Overview of the financial issues experienced by subsidised commuter bus operators

1. SABOA presentation to The Portfolio Committee on Transport, Parliament 30 July 2013 Overview of the financial issues experienced by subsidised commuter bus operators

2. Overview of the presentation • Background • An overview of DORA and its impact on the industry • Why the industry is not coping financially • Five options, and • The way forward

3. Background • The subsidised commuter bus industry is collapsing in front of our eyes • Where the bus contracting system is supposed to provide for industry financial stability, an objective of the White Paper of 1996, it is resulting in the opposite- most companies are in serious financial difficulties due to externalities beyond their sphere of control • Interim contracts are now 17 years old • Operators have been on (unreasonable) short term contract extensions since 2003 (11 years) – no where in the world have we come across a similar situation • Since 2001 (13 years) no expansion of the system has been allowed, despite significant in-migration and major community needs

4. Source: Compiled by the author for the purpose of this paper (SABOA and DoT sources) (2006 data)

5. Contract types in operation

6. Background • At the heart of the current financial problem is the negative impact that the DORA PTOG has on the financial well-being of the industry • DORA had the following aims (amongst other) when it was introduced: • To ring-fence bus subsidiesat the provincial level (provinces can only spend this budget on subsidised commuter services) • To limit an ever-increasing subsidy budget (focusing mainly on restructuring Interim Contracts that were based on a passenger subsidy basis –the more passengers transported the higher the subsidy claims) • To have a predictable subsidy budget every year

7. Shaping the financial landscape of state support for commuter bus transport…. via DORA • To achieve these aims all Interim Contracts were converted from passenger base to kilometre-based contracts • The actual contract kilometres were capped for all contracting forms – Tendered (TCs), Negotiated (NCs) and Interim Contracts (ICs) • A three-year “rolling budget” was introduced

8. Shaping the financial landscape of state support for commuter bus transport…. via DORA • Treasury would decide what the annual DORA escalation would be – with the intention that the provinces will pick up the differences when compared to the agreed escalation rate • At the heart of the problem, as far as DORA is concerned, are statements in Schedule 4A of DORA: • A table heading which reads: “Allocations to provinces to supplement the funding of programmes or functions funded from provincial budgets” • A purpose statement which reads: “To provide supplementary funding towards public transport services provided by the provincial departments of transport”

9. Shaping the financial landscape of state support for commuter bus transport…. via DORA • The reality is that Provinces claim that they don’t have the funds, leaving the industry as the “ham in the sandwich” • Provinces don’t budget for DOT subsidised commuter bus service subsidies, nor do they budget for the difference between the supplementary grant and the actual costs of running the bus services based on escalation formulae in the respective contracts • The devolvement of the DOT subsidised bus services to provinces/local spheres of government, together with the necessary funding from National, has been a policy debate over the last 30 years and has been the cause of many policy delays since subsidised public transport devolvement was first mooted

10. The impact of DORAs PTOG • The 2009 DORA intervention has had major consequences over the last four years: • Operators are held “at ransom” re the contracted kms – public pressure forces them to offer non-subsidised services as the DOT and Provinces don’t have the funds to fund an expansion of services • Markets cannot be served adequately –many areas are in need of new and additional services • Serious under-funding compared to the agreed contractual escalation formulae – a one-sided approach that has a major operational impact on bus operations

11. The operational impact of the PTOG on the industry • Fleet replacement programmes • Maintenance programmes • Service levels and reliability • Scope and range of services • Overloading of buses • Industry safety levels • The financial sustainability of the industry

12. Major industry cost drivers

13. Labour costs These wage increases are negotiated in the South African Road Passenger Bargaining Council

15. Diesel costs R12.33/l (Apr ‘13) 88.5%INCREASE R6.54/l (Jan ‘09)

16. Maintenance costs * The increase in maintenance costs was calculated using the relevant and comparable items in the Producer Price Index (PPI) of Stats SA from April 2008 to April 2012. (This includes spare parts, accessories for motor vehicles, bearings, tyres, tubes, ironmongery & oil)

18. The consumer price index

20. Industry cost increases

21. Actual vs. contract escalation (Operators in Gauteng)

22. Actual vs. contract escalation (GABS in the Western Cape)

24. The DORA PTOG increases • The PTOG does not reflect, nor take into account, the cost increases that bus companies are experiencing in the real world. • Passenger fare levels and structures are prescribed by the DOT/Provincial DoTs in the ICs, TCs and NCs but the funding of the contracts is via DORAs PTOG • The PTOG is determined without considering increases in operational costs e.g. fuel increases, maintenance increases, wage increases and inflation. • The equalisation principle further reduces the funding for operators in more developed provinces (operators experience the same cost pressures throughout the country) • Provinces see commuter bus subsidy issues as a national (DOT) funding matter as they do not have the funds to either fully fund or supplement current funding levels

