How to subsidise buses

This is a follow-up article to PAP government in messy affair with new sweetheart. The earlier article focussed on the government’s muddleheadedness and the mess that it is creating in terms of accountability. In this note, I wish to outline a better way of subsidising bus transport.

I accept that the “user pays” dogma is incompatible with our public transport objectives. This is a criticism I have of the government’s starting philosophy, which they themselves now recognise as unable to meet public objectives. Nonetheless, they do not want to disown their earlier philosophy, so they seem intent on keeping the structures they created under the “user pays” scheme — the sectional monopolies and the two government-linked “private” companies, each with split objectives, not quite sure whether they should focus on rail or bus — while showering them with subsidies. These would be sweetheart deals opaque to public scrutiny; creating the worst of possible outcomes.

Public objectives with regard to public transport consist not just of meeting public demand. They include promoting public transport over private cars for the sake of the environment. A comprehensive, reliable and affordable public transport system is a social equaliser and advances the public good known as social mobility. What do I mean by that? For example, if most of the middle class is going around by private cars, not only will our environment suffer, the less well-off will find that public transport will be reduced to a skeleton service due to lack of demand. Already disadvantaged by income, they will be marginalised further through impaired access to jobs and schools.

Therefore it is entirely justifiable to use public money to ensure a good and affordable public transport system. The question then becomes how to use it effectively and transparently.

I ended the previous essay by saying we should nationalise the two chimera-type companies. It is the simplest route out of the present mess. I accept however, that there are other possible ways, and I am going to outline one alternative here.

* * * * *

The principle outlined by Raymond Lim when he was Transport Minister remains a viable one. As quoted in my previous article, he said:

Once the new bus network has been implemented, LTA [Land Transport Authority] will then look at how best to package the bus routes for competitive tendering. . . . We are not looking at competition ‘in’ the market where operators compete head-to-head for market share. Experience elsewhere has shown that in the public transport sector, this type of competition will destroy integration and lead to wasteful duplication.  Instead, we are looking at competition ‘for’ the market where the operators compete to provide a package of bus services or run a rail line.  By introducing greater contestability to the public transport sector, commuters will benefit as the operators would be incentivised to improve efficiency, service quality and innovation.  Thus the public interest is best served not by simply having a single public transport operator . . . . but by ensuring there is the threat of competition to keep these dominant market players on their toes.

– Parliamentary Reports, 12 February 2009.

Thus, for the government to take back network planning was a good move. Assuming competent execution, the outcome should be packages of routes, designed through public consultation, that are put out to tender. The packages should come with quality standards, and be for a determined period, say 5 or 8 years. Moreover, since it would be in the interest of public convenience to have a standard pricing policy across all services with fare portability, the tender packages will have to stipulate that operators will subscribe to the common fare system operated by TransitLink.

The pitfall is when the tender exercise is restricted to only SBS Transit and SMRT, both being government-linked entities. No tender is truly competitive unless five or more parties take part, with no significant cross-shareholdings or common owners among the participants. To achieve this, the tender must invite foreign transport companies to participate, and it would be in our long-term interest to give preference to new players over the existing two in the first few tender rounds. This will enable new players to gain footholds in the local market and acquire the necessary experience to participate more competitively in subsequent tenders.

But how will subsidies fit into all this?

Simple. Since it is unlikely that tender winners will be able to run the route packages to the prescribed standard and at fares laid down by TransitLink, their bids will be permitted to include a subsidy request. Among those who can satisfy the regulator that quality standards will be met, the party that bids the lowest subsidy (or none) wins the tender. That way, the public will know that we have made the most effective use of public money in subsidising public transport.

Such a simple, transparent, competitive system is far better than what the government is proposing: sweetheart deals (bailouts — some comment-makers have called them) that favour two entrenched companies whose boards also provide cushy sinecures.

