competition in public transport sector in...

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2010/SOM1/EC/SEM/005 Agenda Item: 1b

Competition in Public Transport Sector in Singapore: Is There Room for More Than One Operator?

Submitted by: National University of Singapore

Seminar on Impacts of Structural Reform and Leaders' Agenda to Implement Structural

Reform Stocktake Hiroshima, Japan25 February 2010

Competition in Public Transport Sector in Singapore: Is there room

for more than one operator? Anthony T H Chin, Associate Professor, Department of Economics, NUS

[email protected]

APEC Economic Seminar on "Impacts of Structural Reform and LAISR Stock‐take" , Hiroshima, JAPAN, 25 February 2010

Outline

1. What’s the issue?2. What others have to say on economies of bus

operations?

3. What have cities done to enhance efficiency and welfare of users and results?

4. What should Singapore do? Room for 1 more?

5. What are the conditions for successful competitive environment?


What’s the issue? Myth: Viable competition in public transport requires high

population densities otherwise it would require large subsidies.

Fact: Public transport runs successfully in many cities with similar or lower population densities. Any city with sufficient population density to cause traffic congestion has sufficient population to support a first-rate public transport alternative. The question and amount of subsidy depends on many factors such as the design and framework of competition, transport policies, travel demand management, and public transport oriented land-use development

Observation: Public policy relies on the competitive market is to establish the price and quality of goods and services. In themarket, customer preferences drive the prices of competitive firms lower, while maintaining or improving product quality. At the same time, public policy seeks to avoid monopoly.


Singapore in context!

MRT: 109km, 67 stations LRT: 29kim, 43 stations Bus: 325 routes, 3700 buses Taxi: 24,0001.8 million trips 3.1 million trips 0.9 million trips


Public Transport at a Glance

Rail Transit System

• MRT serves heavy public transport corridors• 2 RTS Operators – SMRT and SBST• 138 km of MRT & LRT lines• Fares and service standards are regulated

Bus

•Provides comprehensivecoverage• 2 bus operators – SMRT Buses and SBS public transport-Assigned areas of responsibility- More than 300 scheduledservices

• Fleet of more than 3,700• Fares and service standards are regulated

Taxi

• Fill the gap between public and private transport• Industry has been liberalised– Fares de-regulated– New entrants allowed

• 8 taxi companies with some individual owners• Service standards areregulated



Future Clementi Hub (artist impression)

Future Clementi Hub (artist impression)

Enhance integration of our PT system

CentralisedBus Network

Planning Distance basedThrough fares

IntegratedPT hubs

Integratedtransport and landuse

planningAPEC Economic Seminar on "Impacts of Structural Reform and LAISR Stock‐take" , Hiroshima, JAPAN, 25 February 2010

Fare cap mechanism

1998 ‐ 2004 2005 to date

Fare Adjustment Cap = CPI + X

CPI : the change in the Consumer Price Index over the preceding year

X : inflation rate, wage changes and national productivity gains. Intended to compensate the operators for net cost (after considering wages and productivity) increases beyond inflation.

Fare Adjustment Cap = 0.5(ΔCPI) + 0.5(ΔWI)

ΔCPI is the change in Consumer Price Index over the preceding year,

ΔWI is the change in Wage Index, defined as the average monthly earnings (overall average by industry) adjusted for any change in employers’contribution to the government’s central provident fund


Notes: General weak economic conditions in 1999‐2000 and 2003‐2004Source: Report of the Committee on the Fare Review Mechanism (Reference 9)

Public transport fare adjustment

Fare affordability trends

Affordability index values

Source: Income derived from Millennium Cities Database, WB Country Income Data; Bottom quintile derived from WB database; Fares for 10km of travel derived from internet data and World Bank Country offices

Bus passengers satisfaction survey results 2006

Source: PTC

Comfort not just speed!


Level of service factors

Public Transport Public Transport Waiting Areas

Availability (daily service hours). Frequency (trips per hour or day). Speed (particularly relative to automobile travel). Reliability (how well service follows schedules).

Ease of access (walking conditions) to public transport stops and stations. Security. Shade and weather protection. Lighting quality.

Comfort (whether passengers have a seat and adequate space). Stop/station quality. Fare payment convenience.

Seat comfort and crowding. Cleanliness and aesthetics. Services (such as washrooms and refreshments).

Security (feelings of safety). Affordability (user costs relative to incomes, and other travel options). User information availability. Cleanliness and aesthetics.

