Saturday 31 May 2014

Improving the lot of commuters, operators

By Christopher Tan, The Straits Times, 29 May 2014

IT IS all too easy to deride the current bus operating model as a failure when we are presented with an all-new system that everyone - from investors to political commentators - is hailing as the best thing since sliced bread.

But the soon-to-be-replaced "regulated franchise" model has in fact served us fairly well.

In it, SBS Transit and SMRT have to meet the Public Transport Council's universal service obligation, which states that everyone should have a bus service within 400m, even if the service is unprofitable.

The two operators do not receive upfront subsidies, but are exempted from levies such as Certificate of Entitlement, Additional Registration Fee and diesel duty.

They almost always get annual fare increases, but have to set aside sizeable budgets for asset replacement. The profit motive keeps them efficient.

The operating model however, has one fatal flaw: as service standards rise (which they have in recent years), profits dive.

SMRT reported a loss of $28.4 million for its bus business last year, while SBS Transit posted a bus loss of $4.7 million for the first quarter of this year.

Taken to its logical conclusion, there will eventually be no incentive for the companies to continue the bus business.

In the new arrangement, the Government assumes ownership of operating assets such as buses and depots, freeing the operators from lumpy depreciation and capital expenditure patterns.

Operators bid for route parcels in a competitive tender, while fare revenue is handed over to the Government. This allows operators to meet service standards without having to worry about fares.

The new order also allows Singapore to discover the "right price" for its public bus service through real competition.

The flip side is that it entails Government subsidies - foreseeably, quite a lot.

In London, bus subsidies grew from £41 million (S$86.5 million), 6.5 per cent of the cost of contracts awarded, in 1999/2000, to £653 million, 40 per cent of the contracts' cost, in 2007/2008, according to a report by KPMG.

This however, is an unavoidable trade-off in the new regime. If we want public transport commuters to enjoy good service, and the bus business to be reasonably attractive to private companies - taxpayers have to chip in.

There is no other way. Or so it seems.

Truth is, there are alternatives.

Nationalisation is one, naturally. But it would require the Government to take over SBS Transit and SMRT entirely, and delist them. It would still entail tax spendings, but with less assurance of the efficiency that usually comes with competition. Also, such a drastic move might unnerve the investment community.

On the other hand, such a model will serve only one master (the public), as shareholders will no longer be part of the equation. At the opposite end of the spectrum is the fully privatised model. That will be hugely attractive to operators and their shareholders, but only at the commuter's expense.

There is one other option, however, which does not require us to reinvent the wheel.

It involves packaging the current bus, train and taxi operating licences into one, with service standards - as well as rewards and penalties - clearly spelt out for each transport mode.

This way, the highly profitable taxi business can cross-subsidise the low-margin bus operation.

The trouble is that the two operators are not evenly matched in the three businesses. And hence there will not be any real competition to extract the best efficiency from either of them.

The two could merge to form a transport giant that enjoys vast economies of scale. But "monopoly" is a dirty word no one wants to utter. So, on balance, the service contract model which we are moving towards may be the best compromise. After all, cities in Scandinavia, Britain, South America and Australia have applied it with reasonable success.

It will involve higher costs, which will have to be borne by taxpayers, and quite possibly, commuters as well. The question is, will service be much better?

The Land Transport Authority says that in the new regime, buses will arrive at each bus stop at intervals of no more than 15 minutes during morning and evening peak hours. Today, they are supposed to do so within 30 minutes.

But will there be special exemptions, like those that exist today?

For instance, despite the so-called universal service obligation, there are no buses serving the Kranji countryside, nor the farms in Lim Chu Kang and Pasir Ris. And one serving Mount Faber has recently ceased.

True, demand in these areas may be too low to warrant services with full-sized buses. But what about mini-buses, which have served Hong Kong well?

Also, will we have a bus timetable that operators have to adhere to strictly, which is the case in many developed cities?

