1. S YNTHESIS R EPORT – C OMPETITION R EFORMS, N ATURE OF M ARKET & I MPACTS ON B ENEFICIARIES (B US T RANSPORT ) Nathan Associates on behalf of Frederic Jenny, Adviser, CREW Project CREW International Conference 18 th Nov 2014, Bangkok

2. 2 Importance of the Bus Transport Sector  A study estimated that congestion costs Europe about 1% of Gross Domestic Product (GDP) every year.  In London, a fifth of the commuters spend on the road travelling for more than two hours a day, adding up to one working day a week.  On an average, transportation expenses accounts for 4% of cost of manufacturing. Similarly, it accounts for 10-15% of household expenditure.

3. 3 Bus Transport Sector in India: Background  2 key central laws governing the sector in India:  Road Transport Corporations (RTC) Act, 1950 - provisions for establishing RTC for the whole or any part of the state  Motor Vehicles Act (1939 and 1988) - provisions to nationalize road transport services to be operated by state road transport undertakings (SRTU)  These laws provide discretion to the state governments in their implementation at the state level resulting in disparate impact of regulation on competition across states.  Eg - The MVA allowed the SRTUs to use discretion to decide on partial or complete exclusion of private entities in provision of road transport services - The share of private buses varied from 7% in Maharashtra in 2005 to 97% in Orissa and 85% in West Bengal.  Besides the central MV Act, there are state MV rules (within the ambit of the MV Act) that vary from state to state resulting in varying structure of road transport across the states. For example, while all intra-city routes are reserved for public operations in Maharashtra since 1974, Madhya Pradesh (MP) abolished the MP State Road Transport Corporation (MPSRTC) in 2005.

4. 4 Bus Transport Sector in India: Focus of the Study  The study analyzes the impact of competition in the transport sector with respect to the intra and inter city bus transport services in two states – Gujarat and MP.  The intra-city transport focuses on the two main cities in these states – Ahmadabad in Gujarat and Bhopal in MP. It is divided into 2 types of bus transport (a) regular bus transport and ( b) bus rapid transport system (BRTS introduced in 2009 in Gujarat and 2013 in MP).  The inter city bus transport segment is also divided into 2 types of transport (a) stage carriage and (b) contract carriage. The policy measures being addressed under this segment are:  The varying public control over permits issued in the inter-city bus passenger transport segment - In Gujarat, stage carriage permits are exclusively reserved for the SRTUs, while in MP, the inter-city bus passenger transport segment is open for private sector, with the state government retaining only certain regulatory oversight functions.

5. 5 Regulatory context Barriers to entry and concentration Assessment of regulations and competition Policy and market failure Monopoly of public sector (AMTS) over the intra-city bus transport network BRTS introduced in 2009. Regulated by Ahmedabad Janmarg Ltd (SPV of Ahmedabad Municipal Corporation) Regulation restricts entry of private operators – role of private sector limited to provision of buses to AMTS Private operators are engaged through competitive bidding (Revenue is charged on per km basis irrespective of the route allocated, assuring the operators a return based on distance covered) Chartered Speed Carrier is the only operator for rapid transit in Ahmadabad acting as an extended arm of Ahmadabad Janmarg. Fare regulation, spread of the network, fleet size, bus routes, variation in services, etc. under AMTS. Private operators receive a fixed amount on per km basis. Limited scope for market to play a role. Inefficiency in the delivery of service by public operators in the absence of significant competition. Losses from operation for public operator. No incentive for private operators to provide efficient service / innovate - cost minimization is the only operational target for private operators. Control of public operators in deciding the contours of the bus transport service to be provided stifles innovations Intra-City Bus Transport: Ahmadabad

6. 6 Intra-City Bus Transport: Bhopal Regulatory control / initiatives Barriers to entry and concentration Assessment of regulations and competition Policy and market failure Operated through PPP model. BCLL provides regulatory oversight but operation largely in hands of private operators Barriers to entry exist in the form of high investment required for operation in a route. Private bus operators, are chosen through open route-wise competitive bidding - There are 2 private operators, each enjoying monopoly over its route for 8 years. Capital Roadways is the only private operator for BRTS in Bhopal Operational decisions likes fare regulation, route determination, bus schedule preparation, etc are under BCLL. Limited scope for market to play a role Control of BCLL in deciding the contours of the bus transport service to be provided stifles innovations Limited choice for consumers. No competition for operators in case of BRTS - no incentive to innovate or improve service

7. 7 Inter-City Bus Transport: Gujarat Regulatory control / initiatives Barriers to entry and concentration Assessment of regulations and competition Policy and market failure Only GSRTC permitted to operate stage carriage service All private operators limited to contract carriage only No private players in the stage carriage segment legally. Entry and exit is easy in the contract carriage segment - no restrictions on the number of permits or fleet size Competitive rivalry between public and the illegal private operators Clandestine (illegal) operations of private operators in stage carriage segment indicate weak regulations Limited private competition, competitive benchmarking, presence of budgetary support, etc. lead to significant operational inefficiency by GSRTC. Private contract carriage permits are operating de facto as stage carriage operators, however, cannot publish time schedule of operation or fare chart, cannot enter the city limits during specified hours of the day, issue tickets etc