* * * * *

ADDENDUM (4 hours after publication)

A reader emailed me Monday (27 Feb) to say that he had sent transport minister Lui Tuck Yew (pic, left) a letter last Thursday proposing almost exactly the same scheme — tendering of bus routes with Quality of Service criteria, with the key difference related to sharing of TransitLink/EZLink data (which I think is an important addition). London buses have been operating under this model for 27 years already, he informs me.

Here is the letter he sent to the minister:

Dear Sir,

I welcome Singapore Government’s intention to invest S$1.1B to boost the public bus service standard. I am concerned however with the approach of directing injecting of funds. Both SBS and SMRT are public listed companies and direct Government funding will lead to a free ride for its existing shareholders at the expense of public coffers.

At the heart of the issue is the unhappiness of the commuter over the quality of service (QoS) of Singapore’s public transport. I will like to suggest a different approach that will introduce competition into bus services and keep the cost down while ensuring QoS targets are met. This is done through the tendering out of bus routes with QoS criteria attached and inviting bus companies to bid for these routes.

For each bus route, the Government will need to specify clearly the QoS criteria to be met. The QoS should specify the expected passenger carrying capacity, the bus frequency for each time period etc. The tender should also specify the associated punishment if the QoS are not met. The bidding bus companies will have to take the QoS criteria into consideration and bid for the bus route accordingly. Unlike a normal tender, the tender value that is submitted by the bus companies may be positive or negative. A negative tender value will indicate that the bus route needs to be subsidized in order for the QoS to be met. If the Government were to set a very high QoS such as requiring high bus frequency or large passenger capacity at peak hour, then subsidy of bus routes are likely. By adjusting the QoS standard, the Government is able to influence the amount of subsidies needed. Instead of injecting funds directly into the bus companies, I am proposing that the Government uses that fund to subsidize the bus routes.

This proposal is not without its concerns.

Concern 1

One concern is the lack of information that is necessary for the bus companies to bid fairly. An incumbent bus operator will have some idea how much revenue a bus route can generate, information which other bidders do not possess. This will disadvantage other bidders.

This can be resolved by releasing the Ez-link card usage pattern to the public. Each time a passenger taps his Ez-link card, a computer record is generated. Everyday millions of data points are being generated this way. Data analysis of Ez-link logging data will enable us to find out the expected traffic volume for a particular bus route at a particular time period and the expected variation. It will also enable us to find out how over crowded the bus is. Armed with this information, it is possible for the Government to specify the QoS that is expected of a bus route. Verifying whether the bus company has met the QoS can be done by analyzing the Ez-link logging data.

The same information will also enable bus companies to do their revenue computation and bid for the bus routes accordingly. If the bus route is lucrative, the bus companies will come back with a positive bid value i.e. the bus company is willing to pay for the right to operate the bus route. If the bus route is money losing, the bus companies will come back with a negative bid value i.e. the bus company will operate the bus route only if the Government is willing to subsidize the bus route.

Concern 2

There are currently only 2 bus companies, with SMRT Bus dominating the north and western part of the island and SBS the rest. The duopoly situation may reduce the competitiveness of the industry concerned and make the bus route bidding process ineffective. Unlike MRT it is relatively easy to introduce competition for bus services. The Government should consider liberalizing the bus industry (much like the taxi industry) and allow new players to come in. An introduction of a 3rd or even 4th bus operator will invigorate the industry concerned.

This approach has several advantages. It eliminates the shareholder free ride issue. It tackles QoS directly through the tender process rather than relying on the goodwill of the bus companies to meet the QoS. It spurs competition as bus companies will need to compete for the right to operate the bus routes. I sincerely hope the Government will find the above proposal useful.

Yours truly

15 Responses to “How to subsidise buses”

  1. 1 Poker Player 27 February 2012 at 14:00

    Question. Where do our parasites… oops.. amakudari fit in your scheme of things?

