Pros And Cons Of Outsourcing Bus Operations

Pros & Cons of Outsourcing Bus Operations Urban Mobility Conference Technical Session IV - PPP in Urban Bus Operations and Maintenance Strategies Sanjiv N. Sahai Managing Director & CEO, DIMTS Ltd

Structure of the Presentation Introduction Various Models for Procurement of Bus Operation Appraisal of Different Models Discussion on Gross Cost

Trends in the Delhi Bus Market * Walk-only trips account for 35% of trips Modal Split - % of Person Trips (excluding walk trips) in Delhi* (Figures in Percent) Source: RITES Delhi Traffic and Forecast Study (2008) 2000-01 2007-08

Buses Vital for Reducing Car Use Source: Bus Rapid Transit Planning Guide, GTZ Transport Share - Cities

Buses in Delhi Private Stage Carriage - Bluelines Privately owned Fares set by Government Reliant on Fare box Revenue 77% of owners have one vehicle Delhi Transport Corporation State owned Fares set by Government Get Gap-funding from the Govt. No performance monitoring

Characteristics of Bus Network in Delhi Public Operator (Delhi Transport Corporation) carried approx. 2.2 million passengers on an average per day in 2008. Private Operators carried approx. 2 times more passengers than Public Operator. Source: STA as of February 2009 DTC Operational Statistics (October 2009); Delhi Metro – Feeder Service (http://www.delhimetrorail.com/commuters/feeder_bus.html) Bus Fleets Size in Delhi – By Operators

Public Sector Model - Advantages Closer authority control over services and fares Social and community objectives can be easier to achieve Offering free passes to freedom fighters etc. More accessible in terms of: Geography : serving unremunerative and rural routes Time : operating service in early morning & late night Fare : offering concessionary passes to students, old persons etc. Easy to acquire assets such as new fleet and depot space Better paid and trained manpower including drivers etc. permits adequate rest and recuperation

Issues with Public Sector Model Poorly incentivized management - perceived risk Over staffing and at the same time absenteeism No incentive to adhere to performance management system Not responsive to customer demand Lack of innovation and adaption to changing environment Little incentive to control costs as subsidies provided ex-post with no link to achieving policy objectives Source: Halcrow Fox for DfID, May 2000 DFID Global Review of Bus Performance “ could not find any example where a pure public monopoly offers a superior alternative to the best designed competitive arrangement”

Productivity Gap Source: DTC Operational Statistics (June 2009) Parameters Particulars Nos. Buses Average Fleet 3,028 (Nos.) Average buses on road (Daily) 2,458 (Nos.) Fleet Utilization (%) 81.18% Trips Scheduled Trips (Daily) 22,447 Operated (Daily) 17,265 Trip Efficiency (%) 76.91% Kms Scheduled Kms (Daily – in Lakhs) 164.31 Actual Kms (Daily – in Lakhs) 125.85 Kms Efficiency (%) 76.59%

Private Stage Carriage Model - Advantages No subsidy burden on the govt. exchequer Cost control and higher levels of bus patronage occupancy as payment made per passenger

Characteristics of Private Bus Operation Source: STA, Delhi (October 2007) Distribution of Blueline Fleet Size by Size of Operator Ownership Pattern

Characteristics of Private Bus Operation Fare regulation / setting is a political decision and does not encompass the financial and economic imperatives Wars of pennies - Competition in the market Fare Regulation 0-4 km 4-8 km 8-12 km >12 km Source: Transport Department, GNCTD

49% of bus routes are non-operational Lack of network benefits Undesirable driving practices Accidents and traffic violations Predation by incumbents or cartelization Unreliable bus service - absence of bus route/schedule information Under investment Issues in Private Bus Operation

Regulatory Burden - Permit Conditions There are more than 51 permit conditions which private operator needs to comply. The cost of compliance is high so violation is likely In case of violation of permit condition, buses are moved off the road by the authority The operators face 100% revenue risk as most of the operators are single bus owners Passengers also faced inconvenience due to withdrawal of services

Strategic Objectives What kind of bus service do we need? Effective, economic, efficient and safe A high quality, affordable public transport service Mitigate safety risk – competition for the market, not in the market Minimum scale required to ensure appropriate management skills Clear contractual obligations and responsibilities Maintain service levels on existing routes, extend coverage Provide comfortable and clean environment Ensure flexibility for the future Current route network is not rationalised or optimised Need scope to redeploy resources to respond to shifts in demand Ability to respond to demographic changes and economic growth Capability to accommodate changes in regulatory policy (e.g. fares)

Risk Allocation Appropriate allocation of risk High cost associated with attempts to transfer uncontrolled risk Where does control lie? Recognise information gaps and asymmetry Sponsor’s dilemma . . . the greater the extent of attempted risk transfer the fewer the likely bidders the greater the potential costs

Contract Types Net Cost Full transfer of revenue risk? or Shared risk? Or Minimum revenue guarantee? Gross Cost Resource contract No transfer of revenue risk Revenue paid to Government Cost Revenue Profit Funding Support Govt Operator Cost Revenue Profit Funding Support Govt Operator

Contract Types Production (Cost) risk borne by Authority Operator Revenue risk borne by Authority Operator Gross Cost Net Cost Management Contract (cost plus) Gross Cost with passenger volume/revenue incentive Net Cost with shared revenue risk

