Welfare Analysis of Informal Transit Services in Brazil and the Effects of Regulation

In Brazil, the recent explosion of informal transport activity is having profound effects on formal, regulated transport systems and is the source of great controversy in the urban passenger transportation arena. A variety of policies are being proposed to manage what has been an uncontrolled growth of the sector. This study seeks to understand the advantages these systems have for users who choose them, and how proposed policies will impact these benefits. A corridor in Rio de Janeiro with substantial informal activity was used as a case study and field trips were made to gather basic data and perform travel surveys. Standard measures of welfare changes in a discrete choice framework were used to measure the proposed policies’ welfare impacts on users. Eleven candidate policies were evaluated, ranging from the eradication of the informal modes and investment in formal modes, to the legalization and regulation of the informal modes. Benefits were compared with costs to discuss policies’ efficiencies, and the distribution of benefits across income classes was explored. Net benefits from some policies were found to be substantial, on the order of hundreds of dollars per year per commuter, a significant share of the typical yearly earning of 2000 dollars (US). Legalizing the informal sector was found to benefit users only slightly but further investments in the sector are probably inefficient. Users benefited most from improvements in formal mass transit modes (trains and buses), on the order of 50 to 100 dollars per commuter per year. Finally, policies to foster a competitive environment for the delivery of both informal and formal services was shown to benefit users, on the order of 50 dollars per commuter per year. These best policies are discussed in light of current and past management practices in the sector. High costs of investments, an environment resistant to and unfamiliar with open and competitive bidding for concessions, and difficulties in the enforcement of regulations will threaten the successful implementation of these policies.