  2. 2 jentrifiedcitizen 28 February 2012 at 00:02

    reading your proposal and the clever one made by that reader makes me proud and happy to see such activism from singaporeans. yet, it makes me wonder what our world highest paid ministers are doing? surely common sense would have dictated a proper analysis of the options to improve the bus system? Yet they came out with this quick fix yet unaccountable $1 billion outright subsidy to listed transport companies. Where is the common sense, the business smarts and the accountability? Just glad we have people like you to raise the issues and discuss them openly and so logically. Can only hope our govt isnt so set in their mindset of never admitting they are wrong. They must listen and change when they are wrong as in this case or Singapore will never improve.

    • 3 Lye Khuen Way 28 February 2012 at 19:31

      Well said ! So why are we paying beyond first class salary cum bonuses to Ministers & top Public Servants also known as Government. Servants or Civil Servants ? When we get pissed enough, real talent will surfaced.

    • 4 bluelightningblue 26 April 2012 at 01:45

      Search on the LTA academy’s website and you will see articles in their journal about exactly this concept from 2011 and earlier. There are challenges with competitive tendering, one of which is the gains to be had are windfall gains – unit costs tend to go up with subsequent tenders. This does not benefit the commuter – and it also means that the level of subsidy will increase with time. This is also the case for nationalisation (except it’s worse). So it is not true that government does not know of such “clever ideas”. It is always about considering several options that each present different tradeoffs.

      We can each have our opinions which option is superior – but just because yawningbread doesn’t mention them in his blog post, doesn’t mean shortcomings in these ideas don’t exist. That said, the government is especially guilty of this as well in communicating with the public. That doesn’t mean that we should accuse anyone – ministers or yawningbread, for “not thinking”, being stupid or worse. That is counter-productive.

      What I would like to know is why the government thinks its direct injection of funds is preferable to these other alternatives which they have rejected.

  3. 5 dylan 28 February 2012 at 02:38

    Can anyone see the irony in the budget? It essentially forces SMEs to ‘innovate’ by cutting down the number of foreign workers (stick) and by pumping in money to subsidise for purchases or innovations (carrot) that falls under the ‘Productivity and Innovation Scheme’.

    The main assumption behind this carrot and stick approach is that companies cannot solve their productivity woes by dumping cash (on cheap labor). Rather, they would have should acquire new machines or technology to innovate.

    In short, throwing money to solve productivity/growth problems (the hitherto approach taken) is discouraged and innovation is strongly encouraged.

    Ironic then that in that very same budget they are throwing in $1.1 billion (the hitherto approach but since discouraged) to a company that needs more innovation not less!

    Double standards no?

  4. 6 Poker Player 28 February 2012 at 03:27

    We know Ministers or their underlings (we assume on private payroll) read YB comments and take the trouble to react – ahem…cough…cough…

    What about articles themselves -especially one on something of national importance 😉

  5. 7 Rabbit 28 February 2012 at 04:57

    I have another random thought where the $1.1B can be utilized in a way similar to employer credit-scheme. In this case, the govt can use the money to implement “shutter bus credit scheme” for companies which engage private bus operator to ferry workers from various heartlands to the company.

    Companies located in somewhat distant route or remote area will benefit from such a scheme, example like places in Changi, Lok Yang, Loyang, Tuas, senoko, Sungei buloh or wherever public bus find it not cost effective to mobilize too many buses there. Private operator can than compete this route during peak hour and enjoy fixed income (with the help of $1.1b subsidy).

    Since the monthly bill of chattered bus is quite fixed, it is easier to calculate subsidies based on those bills. The bigger the bus load, the higher the subsidy given to the company. This will encourage smaller companies within the same vicinity to work together for bigger bus load rather than individual small companies hiring their own smaller shutter bus and getting lesser subsidy as a result.

    Whichever option smaller companies choose to ferry their staff to work, they will enjoy the share of grant out of the $1.1B.

