua.
In terms of the other component of the government's public transport policy - the provision of subsidized fuel - the government has maintained a permanent subsidy for public transport in Managua and introduced periodical fuel subsidies for public transport in the rest of the country when the price of fuel is particularly high.
50% transport subsidy in Managua brought an end to regular transport strikes
Undoubtedly the most extreme example of just how unsustainable the public transport system had become prior to the FSLN's 2006 electoral victory was the situation in Managua in 2005 and 2006 when violent and massively disruptive prolonged bus strikes became a regular occurrence.
In order to get an idea of how disruptive these strikes were it is important to take into account the fact that, according to government figures, anything up to one million Nicaraguans (around 18% of the nation's entire population) uses public buses in Managua each day. For school children, students, the unemployed or low income workers there is no affordable travel alternative to buses in the capital city.
The combination of rising expenditure and the inability to charge more for transport services created a situation in which the quality and security of Managua's public transport fleet was seriously compromised while transport strikes presented themselves as an inevitable vent for the abandoned sector's discontent.
Even before the FSLN came to power in January 2007, however, the party was able to play a leadong role in solving this ongoing problem. In April 2006 the then FSLN Mayor of Managua, Dionisio Marenco, led a delegation of Nicaraguan mayors to Venezuela where an agreement permitting oil to be exported to Nicaragua from Venezuela under extremely preferential payment conditions was signed with the Venezuelan state oil company PDVSA.
Despite the numerous obstacles created by former president Enrique Bolaños' government to prevent the Venezuelan oil actually entering Nicaragua, Marenco was able, in October 2006, to oversee the provision of subsidized fuel to Managua's public transportation sector as part of the agreement with PDVSA, thus permitting the fare to be reduced from C$3 to C$2.5.
Ever since then, and despite soaring international oil prices, the FSLN has been able to maintain the bus fare in the capital city at C$2.5 (US$0.12) thanks to the government's ability to subsidize fuel, something made possible as a result of Nicaragua's membership of ALBA.
According to official calculations, the real price of public transport in Managua today is C$5 (US$0.25). With the 50% government subsidy, however, the tariff in Managua is lower than in any other Central American capital city (see table below):
Bus Fares in Central American Capital
Cities, June 2010
| Panama City |
San José |
Managua |
Tegucigalpa |
San Salvador |
Guatemala City |
|
| Transport tariff (US$) |
0.25 |
0.23 |
0.12 |
0.16 |
0.23 |
0.13 |
Source: La Prensa
The success of the transport policy implemented in Managua is reflected by the fact that during the three and a half years of the FSLN government there has not been one public transport strike in the capital city.
Fuel subsidies have prevented further fare increases in other parts of the country
Over the last couple of years the FSLN government's strategic policy to mitigate the potentially disastrous effects of unprecedented fuel price increases and fluctuations on public transport in the rest of the country has been to subsidize fuel purchases for all road and marine transport when fuel prices are particularly high. This national fuel subsidy, like the fuel subsidy in Managua, is made possible only as a result of Nicaragua's membership of ALBA.
The provision of subsidized fuel for public transport at a national level was first introduced in May 2008, when the international oil price was peaking at historic levels of well over US$130 a barrel. Soaring fuel prices provoked a number of Nicaraguan transport organizations to declare a national transport strike on May 4th of that year. On May 16th, after twelve days of disruption and million dollar losses, President Ortega announced his government's decision to subsidize purchases of gasoline and diesel to the tune of US$1.30 per gallon for up to five gallons a day for all public buses, taxis, small boats and ferries. In return transport providers were instructed not to increase fares.
A number of the main protagonists of the strike had been demanding the government freeze the price of fuel at 50% the going rate in a blatant attempt to undermine the government's capacity to meet the striker's demands therefore ensuring the indefinite continuation of the strike.
The majority of the participating transport cooperatives - the ones whose participation meant the strike had an effect in the first place - celebrated Ortega's announcement of a US$1.30 discount on fuel, however, and called off the strike on May 17th.