Trains may not need timetables because of their high service frequency, but if buses are to call at each stop every 10 to 15 minutes, surely a reliable timetable will help commuters to plan their journeys (including transfers)?

Transforming the current bus system to the new one islandwide will take close to 10 years. In the meantime, it is crucial that commuters are shielded from the inevitable transitional pains as much as possible.

Invariably, the shift will involve route changes. And certain districts which are converted first may have bus services from other areas, which are still under the current system, plying through them.

The Land Transport Authority has indicated that it intends to have one common colour and livery scheme for buses, like in London. This would be wise, as it would minimise confusion among commuters, especially newcomers or those who do not take buses regularly. Also, it will avoid a new operator having to respray its vehicles when its takes over from another, which is unnecessarily wasteful. And during the transition years, will fares remain uniform? Or will buses under the contracting regime have different fares from others?

If so, this may present itself as a test case, to see if commuters are willing to pay more for better service - assuming service is indeed going to be better.

'Good move' for bus operators and commuters

A restructuring of the bus industry is under way, which from 2016 will see the Government own all buses and depots while transport firms bid for the right to operate route parcels. Senior Correspondent Christopher Tan holds a virtual round-table discussion with key stakeholders to find out their opinions about the new structure.
The Straits Times, 30 May 2014

Government Parliamentary Committee for Transport chairman Cedric Foo

What are your thoughts regarding the changes?

The new contracting model is superior to the status quo for three main reasons. First, the Government can be more responsive in making changes to bus routes and service attributes as travel patterns evolve.

Second, the Government can procure more effectively, through open and competitive tenders.

Third, service levels will improve as the winning bidder will be subject to a relatively short contract period of five years, which could be extended for two years if it performs well. Operators would also want to bid for other bus packages... so a good service track record would make commercial sense for the operators. This system better aligns the interests of the operator with those of the commuter.

The new model will succeed if there are sufficient bidders for each package so that the benefits of competition can be realised. The Land Transport Authority (LTA) would need to reach out to reputable operators, both local and foreign, to encourage them to bid.

Also, each of the packages should be large enough to retain economy of scale in operations and yet small enough that the bidders are not limited to only the very large operators.

In addition, the tender could take a two-envelope approach, where the first stage focuses on the quality of the proposal and the second on gross cost. We should not simply award contracts to the lowest cost bidder if there are doubts about its ability to perform.

I would caution against a "big bang" approach, where too many packages are implemented at one go. Transition issues would be challenging, given the large and diverse commuter base for public bus services.

The Government has always been loath to take revenue risks. So why this?

One of the benefits of the Government assuming fare risk is a better outcome in procurement. Ceteris paribus, removing fare risks from private sector bidders will improve the tender results. If a prospective operator had to take fare risks, he would build in a higher mark-up to account for the higher risk. In contrast, the Government would come under public pressure whenever it wanted to increase fares, even if conditions warranted it. No commuter likes a fare increase.

The new model will at least create greater transparency. This sits well with a better-educated populace. We would know what the "market clearing cost" is to provide the level of service that commuters need. Assuming this gross cost is higher than prevailing fare revenues, the amount of government subsidies needed would also be known.

What are the implications for taxpayers?

One could make a case for some form of government subsidies in public transport. I believe taxpayers will support subsidies for certain groups of commuters. For example, currently, two groups of commuters are directly subsidised by the Government: persons with disabilities and low-income workers.

Also, infrastructure investments create positive externalities for the Government: a more productive economy, a more attractive investment destination, higher government land sale prices, higher home prices, etc. These externalities benefit the Government and the populace at large and not just commuters.

Finally, efficient public transport is an essential public good and should be kept affordable. That doesn't mean no fare increases at all, since transport workers also need the occasional pay adjustments, fuel costs could rise and service levels might need to be enhanced over time. But my view is that fare increases should not outpace wage increases.

SMRT Corp chief executive Desmond Kuek

How do you feel about the sweeping reforms?

We look forward to them. A fee-based contracting arrangement is a much more sustainable business model for operators.