Phillips, Karachepone and Landis, 2001; VTPI, 2006

Some elasticities ƐMarket

SegmentShort Term Ɛ Long Term Ɛ

public transport ridership WRT public transport fares

Overall –0.2 to –0.5 –0.6 to –0.9


Peak –0.15 to –0.3 –0.4 to –0.6


Off-peak –0.3 to –0.6 –0.8 to –1.0


Suburban Commuters

–0.3 to –0.6 –0.8 to –1.0

public transport ridership WRT public transport service

Overall 0.50 to 0.7 0.7 to 1.1

public transport ridership WRT auto operating costs

Overall 0.05 to 0.15 0.2 to 0.4

Automobile travel WRT public transport costs

Overall 0.03 to 0.1 0.15 to 0.3


Travel Time Values Relative To Prevailing Wages

(Litman, 2008)


What’s the issue?

What’s the issue?

Greater contestability will be introduced in the public transport industry to encourage greater efficiency and service improvements for the benefit of commuters. The licence period for future RTS operating licences will be shortened while the basic bus service market will be opened up gradually to allow greater competition.

LAND TRANSPORT MASTERPLAN 2008


What’s the issue? centralised planning of bus services, greater

contestablity for the market in the bus industry, move towards integrated distance-based throughfare structure, more bus priority measures, more premium bus and niche services, etc.

expansion of the rail network, greater contestability for the market in the rail industry, continued capping of public transport fares, catering to diverse needs, etc.

road network expansion, vehicle growth, ERP, improving bus headways, allowing basic bus services to duplicate sections of mature rail lines with heavy passenger loading, more train trips, etc.


What’s the issue? Balancing commuters' interest with the long-term

viability of the public transport operators through: Creating a comprehensive and integrated bus network;

Assuring quality bus services with USOs;

Maintaining affordable bus and train fares through fare-cap mechanism;

Safeguarding public interest in the mode of payment of fares, EZ-link etc.


What’s the issue?

• Rapid economic growth• Rapid urbanization• Large scale urbanization• Rapid globalization

• Motorization• Lack of Infrastructure

Demand for higher mobility

Not adequate time, capacity and resources to respond !

Problems:• Congestion, Pollution, Accident• Declining public transport share• Worsening access to poor

How to solve?• International experience useful• But a new perspective may be

needed !


Key element of sustainable mobility

Cost of motorization: too high

Peak-hour urban road congestion: unavoidable

Need of multi-modal system for both equity and efficiency

Conventional bus system: not competitive against private car

Acceptance of cross-mode subsidies

Large-scale urbanization

High-density inner city areas

Inadequate road space

High share of public transport (existing)

High income growth- rapid motorization

High proportion of urban poor and informal sector

Lessons from international experience Characteristics of Asian cities

Competitive public transport mode

as the backbone of multimodal urban transport system ?


+

Urban Density

-

+

Motorization

Congestion

-

+

-

Dynamics of Urban Transport System

Service quality of public transport

-

-

+Modal share of Modal share of

public transportpublic transport

+

+

+

-

• Toll/pricing• Fuel tax• Vehicle tax• Parking fee

• Road building• Traffic management

• Land-use• TOD

• Subsidies• Deregulation

Mass Rapid Transport (MRT)

+

Effectiveness of measures Timing and Sequence of measures Combination of measures


GDP per capita

Desirable path

Expected pathExpected path

Critical stage

feasible unfeasible

feasible

difficult

Mod

al s

hare

of P

ublic

Tra

nsp

ort (

PT

)

Challenge: how to maintain public transport share?

The dynamics of urban transport system moves towards shifting public transport share to private modes as the income rises

When public transport share drops to very low level, reversing it through policy intervention is very difficult (due to unfavorable land-use condition)


What’s the issue? Two major categories of direct benefits of efficient

public transport services: Mobility benefits result from increased travel by people

who are economically, physically and socially disadvantaged.

Efficiency benefits result from reduced vehicle traffic when inefficient automobile travel shifts to more efficient and environmentally travel by public transport.


Outline1. What’s the issue?

2. What others have to say on economies of bus operations?





Economies of scale? Results are at best mixed! Economies of scale supports the merger of small public transport

agencies into one larger agency, while diseconomies of scale implies that it is more efficient to have multiple smaller agencies serving one area (Williams, 1979).

Performance indicators based on average costs can be comparable among agencies in different sizes only when constant returns to scale can be assumed (Berechman and Giuliano, 1985).

While marginal cost pricing should be set to cover the total costs under the condition of constant returns to scale, no simple pricing strategy exists under the condition of increasing returns to scale (Mohring, 1976; Berechman and Giuliano, 1985).

Furthermore, the subsidization of public transport service is necessary to provide the optimal level of output with marginal cost pricing when economies of scale exist (Berechman and Giuliano, 1985).

Despite these important policy implications, findings vary significantly depending on the particular data sets and regression equations used in past studies, and the literature on the subject has been inconclusive.


