1 saboa presentation to the portfolio committee on transport, parliament 30 july 2013
TRANSCRIPT
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
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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
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Type of contractNumber of buses
Contract characteristics
Duration
Interim contracts+/- 3849 (68% of sub budget)
Foreseen as transition arrangement in 1997. ICs are now 17 years old
3 years originally.In practice interim contracts are 17 years oldContract extensions are between 1 and 3 months. Last round of renewals up to 6 months
Tendered contracts
+/- 1834(28% of subsidy budget)
Based on standard contract document Mostly “stand alone” services in rural/urban operations
5 years originally.Contract extensions are between 1 and 3 months. Last round of renewals up to 6 months
Negotiated contracts 250
Mostly applicable to state-owned and -operated bus companies
5 years originally.Contract extensions are between 1 and 3 months. Last round of renewals up to 6 months
Sale of bus entity through negotiation based on service contract specification (form of privatisation)
1050
Applicable to bus operations at local and provincial government levels
Contracts are 5 years in duration. Implemented in the City of Durban (June 2003) and North West Province (January 2004).
Source: Compiled by the author for the purpose of this paper (SABOA and DoT sources) (2006 data)
Contract type NumberPercentage of subsidy
budget
Interim contracts 39 68
Tender contracts 66 28
Negotiated contracts 10 4
TOTAL 115 100
Contract types in operation
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 subsidies at 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
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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
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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”
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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
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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
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The operational impact of the PTOG on the industry
Fleet replacement programmesMaintenance programmesService levels and reliabilityScope and range of servicesOverloading of busesIndustry safety levels The financial sustainability of the industry
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Labour costs
These wage increases are negotiated in the South African Road Passenger Bargaining Council
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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)
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Actual vs. contract escalation (Operators in Gauteng)Actual vs. contract escalation (Operators in Gauteng)
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Actual vs. contract escalation (GABS in the Western Cape)Actual vs. contract escalation (GABS in the Western Cape)
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YEAR
ACTUAL SUBSIDY INCREASES(What GABS
actually received)
Difference in subsidy received versus actually
received
CONTRACTUAL SUBSIDY
INCREASES(What GABS should have
received)2009/10 -6.80% 10.97%2010/11 6.50% 6.67%2011/12 5.35% 9.65%2012/13 4.50% 7.41%
Average 2.39% 8.68%
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
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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 renderedRationalising the business activities in difficult financial times, cutting costs when profit margins are under pressure and terminating non-viable services/productsIncreasing 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
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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
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Other factors compounding the problem…
Interim contract escalation being retrospective
Short term contract extensions causing uncertainty
Changing origins & destination points Additional unsubsidised trips
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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.
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TENDERED CONTRACT ESCALATION INTERIM CONTRACT ESCALATION
4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3
YEAR ONE YEAR TWO YEAR THREE
Difference in escalation between interim and tendered contracts
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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
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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.
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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.
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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.
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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
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Reality checkIncreasing 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
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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
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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 discontinuedScope of services must be curtailed – but the
subsidy kept the sameNegotiate 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)
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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
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