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OPERATOR BUSINESS MODELS FOR BRT

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 OPERATOR BUSINESS MODELS FOR BRT SYSTEMS IN SOUTH AFRICA

                                   Paper presented to the SABOA Conference

                                              28 February 2008

                                                     by

                                                 Thys Heyns

                                             Corporate Director

                                                 Putco Ltd.



Mr. Chairman, distinguished guests, ladies and gentlemen.

Bus Rapid Transit has taken South Africa by storm. Not unlike the rest of the world it has captured
the imagination of South African transport experts and authorities as a fresh solution to the
suffocating curse of all developing cities , namely traffic congestion.




Mr. Chairman, I must admit it is refreshing to have a bus industry conference where we can talk
about a positive new development in bus transport in South Africa rather than lamenting the lack
of action, indecisiveness and lack of progress on transport policy matters, as we have done over
the last 8 years.

At present 9 South African cities, are busy with the planning and implementation of bus rapid
transit projects namely:-

             o      Johannesburg,
             o      Pretoria,
             o      Cape Town,
             o      Port Elizabeth,
             o      Durban,
             o      East London,
             o      Bloemfontein,
             o      Nelspruit and
             o      Polokwane
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These BRT Projects are at different stages of development with Johannesburg, Pretoria, Cape
Town and Port Elizabeth having made the most progress.

The 2010 FIFA Soccer World Cup has provided a much needed impetus to get things moving and to
inject a sense of urgency and focus. With only 69 weeks left before the start of the Confederations
Cup and 119 weeks to go before the kick-off in the World Cup we need all the urgency we can
find. The clock is ticking and there is much to be done.




The authoritative BRT Planning Guide makes the point that:-

                 ‘the ultimate sustainability of a BRT system is likely to depend as much on the
                system’s software (business structure & regulatory structure) as it is on the
                hardware (buses, stations, roads and other infrastructure)’.



In most of the South African cities, where BRT systems are planned, the focus has been on the
‘hardware’ and not much attention has yet been paid to software issues such as the operator
business models and business structures. Given how little time is left this may be a serious
oversight and we need to start looking at these issues as a matter of urgency

My presentation this morning will deal with following issues:-

            1. The options for competitiveness in a BRT system
            2. Discussion of 4 possible operator business models or business structures for BRT
                systems in South Africa
            3. To share some ideas on how the BRT cake could be sliced between operators
            4. To raise 2 other important factors in selecting the operator structures for South
                African BRT systems




When implementing a BRT Project it would be nice to start with a clean slate and no historical
baggage, but in the real world you are always faced with an existing dispensation and political
realities. Broadly speaking, the first questions which a BRT authority must answer, relates to the
degree of competition that will be allowed between prospective operators for the right to be
awarded concession contracts. This is well illustrated in the BRT Planning Guide as ‘A Spectrum of
competitiveness for operator contracting’.
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On the one extreme you have full competitive tendering with no advantage given to any potential
BRT operator. This leaves it open for large international operators to compete with local operators.
While this may be the most desirable option, political, economical and legal realities may require
some compromise.




The next level on this spectrum is competitive tendering with certain advantages built in for existing
operators. This is the model used in Bogota where a points system was used to evaluate bids and
where additional points could be gained by operators who had local operating experience. This
provided an advantage to local operators. The next level in this spectrum is a tiered approach with
advantages given to existing firms. This model, followed in Guayaquil in Ecuador, sees the
authorities setting certain minimum requirements for prospective operators. Existing operators are
given first option to meet these standards. If the local operators are unable to meet these
standards operating contracts were opened up to other operators.




On the other extreme in the spectrum, automatic grandfathering rights are given to existing
companies or contracts are awarded in an arbitrary manner to local operators. In this model used
by Quito in Ecuador, León in Mexico and Jakarta in Indonesia, selected local operators were
allowed to continue under a BRT regime.

Most BRT systems today fall somewhere between the extremes on this spectrum . Political, social
and legal realities will influence the positioning of a BRT system on the Spectrum of
Competitiveness. In South Africa, Johannesburg and Port Elizabeth have already indicated that
they will not use open competitive tendering, but will work with existing operators for their BRT’s.




That brings us to the next question:- How should bus and taxi operators organise themselves for
participation in BRT systems and what business structures or operator business models should be
considered.
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The first model is where a single entity or consortium is awarded the right to operate the total BRT.
We will call this model the ‘MONOPOLY OPERATOR MODEL’. In this model you would have all the
potential actors in the BRT, most likely all your existing bus and taxi operators , forming a single
operator entity, let us call it BRT Newco, for ease of reference.




The BRT Newco will be awarded the concession to operate the total BRT system including trunk
and feeder services. In the Optibus BRT System León in Mexico, a monopolistic consortium was
formed by operators who acquired the concessions to operate both feeder and trunk services. In
Quito in Ecuador, the existing operators formed a joint consortium and were given the rights to
provide services for a ten year period.