The 2008 transport subsidy was maintained for nine months, eventually being suspended in January 2009 after the international oil price dropped to US$41.74 a barrel (less than a third of the June 2008 peak price of US$133.93 a barrel).
Over the last 12 months, however, the price of oil has again begun to climb, although more gradually than in 2008, reaching US$84.48 a barrel in April 2010. This latest increase has again created problems in terms of the financial sustainability of the public transport system in Nicaragua.
The government's "investment" to guarantee production
The government responded to this situation by announcing the reintroduction of fuel subsidies for all terrestrial and marine transport on April 30th. This time the discount is worth US$0.35 a gallon on gasoline and US$0.40 a gallon on diesel.
The table below shows the average price of fuel at Nicaraguan gas stations in May 2008 when the first subsidy was introduced, in January 2009 when it was suspended and in May 2010 when the latest subsidy was introduced. Also shown are the reduced prices paid by public transport providers in May 2008 and May 2010 taking into account the government subsidy:
Average Fuel Prices in
Nicaragua
| May
'08 (US$1 = C$19.25) |
May
'08
(subsidized price) |
January
'09 (US$1 = C$19.89) |
May
'10 (US$1 = C$21.21) |
May
'10 (subsidized price) |
|
| Gasoline (US$/gallon) | 4.79 | 3.49 |
2.89 |
4.12 |
3.77 |
| Diesel (US$/gallon) | 4.72 | 3.42 |
2.68 |
3.48 |
3.08 |
On several occasions government representatives have described the public transport policy as a key priority for the government. President Ortega himself has often mentioned the vital importance a functional, accessible transport system represents in terms of the economic and social well-being of the poor majority as well as the overall economic viability of the nation.
In a recent speech the President suggested his government's program of financial support for the public transport system "should not be considered a subsidy, but a government investment to guarantee production."
The problem of unregulated fuel prices
Perhaps the main obstacle preventing further financial sustainability within the public transport system is the lack of legislation permitting government regulation of fuel prices. Unlike in the case of the electricity tariff and the price of cooking gas, fuel prices are not regulated by the government's energy regulatory body, INE.
As a result, while oil price increases are consistently reflected by corresponding increases in the price of fuel at Nicaraguan gas stations, oil price reductions at an international level are not necessarily reflected with corresponding proportional fuel price reductions.
This problem is demonstrated by the fact that while the international price of oil decreased by 67% between May 2008 and January 2009, the price of gasoline at Nicaraguan gas stations fell by just 40% during the same period.
This asymmetry between international oil price fluctuations and fluctuations in the price of fuel at local gas stations is the cause of much discontent among Nicaraguan drivers and the transport sector in general.
When questioned by journalists about this situation in September 2008, presidential economic advisor Bayardo Arce, pointed out that it is the US multinational Exxon Mobil (which owns the only oil refinery in Nicaragua) that effectively sets fuel price margins within the country.
Because Nicaraguan law does not contemplate fuel price regulation, the Exxon refinery is free to sell refined petroleum products on to the different fuel distribution companies operating in Nicaragua at whatever price it likes. And of course the complete lack of competition, due to there being no other refineries in Nicaragua, exacerbates the situation.
During the second half of 2008 there was great public pressure in favour of the introduction of fuel price regulation. This pressure resulted in the ratification in September 2008 of a reform that would introduce such regulation. That reform has not yet been regulated by the National Assembly, however, which means that it has not come into force.
It is impossible to know the reasons behind the National Assembly's failure to bring this legislation into effect, but one can speculate that it is unlikely Exxon would give up its ability to exploit the monopoly it has on refining petroleum for all it is worth without attempting to blackmail the different branches of government with threats of potentially devastating actions concerning the future of its refinery in Nicaragua.
Of course when operations at the "Bolívar's Supreme Dream" oil refinery commence, which is scheduled to happen in 2013, the current situation is likely to change significantly. It remains to be seen in the meantime, however, to what extent the government is able to reduce the long-standing negative consequences of Exxon's monopoly.