Public transport fare formula

Time for a fresh look at fare formula
The formula to cap increases in public transport fares is up for review this year. What factors should shape its rewriting?
By Goh Chin Lian, The Straits Times, 6 Apr 2012

IT HAS been seven years since the last major revision of the public transport fare formula.

In that time, the change most obvious to the daily commuter is the overcrowding on buses and trains due to a sharp spike in Singapore's population.

Two prolonged train disruptions last December and a 10-hour breakdown last month - which together affected 331,000 commuters - further tainted public perception of the system's efficiency.

Yet the change that has a far more direct bearing on operators' costs has gone largely unnoticed by the commuting public. That change is a sustained upward spiral of fuel prices which shows no signs of easing.

The committee tasked with reviewing the transport fare formula thus faces a tough challenge. It has to balance operators' needs with the public's grave reluctance to pay more for a service that has deteriorated in quality.

All eyes will be on former senior district judge Richard Magnus, who chairs the review committee. Transport Minister Lui Tuck Yew said Mr Magnus brings a new pair of eyes and a fresh mind to the task.

Several issues will need to be scrutinised. First, how can the formula take into account the conflicting concerns set out above?

Second, why have a formula if the Public Transport Council seems to have made a habit of granting smaller fare increases than the formula allows?

And looking ahead, how will planned changes in the public transport sector affect the formula?

Balancing between operators and the public

THE fare formula is centred on transport operators' costs and productivity. It tracks changes in a trio of factors: the Consumer Price Index (CPI) - a proxy for fuel price increase; wages, which make up the lion's share of operating costs; and productivity.

The 2005 committee that drew up this formula first met in 2004 and drew on 2003 data. Back in 2003, fuel accounted for just 11 per cent of the two operators' total operating costs. Now, it accounts for between 20 per cent and 25 per cent.

The increases in fuel prices have also far outstripped changes in the CPI. While the price of high sulphur fuel oil used on MRT trains, for instance, rose more than 40 per cent from 2005 to 2010, the CPI grew 16 per cent from 2005 to last year.

The limitations of the CPI in capturing large and sustained increases in fuel prices were foreseen by the 2005 review committee.

Although operators are required by law to put aside some of their revenue each year in a Fuel Equalisation Fund, the committee noted that they can apply to the Public Transport Council (PTC) to draw from the fund only for sharp and transient spikes in fuel and electricity prices, not large and sustained increases. The committee suggested giving a one-off fare adjustment in such situations, but that has never happened.

A question now arises on whether fuel and energy costs should be entrenched as a factor in any new formula that is drawn up. That would likely require an index for fuel prices, as is the case with wages.

The 2005 review committee had said that an index was preferable to using operators' actual costs, to force them to benchmark their cost increases against national increases. To do otherwise would have suggested that the more operators spent, the more they would be compensated by the fare formula, it added.

Adding another index could complicate the formula, however.

A simpler way to reflect rising fuel and energy costs is to replace the CPI with an index that more accurately reflects the price of producing public transport, says transport economist Anthony Chin of the National University of Singapore.

The CPI's basket of consumer goods includes items like rice, poultry, hawker food, tuition fees and spending on hobbies. These have little to do with public transport, he observes.

A production price index could take in factors like manpower and fuel costs, and would remove the need to have separate wage and fuel indices.

'If you really want to simplify the whole thing, just look at the cost of production,' says Associate Professor Chin, who was a member of the PTC and one of the experts consulted in the 2005 review.

Operators' costs are, however, just one side of the fare equation. The larger question is whether service standards should be taken into account when considering fare increases.

Right now, they are not.

Service standards are regulated outside the fare formula and enforced through a system of penalties - by the PTC for buses, and by the Land Transport Authority for trains.

Operators can be fined from $100 each day for each lapse to $10,000 a month for breaching bus service standards. Theoretically, if an operator's bus services consistently fail to meet standards against overcrowding once a week, the penalty over six months could add up to $676,000. The penalty is up to $1 million for each train service disruption. Even with these penalties in place, commuters find it difficult to divorce service quality from the fares they are prepared to pay.

As Mr Lim Biow Chuan, the MP for Mountbatten, observes: 'One of the frequent sources of unhappiness is that if you want to raise fares, you must give me better service.'

Mr Lim is also a member of the Government Parliamentary Committee (GPC) for Transport.

So should service standards have a more direct bearing on the fares that operators are allowed to charge?

Observers say that for such a move to be effective in defusing public dissatisfaction, the service standards used need to be robust, objective and acceptable to commuters.

A separate concern is that incorporating service standards into the fare formula would muddy the waters, and complicate decisions on whether or not to allow a fare increase.

