Designed properly and regulated using proper data on the operations and expenses of all public utility vehicles (PUVs) plying in a particular route, government service contracting can precisely compensate for extraordinary fuel costs incurred in-between fare adjustments. This is similar to bills sent by public utilities in the power sector that include belated recoveries due to higher-than-expected fuel/operations of generation plants, among other items.

The first Department of Transportation (DoTR) order implementing service contracting was issued in September 2020 using funds made available from Bayanihan I (RA 11494). It was meant to support operators and drivers to comply with COVID-19 physical distancing requirements and its corresponding costs that they had no way to recover, from 2020 to 2021. Also, only a very small number of the PUV fleets could be mobilized because of the quarantines and people’s fear of being infected, which meant that PUV operators had no income with which to pay for fixed maintenance, rentals, and utility expenses.

In 2022 the rationale for service contracting has changed as conditions started to normalize and as PUVs are allowed to take on full loads. By mid-year the service-contracting budget was almost fully used up, though excess revenues from VAT on expensive oil can be used to provide additional budget. Service contracts were used to provide free rides, and in a second modality, to add to the revenues of PUVs in cases where fares collected do not suffice to call forth a sufficient number of PUVs.

Service contracting is a mechanism designed to enable fair returns for a limited number of drivers and operators, or social amelioration, though this is also the objective of Pantawid Pasada. But in addition, through LTFRB MC 2022-031 which implements the 2022 GAA fund of P7 billion, service contracting is a tool that can be used to call forth additional PUV services during particular times within particular routes, and also, to improve service standards. If designed properly and with the regulator having digital information on the operations and expenses for different PUVs on the roads, a service contract can also be a mechanism that can precisely compensate for extraordinary fuel costs incurred in-between fare adjustments. This would not be too different from bills sent by public utilities in the power sector that include belated recoveries due to higher-than-expected fuel/operations of generation plants, among other items.

The simplest arrangement that can theoretically assure all the objectives above are met is if the government would collect all the fares paid by the commuters and then compensate the drivers and operators according to a service contract awarded through bidding. If the fares are not enough to cover the costs, then the government could fill the deficiency using revenues from general taxes, or perhaps from road users’ taxes.

Alternatively, the drivers and operators in a particular route, e.g., the PUV cooperative can collect the fare and the government can then cover the expenses that the fares cannot pay for. Regulated fares meant to encourage ordinary people to afford them and so that PUVs is preferred over using private vehicles are typically not enough to cover the expenses of operation.

If there were not enough PUVs on certain routes during certain times, say, because there were not enough passengers going towards a terminal, but far too many waiting in line to catch a ride home, the government can require more vehicles to be on standby to be used to raise the frequency of PUVs going to the busy terminals during peak hours, even if the vehicles would be idle during off-peak hours and empty going to designated areas.

Such higher service levels would entail higher costs, so well-defined price adjustment mechanisms need to be in place. If the contractor and government cannot come to an agreement on the proper compensation for amendments to the service contract—the operators (joint venture project companies) can come and go but the employees or their coops can conceivably remain as part of area-wide joint ventures that can join the new project company and contract with the government.

In the context of the PUV modernization program in the Philippines, Sunio et al (2022) mention without providing the reference, that the Land Transportation Franchising and Regulatory Board
(LTFRB) and the DOTR imagine that the new route assignments with only one or two consolidated operators can subsequently become the service contractors, and either the LGU or a metropolitan corporation composed of different LGUs can contract and pay for the services.

This proposal might work for hyper-local routes. In the case of routes connected to major toll roads, ports or other high capacity transit hubs, it makes sense for the national government to also play a part in designing and financing the service contracts, and perhaps also in promising to undertake actions that will ensure efficient operations: for example through the provision of dedicated lanes and the provision of well-designed loading stations and fare collection systems. The national government would be interested in maximizing the ridership and revenues for example of trains financed through loans—to entice people to shift to public transport and use not only trains but also buses and jeeps going to intended destination on time and enough to rival private cars in the convenience they offer.

As in many cases of actually existing service contracting arrangements in other countries such as Brazil, Germany, Malta, Russia, the USA and others, there is evidence that the right contractual design and terms cannot be hit upon on the first try. Incremental improvements and even improvisation would seem to be the rule rather than the exception during the early stages. The prioritization of routes to be given service contracts, the service dimensions and levels, the compensation methods, the manner of renegotiation of contract terms and the assignment of risked must evolve gradually from simple towards more sophisticated forms over time — as the gathering of information on costs and performance becomes automated, ridership hopefully shifts to more public modes with the volume of private vehicles on the road reduced, and as public regulatory capacity improves.

The situation in the Philippines gets further complicated by the transitions being induced by the PUV modernization program. To respond, for example, to the clamor of operators and drivers for greater subsidies to enable decent take home pays – the transition towards service contracting might introduce a gradual increase in the proportion of modern jeeps in the service contractor’s fleet and the compensation can include a capital subsidy (for which the government and or commuters will be entitled to returns or shares in the service contracting joint venture company).

Other considerations that deserve further investigation and maybe experimentation can include increases in road users fees so that the DOTR and the LGUs can have a sustained source of revenues for the service contracts. A law may be passed to provide the resources and the predictability the PPP service contracting arrangements will require.


Jude Esguerra is a fellow at LEARN.


Land Transportation Franchising and Regulatory Board. (2021). LFTRB MC 2022-031 Implementing Guidelines of the PUV Service Contracting Program under the General Appropriations Act of 2022.

Sunio, V., W.J. Li, J. Pontawe, A. Dizon, J.B. Valderrama, A. Robang. (2022). “Service contracting as a policy response for public transport recovery during the Covid-19 Pandemic: A preliminary evaluation.” Transportation Research Interdisciplinary Perspectives. Vol 13, March 2022. 100559.