    The benefit:
    Such scheme encourage more Singaporeans to apply jobs far from their town instead of worrying about relying on public transport that take more than an hour traveling journey to work.

    Many companies in ulu places complained about difficulty attracting people without offering higher than competitive salary. These companies may not be willing to pay to ferry the staff to work for fear of upping their operating cost or due to lesser headcount. The subsidy can help share those cost.

    General workers with lower wages will benefit with some savings if company provides free shutter service for them.

    This initiative will hopefully cut down some human load during peak period on public transport facilities, increase worker’s productivity with shortened traveling time too.

    Employee will be willing to accept wages companies can afford to pay without worrying too much on traveling cost since they have such entitlement and will not be affected by future public transport fare hike.

    However, not all companies can be entitled to such subsidies if they are operating within walking distance from MRT, thus public transport operator will still enjoy the market share of business as a result.

    Though not all companies will adopt the scheme, they will lose out to those who do to attract workers willing to give up their private car.

    I will hazard a guess that we may not need $1.1B to implement “shutter bus credit scheme” since the cost is shared by company which benefited both employer and employee.

    No messy accounting if it can be treated as one of the many grants to help private companies improve their operations and attract workers?

  6. 8 Anonymous 28 February 2012 at 05:48

    I believe that in the competitive tendering for London bus routes, fare revenue is collected but not retained by the bus operators. The operator’s bid is the revenue it needs per year to operate the route. There is no volume-related risk to the operator’s revenue, only quality-related ones, and hence no need for bidders to have access to data on passengers and trips. I absolutely do not support any old bus company having access to passenger EZ-link data. Services should be specified in relation to the frequency and timeliness of buses, and private bus companies should not be speculating as to how lucrative a route can be.

    • 9 George 28 February 2012 at 14:43

      Anonymous at 05:48

      What is your basis for rejecting access to EZ-link data?
      I am sure it is possible to extract the nec info without incurring any privacy issue.
      No names are necessary, just route volume, time, day should be sufficient to determine demand pattern.

      • 10 Anonymous 29 February 2012 at 08:18

        I have no objection to demand patterns comprising route volume at different times of the day in an aggregated fashion being issued with tender documentation (e.g. 200 people per trip between 8am and 12pm, Monday to Friday, 50% of journeys are for under 10 stops). By “EZ-link data”, I refer to passenger and trip level panel data.

        1) There should be no need for sharing EZ-link data. This was suggested in order to level the playing field in the forecasting of route revenue. As I pointed out, this should not be required, hence neither is the proposed “solution”.
        2) Data may be provided on a no names basis, but will there be other socio-demographic identifiers (concession status, makes GIRO top-ups)? Even without these, there is still information that can be inferred from passenger and trip level data and data handling will be very important (see next). Three things I do not want to see facilitated through data release are: i) anybody having the ability to identify me precisely from the data and inferring things about my lifestyle (e.g. by knowing that I start my journey from X at 8am every Monday, and seeing this same person is making a trip to Y on Saturday); ii) advertisers having better information with which to advertise to me; iii) bus companies taking into account passenger type (e.g. fish mongers, foreign workers, students, christians).
        3) It is A LOT of data — say several terbytes for all trips in the last five years, do you really want it distributed to bidders? There will need to be procedures developed to anonymise the data, and rules about how bidders can use/store/share the data. Nonetheless, there could be a screw up and enforcement could be imperfect (especially where there is a large pool of bidders), resulting in the unintended release of personal information or misuse of information.
        4) It is assumed that information release will level the playing field, but this is not necessarily the case as a smaller company may not have the resources to undertake sophisticated analysis of the data. Ultimately this is needed in (central) planning of the transport network but not in bidding for contracts to operate bus routes.

  7. 11 Marcus 29 February 2012 at 11:56

    Hi, I am the guy that suggested using the Ez-link data.