Net Cost – Full Revenue Risk Bid annual premium or subsidy for operation of package of routes Defined frequency, x hours service per day, y buses Set of functional specifications + Incentive to maximise patronage + Incentive to enforce revenue collection - No data on actual patronage revenue - No service on some routes so not possible to survey - Potential for high risk premium and/or few bids - Disincentive to offer/accept concession fares - Potentially unrealistic expectations of growth (high or low) - Potential for competition with DTC (or routes in overlapping clusters) - Potential windfall gain if DTC underperforms If genuine revenue risk transfer required then should have freedom to set tariffs

Net Cost 2 – SRR and MRG Bid annual premium or subsidy for operation of package of routes Define expected revenues each year Shared Revenue Risk (SRR) Any shortfall in revenue partially compensated by Government Any upside revenue gain shared with Government Minimum Revenue Guarantee (MRG) All shortfall compensated by Government All upside to operator Similar pros/cons to Net Cost with full revenue risk except : + Reduces potential risk premium in bid + Reduces incentive for competition with DTC

Gross Cost – No revenue risk Resource contract with fare collection on behalf of Government Tender for defined package of service schedules and functional specifications Define costs by type of bus for base bid Defined rates for marginal service increments Fare collection and revenue protection separately outsourced + Flexibility to add routes, change frequency, redeploy resources + Fares and ticketing policy revised at will + Full acceptance of all ticket types including concession fares/passes + Payments related to type of bus (quality of service) provided + Reduced cost of finance due to secure income stream (from Government) - No incentive to maximise patronage (or pick up) - No incentive for revenue protection

Government Contractual Obligations Gross Cost Guaranteed on time payments Provide for inflation indexation on quarterly or annual basis Provision of depots and for Net Cost DTC to run in accordance with unified timetable

Bid Parameters Cost to operate a defined schedule for a set of services = base bid Specified outputs: Bus-kms Bus hours Minimum peak buses in service by bus type }

Guiding Principles for Gross Cost Contracts Deliverability Define organisational structure and responsibilities / accountability Evidence of managerial experience and competence Evidence of contractual commitments including timescales Realistic timetable for roll out with key milestones Sustainability Minimise risk of financial failure (hard/expensive to restore confidence) Require breakdown of costs – compare against realistic range (benchmark indicators) Indexation for key cost elements (eg labour, fuel)

Comparator Models The value for money can be assessed by comparing the various bids with a public sector comparator (PSC) or ideally an “efficient operator” model DIMTS has relevant data for DTC and hypothetical private operator.

Net Cost Vs Gross Cost: Operator profit levels Profitability to the operator rose to average of 12.5% under Net Cost contract regime (some >17%) Since introduction of Gross Cost margin has fallen to between 5-10% (current average 7.5%) Source: Steer Davies Gleave (SDG), London (U.K.) Privatisation < Net Cost Tendering > Pre-tax operating margin

Approaches in Other Cities City Contract Type London UK Gross cost Route based Copenhagen DK Gross cost Area based Stockholm SE Gross cost Area based Adelaide AU Gross cost Area based Bogota CO Gross cost Corridor based Santiago CL Gross cost Area based

Scheme of Private Stage Carriage Corportisation Routes clustered (657 bus routes classified in 17 Clusters) so as to leverage network synergies.

Role of Integrated Mechanism – DIMTS Monitor compliance of the Performance Standards by bus operators Process and impose performance adjustment (PA) for non-performance on bus operators Enforcement and monitoring of Unified Time Tables (UTT) Monitoring aspects that impact customer service Data collection, analysis and monitoring of cluster-wise operation, along with route rationalization

Performance Management System Reliability and Frequency Safety Quality such as cleanliness etc. A performance incentive system will be implemented to reward or penalize the operator on the basis of the quality of service delivered.

Role of Technology in Performance Monitoring Automatic Vehicle Location Tracking System (AVLTS) Operating Control Centre (OCC) with ITS capability Automatic Fare Collection System (AFCS) There is a strong reliance upon modern location technology and intelligent transport systems to monitor operator performance.

Supported by Systematic Checking Driver Quality Monitoring (DQM) Engineering Quality Checking There is also a strong need to assess the other quality parameters, through daily routine checks and periodic surveys. Source: www.thestar.com

Performance Regime – Potential Bonus Payment for service exceeding minimum performance standards Payment for passenger volume growth Overall Performance Reward (incl. Punctuality) Volume Growth +15 % Max Achieving forecast growth Exceeding forecast growth +5 % +5 % Targets must be realistic and achievable A positive response is likely if the incentive is structured in line with economic principles to provide a commercial return to the operator i.e. the cost of delivering the desired standard is less than the reward For DIMTS, the task is to determine the optimum level at which to set the incentive.

Performance Regime – Structure of Penalties Deduction for proportion of service operated by vehicles meeting set standards Deduction for service failing to meet minimum performance standards Payment for basic service output Cleanliness /Condition Basic Reliability Non-Operated Mileage 100 % Rs. 500* -10 % max Elements at Risk Proportional to kilometres not run or service standards below minimum specifications Deduction for service not operated due to factors within operator control 150 % * Per default - Provision of penalty on entire fleet on 10% sample checks.

Challenges Political will to ‘stay the course’ of reform Institutional capability to plan, monitor and manage Data collection and sophisticated information management to maintain consistent quality Subsidy dependent Reliant on technology to reduce revenue leakage

Pros And Cons Of Outsourcing Bus Operations

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Pros And Cons Of Outsourcing Bus Operations

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