8. 8 Inter-City Bus Transport: Madhya Pradesh Regulatory control / initiatives Barriers to entry and concentration Assessment of regulations and competition Policy and market failure In 2005, MPSRTC was abolished and the inter-city bus passenger transport sector was thrown open for entry by the private bus transport operators. Limited oversight by the STA/RTAs - Fares are however regulated externally by RTAs Market entry is easy and there are no restriction on the number of permits or fleet size for the private players - as evident by market domination by private players Sector is fragmented with 200 operators in Bhopal with 20-30 buses each Significant competitive rivalry between private and public operators A strong and effective regulator is absent Service availability limited to profitable routes Inefficiencies in the form of unreliable schedules, fares higher than what regulation allows, poor condition of vehicles, etc due to insufficient infrastructure and regulation

9. 9 Bus Transport Sector in India: Conclusion  MP: Regulatory oversight in terms of legislative backing, availability of resources and ability to intervene is important in the transport sector to ensure the welfare of consumers and producers.  Gujarat: Enhancing efficiency through increased competition from the private sector needs to be undertaken to enhance welfare and reduce the burden on the public exchequer.  Competitive bidding is one way to introduce private competition in the bus transport sector. Under this system, the operational control in terms of routes, fares, frequency etc is held with the government, while the operations are delegated to private operators. Competitive bidding however must be carefully planned to maintain a balance between entry barriers and service quality.  It is important to integrate the public operators in a reformed transport framework with greater private participation and competition. A negotiated performance based contract model based on parameters such as ratio of on road buses to total fleet, punctuality in services, revenue per km, cost per km, manpower deployed per bus, revenue staff, daily operational length per bus, etc. may be identified as targets for SRTUs, whereby the state budgetary support may be tied to target fulfillment. Benchmarks can be decided based on the performance of the other private/public operators plying under identical/ similar service environment.

10. 10 Bus Transport Sector in the Philippines: Background  Move from a highly regulated and concentrated market in the 1970s to a liberalized market composed primarily of small operators  Major reforms in bus transport regulation were carried out in the early 1990s and a moratorium on issuance of new franchises was imposed in 2000  The market operates under a highly complicated regime where regulation and enforcement is shared by several agencies  Entry into the market is now relatively unfettered Entry categoryDetails/Characteristics Entry Into and Exit Out of Industry Liberalized to introduce and/or enhance the level of competition in terms of the rates charged and the quality of service rendered. Minimum of 2 operators in any route Entry to a New Route Protection of investment for a maximum of 2 years, after which, the link/route shall be opened for entry to at least one (1) additional operator Entry to an Already Established Route Served by Franchise Operator(s) More efficient and cost-effective, competitive service than the existing/authorized operators; better quality service; additional capacity to meet an increase in demand; lack of effective competition; and violation of regulations by existing operator

11. 11 Bus Transport Sector in the Philippines: Impact of Regulations Regulatory control / initiatives Barriers to entry and concentration Assessment of regulations and competition Policy and market failure Liberalization in the early 1990s Moratorium on issuance of new franchises in 2000 Numerous operators (over a thousand) with a few buses per operator (11 to 14 on average) in the major routes The moratorium was not binding Fragmentation of enforcement Too many operators and buses resulting to traffic congestion, despite moratorium indicating ineffective regulation- Excess of buses on the 30 operational routes with load factors well below capacity No flagrant anticompetitive practices Infrastructural constraints Transport safety and concerns Congestion costs: Foregone earnings of 4.5 billion PHP Bus operators costs of 900 mil PHP

12. 12 Bus Transport Sector in the Philippines: Conclusion  The numerous operators and the limited network of roads is akin to a common pool problem, that left to unfettered competition results in a less than optimal result in the form of traffic congestion.  The challenge for the regulator is to come up with a way to maximize social welfare (availability of affordable mode of transportation at a timely manner) through a mode of contracting (allocating routes) that is self-regulating, i.e., incentive compatible such that operators deploy the optimal number of buses given the needs of the metropolis.  The benefit-cost analysis implemented in this DCR shows the tremendous magnitude of benefits from implementing an effective regulatory regime that addresses the congestion problem.  Such a regime may, to be feasible, entail limits in the number of operators.  Obviously such limits should not be overly restrictive and go the opposite extreme, leading to failure of contestability and the rise of market power.

13. 13 Bus Transport Sector in Ghana: Background  The sector was deregulated in 1980s to increase competition and encourage greater efficiency and service improvements for the benefit of commuters  Overtime, the Government of Ghana has undertaken various reform initiatives towards the development of bus transport in Ghana. These include:  Development of the National Transport Policy in 2008  Introduction of various transport plans and programs  Creation of Metro Mass Transit (MMT) service to reduce congestion;  Regulation of fares to meet the needs of the poor; and,  Promoting private sector investment in transport infrastructure and services to improve service quality and safety.