The one South African city, which has done a lot of work on operator business models is Port
Elizabeth in the Nelson Mandela Bay Metropolitan area. They engaged the services of KPMG to
assist and advise them on appropriate operator structures . There are 5 contracts or concessions
planned for this BRT in Port Elizabeth Interestingly enough, the model proposed for Nelson Mandela
Bay is what we termed the ‘MONOPOLY OPERATOR MODEL’. The 10 local taxi associations have
been asked to form a single entity , let us call it TAXI NEWCO. The taxi associations will be
shareholders in TAXI NEWCO who in turn will be a shareholder in the operating entity BRT NEWCO.
The major bus operator in the area, Algoa Bus Company will also be a shareholder in the BRT
NEWCO. BRT NEWCO will operate trunk and feeder services for all 5 contracts.




The advantages of the MONOPOLY OPERATOR MODEL are:-

            1. It forces integration between the bus and taxi sectors in the BRT system. The bus
                and taxi operators are, in the words of Trevor Manual, ‘in this together’ and must
                learn to live and work together.


            2. From the City’s point of view they have only one BRT operating entity to deal with.


            3. The knowledge and experience resources of all the operators in an area are united.
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            4. The financial resources of all local operators are put together.


            5. The risk of business failure is reduced because resources and expertise are pooled




        Some of the disadvantages of the MONOPOLY OPERATOR MODEL are:-

                1. All the BRT eggs are placed in one basket. Business failure of the single operator
                    entity will have catastrophic consequences for the public transport network in a
                    city.


                2. The negotiating power of a monopolistic entity may be too strong. Experiences
                    in other BRT Systems have shown that a single overly powerful operator is not
                    good for an effective BRT.


                3. There is no competition or benchmarking between BRT operators,


                4. Any crippling problem with the single BRT operating entity, e.g. strike action
                    may bring the total BRT network to a standstill.




The second possible business structure for BRT operators is where multiple operators become
participants in a BRT system. Let’s call this the MULTIPLE OPERATOR model. Rather than organising
all actors in the BRT system in a single BRT entity existing bus and/or taxi operators form multiple
entities to operate different parts of a BRT. Within this model several different options exist, for
example:-



           A specific operator can operate both trunk routes and feeder routes


           Alternatively, concessions for trunk routes and feeder/distribution routes can be
            separated, resulting in some operators operating only feeder services while others
            operate only trunk routes.
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           You may have also have a mix where some operators would be awarded both trunk and
            feeder concessions, with others rendering only one or the other.




This brings us to route concessioning. A route concession contract specifies which services, routes
and trips each operator will be responsible for. It is not uncommon to have multiple operators
operating trunk routes e.g. The TransMilenio BRT in Bogota has 4 trunk line contractors and 7
feeder service contractors. Each trunk corridor hosts between two and four different operators.
Due to the specifications of the BRT system the look and feel of each vehicle is similar, regardless of
whom the operator is. To the passenger, the services look the same. As far as the feeder services
are concerned, it is probably more practical to have a single feeder company operating in a given
zone or area of the city. The feeder services, perhaps more so than the trunk routes, provide an
opportunity to accommodate larger number of existing smaller operators forming themselves into
consortiums.

The advantages of a MULTI OPERATOR MODEL include:-

        1. Substitute operators are available to provide continuity in case of operator failure


        2. Competition between operators in terms of service quality and benchmarking.


        3. More balanced bargaining power between operators and authorities


        4. Can select best operators for further phases in BRT.




   Disadvantages of the MULTI OPERATOR MODEL are:-

        1. Financial resources and business expertise are thinly spread across different
             operators.
        2. The ability of some of the smaller operating entities to raise finance may be limited.
        3. The BRT authority must deal with multiple operators.
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        The MULTIPLE OPERATOR model is advocated by the Joburg BRT. In the Joburg Operational
        Design Report the following view is expressed:-

            It is envisioned that multiple operators will operate a combination of Trunk, Feeder and
            Complimentary services, rather than having one operator providing feeder services, a
            separate operator providing trunk services and a separate operator providing
            complimentary services. This is to ensure better coordination between trunk and feeder
            services and to ensure that smaller scale investors, such as existing minibus taxi
            operators, are not foreclosed from participation in the corporations dominating the
            more lucrative trunk routes’




A third model to be considered is a variation on the multiple operator model. With this model
concession contracts do not contain fixed areas, routes or specified trips but rather guarantee a
minimum number of vehicle kilometres over a specified period. Let us call this the FLEXIBLE
OPERATOR MODEL.

With this approach, the BRT authority does not specify in the Concession Contract in which
corridor or areas the guaranteed kilometres will be allocated. This model, used in TransMilenio,
provides a high degree of flexibility to the BRT authority to move buses and operators from one
corridor to another without changing or re-negotiating contracts.




