Annex 2 Options for Bus Service Development

Baseline Scenario 2: Government company does not enjoy a monopoly over bus service provision

Figure 2 shows the basic options for the augmentation of bus operations under the condition that no monopoly exists. In this situation, either the Regulatory Authority can issue permits to operators or this can be facilitated by a Special Purpose Vehicle (SPV).

Figure 2 Options for Bus Service Improvements under Non-monopoly Situation

In many cities, the baseline condition allows unregulated entry of bus operators either with quality control (issuance of permits from competent authority) or without quality control. In the latter case, free entry to the public transport market is permitted (Option D). The main disadvantage of this condition is that it attracts illegal operations and services concentrate only on the most profitable routes. Private operators do not wish to risk investing in new or additional buses as they fear a change in fares policy by the government or uneconomic fares may well ruin their investments. However, leaving the pricing of the service to be determined by market forces would be detrimental to a large section of society. Apart, from the fare structure, the regulatory framework, the fiscal regime and exposure to a large number of enforcement agencies are factors that keep private operators from investing in city buses. For such reasons, most of the buses under this scenario are over-aged and are run to maximise profit, rather than with a view to a professional, high quality service.

Under Option E, the Regulatory Authority directly issues permits at fixed rates, or the rates are fixed by bidding. This option is currently practiced with Blue Line services in Delhi. Entry to the public transport market is permitted, subject to the vehicles meeting specified standards for public transport vehicles. This may be viewed as an improvement over unregulated entry, but many of the problems of illegal and congested operations, as well as lack of investment, still apply.

Under Option F, a Special Purpose Vehicle (SPV) involving all stakeholders is introduced and granted authority to engage private operators to provide services. This SPV is required as the regulator (Regional Transport Authority) does not usually have the expertise to plan and run the public transport system. The selection of private operators may be through a bidding process. The SPV can tender routes and enter into contracts with private operators at rates fixed by bidding (Option F1). This option is currently not practiced, but remains a possibility.

Alternatively, the SPV can work in partnership with private operators (Option F2) by making collaborative agreements. In several cities, there is no State owned monopoly operator and the services are provided by a group of private operators under permits from the Regional Transport Authority. This leads to a lack of coordination among the operators. This problem could be overcome if a government agency acts as a facilitator and provides certain value added services to operators so that all come under its umbrella. In Indore, a Company owned by the local authorities provides certain value added services and coordinates the operations of all the private operators. This system also brings in private capital and the state agencies are not required to invest any funds out of the public exchequer (See Annex 4 for the Indore model). The table below provides a summary of the advantages and disadvantages of the above options.

Table 2 Advantages and Disadvantages of Bus Service Improvement Options under Non-Monopoly Conditions

Options Advantages Disadvantages
OPTION D Unregulated Entry
  • No investment on buses is required to be made by the Government
  • No single operator enjoys a monopoly and this promotes market competition
  • Tends to attracts illegal operations
  • Services concentrate only on the most profitable routes
OPTION E Regulatory Authority issues permits
  • No investment on buses is required to be made by the Government
  • The Government earns a steady stream of revenue
  • No single operator enjoys a monopoly and this promotes market competition
  • Competition may degenerate as operators start cutting corners
  • There would be no takers for uneconomical routes
  • It becomes difficult to have monthly or travel anywhere passes
  • Investment in infrastructure like bus stands has to be made by the Government
OPTION F1 SPV tenders routes to Private Operators
  • No investment on buses is required to be made by the Government
  • Different stakeholders can be part of SPV-ensures better coordination and planning
  • The SPV earns a steady stream of revenue
  • The SPV and the Operator have a Principal-Agent relationship
  • Running on uneconomical routes requires a complex subsidizing mechanism
  • The SPV being a principal is responsible for all acts of the private operator
  • Revision in prices of inputs poses complex problems of revision of premium rates payable by the private operators
OPTION F2 SPV works in partnership with Private Operators
  • No investment on buses is required to be made by the Government
  • The SPV earns a steady stream of revenue
  • Different stakeholders can be part of SPV-ensures better coordination and planning
  • The SPV and the Operator do not have a Principal-Agent relationship
  • Running on uneconomic routes requires a complex subsidy mechanism
  • The operators have to obtain permits from the RTA.
  • Revision in prices of inputs poses complex problems of revision of premium rates payable by the private operators
  • The system becomes complicated as the scale increases
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