25. Why bus companies are struggling to survive… In other businesses management has certain levers (mainly three) that it can use to ensure the sustainability of the business and to protect profit margins, e.g. • Growing the business by expanding the services rendered • Rationalising the business activities in difficult financial times, cutting costs when profit margins are under pressure and terminating non-viable services/products • Increasing prices (fares) to pass on inflationary cost increases (e.g. fuel) to their customers to protect profit margins. The current bus contract system has removed these levers from the business

26. Under the current contract conditions…. • Bus operators cannot grow their service – caps • Cannot cut costs significantly – fixed schedules • Increase fares without approval (provincial resistance as well as major consumer resistance and a lack of customer propensity to pay for services) • Reduce the scope of services • Cover cost increases with the current PTOG funding levels

27. Other factors compounding the problem… • Interim contract escalation being retrospective • Short term contract extensions causing uncertainty • Changing origins & destination points • Additional unsubsidised trips

28. Interim contract subsidy escalation • The escalation in contract rates for Interim Contracts is different from the escalation in the Tendered Contracts… • A Tendered Contract escalates monthly which is less burdensome for the bus operator • An Interim Contract is only escalated once a year in retrospect • This means that the Interim Contract bus operator only receives an escalation on the contract rate from 1 April in the financial year following that in which it had incurred the increased labour, fuel and other operating costs.

29. Difference in escalation between interim and tendered contracts Click here to add text Click here to add text. Click here to add text. Click here to add text. Click here to add text. Click here to add text. Click here to add text.

30. Extension of contracts for short time periods e.g. (3- 6 months) creates uncertainty and a lack of long term sustainability. • The short term extensions make longer term investment decisions difficult (e.g. new buses, new depots, new ticket machines, equipment, any capital investment, etc.) • Banks are reluctant to provide funding because of uncertainty over the future of the contracts • This on-going uncertainty about the future of contracts affect the ability of bus operators to plan for the long term and to take capital investment decisions that will improve service delivery to passengers

31. Changing origins & destination points • When the current contracts commenced (1997 – 2000) the starting points and destination points were determined by the passenger demand at that time. • During the last 15-17 years these areas have changed, grown and developed a lot and the passenger demand today is totally different than then.

32. Changing origins & destination points • The starting points and destination points of these trips have moved as areas developed. • Bus operators must now load and off-load passengers at points further than the original points in the contracts concluded 15 years ago to meet the demand of passengers.

33. Changing origins & destination points • The contracts have never been adjusted since 2001. • Requests for extra subsidy on additional kilometres have been refused. • As operators are paid for contract kilometres operated in a fixed schedule, operators must run these additional kilometres at their own cost. • This problem has grown to the extent that most contracts are operating at a loss and these contracts cannot be sustained in their current form.

34. Reality check • There is a major need for subsidised bus services: • The major growth in IC operations (passenger volumes) before DORA was implemented is testimony to this trend • The 2011 Census information on: • Increasing urban populations e.g. in Gauteng alone from 7.8m in 1994 to 12.3m in 2011; Western Cape from 3.9m to 5.8m • The emphasis of the National Development Plan 2030 on more reliable and affordable public transport and better coordination between various modes of transport; better quality public transport • The DoTs 2003 Household Travel Survey pointed to issues such as affordability, safety, accessibility etc. of PT

35. Reality check • Increasing household expenditure on food, transport, electricity, water, potential new toll roads etc. necessitates affordable, accessible public transport • General lack of alternatives to the car and walking • Government promises to improve public transport – we now have Gautrain and 2 BRT lines but what about the bulk of existing PT services upon which the majority of commuters rely for their daily transport needs? • The media debate about the lack of public transport as an alternative to the car and the use of toll roads

36. An urgent solution is required • The current situation is not commercially sustainable and will cause all bus companies to eventually fail • It will further compromise service quality, road safety, fleet condition, training of drivers and legal compliance

37. Five options are available • More funding must be made available and agreed escalation formulae honoured • Should this not be possible, then: • Higher and more regular fare increases must be approved and jointly communicated by the operator and government • Non-subsidised trips must be discontinued • Scope of services must be curtailed – but the subsidy kept the same • Negotiate longer term NCs as per the NLTA (but the DORA PTOG matter has to be addressed as the four model contracting documents have an override clause that the DORA escalation will override the agreed escalation forumla)

38. The way forward… • The funding shortfall must be addressed in the short term • There is a need to stabilize the industry • Restore faith in its future • There is a need for clear policy signals to ensure adequate investments in equipment, infrastructure and manpower • Clear policy signals are required about the future state of subsidised commuter bus transport

39. Thank You