Annex 2 Options for Bus Service Development

Baseline Scenario 1: A government undertaking (or the municipal government) does enjoy monopoly in bus service provision

Figure 1 shows three basic options for the augmentation of bus operations under the monopoly baseline scenario.


Figure 1 Options for Bus Service Improvements under Monopoly Situation

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OPTION A: Monopoly Acquires Buses Through Own Capital

Under this Option, the monopoly finances the procurement of new buses either by a grant from the government, or using its own financial surplus, or by borrowing. Most government corporations adopt this option. The acquisition of buses can be either by the City government or the Government Companies already running public transport.

Acquisition of Buses by City Government: Prima facie operation of buses by the city government appears to be a simple solution. Such a system prevails in cities in Maharashtra and Gujarat. Operation of buses by the city government has the advantage that the agency owning the roads and regulating them and the agency running the buses is the same. This may lead to better planning and coordination. Added to this is the advantage that the bus system is not subjected to various levies by the City Government. However, experience has been mixed. In Mumbai the City Government runs one of the biggest bus systems in the country, but many smaller municipal bodies provide bus services of poor quality. The financial performance of these bus operations tends to be poor and the finances of the municipal bodies are usually inadequate to invest in new buses. Moreover, this option is available only in a few States where the municipal bodies are mandated under law to run public transport services.

Acquisition of Buses by Government Companies Running Public Transport: In several cities, the government organizations running buses have a monopoly and no private operator is allowed. Under such circumstances the only way to introduce new buses is by the government owned company. The financial performance of these organizations, like those run by the municipal bodies, has generally been poor. Therefore, they do not have surpluses which could be invested in additional buses and the prospect of making further losses deters them from borrowing. Thus this option also has limited potential.

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OPTION B: Monopoly Hires Buses from Private Sector

The Monopoly Operator has the responsibility of providing bus services in the city. The usual practice is that the operator owns and runs the buses: therefore, any expansion or induction of new buses requires procurement of vehicles. However, the financial condition of the monopoly operator (which is a state owned company) is typically precarious and it cannot invest in additional buses. In such cases, a partnership between the public sector monopoly and the private sector may be beneficial. The public sector is known for its social concern for the people and the private sector is known for its efficiency and professionalism and these aspects can be brought together.

Under this Option, the monopoly hires buses directly from the private sector. It can take the buses on hire from the private owner and compensate the owner on the basis of distance run. Such buses are normally taken on ‘wet lease’ for a long period. The farebox revenue goes to the Government monopoly operator. The advantage of this arrangement is that private capital is brought into the system by the private operator. Moreover, the private bus owner is insulated against the unpredictability of the government’s fare revisions.

The system can have several variants. The contract may have ‘pass throughs’ for costs of inputs. The buses may be run under the ‘colours’ of the monopoly operator. The Government monopoly operators could put their own conductor in the bus or even outsource the fare collection to a third agency. A variation of this model was adopted in the ‘Km-scheme’ of Delhi Transport Corporation (DTC), in which the operator is paid a fixed amount for each kilometer of bus operation, and the ‘Hiring of Bus Scheme’ of Bangalore Metropolitan Transport Corporation (BMTC) (See Annex 4). Another variant could be hiring of buses with both crew (driver and conductor) being supplied by the Government monopoly operator.

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OPTION C: Monopoly Tenders Routes/Areas to Private Sector

Under this Option, the Government agency (with monopoly on the routes) may tender the routes or area and invite bids from private operators. The private operator offering the highest premium is given the authority to operate on the given route or within a specific area.

The decision to tender either routes or areas is based on a number of considerations. For example, whether the city has a number of relatively self-contained areas or if the authority wishes a particular operator to be identified with an area. The area basis contract has an advantage in that the operator can plan services better and does not have to compete with another operator in his area: therefore there is less incentive to cut corners in quality of service. However, this system creates problems when certain services have to cut across the areas of one or more permit holders. This problem can be overcome to some extent by allotting permits for a set of routes instead of an area. Even this system creates problems in the case of overlapping routes of different operators. Route contracts may be preferable if the authority wishes to offer opportunities to small operators or retain control over routes and schedules.

Gross-Cost Basis Contract (Option C1): Under a Gross Cost Contract, the authority pays the Operator to provide a service in the specific area or route(s) for a set period. This Option is appropriate if the authority wishes to avoid on-street competition for passengers and to provide free or discounted interchange between routes.

Net-Cost Basis Contract (Option C2): Under a Net Basis Contract, the farebox collection is retained by the Operator, though the fare rates are usually fixed by the authority. The operator should have an incentive to run a good service and collect more revenue, however, often the operators in their quest to maximize revenue cut corners, violate the rules and tend to maximize profits, which can be detrimental to providing comfortable and safe services. The authority may pay the Operator a subsidy if the bus services are unprofitable. On the other hand, if the services are profitable, the authority can receive a royalty from the Operator.

Table 1 below provides a summary of the advantages and disadvantages of the above options.

Table 1 Advantages and Disadvantages of Bus Service Improvement Options under Monopoly Conditions

Options Advantages Disadvantages
OPTION A Monopoly acquire buses through own capital
  • Easiest method for fleet acquisition
  • Government Company retains full control
  • Existing facilities such as depots can be used
  • Government companies tend to have insufficient capital to acquire buses
  • Each additional bus requires additional staff of 7–10 persons
OPTION B1 Monopoly hires buses from Private Sector (without crew)
  • The Government Company does not require available capital
  • The private sector (fleet owner) is insulated against fare revisions
  • Crew has to be employed by the Government Company
  • Fixation of rate payable to operator may create problems especially when cost of inputs is increasing
  • Lack of competition
OPTION B2 Monopoly hires buses from Private Sector (with crew)
  • No capital required for Govt. Company
  • The private sector (fleet owner) is insulated against fare revisions
  • Fixation of rate payable to operator may create problems especially when cost of inputs is increasing
  • Lack of competition
OPTION C Monopoly tenders routes or areas to Private Sector
  • No capital required from Government Company
  • The Government company earns a fixed revenue
  • Brings in competition
  • Tendency for operator to maximize profit by cutting corners
  • Impractical on loss making routes
  • Problems created during fare revisions and if input costs increase

In practice, worldwide many cities have adopted net cost route systems (C2). This option often replaces unrestricted private operation and requires the least level of public sector administration and management. Gross cost systems may be suitable if strongly administered systems are in place and revenue clearing systems exist. It can also assist inter-modal coordination.

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