Service concessions, such as transport concessions, discounts for heating and hot water, free telephone calls and subsidised dwelling credits, are widespread in Lithuania. Such concessions are regarded as social aid for certain segments of the society. In this article we shall look at two types of concessions: for transport and heating and hot water.
Over a million people in Lithuania use transport concessions. Some are entitled to free services, while others receive discounts. We all know that there is no such thing as a free lunch. The concessions in question are covered either by other people or, indirectly, by the very same consumers. So the first question revolves around who pays the rest of the price.
The law states that any discounts are covered by carriers, whose losses are later compensated by the municipality. Income from compensations accounts for almost half of the income reported by urban carriers. Actually, and traditionally, carriers are not repaid the entire amount they report as losses incurred through the discounts. Part of the burden is thus placed on the budget, that is on all public transport users and non-users taxpayers and the carriers. Naturally, carriers seek to regain the costs by raising fares or by augmenting the compensated amounts and demanding compensations from municipalities. Both ways of “invalidating a free lunch” lead to the municipal corridors (an increase in fares must be approved by the municipal council). In both cases the privileges are financed by taxpayers, with somewhat more being paid by unprivileged passengers.
Compensation for heating and hot water follows the same pattern: compensations are paid to the suppliers for servicing a specific segment of society. Let us now look at the effects of this mechanism of payment.
Quality and prices
In a system like this, carriers lose interest in the quality of services they provide. What interests them is the municipality, not the passenger. As a result, the quality of services declines, causing misery for consumers. In the long run, public transport is used solely by the privileged (you don’t look a gift horse in the mouth), and the carriers end up suffering even greater losses. Others buy cars to spend their time in traffic jams, with nothing but fumes created in the process.
Suppliers of heating are indifferent to the quality of their provided services for the same reasons. Especially given that alternative heating systems are difficult to install, and the users are tied to the supplier by the pipelines.
The shackles of social obligations
Under the conditions when the law requires that some passengers be carried free of charge and no compensations are granted to private companies, private carriers are in no position to challenge the existing monopolists. The transport system thus falls prey to social policy and is unable to maintain the same standard, let alone to develop. The bus and trolley companies are heavily indebted and cannot purchase any new vehicles. The quality of the services thus declines and the probability of accidents increases. We may claim that carriers abuse the social factor because of their monopoly position. But how shall these monopolies be dismantled if any attempt to reorganise or privatise them is obstructed for social reasons?
Depersonalised compensations which are used in Lithuania cripple the expectations of heating suppliers. The pricing is obscured as a result, and the possibilities for abuse in service provision and price setting increase. The worst of it is, the suppliers do not bother about how much heating the consumers need. On the other hand, people have no incentive to save the energy, to introduce new technologies, to measure the precise quantity of the heating used, to bother about the bills and to feel responsible for their own dwelling in general.
The cost of compensations
The costs of administering the compensation system are outrageous, especially if we take into account the fact that a very rough and arbitrary calculation is made to determine the size of compensations. In the case of passenger carriers, the number of passengers who use concessions is empirically derived from surveys of passenger flows for each passenger category. Based on this, the carriers estimate the amount of compensations to be paid by the municipality.
Heating discounts depend on household income, but household income cannot be determined accurately in the absence of formal income declaration procedures. The direct costs of the compensation system are thus conditioned by the fact that support is extended to the beneficiaries via intermediaries – service suppliers. This makes it impossible to calculate precisely the quantity of the services used. In addition to that, even those who are ineligible for the discounts have ample opportunity to get them.
The indirect costs of the system are even higher. I have already mentioned two examples. One of them refers to the harm done to unprivileged consumers (through soaring prices and low quality services). The other is related to the “conservation” of the market. Equally important is the ecological factor. More concessions engender more demand. So the demand for transport, which tends to grow as it is, is increasing even more rapidly. This is a serious urban, ecological and social concern, and any stimulation of the process is detrimental to society. Equally harmful is inefficient use of, and the artificial maintenance of the need for, thermal energy.
Aid without harm?
Social support in the form of transport concessions is costly in all respects. If social aid is to be linked with transport services, the funds earmarked for compensation should be divided and disbursed as cash payments to all people who meet the criteria established by law.
The central argument which is used against eliminating subsidies to service suppliers in favour of consumers only confirms the social injustice involved: if the current subsidy fund were divided among those who are entitled to transport concessions, the sum required would be very small. It means that only a negligible portion of people entitled to concessions actually use them. If some people do not use public transport for health reasons or because of the place of residence, it does not mean that they don’t need transportation. These needs could be satisfied by alternative measures, such as specialised transport, telephone, taxi or other services which people would resort to if they received benefits in cash.
If the size of benefits is to be related to the amount of money required to purchase the services, social benefits, pensions or other allowances should be increased accordingly for the beneficiaries.
But is this approach justified? No one disputes the importance of satisfying heating and transportation needs. Yet, equally essential are food, drink, clothing, and the like. The subsidised services are not distinct in terms of their significance. The introduction of compensations have been prompted by a steep rise in prices of public utilities. Now that changes in prices are more moderate, it would be reasonable to abandon social aid whereby concessions are granted to specific segments of the population. Instead, a transparent system should be introduced under which social support would be given in the form of money to low-income individuals on a means-tested basis. What’s more, restructuring of the energy sector and transport services becoming a normal commodity will be inevitable in the context of European integration.