Currently, we run services to stipulated regulatory standards, but have little control over fares, routes or ridership. The new model takes away the fare revenue risk and allows us to focus squarely on the quality of our service delivery.

This is an area where we have been placing the greatest priority, and we believe we stand in good stead in the competitive tendering exercise. However, there remain significant issues in terms of bus and depot assets that need to be transferred with any change in operator - and most importantly, the interests of affected staff... that will need to be looked after.

What are the pitfalls we need to sidestep to make a success of this new model?

The greatest concern will be the impact on the overall workforce, because if bus captains are demotivated by changes in operator every five to seven years, or if they do not have the assurance of job stability or career progression... it will be hard to maintain a high level of service. So it's not just the immediate set of issues for transition to the contracting model that need to be ironed out, but also the long-term issues for a sustainable and professional workforce that need to be clarified upfront.

Another concern will be how to ensure stable operations during the transition, so commuters will not be unduly affected.

What do you think the new model will mean for bus drivers?

Winning a contract at a reasonable margin is not everything - attracting and retaining suitable bus captains, interchange and depot staff, and service controllers will be the more pertinent challenge. I believe our bus captains are discerning, and look for more than just a job - they seek an employer of choice and a viable career proposition.

Currently, SMRT has around 30 per cent of the market. With competitive tendering, there is a chance you might be out entirely. How do you feel about that?

That's the nature of competition - only the fittest survive. We are ready and prepared, and confident that we will be competitive based on the strength of our service delivery and operational efficiency.

PwC's Asia-Pacific leader for capital projects and infrastructure Mark Rathbone

In the contracting model, it might come across to some that tax money is being used to shore up the shortcomings of private enterprises. We have seen nationalised entities that are highly successful. So why not this route?

A key principle that governments should bear in mind when deciding on different operating models is that the model must be designed to meet policy objectives. There is no single model that fits every situation.

At the moment, LTA is providing funding to the bus network through the Bus Service Enhancement Programme, and this funding has resulted in improvements to service levels and passenger experience. Under the new model, LTA will pay operators for the services they deliver - it will not "bail out" the operators. LTA will clearly define the services that must be delivered. If the operators do not deliver, then we expect that they will be penalised financially. As a last resort, LTA could terminate the contract, and it might not award them any more contracts.

Throughout the world, there is a move away from state-owned enterprises delivering transport services. This is driven by the fact that these enterprises take the full risk of any cost increases, including those for labour, which is a key component for bus services. Adopting a contracting model transfers this risk to the private operators.

How will the Government keep a lid on public spending? In London, it seems subsidies have soared since this model was adopted in 1985.

As the masterplanner, LTA has the ability to control the specification of the network, which gives it some control over the level of funding it has to provide. Competition between operators at the time of tendering by LTA will result in efficiencies.

In addition, new operators from abroad will bring in new operating and maintenance practices, which will further drive improvements. These efficiencies and new operating practices will benefit both operators and the Government.

Further, operators must bid a price for a contract, at the time of tendering. Operators are paid this amount and are responsible for managing costs. Thus, LTA can forecast in advance what it will need to pay the operators - it provides them with budget certainty.

Public transport is a public good that has positive benefits for the economy and the quality of life for residents. For example, a reliable and safe bus network would encourage people to shift from private to public transport. Thus, government subsidisation of public transport should not be viewed negatively. What is more important is the effectiveness of the subsidy.

Investor and corporate advisor Mano Sabnani

How will the changes affect investors' perceptions of transport stocks?

It is a big change, which I think is positive overall.

Operators are assured of profitability. They will become asset-light, and their capital expenditure will go down.

They might lose some routes to competitors, but that is to be expected. The market has partly factored in this risk.

So from an investment point of view, transport stocks will become more attractive. But their prices have moved up already... and benefits will take time to show.

Commuters can look forward to higher standards at relatively low fares. Fares will be kept affordable, with the Government bearing any operational losses.

The Government can recover capital through land sales around interchanges, which would fetch higher prices.

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