For instance, is a fare increase acceptable if service exceeds standards but operating costs fall? Or if service standards fall but costs go up, will a fare reduction make it even harder for operators to invest in improving their service?

To avoid these problems, the PTC could also consider whether service standards are adequately met before deciding whether to grant the full fare increase allowed by the formula.

Transport economist Michael Li from the Nanyang Business School suggests offering operators this carrot - allowing them to charge a 'service premium' and raise fares by an extra, say, 0.5 cent for a period of time if they consistently meet or exceed service standards.

'It would be a variable component,' says Professor Li, who was also consulted in the 2005 fare formula review.

'The company that provides better service should be rewarded. There's no point to keep punishing them when commuters are already suffering.'

While such an incentive may make sense from a regulator's perspective, it could be difficult to sell politically. As things stand, many members of the public are already of the opinion that the formula allows the transport operators to rake in large returns.

The PTC's stand has been that it checks the operators' return on total assets against that of companies with comparable risks like London's Stagecoach Group, Hong Kong's MTR and Singapore's SembCorp Industries and Singapore Post.

The productivity gain that is shared with commuters also acts as a check against runaway profits.

But the chairman of the GPC for Transport, Mr Cedric Foo, thinks a question mark still hangs over whether these companies are comparable. Public transport here is a low-risk natural monopoly with an assured base of commuters that better resembles the utilities industry, he says.

Why not fix the return that operators can get at a level that is commensurate with their business risks, he suggests. And make it a requirement for them to meet a minimum threshold for productivity, safety, maintenance and service quality.

'The attractiveness of this method is not giving them any return other than that which is fair for the risk they take. If they are unprofitable, they have a case to come back to the PTC for fare increases. The first test is returns. The second test is affordability,' Mr Foo says.

This focus on returns would also do away with the need to keep calibrating the formula for cost changes.

'It's hard to build every aspect into the formula. If we focus on the ultimate returns, we will capture all of these aspects,' he adds.

Do formulas work?

IN THE seven years that the formula has been in use, there have only been two years in which the PTC granted the full fare increase - 2.4 per cent in 2005 and 1.7 per cent in 2006. In 2010, it reduced fares by the full 2.5 per cent provided by the formula.

In the other years, the fare increases granted were 0.7 percentage point to 2.3 percentage points lower than the level allowed by the formula. The reason given: to safeguard commuters' interests.

There was also an exceptional occasion during the 2009 recession when the operators 'worked with the PTC' to offer rebates that reduced fares by 4.6 per cent (of which 3 per cent was a temporary fare rebate for 15 months). They did so despite the formula allowing a 4.8 per cent increase in fares.

Looking at these decisions, one might ask whether there is any point in having a transport fare formula.

Historically, Version 1 of the fare formula appeared only 14 years ago, in 1998, when fare increases were becoming more frequent.

The earlier years - from 1981 to 1990 - saw only one across-the-board increase in bus fares, as operators obtained productivity gains by switching to one-man-operated buses, introducing feeder services and using more double-decker buses. But transport officials warned that it would become harder to avoid fare increases with fewer possible productivity improvements and rising costs.

The political cost of any fare increase was apparent early on: Singaporeans' unhappiness over reported impending bus fare hikes was blamed as one of the factors which accounted for the ruling People's Action Party's defeat in the 1981 Anson by-election.

The first major revision of bus and MRT fares in 1990 also raised a public outcry, especially as some commuters were inconvenienced and ended up paying more after a network rationalisation exercise in 1991 that rerouted or cancelled bus services to feed people into the MRT system.

Along with public uneasiness over the rising costs of living, a Cost Review Committee in 1993 recommended fare increases be made in small, regular steps, for example, five cents or even one cent instead of 10 cents.

It also said the reasons for fare increases should be better explained to the public so they did not get the impression that fare increases were caused by a single, temporary factor, like a hike in oil prices.

When the next major revision of fares was made in 1997, the PTC announced a CPI + X formula to cap fare changes from 1998 onwards. X was fixed for a number of years to compensate operators for net increases in costs beyond inflation, after considering wages and productivity.

Safeguards in place to protect commuters' interests

Then PTC chairman Eric Gwee said of the formula: 'This will ensure that future fare increases will be fair to the commuters and operators, and fares will remain affordable.'

If the formula was aimed at defusing unhappiness over fare increases, it backfired in 2002 when the formula itself was criticised. That year, the formula provided for a fare increase even as people were still reeling from the country's worst recession since independence.

The public outcry that ensued sparked a fiery parliamentary debate in which then East Coast GRC MP Tan Soo Khoon tabled a motion calling for a review of the hike. Almost 20 MPs supported the motion, hitting out at the bad timing of the increase and the big profits of the operators.

