New Bus Contracting Model

Mr Teo Siong Seng asked the Minister for Transport whether the Government has made a provision in the Budget for the new bus contracting model and, if so, whether the budget will be made transparent to the public.

Mr Gerald Giam Yean Song asked the Minister for Transport under the new Government contracting model for public buses (a) how does the Government plan to buy back the public bus infrastructure and operating assets currently owned by the two public transport operators (PTOs); (b) how will the value of these assets be assessed; (c) how will the Government ensure that the PTOs do not profit from the disposal of these assets; and (d) how will the Government fund these asset purchases.

Mr Gerald Giam Yean Song asked the Minister for Transport (a) whether the Government expects to make an operating loss over the long term under the new Government contracting model for public buses; and (b) approximately how much operating subsidies the Government expects to inject into the public bus system each year.

Mr Gerald Giam Yean Song asked the Minister for Transport (a) whether the Government has any plans to extend the new public bus contracting model to the MRT system; and (b) whether the Government is satisfied with the current MRT ownership and operating model.

As announced in May, we are moving the public bus industry from the current privatised model to a Government Contracting Model.

We have been studying this move as early as the Land Transport Master Plan in 2008. Under the current model, the public bus operators rely on their fare and non-fare revenues to pay for their operations and buy operating assets, such as buses. When fare revenues are uncertain, as it has been in recent years, operators may be reluctant to expand capacity ahead of demand, or to improve service levels beyond regulatory standards on their own accord. This was why the Government had to step in with the Bus Service Enhancement Programme (BSEP) in 2012 to quickly raise service standards and to add capacity, even as we worked towards a more sustainable bus industry model.

Under the proposed Government Contracting Model, LTA owns the buses, plans the routes and engages private bus operators through competitive tenders to run the services. This will enable us to respond more quickly and effectively to changes in ridership and commuter needs. The model also allows for more operators, potentially even overseas ones, to compete for the contracts. Bus operators will need to compete on the basis of costs and service quality. Over time, this will lead to the provision of better bus services in a cost-competitive manner, thereby benefiting commuters.

Mr Dhinakaran, Mr Gerald Giam and Mr Teo Siong Seng asked whether the Government is setting aside a budget for the new bus contracting model and how much the Government will subsidise bus operations. I think it is probably not in the Government's interest to reveal any budget that we may have set aside and how much we are prepared to subsidise before the tenders are issued and the returns are seen, as this may well skew the bids against us.

The eventual amount of subsidy will crucially depend on whether fares and bus service standards are set realistically. Regardless of industry model, the cost of the overall bus system has to be paid for either by commuters in the form of fares, or taxpayers in the form of Government subsidies. There surely is no free lunch. Therefore, we have to strike the right balance. The Government is committed to ensure the affordability of public transport fares. However, regular fare adjustments are still necessary to ensure the overall financial sustainability of the public transport system.

Likewise, new bus routes and higher service levels have to be assessed judiciously. Even today, we receive many requests to run bus routes that have low ridership. From the point of view of the select few who benefit, these bus routes are, of course, "necessary". But if we run too many of these routes throughout the system, either higher fares or more Government subsidies will be required.

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Mr Giam asked about how we intend to treat the current bus assets owned by the two incumbent public bus operators. We will discuss this issue as part of our negotiations with SBST and SMRT on the nine bus packages that they will continue to operate after 2016.

Finally, Mr Giam may perhaps not be aware that we have already implemented the New Rail Financing Framework (NRFF) starting with the Downtown Line last year, even before the announcement of the public bus contracting model. In fact, the Government Contracting Model for buses brings us closer to the NRFF, where the Government, instead of the operator, owns the operating assets and is responsible for major capital asset investments.

Thank you, Madam. I have four supplementary questions, three of which are related to each other. First is how does the Government ensure that there is genuine contestability and competition among the operators so that they will be kept on their toes to constantly improve service quality and efficiency? How will it ensure that the new model will not see the same few players dominating the market?

Secondly, how will the Government ensure that it is easy for new players to enter the market and also easy for non-performing operators to exit?

Thirdly, how many new players does the Government plan to allow into this market?

Fourthly, does the Government have plans to set up a corporatised, not-for-profit entity like a National Transport Corporation or Transport for London, that manages the assets in the day-to-day operations of the bus network, while leaving LTA to play the regulatory and planning role, as this could lead to greater efficiency and accountability and minimise the risk of regulatory capture?

Mdm Speaker, I thank the Member for his supplementary questions. Perhaps, I will start with a reply to how we would encourage new players to enter the market and then I will go into the specifics of contestability and how many new players.

One important thing is to lower barriers to entry, which is why we decided that as we embarked into the Government Contracting Model that it would be best for LTA to purchase and own the buses. For each package, you may be looking at perhaps 400 to 500 buses. For 400 buses, you may be looking at $150 million and $200 million dollars – quite a significant capital investment if it has to be invested by a new player.

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We do not want to preclude the possibility of operators that are already in the local market running private buses quite efficiently who may be prepared to make a bid for one of these packages, provided we lower the barriers to entry.

How do we ensure genuine contestability? Well, to have as many bidders as possible, to make the bidding as simple as it can be so that your evaluation is as straightforward as possible.

