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

2. 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

3. 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

4. A BRIEF HISTORY OF TRANSPORT POLICY 1996-2005)
Signing of Interim Contracts
Signing of Heads of Agreement
Moratorium on tendered contracts
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
Introduction of competitive tendering
First Tendered Contracts
Target date for all services to be on tendered contracts
Since No tendered contracts issued or awarded

5. 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

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

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

8. 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

9. 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)

10. 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

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

12. 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

13. SUBSIDY ALLOCATION TRENDS

14. CURRENT SITUATION 14

15. 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

16. 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

17. 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

18. 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

20. 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

21. CHANGING SUBSIDY ENVIRONMENT SINCE 200921

22. 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

23. 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
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 .

24. NEED FOR INTERVENTION 24

25. 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

26. 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

27. 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

28. SUBSIDY REQUIREMENT (STABILIZATION)28

29. 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

30. 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

31. 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

32. 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

33. 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 -

34. RESPONSE TO CONCERNS AND PROPOSALS RAISED BY SANTACO34

35. 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

36. 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

37. 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

38. 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

39. 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

40. THANK YOU 40