SABOA presentation to The Portfolio Committee on
Transport, Parliament
30 July 2013
1
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

2
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
3
Type of contract
Number
of buses
Interim contracts
Foreseen as
+/- 3849
transition
(68% of sub arrangement in
budget)
1997. ICs are now
17 years old
Tendered contracts
Negotiated contracts
Sale of bus entity
through negotiation
based on service
contract specification
(form of privatisation)
Contract
characteristics
Duration
3 years originally.
In practice interim contracts are
17 years old
Contract extensions are between
1 and 3 months. Last round of
renewals up to 6 months
5 years originally.
Contract extensions are between
1 and 3 months. Last round of
renewals up to 6 months
+/- 1834
(28% of
subsidy
budget)
Based on standard
contract document
Mostly “stand
alone” services in
rural/urban
operations
250
5 years originally.
Mostly applicable to
Contract extensions are between
state-owned and 1 and 3 months. Last round of
operated bus
renewals up to 6 months
companies
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 types in operation
Number
Percentage of subsidy
budget
Interim contracts
39
68
Tender contracts
66
28
Negotiated contracts
10
4
TOTAL
115
100
Contract type
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
6
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

7
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”

8
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
9
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 onesided approach that has a major operational
impact on bus operations
10
The operational impact of the
PTOG on the industry
 Fleet replacement programmes
 Maintenance programmes
 Service levels and reliability
 Scope and range of services
 Overloading of buses
 Industry safety levels
 The financial sustainability of the industry
11
Major industry cost drivers
12
Labour costs
These wage increases are negotiated in the South African Road
Passenger Bargaining Council
13
14
Diesel costs
R12.33/l
(Apr ‘13)
R6.54/l (Jan ‘09)
15
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)
16
17
The consumer price index
18
19
Industry cost increases
20
Actual vs. contract escalation (Operators
in Gauteng)
21
Actual vs. contract escalation (GABS in
the Western Cape)
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%
22
23
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
24
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 rendered
Rationalising the business activities in difficult financial times,
cutting costs when profit margins are under pressure and
terminating non-viable services/products
Increasing 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
25
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
26
Other factors compounding the problem…
Interim contract escalation being
retrospective
 Short term contract extensions causing
uncertainty
 Changing origins & destination points
 Additional unsubsidised trips

27
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.
28
Difference in escalation between interim and
tendered contracts
TENDERED CONTRACT ESCALATION
INTERIM CONTRACT ESCALATION
Click here to add text
Click here to add text. Click here to add text.
4
5
6
7
8
9
Click here to add text. Click here to add text.
10 11 12
YEAR ONE
1
2
3
4
5
6
7
8
9
10 11 12
YEAR TWO
1
2
3
4
5
6
7
8
9
10 11 12
1
2
3
YEAR THREE
Click here to add text. Click here to add text.
29
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
30
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.
31
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.
32
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.
33
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
34
Reality check
 Increasing 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
35
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

36
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 discontinued
 Scope of services must be curtailed – but the
subsidy kept the same
 Negotiate 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)
37
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

38
39