From the criticisms of the formula, it appeared that what people sought was greater transparency and responsiveness to economic conditions. They were also suspicious of any formula that would unduly favour the operators.

A committee of mostly MPs who reviewed the formula concluded that the principles underpinning it were sound. It noted that the burden of public transport cost on the average household did not increase from 1998 to 2003.

Version 2 of the formula, used since 2005, laid out for the first time several safeguards to protect commuters' interests.

Perhaps the most significant was that the PTC could reduce or even reject fare increases allowed by the formula when economic conditions were adverse, or when the overall affordability of public transport fares had significantly deteriorated. The PTC would also compare the operators' return on total assets with that of other industries with similar risks.

For instance, in 2007, it withheld a fare increase for trains on the basis that the rail industry had done 'very well' relative to other companies.

And when the PTC granted a fare increase of 1 per cent last October, below the 2.8 per cent allowed, it sought to explain its decision in some detail.

First, it noted that fares remained affordable. In particular, the monthly expenditure on public transport as a percentage of household income for a typical family in the 21st to 40th income percentile showed a downward trend from 5 per cent in 2005 to 3.7 per cent in 2010.

The operators' return on total assets of 7.8 per cent to 11.2 per cent remained comparable to that of other companies.

Still, the PTC said it would grant a lower fare increase 'in view of the continuing rising cost of living environment faced by the commuters' from last October, just five months after the General Election.

The process for deciding fare increases thus recognises that a formula can at best act as a guide to those charged with deciding and approving fare changes.

It cannot be the last word on fare changes, since such decisions, at the end of the day, rest on an assessment of the wider context and public sentiments.

Moving ahead

WHATEVER fare formula drawn up by Mr Magnus and his review committee will have to stand up to public scrutiny.

At the same time, it will itself be subject to change and further refinement, given planned changes to the way public transport is financed.

One major change relates to the financing of replacement assets for MRT lines. Currently, operators have to set aside a part of their returns for such assets, as the Government pays for only the first lot of trains, signalling systems and other operating assets.

But starting from the future Downtown Line, the Government will own the operating assets and collect licence charges which go into a sinking fund to pay for the replacement of the operating assets.

Coupled with shorter operating licences of about 15 years - existing MRT lines have 30- to 40-year licences - policymakers hope the more competitive framework will spur an operator to improve efficiency, cost competitiveness and service levels, or risk being replaced when its tenure is up.

This could reduce the pressure to raise fares, while improving service standards, one of the main concerns of commuters.

Another change is the Government's long-term plan to introduce competition in the bus industry by carving out packages of bus routes and putting some of them up for competitive tender.

Policymakers hope this becomes a natural check on costs: The operator that can manage its costs most effectively will win the rights to run the routes up for tender.

Commuters stand to gain if these plans translate into service improvements in a way that also keeps fares affordable.

How Singapore compares to other cities
By Matthias Chew, The Straits Times, 6 Apr 2012

DESPITE often-heard complaints about bus and train fares, Singapore's public transport is more affordable than that in several major cities with similarly established transport networks.

Data compiled by The Straits Times shows that the average Singaporean typically spends less than 1 per cent of his daily pay on a ride on the MRT.

This makes the Republic's MRT the most affordable when compared to five other cities - Tokyo, Hong Kong, London, New York and Chicago. In these other cities, the average passenger can spend up to 3.4 per cent of his daily pay on an average ride.

Low-wage workers in all of these cities, including Singapore, may have to spend a far larger share of their daily wages on train fares. In Singapore, low-income groups receive targeted help in the form of transport vouchers.

As for buses, Singapore's are the most affordable, with Chicago's coming second.

The comparisons are based on average fares and take into account publicly available data on income levels in these cities. That gives a fairer measure of affordability than simply comparing actual fares.

The five cities were chosen because they have equally established public transport networks.

Singapore stands out for its affordability for both buses and trains.

London has one of the most affordable buses, but also the most expensive trains. Tokyo, on the other hand, has relatively cheap train fares but expensive buses.

And Hong Kong has among the least affordable bus and train fares, though it makes up for it with a proliferation of cheap privately run minibuses.

The comparisons, however, are limited by the available sources of data on fares and income levels.

For example, the average fares are determined by dividing operators' total fare revenues by the number of rides. This may not give an accurate representation of full-price fares, as they could be affected by concessions.

It also does not take into account the cities' geographical differences, with commuters paying more to travel greater distances in some cities.

Also, data in the table above is taken from certain public operators deemed representative of each city, and may not reflect fare levels across the entire transport network.

Notably, there appears to be no direct correlation between ownership model and fare levels. Train networks in Tokyo and London are run by the municipal authorities, but are relatively cheap in the Japanese city but expensive in the British capital.