Joan Ng: Saving the bus operators and commuters

ANYONE WHO HAS attempted catchinga bus from Orchard Road at 7pm will probably feel that the public bus system needs fixing. Besides a long wait, the buses that arrive are often already packed. On the face of it, the answer is simple: more buses, operating more frequently. 

 

Yet, the bus operations of both the public transport operators, SBS Transit and SMRT Corp, are bleeding red ink, and adding buses would probably result in even more losses. On the other hand, raising bus fares is unlikely to go down well with the public, which has grown increasingly disgruntled with the state of the public transport system. 

 

Now, the government is coming to the rescue of commuters and the public transport roads over the next five years. The fund will be used to purchase 550 buses and to pay for the running costs of these buses over the next 10 years. Meanwhile, the public transport operators will pay for the purchase and operations of another 250 buses.

 

These additional buses will expand the total fleet by about 20%, which is roughly equal to the increase over the last 20 years. It will also enable almost all feeder buses to run every 10 minutes or less, for two hours during morning and evening peak periods, up from one hour currently.

 

Analysts have welcomed the new government initiative. In a report, DBS Vickers estimates the additional capital expenditure of the public transport operators to buy the 250 buses at around $100 million over five years, or an average of $20 million a year, which should be well within the budgets of both companies. “This initiative should be positive for the bus operators, particularly SBS Transit, as this would significantly reduce their investment costs on buses, and aid in improving margins,” the brokerage says. 

 

However, the government’s willingness to subsidise the purchase and operations of new buses seems a disturbing acknowledgement that the transport companies wouldn’t be prepared to meet the needs of the growing number of commuters if they were left to their own devices. Indeed, the financial numbers at the bus divisions of SMRT and SBS Transit show why they have little incentive to do so.

 

For 3QFY2012 ended December, SMRT reported revenue of $54.4 million from its bus operations, up 3.3%. However, the bus business reported an operating loss of $1.7 million, compared with a loss of $1.1 million in the yearago quarter. For 9MFY2012, SMRT’s bus business has accumulated an operating loss of $7.9 million, largely owing to soaring diesel prices.

 

SBS Transit saw revenue from bus operations rise 3.1% to $566.1 million in FY2011. However, it also reported an operating loss of $6 million for the year, compared with an operating profit of $14.9 million in FY2010. This led the company to report a 32.4% decline in net profit for the year.

 

Should public sector funds be used to support the expansion of failing private sector businesses? Why aren’t SMRT and SBS Transit able to operate their buses profitably? Are we on a slippery slope to a government-funded transport system?

 

BURDENED BUS OPERATOR

The government has stressed that the funding allocation for new buses is a one-time move and that the “viability of bus operations will have to rest on improvements in efficiency and a sustainable system of fare revenues”. Yet, the bus operators hardly operate in a free-wheeling, market system. They do not set their own fares and, since the Land Transport Authority (LTA) took on the role of central bus network planner in 2009, they do not create their own routes either.

 

Instead, the LTA’s bus planning prioritises a hub-and-spoke system with buses feeding commuters on to trains. And, fares are set by the Public Transport Council (PTC) based on a formula that takes into account wages and inflation.

 

To be sure, the provision of essential services by the private sector ought to be closely regulated to ensure that the public gets a fair deal. Yet, it seems that too much pressure has been placed on the transport companies in recent years. They have been burdened with a significant rise in ridership demand as a result of the huge influx of foreigners, while the rocketing cost of fuel has sapped their profitability.

 

Amid the public discontent with the crowded buses and trains, the public transport operators were also denied the full fare increase of 2.8% allowed under the fare-setting formula last year. Instead, they were only granted a 1% fare hike, which does not seem to have been enough to cover the increase in fuel costs.

 

This is not the first time that the operators have gotten less than the maximum increase under the prescribed formula. In fact, in 2009, although the formula allowed for a 4.8% increase, the operators announced they would forego an application for a fare adjustment because of the economic crisis. Instead, fares were reduced 4.6%, which more than offset the fare increases of the previous three years. This included a temporary rebate of 3%. The fare reduction cost the operators about $80 million over a 15-month period, of which just $37 million was met by savings from a generous government budget.

 

On top of that, the public transport players get little respite from taxes. Public buses are currently exempted from Certificate of Entitlement payments and there have been moves to reduce other fees. For instance, public buses have been exempt from the Additional Registration Fee since March last year. But they still pay the Electronic Road Pricing (ERP) fee and road tax. In an email response to queries, SBS Transit says the company paid some $4.5 million in ERP fees in 2011, and about $5.5 million in road taxes.

 

The LTA has said that buses are subject to the ERP scheme because they occupy road space and contribute to traffic congestion. Yet, isn’t the aim of the ERP to steer people from private vehicles onto public transport? Or, is the ERP supposed to deter people from going anywhere at all?

 

The transport operators also contribute money to the Fuel Equalisation Fund, which is supposed to ensure that sharp and transient spikes in fuel and energy prices will not have a significant effect on public transport fares. Annual contributions to the fund are determined by the PTC, based on the reference electricity tariff and diesel price for the year, according to SBS Transit. As at FY2011, the balance in SBS Transit’s bus fund was nearly $40 million. The last time it drew down from the fund was in FY2001, the company says. Meanwhile SMRT says that it contributed $1.2 million to the fund in FY2010. “From our records of the last five years, we see that we have not drawn on this fund during that period,” the company adds.

 

 

TRANSPORT PLAYERS GO ABROAD

Besides providing bus operators with a onetime subsidy to expand their fleets, the government needs to look at ways of improving their longer-term viability. This could include further tax exemptions, greater flexibility in structuring their own routes and a tighter fare-setting mechanism that insulates them from costs they cannot control. Failing to do so could mean lacklustre profitability across the whole sector, limited investment and continued unhappiness among commuters.

 

It is perhaps no surprise that the transport companies have been increasingly investing beyond Singapore in recent years. While SBS Transit is losing money from its bus operations, its parent company ComfortDelGro Corp reported an operating profit from the business. Besides Singapore, ComfortDelGro also has bus operations in Australia, the UK and China. No doubt, ComfortDelGro suffered declines in profitability in some of these overseas markets owing to higher fuel prices. But its overseas diversification has already made it the favoured land transport company among analysts and investors. 

 

In a Feb 21 report, UOB Kay Hian points out that the domestic bus and rail businesses of SMRT and ComfortDelGro have contracted to their lowest in five years. “Despite reasonable ridership growth for bus and rail transport, revenue growth was not as strong due to lower average fares,” the report says, adding that while cost pressures still loom ahead for both companies, pricing power in the local market is limited.

 

UOB also highlights that ComfortDelGro’s operating margins have been more resilient because its UK and Australian businesses benefit from cost indexation contracts. “Operators are paid on a per-mile-operated basis and the amount is adjusted for increases in operating costs such as staff and fuel costs.” At Comfort- DelGro’s recent FY2011 results briefing, managing director and group CEO Kua Hong Pak noted that the company’s bus business in Australia earns margins of some 18.7%.

 

Thanks to its diversification into such overseas markets, ComfortDelGro has been able to pay good dividends, says UOB. The company recently announced a final dividend of 3.3 cents for FY2011, up from 2.8 cents last year. Earlier in the year, it had declared an interim dividend of 2.7 cents. That represents a total dividend yield of about 3.9%, based on its closing price on Feb 22 at $1.53.

 

As you fight your way on to another bus during rush hour, and tap your EZ-Link card on the reader, remember: The fare you’ve paid isn’t making the transport operators rich.