BRIEFING ON PUBLIC TRANSPORT SUBSIDIES PRESENTATION TO THE PORTFOLIO COMMITTEE ON TRANSPORT 05 NOVEMBER 2013

SCOPE OF PRESENTATION The presentation will try to answer the following questions: Why do we find ourselves in this state of affairs? What is the current situation with regard to bus subsidies in the country? Why is there a need for urgent intervention? What form should intervention measures take and what are they likely to cost? How should a transition to improved system be effected? Responding to some concerns raised by SANTACO 2

PRESENTATION OVERVIEW Brief history and background Why the tender contract system was stopped Current situation Changing subsidy environment since 2009 The need for intervention National Public Transport Transformation Plan Response to concerns by SANTACO Conclusion 3

A BRIEF HISTORY OF TRANSPORT POLICY 1996-2005) 1997 Signing of Interim Contracts 1999 Signing of Heads of Agreement 2001 Moratorium on tendered contracts 2002-5 Negotiated Contracts (some linked to asset sale) 1. Perpetuity permits ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 1 2 3 4 5 6 7 8 9 10 <‘96 1996 Introduction of competitive tendering 1998 First Tendered Contracts 2000 Target date for all services to be on tendered contracts Since 2001 No tendered contracts issued or awarded

BRIEF BACKGROUND In 1997 Government signed Interim Contracts with subsidized bus operators (IC duration 2/3 years) Interim contracts were to serve as a bridging mechanism between the life long permit system and tendered contract system. Government negotiated and agreed to certain issues with operators which were captured in the Interim Contracts These contracts gave certain rights and obligations to both Government and Bus Operators (annual escalation, right of first refusal, operators to surrender permits) Government, labour and the bus industry entered into a Tripartite Heads of Agreement that was intended to govern the handling of labour issues in the transition from IC to TC Plan: By end 2000 all services would be out on Tender Contracts The first group of major tendered contracts came out in 1998 mostly in Gauteng and Kwazulu Natal However, in 2001 the tendered contract system was stopped

WHY DID THE TENDER CONTRACT SYSTEM STOP? In May 2001 a moratorium was placed on all tendered contracts for 3 main reasons: LACK OF TRANSPORT PLANS – (COURT ORDER) LABOUR PROBLEMS LACK OF FUNDING

WHY DID THE TENDER CONTRACT SYSTEM STOP? 3 main reasons- LACK OF TRANSPORT PLANS LABOUR PROBLEMS LACK OF FUNDING

LABOUR PROBLEMS IN TENDERED CONTRACTS Successful tenderers tendered at much lower wage and benefit levels A massive drop in wages for employees (up to 75%) A huge reduction in the amount and levels of employee benefits Large scale outsourcing of functions by successful tenderers leading to serious job losses in the bus industry Up to 40% of the original number of jobs were lost in moving from IC to TC Labour cost became the main area in which operators cut costs to the bare minimum Reduced training and development of staff – no provision in tenders

LABOUR PROBLEMS THAT REQUIRED SOLUTIONS Wages and Conditions of Employment Job Guarantees Clean Break Provisions Bus Industry Restructuring Fund Right of First Refusal Amendments to the Heads of Agreement (HOA)

CHANGED LABOUR CIRCUMSTANCES S197 OF THE LABOUR RELATIONS ACT (2000) S197 of the LRA specifically designed to protect jobs and the “going concern” principle in it applies also in the tendering system and therefore guarantees 100% continuity of employment. The sole purpose of HOA was to minimize job losses and this could be achieved through the LRA Tender documents should be structured in such a way that they enable compliance with the application of S197 of the LRA both with regard to disclosure of information for tenderers and security of employment for employees. 10

