From The Straits Times archives: New contracting model a 'good move' for bus operators and commuters

A restructuring of the bus industry is under way, which from 2016 will see the Government own all buses and depots while transport firms bid for the right to operate route parcels. Senior Correspondent Christopher Tan holds a virtual round-table discussion with key stakeholders to find out their opinions about the new structure.

This article first appeared in The Straits Times on May 30, 2014

Government Parliamentary Committee for Transport chairman Cedric Foo

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  • What are your thoughts regarding the changes?

The new contracting model is superior to the status quo for three main reasons. First, the Government can be more responsive in making changes to bus routes and service attributes as travel patterns evolve.

Second, the Government can procure more effectively, through open and competitive tenders.

Third, service levels will improve as the winning bidder will be subject to a relatively short contract period of five years, which could be extended for two years if it performs well. Operators would also want to bid for other bus packages... so a good service track record would make commercial sense for the operators. This system better aligns the interests of the operator with those of the commuter.

The new model will succeed if there are sufficient bidders for each package so that the benefits of competition can be realised. The Land Transport Authority (LTA) would need to reach out to reputable operators, both local and foreign, to encourage them to bid.

Also, each of the packages should be large enough to retain economy of scale in operations and yet small enough that the bidders are not limited to only the very large operators.

In addition, the tender could take a two-envelope approach, where the first stage focuses on the quality of the proposal and the second on gross cost. We should not simply award contracts to the lowest cost bidder if there are doubts about its ability to perform.

I would caution against a "big bang" approach, where too many packages are implemented at one go. Transition issues would be challenging, given the large and diverse commuter base for public bus services.

  • The Government has always been loath to take revenue risks. So why this?

One of the benefits of the Government assuming fare risk is a better outcome in procurement. Ceteris paribus, removing fare risks from private sector bidders will improve the tender results. If a prospective operator had to take fare risks, he would build in a higher mark-up to account for the higher risk. In contrast, the Government would come under public pressure whenever it wanted to increase fares, even if conditions warranted it. No commuter likes a fare increase.

The new model will at least create greater transparency. This sits well with a better-educated populace. We would know what the "market clearing cost" is to provide the level of service that commuters need. Assuming this gross cost is higher than prevailing fare revenues, the amount of government subsidies needed would also be known.

  • What are the implications for taxpayers?

One could make a case for some form of government subsidies in public transport. I believe taxpayers will support subsidies for certain groups of commuters. For example, currently, two groups of commuters are directly subsidised by the Government: persons with disabilities and low-income workers.

Also, infrastructure investments create positive externalities for the Government: a more productive economy, a more attractive investment destination, higher government land sale prices, higher home prices, etc. These externalities benefit the Government and the populace at large and not just commuters.

Finally, efficient public transport is an essential public good and should be kept affordable. That doesn't mean no fare increases at all, since transport workers also need the occasional pay adjustments, fuel costs could rise and service levels might need to be enhanced over time. But my view is that fare increases should not outpace wage increases.

SMRT Corp chief executive Desmond Kuek

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  • How do you feel about the sweeping reforms?

We look forward to them. A fee-based contracting arrangement is a much more sustainable business model for operators.

Currently, we run services to stipulated regulatory standards, but have little control over fares, routes or ridership. The new model takes away the fare revenue risk and allows us to focus squarely on the quality of our service delivery.

This is an area where we have been placing the greatest priority, and we believe we stand in good stead in the competitive tendering exercise. However, there remain significant issues in terms of bus and depot assets that need to be transferred with any change in operator - and most importantly, the interests of affected staff... that will need to be looked after.

  • What are the pitfalls we need to sidestep to make a success of this new model?

The greatest concern will be the impact on the overall workforce, because if bus captains are demotivated by changes in operator every five to seven years, or if they do not have the assurance of job stability or career progression... it will be hard to maintain a high level of service. So it's not just the immediate set of issues for transition to the contracting model that need to be ironed out, but also the long-term issues for a sustainable and professional workforce that need to be clarified upfront.

Another concern will be how to ensure stable operations during the transition, so commuters will not be unduly affected.

  • What do you think the new model will mean for bus drivers?

Winning a contract at a reasonable margin is not everything - attracting and retaining suitable bus captains, interchange and depot staff, and service controllers will be the more pertinent challenge. I believe our bus captains are discerning, and look for more than just a job - they seek an employer of choice and a viable career proposition.

  • Currently, SMRT has around 30 per cent of the market. With competitive tendering, there is a chance you might be out entirely. How do you feel about that?

That's the nature of competition - only the fittest survive. We are ready and prepared, and confident that we will be competitive based on the strength of our service delivery and operational efficiency.

PwC's Asia-Pacific leader for capital projects and infrastructure Mark Rathbone

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  • In the contracting model, it might come across to some that tax money is being used to shore up the shortcomings of private enterprises. We have seen nationalised entities that are highly successful. So why not this route?

A key principle that governments should bear in mind when deciding on different operating models is that the model must be designed to meet policy objectives. There is no single model that fits every situation.

At the moment, LTA is providing funding to the bus network through the Bus Service Enhancement Programme, and this funding has resulted in improvements to service levels and passenger experience. Under the new model, LTA will pay operators for the services they deliver - it will not "bail out" the operators. LTA will clearly define the services that must be delivered. If the operators do not deliver, then we expect that they will be penalised financially. As a last resort, LTA could terminate the contract, and it might not award them any more contracts.

Throughout the world, there is a move away from state-owned enterprises delivering transport services. This is driven by the fact that these enterprises take the full risk of any cost increases, including those for labour, which is a key component for bus services. Adopting a contracting model transfers this risk to the private operators.

  • How will the Government keep a lid on public spending? In London, it seems subsidies have soared since this model was adopted in 1985.

As the masterplanner, LTA has the ability to control the specification of the network, which gives it some control over the level of funding it has to provide. Competition between operators at the time of tendering by LTA will result in efficiencies.

In addition, new operators from abroad will bring in new operating and maintenance practices, which will further drive improvements. These efficiencies and new operating practices will benefit both operators and the Government.

Further, operators must bid a price for a contract, at the time of tendering. Operators are paid this amount and are responsible for managing costs. Thus, LTA can forecast in advance what it will need to pay the operators - it provides them with budget certainty.

Public transport is a public good that has positive benefits for the economy and the quality of life for residents. For example, a reliable and safe bus network would encourage people to shift from private to public transport. Thus, government subsidisation of public transport should not be viewed negatively. What is more important is the effectiveness of the subsidy.

Investor and corporate advisor Mano Sabnani

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  • How will the changes affect investors' perceptions of transport stocks?

It is a big change, which I think is positive overall.

Operators are assured of profitability. They will become asset-light, and their capital expenditure will go down.

They might lose some routes to competitors, but that is to be expected. The market has partly factored in this risk.

So from an investment point of view, transport stocks will become more attractive. But their prices have moved up already... and benefits will take time to show.

Commuters can look forward to higher standards at relatively low fares. Fares will be kept affordable, with the Government bearing any operational losses.

The Government can recover capital through land sales around interchanges, which would fetch higher prices.

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