Regular fare increases needed for new bus contracting model to be sustainable: Lui

By Royston Sim, The Straits Times, 8 Jul 2014

FARES must go up regularly for a new bus contracting model to be financially sustainable, said Transport Minister Lui Tuck Yew.

Speaking for the first time in Parliament about the new model announced in May that will dismantle the existing duopoly here, Mr Lui fielded questions from four MPs on matters ranging from routes and fares to ensuring genuine competition.

A key question concerns the amount of subsidies the Government will fork out under the new model, and both Non-Constituency MP Gerald Giam and Nominated MP R. Dhinakaran quizzed Mr Lui about that.

He declined to answer, however, saying it would not be in the Government's interest to reveal its budget and how much it is prepared to subsidise, as that may skew tender bids.

The new bus contracting model will see the Government owning assets, that is, the buses and depots, while transport firms will bid to operate parcels of routes.

During yesterday's exchange, the minister was quick to seize on a question by Mr Christopher de Souza (Holland-Bukit Timah GRC) on how to ensure the new model's financial sustainability. Mr Lui said that the issue deserved a great deal of attention.

And the three big factors will be fares, service standards and routes, he said.

On fares, Mr Lui said that going forward, the Government will have to raise them regularly, based on a new fare formula established by a fare review committee that takes into account energy costs.

If it does not and instead allows operating costs to exceed fare increases, government subsidies will balloon. In the seven years from 2005 to 2012, fares went up by an average of 0.3 per cent each year but wage increases and fuel costs were much higher, he said.

Under the new model, the Government collects all the revenue from fares and pays transport firms to operate the routes. The difference between what it collects in fares and the sums it has to pay route operators will have to be covered by subsidies.

And so, "there will be a need for us to make sure we have regular fare increases of the right quantum", Mr Lui said.

Besides regular fare increases, he said, the Government must "judiciously" assess requests for new routes and service levels to keep subsidies from running too high.

This is because running more new routes with low ridership and setting more stringent service standards both lead to higher costs, he said.

"The eventual amount of subsidy will crucially depend on whether fares and bus service standards are set realistically... There surely is no free lunch."

Since the Government embarked on the $1.1 billion Bus Service Enhancement Programme in 2012 to fund new buses and ramp up service, numerous MPs have asked the Land Transport Authority (LTA) for new routes.

In terms of requests for new bus services, Mr Lui said the LTA will work out a framework with thresholds that a route ought to meet in order to be run.

The new model will take effect in phases from 2016. The LTA will carve up existing routes into 12 packages with 400 to 500 buses each for competitive tendering.

Three packages will be put out for tender first, while the remaining nine will be run by incumbents SBS Transit and SMRT under the new contracting terms from 2016 till about 2022, before they too are put out for tender.

Mr Giam asked Mr Lui how he would ease the way for new operators to enter the market, and help keep the sector competitive.

In response, Mr Lui said the Government decided to own the buses to lower the barriers to entry. He cited how buying 400 buses could cost between $150 million and $200 million, which is a "significant capital investment".

There may be local private operators who are prepared to submit a bid if the barriers to entry are low, he said.

So far, private operator Woodlands Transport and at least two international operators have declared firm interest in bidding for the first package of routes later this year.

And the Government is open to having more new players enter the market, Mr Lui added.

With the LTA taking ownership of buses in future, Mr Giam also asked if there are plans to set up a separate, not-for-profit entity to own the buses and manage bus operations.

In response, Mr Lui said: "We do not see a necessity for that at this point in time."

Regular fare increases - one way to finance new bus contracting model: Lui
By Sharon See, Channel NewsAsia, 7 Jul 2014

Having regular fare increases is one way to ensure the financial sustainability of the new bus contracting model, Transport Minister Lui Tuck Yew told Parliament on Monday (July 7).

Mr Lui said there are also other ways to do so, including regular assessment of the viability of new bus routes as well as the cost of maintaining service standards.

Under the new bus contracting model, bus routes will be planned centrally by the Government, and bus operators will have to bid for these routes. The Government also owns all bus operating assets and pays operators a fee to deliver bus services.

Mr Lui said this helps to lower barriers to entry for new players interested to enter the industry.

"For each package, you may be looking at perhaps 400 to 500 buses. So for 400 buses, you may be talking at between S$150 million and S$200 million - quite a significant capital investment if it has to be invested by a new player,” said the Transport Minister.

“We certainly don't want to preclude the possibility of operators that are already in the local market running private buses quite efficiently who may be prepared to make a bid for one of these packages, provided we lower the barriers to entry."

Mr Lui said this would also lead to genuine contestability in the bidding process while reducing uncertainty for operators. However, several MPs questioned how much this new model cost would the Government.

"I think it is probably not in the Government's interest to reveal any budget that we may have set aside and how much we are prepared to subsidise before the tenders are issued and the returns are seen as this may well skew the bids against us," said the transport minister.

He added that it is not clear at this point which packages of bus routes would need subsidies and how much that would cost - something the Government is now studying based on the number of buses, frequency, service quality and revenue collected on certain packages of routes.

MP for Holland-Bukit Timah GRC Chris De Souza asked Mr Lui how he intends to keep this endeavour financially sustainable in the long term.

Mr Lui said this would be done in several ways:

- By assessing whether new bus routes have enough ridership to cover operating costs;

- By weighing the cost of providing better service standards against increasing operating costs;

- By having regular fare increases

"From the middle of the last decade, I think we had actually allowed operating costs to well exceed the fare increases that were taking place each year. So for example, from 2005 until 2012, when we had the fare review committee's work and we suspended any fare increases thereon - 2005 to 2012, the annual fare increase was on average, 0.3 per cent,” said Mr Lui.

“We know, of course, that wage increases were much higher than this 0.3 per cent. Likewise, fuel cost. So there will be a need for us to make sure that we have regular fare increases of the right quantum.”

“We will continue to be guided over the next few years by the formula that has been established by the fare review committee led by Mr Richard Magnus, as well as the decision that the Public Transport Council will make with regard to each and every fare increase.”

However, Mr Lui said bus operators will need to compete on the basis of cost and service quality, and over time, this would lead to the provision of better bus services in a cost-competitive manner, which would benefit commuters.

Related
Oral Reply by Minister for Transport Lui Tuck Yew to Parliamentary Questions on Government Contracting Model
Big revamp of bus services from 2016
Operating public buses: Lessons from London