Cost per Vehicle hour vs. agency size by level of contracting

Iseki, H., Transportation Research Part A 42 (2008) 1086–1097


Diseconomies Cost per VH increases at a decreasing rate, but may not

be able to determine whether it starts declining to show economies of scale.

Small agencies that contract out all service experience a significant diseconomy of scale, and have higher costs per VH compared to agencies that contract out no service.

These small agencies, under the jurisdiction of city and county governments, often contract out all service in order to get expertise in public transport operation.

This means that small agencies may contract out administrative tasks in addition to operation. Therefore, the higher cost per unit of service for agencies that use full contracting may be attributed to additional costs to contract out more tasks than just operation.


Economies of Scale and Scope?

In the presence of economies of scope a multi-output firm is more economical than separate specialized firms. Scope economies can result from sharing or the joint utilization of inputs (Baumol, Panzar et al. (1982) and Bailey and Friedlaender (1982)).

For public transport such sharable inputs are labor, capital andenergy.

Public transport companies which combine several transport modes use similar equipment such as wires, overhead line and similar skills such as driving, management and network maintenance. Such synergies also apply to activities like R&D, advertising and ticketing.

Another source of cost savings is due to economies of massed reserves (Waldman and Jensen (2001)). Multi-output transportation companies can make use of the same reserve capacity for maintenance and buildings.APEC Economic Seminar on "Impacts of Structural Reform and LAISR Stock‐take" , Hiroshima, JAPAN, 25 February 2010

Economies of Scale and Scope? “Local transportation sector is characterized by the existence of

increasing returns to scale and by economies of scope. Therefore, an unbundling of a multi-output company into single-output companies leads to higher costs in the market as the synergies in the joint production are no longer exploited.”

“On the other hand the benefits from the introduction of a tendering procedure (competition for the market) are higher when this procedure is implemented for single lines as the barriers to entry are lower compared to a tendering procedure for a multimode network.” (Mehdi Farsi, Aurelio Fetz, Massimo Filippini, 2008)

Cambini and Filippini (2003) network tendering is more complex than line tendering and the number of potential bidders is lower. Therefore, the trade-off from unbundling between the loss of economies of scope and the gain of higher cost efficiency from the introduction of competition for the market exists.

An alternative to the introduction of competitive tendering procedures could be the introduction of incentive regulation instruments such as yardstick competition.APEC Economic Seminar on "Impacts of Structural Reform and LAISR Stock‐take" , Hiroshima, JAPAN, 25 February 2010







What’s being done : UK

Competitive tendering (CT) versus deregulation (DR) CT by route ala London/Scandinavian-style: Operator no

power routes and transport services

CT by network ala Dutch/French Style: Operator has to determine transport services or helped to do so

DR in GB and NZ: where the operator is free to provide whatever services are profitable and authority orders additional (non-profitable) services through CT.



“The threat of competition forces firms to be efficient; continue to look for opportunities, innovate to maintain if not expand markets.”

Deregulation of the bus industry in Britain in 1985/86 was aimed at bringing about a competitive structure which would is capable of supporting a variety of firms from large enterprises to owner drivers.



In 1985 London Transport (LT) introduced competitively tendering of bus services allowing both private operators and its own subsidiaries to bid for services.

LT prescribes routes, frequencies, fares, capacity and vehicle standards.

London's bus routes were put out for competitive tender, with London Transport retaining the power to regulate service and fare levels.

In the rest of the country, in contrast, the new bus operators were allowed to compete freely for passengers without the residual controls retained by LT in the capital.APEC Economic Seminar on "Impacts of Structural Reform and LAISR Stock‐take" , Hiroshima, JAPAN, 25 February 2010


British bus deregulation: Free competition since 1986 only outside London, often many operators in one city but almost never direct competition

85% of services are commercially viable including compensation for fare rebates and free travel for elderly

15% is subsidized. These are primarily evening services, rural routes or no exclusivity;


London & Outside London Results: 1986-1995 (London: Competitive Tendering; Outside London: Deregulation)

Indicator London Outside Combined

Total Costs -23.5% -28.9% -27.1%

Service Kilometers 30.4% 28.6% 28.8%

Unit Cost (Per KM) -41.4% -44.7% -43.4%

Passengers 1.3% -27.5% -21.6%




Results of British bus deregulation Indexed vehicle kilometers (1985=100): London=178, GB=128 in

2006

Indexed passenger journeys: London=180, GB=70, UltsterBus=79 in 2006

PT Support:

London: £500 million in 1986 to £370 million in 2003

GB :£750 million in 1986 to £300 million in 2003

Operational costs in pence per vehicle kilometre in 2007 price levels:

London: 350 in 1986 to 252 in 2007;