WHY DID THE TENDER CONTRACT SYSTEM STOP? 3 main reasons- LACK OF TRANSPORT PLANS LABOUR PROBLEMS LACK OF FUNDING

COST OF TENDERED CONTRACTS An analysis of 18 tendered contracts showed that the subsidy required for a tendered contract is on average 25% higher than during the interim contract. Why? Due to high up-front capital investment required in a tendered contract Bus specification (fleet re-capitalisation), electronic ticket equipment requirements etc. The lack of sufficient funding for tendered contracts contributed to the suspension and delay in implementation of tendered contracts. Regular budget shortfalls have been experienced by NDOT since then so much so that no new tenders were awarded except the negotiation of a few parastatals

SUBSIDY ALLOCATION TRENDS

CURRENT SITUATION 14

CURRENT SITUATION: FUNDING PICTURE Contract type Number of contracts % of budget of buses Tendered Contracts 66 30% 1834 Interim Contracts 39 66% 3,849 Negotiated Contracts 10 4% 250

CURRENT SITUATION IC The bulk of IC not yet converted and accounts for 66% of the subsidy budget Since 2003 IC are extended on short term basis Subsidy previously based on the number of tickets (passengers) These contracts are characterized by the following inefficiencies: Outdated routes Lack of service level and quality specification (reliability, cleanliness, information, punctuality) Lack of monitoring No value for money No fleet recapitalization Annual escalation 16

CURRENT SITUATION TC/NC Tendered/Negotiated contracts characterized by: Designed routes and services Designed according to available funding Provide service level and quality specification Monitored Value for money Escalation is paid on monthly basis Tendered/negotiated contracts are also extended on short term basis from as far back as 2005 17

CURRENT SITUATION - FUNDING The current PTOG is already fully allocated to existing bus contracts but is far less than what is required to cover the total road based PT system. When current contracts are eventually replaced, there will be no surplus funds available for the proposed new system Total Public Transport system estimated operational requirements R12 billion Interim Contracts 2012/13 R2, 795,461,000 Tendered and Negotiated Contracts 2012/13 R1,520,079,000 18

CHANGING SUBSIDY ENVIRONMENT SINCE 2009 The Department incurred a cumulative subsidy deficit of R1,2 billion during the 2008/09 financial year National Treasury provided a once off allocation of R1,2 billion on top of the annual baseline allocation to clear the deficit Subsidy allocations were converted from an agency base system to a conditional supplementary grant classified as schedule 4 Provinces were expected to cover any shortfall experienced by operators Interim Contracts were converted from ticket base to kilometer base Escalation for Interim Contracts was fixed to the equivalent of CPI or baseline increase 20

CHANGING SUBSIDY ENVIRONMENT SINCE 2009 21

CHANGING SUBSIDY ENVIRONMENT SINCE 2009 System performance improvements Challenges Rationalisation of current routes/services required to ensure efficient application of subsidies prior to funding increases Rationalisation that brings material changes to existing contracts will be challenged as bridge of contracts Enforce efficiencies in the existing contracts (replace current contracts) Current budget is locked in existing services. New contracts cannot be introduced within the current budget since the subsidy increase for the past 13 years has largely been inflation adjusted Contracting functions must be devolved to municipal level (NLTA) and funding will be made available Only a few metros have the capacity to take over the contracting function. Provinces must make good the deficit incurred by operators on their contracts Provinces have never budgeted for bus subsidies except those that inherited the functions from previous administration (Limpopo, North West & Eastern Cape) 22

COST DRIVERS OF CURRENT SUBSIDISED PUBLIC TRANSPORT Spatial, Institutional and Political Drivers Historical fare base X-inefficiencies in administration. Low operator incentive Trip Distance Low densities of demand Peaking ratio Network Inefficiencies Ineffective Planning, institutional structures, allocation mechanism Lack of local level integrated planning, ops. & management Land use patterns Previous government policies GABS World Bank Benchmark Passengers per day per bus 212 1000 –1200 Km per bus per day 211 230-260 Passengers per bus km 1.0 4.3 –4.6 South Africa’s commuter bus market offers very poor productivity ratio’s, indicated here for Golden Arrow bus operations, at 4 to 5 times lower than World Bank, set for developing countries .