14. 14 Bus Transport Sector in Ghana: Impact of Regulations Regulatory control / initiatives Barriers to entry and concentration Assessment of regulations and competition Policy and market failure Establishment of MMT and subsidization of its fare to consumers Regulation of bus transport fares Transport unions play a key role in the market Low barriers to entry results in fragmentation The major barrier to a new entrant is to do with the choice of route and control of terminals by transport unions Private players (mostly informal) dominate the bus transport market Limited enforcement of regulation on road transport operators. Transport unions engage in anticompetitive practices in the informal sector such as market allocation, exclusion from terminals, and mandating joining a union to operate a designated route. Unfair competition between MMT and private operators on some routes on account of heavy subsidization of MMT fares. Poor service quality Major safety issues such as use of unsafe old vehicles Worsening access to transport by the poor Lack of a profit motive provides little incentive for the MMT to be efficient

15. 15 Bus Transport Sector in Ghana: Conclusion  Private sector development: The scope of private sector recapitalization is limited due to high interest rates and the level of risks associated with recovery by the financial institutions and the control exercised by the unions.  Route allocation: Presently, bus route allocation is controlled by unions with the exception of a few free flowing drivers who refuse to join unions. Past efforts at route allocation under the Urban Transport Project (UTP) whereby bus management per route would have been through tendering was also rejected.  Combine route licensing and introduction of quality contract: This will lead to increased bus patronage by  Increase in commercial fares due to higher operational costs from improved service quality  Lower travel time  Effective demand management and improvement in local bus services (such as increased frequency, imaginative fare structures and better real time information for passengers)  Economies of scale from combination of overhead operational cost such as management, labor and vehicle maintenance.

16. 16 Bus Transport Sector in Zambia: Background  Deregulation of the transport sector in 1991 led to entry of private sector  However, entry did not lead to sufficient supply to meet demand due to high capital outlay and poor road infrastructure. Thus, tax concessions were offered on bus imports in 1994 and 1995, which along with the liberalization of the economy and market determination of bus fares, made bus transport attractive  Passenger transport trade associations outlawed in the mid-1990s - operate on ad-hoc basis usually to achieve a specific purpose (like fare revision)  Proposals of fare revisions by operators are reviewed by the Road Transport and Safety Agency (RTSA) in consultation with Ministry of Transport, Works, Supply and Communication (MTWSC) and other stakeholders

17. 17 Bus Transport Sector in Zambia: Impact of Regulations Regulatory context Barriers to entry and concentration Assessment of regulations and competition Policy and market failure Liberalization in the 1990s No route allocation policy currently. Instead operators obtain licenses for inter or intra-city routes Market determined fares (to some extent) Promoted entry through imports, market determined fares, etc Private participation Similar fares in intra-city network Variation in inter- city bus transport in terms of service Little or no regulatory barriers to entry Competition between the operators in terms of price/service Potential for revision in route allocation and fare determination policies Better coordination among regulatory agencies Right mix of regulation and competition

18. 18 Bus Transport Sector in Zambia: Conclusion  Limiting barriers to entry has resulted in competition on the basis of price/service  Market determined route allocation and fare determination promotes entry and competition in the market  Need to ensure:  coordination between the Ministry of Transport and other regulatory authorities.  the right mix of competition and regulation

19. 19 Key Findings  Lack of competition leads to poor performances whether through monopoly (including public monopoly) or anticompetitive practices (allocation of routes by unions in Ghana).  On the other hand, competition without regulation may lead to diminution of the quality of services (through skimming of the most profitable routes, lack of respect of schedules, etc.) (see for example Madhya Pradesh inter city bus transport). But in some cases competition is enough to discipline the market (Zambia). The fragmentation of regulatory agencies may be detrimental to the quality and consistency of regulatory enforcement by creating confusion (Philippines)  Private anticompetitive practices, sometimes fostered by the existence of transport unions, lead to poor performance of the bus transportation sector (Ghana); the abolishment of transport unions in Zambia has not led to decreasing performances of the sector.

20. 20 Key Findings (Continued…)  Licensing and allocation of routes can help eliminate congestion but can create barriers to entry and may reduce competition by excluding informal operators. Licensing does not alleviate congestion if it is poorly enforced. If poorly enforced, it may coexist with congestion (multiplication of informal buses) (Ghana).  Allocation of routes through competitive bidding must be devised so as to ensure that the concessionaire has the right incentives to remain efficient and to maintain the quality of service (see for example India, intra cities bus services comparison between Gujarat and Madhya Pradesh). It may also be that allocation of routes is not necessary (Zambia)  State subsidies given to operators (private or public) often have a disincentive effect and foster inefficiencies (Ghana - subsidy for the MMT)  There is a general lack of information or empowerment of consumers in all countries under review

21. 21 Thank you