GB : 249 in 1986 to 120 in 2007


Markets already opened up to competition in 2003

Mode Country

Bus Denmark, Finland, France, Italy, Netherlands, Norway, Spain, Sweden and United Kingdom

Light Rail France, Ireland, Portugal, Spain, Sweden and United Kingdom

Metro Denmark, France and Sweden

Railway Denmark, Germany, Netherlands, Portugal, Sweden and United Kingdom

What’s being done : EU


Controlled competition is associated with attracting more passengers to public transport

Annual rate of change in numbers of passenger trips

Annual rate of change in the proportion of operating costs covered by fares

Cities using controlled competition

+1.8% +1.7%

Cities without competition in public transport

-0.7% +0.3%

Cities using deregulation without significant control by public authorities

-3.1% +0.3%

What’s being done : EU

Summary of Competitive Tendering ResultsSystem Period % Converted Total Costs Service Level Unit Costs Annual Unit Cost Change

Auckland 1990-96 100% -21.2% 16.5% -33.5% -7.6%

Denver 1988-95 25% 3.0% 25.6% -18.0% -2.8%

Indianapolis 1994-96 70% 8.5% 38.4% 25.9% -13.9%

Copenhagen 1989-96 56% -18.5% 5.0% -22.3% -3.5%

Las Vegas 1993-94 100% 135.0% 243.0% -33.3% -33.3%

London 1985-96 57% -30.0% 28.7% -45.7% -5.4%

San Diego 1979-96 37% 2.7% 46.6% -30.0% -2.1%

Stockholm 1992-95 59% -18.5% 2.8% -20.3% -7.3%

All costs inflation adjusted.

What’s being done : International


Competitive tendering system conversion unit costs

1979 1984 1989 1994

0%

-10%

-20%

-30%

-40%

-50%

San Diego

London

Denver

Las Vegas

Stockholm

Indianapolis

What’s being done : International


Introduced in the late 1990s in various forms of competitive tendering. By 2005 - 15% of the market.

Cost savings and significant fare reductions were the immediate results of most tenders.

In most line clusters, an increase in level of service and ridership.

An increase in consumer surplus together with a long-term subsidy saving represent 7% of the total pre-competition public transport cost.

All types of tenders advance the market to a more competitive environment.

Fare-based competitive tendering is closer to representing perfect competition conditions and maximizing welfare.

Subsidy-royalty bidding results in subsidy savings. The importance of setting the fare level in subsidy-royalty tenders so as to minimize deadweight loss.

What’s being done : Israel








CT in Singapore? Are there Scale Economies in Bus Operations in

Singapore? YES

Are there Scale and Scope Economies? yes

Competition can 3 forms: route / service

market / network

alternative modes

Tension between economies from innovation, scale and scope (size of the market) versus social obligations

Can CT work in Singapore? Yes



Population per hectare by planning region in Singapore


Outline

1. What’s the issue?






Addressing the key issues 1

I. Defining objectives and targets Urban structure (urban density) and transport-land-use planning

Address modal split (dominant mode)

Harmonize mobility and accessibility

Environmental Sustainability

II. Defining strategies and policies Maintain competitiveness of public transport system

Policies towards ownership and usage of private car

Choice of mass public transport technology (Subway, LRT, BRT etc)

Address efficiency and equity

Integrate land-use and transportation



III. Defining operational level1. Timing of investment in mass public transport system (MRT)

If investment is made too early: financially and economically not viable

If there is a delay, land‐use structure development is not optimized

2. Maximum utilization of existing infrastructure

Planning ahead means some underutilization

3. Measures for transport and land use coordination

Land use regulation : Land Acquisition Act, plot ratio, land use

Opening/promoting market for value capture



III. Defining operational level…..4. Hierarchical network of urban railways

Inter and intra urban trains …mass and light rail

Operation and maintenance of tracks by different companies

5. Modal coordination and competition

Inter‐modal transfer facilities (including NMT)

Rationalization of service routes

Level‐playing field for different modes (charge externality)

Response of regulatory regime to emerging needs

Users’ demand for higher service quality

Competition between urban rail and bus

Subsidies and cross‐subsidies

Affordability for poor


Conditions

1. Careful identification of networks and bundling of routes;

2. Provisions on mitigation of operational risks such as recession or oil increase;

3. Knowledge on cost centre behavior (economies of scope and scale) and implication on unbundling;

4. Creation of level playing field for potential entrants;

5. Potential for a hybrids such as introduction of yardstick competition;

6. Strong and efficient authority.


"There can be little doubt that well-ordered, managed competition in London has been better for the bus market than outright deregulation and may have helped to slow the growth of car ownership and use.”

LT Planning Director David Bayliss


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