There is another reason why we have decided to purchase and provide the buses. Because we intend to have a five-plus-two option – five years, with the option for an operator, if he is successful and performing well, to extend for another two years. So, this is five-plus-two. After that, it is re-tendered.

Obviously, the lifespan of a bus extends well beyond the five or seven years. If an operator were to bring in their own buses, then the challenge is how do they cost this into their bid? Do they bring in second-hand buses, meaning the lifespan would run out by the time they finish; or do they bring in new buses knowing that this could disadvantage operators from certain countries, for example, the European countries, because they are on the different side of the road? And so the buses that they use here may well not be so suitable if they were to use them in some other place, like back in their home countries.

So, genuine contestability comes about from lowering the barriers to entry, making sure that you have got competitive bids, structuring the tender so that it is as clear and as simple as possible so that when you evaluate, you can evaluate across a common base line, so that the potential operators do not need to price in too many areas of uncertainty.

As to how many new players, we are actually open to this. The initial part is that three of the 12 packages will be put up for tenders and we will then negotiate with SBST and SMRT to run the remaining nine packages. Over the longer period, the intent is to put up all 12 packages for tender. Whether we continue to have two, three or more players will depend on the returns that come in.

On the not-for-profit entity and whether there should be a corporate player to own the buses, we do not see a necessity for that at this point in time. Basically, it is really the same model that we are trying to adopt as for rail. In rail, we provide the infrastructure, we provide the first set of rolling stock and the operator then subsequently buys it over at the right point in time. The bus industry had been operating on quite a different model in the past because the operators used to have to pay for the depots, buses and everything. What we are trying to do here in the Government Contracting Model is to provide as much as possible the same

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kind of support to the bus industry as we did to the rail industry in the early years.

Madam, I thank the Minister. I would like to ask a supplementary question. How do you plan to structure the subsidies for various bus route segments, and whether this kind of subsidy system will be transparent before the tender takes place?

First, I thank the Member for the very perceptive question. It is not clear at this point in time that all the packages will require subsidy or how much the subsidy is going to be. Essentially, what will happen is that the operators will bid, most likely, on the cost to run a bus on a per-km basis. We may contract them to run, for example, a million km. So, there is a certain price that we will have to pay them for doing so.

Under the gross cost model which we are adopting, all the fare revenues will be collected and it will come to the Government. Of course, if the fare revenues do not match what we have to pay to the operator, there will be a need for a subsidy. Or if the fares do not go up enough in subsequent years, even as the cost may go up based on what is built into the tender returns, then there would be a need for a subsidy. So, we do not yet know at this point in time.

What we will know when the tender returns come in is that we have asked the potential bidders to run a package of routes that we are already operating today. That package of routes, based on the number of buses, frequency and service quality, will let us know what is the revenue that is collected. We will also know how much we have to pay each of the bidders and we can then match the revenue collected for this package of routes with what we have to pay to the successful tenderer. That will determine whether we need to provide a subsidy or not. Hopefully, that results in a higher degree of transparency in terms of how we award this, based on a competitive tender.

The Minister discussed eventual subsidies. How will the Minister ensure that this endeavour is financially sustainable in the long term? Lower fares could mean higher subsidies. How will the Minister attempt to ensure higher productivity among service providers to allow for affordable fares and, therefore, sustainable subsidies in the long term?

Mdm Speaker, I want to thank the Member for a very important question because I think financial sustainability of the industry is something that we have to pay a great deal of attention to.

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I would look at it in several ways. One is to make sure that we judiciously assess all the requests that come in, whether it is to operate new routes or to improve service standards. Because if you operate more and more new routes and the ridership is low, well, the Government and indirectly the taxpayers take on the burden of making sure it is financially sustainable. If you run too many new routes where the ridership is low, then subsidies will, of course, have to go up because the operating cost will exceed the fare revenue that you can collect. That is number one – to make sure that you are quite careful about what you agree to in terms of the new routes. So, we have LTA now working out on a framework that we can perhaps all agree on, on what is the threshold that a new route ought to meet before we can agree for it to be operated, or, if you are prepared to test the new route for a certain number of months and it does not cross the threshold, then I think we will have to sometimes make a painful decision to cut that route and eliminate it.

The second has to do with service standards. If you run a service where the headway is one bus every 10 minutes, the cost is less than if you were to run it every five minutes. We all know that. The more frequently you run the buses, the higher the cost will be. So, we again have to be quite judicious when we raise service standards to make sure that we do not over-step and, hence, ultimately, result in a much bigger bill in terms of the subsidies that we have to pay.

I think the third thing is really to look at regular fare increases. From the middle of the last decade, I think we have actually allowed operating cost to well exceed the fare increases that were taking place each year. For example, from 2005 until 2012, when we had the Fare Review Mechanism Committee's work and we suspended any fare increases thereon, 2005 to 2012, the annual fare increase was, on average, 0.3%. We know, of course, that wage increases were much higher than this 0.3%; likewise, fuel cost. So, there will be a need for us to make sure that we have regular fare increases of the right quantum. In this, we will continue to be guided over the next few years by the formula that has been established by the Fare Review Mechanism Committee led by Mr Richard Magnus, as well as the decision that the Public Transport Council will make with regard to each and every fare increase.