NEED FOR INTERVENTION 24

NEED FOR INTERVENTION Current short term extension of contracts is unsustainable and create uncertainty in the industry Office of the Auditor General has started to query the short term extension of these contracts (some province are being qualified). Urgent intervention measures needed: Interventions Short term Adequate funding for existing bus contracts should be availed in order to maintain these contracts while introducing medium to long term solutions Fuel/labour cost increases should be covered Medium to Long term Implement the National Public Transport Transformation Plan which advocates the replacement of all contracts in order to bring about visible efficiencies in the system 25

NATIONAL PUBLIC TRANSPORT TRANSFORMATION PLAN Transform the system Phase 1: Stabilization that seeks to move from month-to-month and interim contracts by negotiating them in terms of Section 41 of the NLTA even in the absence of IRPTN’s. Cost- additional 1,7bn. Phase 2: Then integrate the services into Integrated Public Transport Networks as envisaged by both the National Land Transport Act (NLTA) and the Public Transport Strategy with full integration as the main objective. Total estimated cost- R12bn/ y APPROACH Negotiate PURPOSE Integrate GOAL Transformation Medium to long term ALL OF THESE OPTIONS REQUIRE MORE FUNDING Approached National Treasury for additional allocation to the current baseline (2013/14) for the shortfall (R50m allocated for 2014/15 MTEF for fuel and labour cost increases.) Short term 26

PHASE 1: SHORT TERM (STABILIZATION) Phase 1: Stabilize the current system by replacing the month-to-month IC in terms of the provisions of the NLTA even in the absence of IPTN’s. Identify interim and/or old order contracts to be replaced over the MTEF. Develop a national implementation work programme and involve the municipalities (develop a cooperation framework to deal with the contracting authority challenges) Taxis should form part of the mainstream formal public transport system. Mobilize more funding 27

SUBSIDY REQUIREMENT (STABILIZATION) 28

PHASE 2: LONG TERM (INTEGRATION) Phase 2: Full integration based on IPTN’s Address the contracting authority challenges in the NLTA. Review the Public Transport expectations in relation to the “12 cities” requirements with regard to IPTN’s Adopt a differentiated approach for different PT challenges in the country High Density Urban Setup (travel demand, congestion, travel time, etc Low Density Rural Setup (availability, access etc.) Quality PT services to enable access and mobility Dedicated infrastructure & services (BRT?) Ensure that modes (rail, bus and taxi) compete for the road and not on the road. Integrate (merge) the funding streams ( PTIS, PTOG, TRP, Green Fund, etc.). MinMec approved the plan (concept) in principle and directed for more work to be done 29

PHASE 2: LONG TERM (INTEGRATION) - APPROACH There should be appropriate solutions for the different challenges facing the different cities, towns and rural areas. One size fits all will never work. Main Metro’s BRT system on multiple main corridors BRT “lite” and integrated bus operations on secondary corridors Dedicated BRT System costs include: Dedicated BRT Roadway (inc.pavement reconstruction) Feeder routes New stations New vehicle fleets Integrated ticketing system Operational control centre Full replacement of current road-based system Other Metro’s & Emerging Cities Single high volume corridor either: or Priority bus trunk route Full /lite BRT single line in larger cities. Other areas comprise bus & feeder integrated scheduled network on existing routes, with some priority on busy corridors. Full replacement of current road-based system

PHASE 2: LONG TERM (INTEGRATION) - APPROACH Towns Formal bus system Inter-town services Mixed fleets including Buses Midi buses Taxis Full replacement of current road-based system Scheduled services High Density Rural and Rural Formalised mixed operations Vehicle re-cap Scheduled daily services to main centres Weekly services to regional towns Minimal infrastructure investments Sparse Rural Selected interventions where viable Weekly & monthly services to towns Sharing services with health transport and scholar transport Brokering, flexible scheduling and confirmation of travel services No infrastructure costed 31

