Monday, March 5, 2012

The $1.1 billion package to expand bus capacity – Who is the Government Subsidising?

Many people have asked about the Government’s decision to spend $1.1 billion to expand public bus capacity. One of the key questions is whether this is in fact a subsidy to SBST and SMRT, the two public transport operators (PTOs) . It is in fact a subsidy for commuters, and not a subsidy for the PTOs. This note explains why.

The Government considered its investment to expand public bus capacity very carefully. It is an important step, aimed at reducing waiting times and crowdedness that Singaporeans experience as they take public transport.

First, what are the PTOs themselves responsible for? The PTOs are required to expand their bus fleets to cater to growth in passenger numbers, as well as to ensure they meet the service levels mandated under existing regulatory requirements. Therefore, in addition to operating the existing bus fleet, they will have to buy 250 additional buses to achieve this. They will fund this on their own.

Why is the Government putting $1.1 billion into the bus system? We are doing this in order to step up bus service levels well beyond the current service standards required of the PTOs.

a. It will increase bus capacity on existing heavily-utilised routes making them less crowded and giving commuters a more pleasant journey.

b. Almost all feeder buses will run every 10 minutes or less - for two hours during morning and evening peak periods, instead of a one-hour peak under current service level requirements.

c. Commuters on existing routes will thus benefit both from shorter waiting times and less crowded bus journeys.

d. A number of new bus services will also be added in order to improve connectivity, and provide commuters with more public transport choices.

e. These improvements are what commuters have been hoping for.

As a condition for the Government’s investment, the PTOs will have to deliver these service level improvements.

We cannot simply mandate that the PTOs add these 550 buses to improve service levels. First, because it goes significantly beyond the service levels under the current regulatory framework. Second, the PTO’s bus operations are already running operating losses, and the 550 additional buses in particular are projected to be a loss-making operation. The cost of acquiring and running the 550 buses are beyond what can be recovered through revenues from these buses.

a. Take the example of improving the frequency of feeder bus services. Increasing the number of buses will shorten waiting times but will add little to the revenue, since the total number of passengers taking the service will remain largely the same.

Without the Government stepping in, these significant service levels improvements would only have been achievable if fares are raised sharply. The 550 additional buses mean significantly higher costs - not only to purchase the buses, but also because more than 1000 drivers would need to be hired and paid a good wage. Fare revenues of the PTOs would have to go up by about 12% - 13% - which translates to an increase in passenger fares of about 15 cents per journey - for the PTOs to achieve this on their own. In the 5 years from 2006, fare revenues went up by only 0.3%, cumulatively. So 12% - 13% is quite a significant increase compared to the last 5 years.

Hence the reality of the matter is that the $1.1 billion Government package, or $110 million each year, is a subsidy for public transport commuters, and not a subsidy for the PTOs. It will improve service levels for commuters, not the profits of the PTOs.

The $1.1 billion package is expected to cover the losses on the 550 buses - in other words, the additional costs net of revenues. Of the $1.1 billion package, $280 million is budgeted for the purchase of the 550 buses over the next five years, and $820 million to cover the net operating costs over 10 years. This is based on best estimates currently. However, we will be monitoring and scrutinising the PTOs’ actual costs for both the purchase and running of the buses. Should their losses turn out to be lower than expected, the Government funding will be reduced correspondingly. So one way or another, there will be no profits made from the 550 buses.

The $1.1 billion for additional buses complements the $60 billion we are putting into the expansion of the rail system. It will take several years for the new rail lines to all come on stream. That is why we are stepping in now to add bus capacity and quickly improve the daily experience of commuters. It is what commuters wanted, and we have assessed that it is worth the public investment.

Despite this Government package, regular and incremental fare increases will continue to be necessary in future, as wage and operating costs rise, so that the bus industry can stay financially viable. The Government will also continue to make sure that needy commuters get adequate assistance for their transport expenses.

3 comments:

  1. Strange that in a nation obsessed with profits, two companies are willing to run at a loss.

    Since we are footing the huge bill, including the infrastructure cost, might as well nationalise our public transportation system. Save the two companies from losses.

    http://theonlinecitizen.com/2011/07/nationalising-public-transportation-is-it-feasible/

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  2. Hi Mr Hri Kumar, in relation to your note, I was checking SMRT's net profit reports for the last 2 years, which reported that SMRT's net profit for FY2011 and FY2010 was $161.1M and $162.9M respectively. The Net loss for Bus Operations (Fares) was up to $3.1M from $1.9M, moving from FY2010 to FY2011, which was attributed to higher staff and related expenses as a result of lower jobs credit and higher diesel cost. Losses increasing with revenues is always bad news. Could this be a case of inadequate management of operations?

    However, the Net Profits from operating the MRT covers such loss more than 30 fold. Would it be acceptable for SMRT to receive subsidies from the Government when their overall business (of providing public transport) still makes huge profits to allow for issuance of dividends year-on-year? Just to put some numbers in perspective, based on 42.4% of 1,517,432,196 shares (2011) in non-governmental hands, the dividend payout alone for them amounts to almost $55M.

    Buses are still a must due to the fact that the MRT lines cannot reach every corner of the country to allow for buses to be eliminated totally. If running buses at a loss allows for them to operate the trains at a profit, a loss-leader business approach should be accepted.

    Also, the loss arising from bus fares does not take into account advertising revenue, which i do see is quite substantial ($17.1M,15M). While no statistics were available to differentiate the source of advertising revenue, the "loss" suffered from Bus operations, might not be a true loss after all.

    Appreciate your comments please.

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