    Your points are valid indeed. Privacy concerns, small players being at a disadvantage in terms of data analysis etc are real issues that shouldn’t be glossed over.

    But .. the 1st thing that needs to happen is to get the Government to reconsider its current stance .. and that won’t happen easily.

  8. 12 George 29 February 2012 at 12:57

    Sorry, anon 29 February 2012 at 08:18,

    You lost me there.

    I don’t see how the three points you mentioned as ‘do not want’ is even possible to capture by EZ link or any other system. You seem to have a very active imagination. If BIG Brother wants to track you or anybody who commutes by bus, the easiest and best way is to plant the ubiquitous CCTV at every bus stop if necessary! Are you aware that such cameras are already installed at certain road junctions? They look like miniature street lamps with a dark red bulb.

    Back to the point, I don’t think you need anything more than aggregated figures for the purpose. In any case, it should serve as no more than ball park figures since travelling patterns would invariably change over time determined by any number of factors and variables. But unless there are drastic changes like a new HDB estate, it should be sufficient and stable enough for the purpose.

    There are possibilities for a hybrid system ie a mainstream player working in coordination with a smaller operator to ply a route. The main and small operator working in concert during a peak period or perhaps the small operator takes over at lesser peak periods to release the main operator’s assets to reinforce service for another route where there is higher demand. This symbiotic relationship is a win-win all round for commuters and the bus companies.

  9. 13 Soon Chun Siong 1 March 2012 at 02:12

    The idea of packaging bus routes for competitive tendering is interesting. I’m not sure if this was already implied in the idea of packaging, but one approach is to create multiple packages maybe of about 10 bus routes, each combining both lucrative and non-lucrative routes, based on current and periodically updated statistics. Service standards will be clearly stipulated for each route within the package. Yearly adjustments to the service standard may be negotiated to take into account changes in ridership – controlled by the central agency.
    To ensure that the winning bidder does not neglect the non-lucrative routes, when service standards are not met, a fine can be levied based on a proportion of the total earnings of the whole route package, including the lucrative routes. The total service period for each package tendered should be at least 5 years. Frequent lapses in QoS over the total service period will incur a penalty for future bids of the company. On the other hand, excellent QoS can be factored in as a discount on future bids.
    Of course, such ideas can only work if the market is opened up to true competition. Having small packages can make it easier for newcomers and smaller players to compete.

  10. 14 周文伟 2 March 2012 at 19:24

    Sorry for being a pessimist, but what is the chance of the Govt adopting these proposal? I think its zero. Why? Cos the transport companies ‘belongs’ to them! Why would they would they willingly share their market and profits with outsiders?

  11. 15 Penny for thoughts 4 March 2012 at 03:25

    Sorry to side track here.

    For all of Raymond Lim’s shortcoming, he is still one of the better Transport Minister to grace the Ministry other then Ex President Ong. He may not be popular when introducing the distance fair but it does makes it more fair and transparent for those who does bus transfers.

    I was personally sad that he was told to step down before the implementation of the bus route package bidding as it was very seldom that any minister came out with a different approach to problems. Think of previous transport ministers Yeow Chow Tong and lesser said about the better, MBT. Now we have a new minister from Ex MICA and Navy who had to learn the ropes and after showing faces here and there, other than proclaiming nationalising is impossible, no innovative solutions other than partaking in the $1.1bil subsidies to the “commuters”. A case of one step forward, two steps backwards.

    The lack of vision of the transportation roadmap is appalling and it shows the lack of inter-agency planning where each works in own silos, e.g. growth in population to achieve economical growth is not supported by infrastructure.

    So how long Lui needs to learn and how much political will does he have to carry on Raymond’s bus plan and to break up the oligopoly? I guess it’s sad that for all of what the minister and his subordinates are earning, it takes a Singaporean to show you what can be done to the bus systems. I shall not dwell into whether they deserved to be that well paid.

    As Rusell Peters said: Be a man, do the right thing.

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