CONSOLIDATED FUNDING REQUIREMENTS Province 2012/13 Allocation ‘000 Taxi/SBO integration Eastern Cape 174,466 523,398 Free State 192,872 578,616 Gauteng 1,625,746 4,877,238 Kwazulu Natal 808,279 2,424,837 Limpopo 260,725 782,175 Mpumalanga 439,003 1,317,007 Northern Cape 39,255 117,765 North West 80,686 242,058 Western Cape 696,237 2,088,711 TOTAL 4,317,269 12,951,805 32

FUNDING PICTURE (2012/13 prices) Funding for Operations Capital Funding R Billions R Billions Excludes – Equitable Share and Metro bus services Bus – close to 5bn, Rail -

RESPONSE TO CONCERNS AND PROPOSALS RAISED BY SANTACO 34

CONCERNS AND PROPOSALS RAISED BY SANTACO Issue Response Right of first refusal contained in the IC and TC goes against the Constitutional provision and contravene the Competitions Act The right of first refusal applies in relation to the first Tendered Contracts following the Interim Contracts. The objective was to increase the likelihood of existing operators being awarded the first Tendered Contract in the areas where they are currently operating The shareholding in the Vehicle Operating Companies for BRTs has proven to be meaningless because the operation value chain has been outsourced to the private sector and not the taxi industry Participation in the operation value chain of the BRT projects is subjected to government procurement processes as required in the PFMA. The taxi industry can still participate . 35

CONCERNS AND PROPOSALS RAISED BY SANTACO Issue Response There is an urgent need to overhaul the Public Transport Strategy to align with the NDP Government has already started to align long term plans of departments with the NDP and identify areas where policy change is required to ensure consistency and coherence. There is a need for a total revision of the NLTA The NLTA is currently being amended and issues that need to be reviewed should be brought into this process The taxi industry has been excluded in the Intermodal Planning Committees Section 15(1) of the NLTA relating to IPCs is being amended IC and TC are still untransformed and exclude the taxi industry The NPTTP intends to address this challenge but can only succeed with additional funding . 36

CONCERNS AND PROPOSALS RAISED BY SANTACO Issue Response Subsidy for the taxi industry either through direct commuter payment or through subsidy to corporatized taxi associations An estimated R12 billion operational subsidy needed for the full integration of road based public transport system. Direct user side subsidy as a method of payment can be explored The cancellation and expropriation of permits/operating licence without compensation as provided for in the NLTA is against the vested rights to property and economic activity for the holder and should be tested in court This matter could still be raised in the Act amendment process for consideration and discussion Government has adjusted targets from 12 cities and 6 districts to 5 cities by 2015 All the 12 cities are at different stages of implementing IPTNs . 37

CONCERNS AND PROPOSALS RAISED BY SANTACO Issue Response Provinces and municipalities be instructed to finalise their IPTN before end April 2013??? Municipalities in their capacity as planning authorities are responsible for preparing transport plans for their areas and ensuring the implementation thereof Negotiation process must commence before end May 2013??? to replace IC an at least 70% be reserved for the taxi industry Additional funding needed prior to the commencement of the negotiations. Negotiations will include all affected operators in the area. The 70% set-aside proposal need to be clarified SANTACO must actively be involved BRT processes to ensure best possible deal for the industry The taxi industry has been actively involved in all municipalities that are implementing the IPTNs . 38

CONCLUSION Sufficient funding should be availed to sustain existing contracts in the short term while moving towards total transformation of the industry Practical measures to bring about efficiencies on the part of operators must be explored Funding for the NPTTP to replace the existing month-to-month contracts should be secured (implementation of the plan should include other road based public transport modes) Rollout of IPTN in areas outside the 12 cities and in rural areas should also be prioritized and funded (to include other road based public transport modes) A task team has been established between the Department, National Treasury and Provinces to deal with the overall subsidy funding regime and its challenges 39

THANK YOU 40