Referring to the Joburg BRT again, the following clause in their Operational Design Report outlines
their view regarding this model:-

                ‘While there has been discussion of awarding operating licences for specific routes or
                what are known as route concessions, the consultants strongly advise not to give
                route concessions. Route concessions give a single operator monopoly control over
                a specific route. His dramatically weakens the leverage of the Rea Vaya BRT
                Authority to regulate operators and to reward or punish them for poor quality
                service. Furthermore , fixed route concessions make it impossible for the BRT
                authority to adjust the service plan to changes in demand. This contractual rigidity
                has been known to increase operating cost by 20% or more’.
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In introducing the last operator model, a pertinent question to ask at this point, is whether there
is merit in the idea of keeping the concession contracts for bus operators and taxi operators
separate, as opposed to the generally accepted notion that bus and taxi operators will be forced
into a BRT business marriage. This may be a controversial option, but is not without merit.




Given the historic rivalry and mistrust between bus and taxi operators, the violence and intimidation
which is prevalent in the taxi industry, the poor track record of bus-taxi joint ventures and the
vastly different cultures between the bus industry and the taxi industry, both the taxi industry and
the bus industry are very wary about being forced into joint business ventures.

All of these factors need to be factored in when considering whether there is there merit in allowing
the bus sector to run and manage their portions of the BRT’s and likewise to allow the taxi
associations to run and manage their portions of the various BRT’s. Although this model may not
bring about the degree of integration between these two sectors which has been hoped for from a
political perspective, it will remove one of the biggest threats to the ongoing success of the BRT
systems, namely the challenge of trying to reconcile different corporate cultures into a single
focussed business entity.




So along these lines, we can identify the fourth and last model which entails splitting the trunk
services and feeder services along a modal line. Let us call this the TRUNK-FEEDER MODAL SPILT
MODEL. In such a model one could for example consider letting the current taxi operators render
the feeder and distribution services, while current bus operators are tasked to run the trunk lines.




Let me hasten to add that such a model would only be feasible if there is an equitable split between
the total operator earnings from feeder operations and total operator earnings from trunk route
operations. If, for example one considers the Operational Design Plan of the Joburg BRT, it
indicates that 56% of the total daily revenue is expected to go to trunk services with 44% expected
to go to feeder and complimentary services. The operational plan and design will differ from one
BRT system to the next and this model may not be a serious consideration for all South African BRT
systems. Nonetheless, it may be worthwhile to consider some variations on this theme among the
different operator models available to BRT authorities and role players.
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So, once we have decided how much competitiveness will be allowed in the BRT, and whether we
want one or multiple operators and whether we want flexible or route specific contracts we come
to the real crux of the matter. Given the fact that most South African cities will seemingly go the
route of negotiating with existing bus and taxi operators, the big question that must be answered
is :- How will the BRT cake be sliced and divided between operators? What portion of the BRT’s
will go to taxi operators and what proportion will go to bus operators?




This is where the BRT negotiations can get very interesting.

Taxi operators will argue that they transport approximately 60% of all users of public transport and
that they should get the biggest slice of the pie. The different taxi associations will argue about their
turf and the hard-fought rights they have won to operate in a specific area.

Big bus operators will argue that they bring the expertise in running and maintaining large bus fleets
and that they will be the financial backbone of the BRT system. They will tell you that they hold legal
rights which they negotiated with government and that they want at minimum an equal stake in the
BRT.

Small bus operators will argue that they must be accommodated in the BRT and not be treated
differently from the small taxi operators. This is after all a BUS rapid transit system and not a TAXI
rapid transit system.

Private bus companies will ask questions about the fairness of having municipally owned bus
services participating in the system, because the metros cannot be a fair referee if they are also an
operator player in the BRT.

So how do you reconcile all these conflicting demands?

One way of doing it is based on the market share of each mode in a defined area or route. This
approach would require a credible and transparent passenger census in all the relevant areas and
routes. Another is to depart from the point of view of having a 50:50 split between bus and taxi
operators to avoid one group dominating the other if for example a single entity structure is
created. A further option is to use the tiered approach we spoke about earlier, where minimum
standards are set, including minimum levels of financial reserves.
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Some BRT Authorities set minimum ‘economic capacity’ requirements. Operators must meet these
requirements to be eligible to participate. Examples of such minimum requirement are:-


       Minimum equity level s e.g. 14% of total value of buses operated

       Minimum working capital requirements




The opportunity can in the first instance be given to existing bus and taxi operators in the agreed
proportion to subscribe to this offer. Should they fail to meet the required minimum standards,
that portion can be offered to other taxi associations or to the local bus operators.




What is clear is that this process will be a daunting and difficult exercise with the potential to
deadlock easily and to turn very nasty very quickly. It would require mature leaders with cool heads
and creative minds. Having a very experienced mediator or facilitator leading the process may be a
wise move.




In closing, I want to briefly touch on two other considerations which will affect the choice of
business models and structures for BRT Systems and which will impact on the financial and
operational performance thereof.




A critical consideration in determining the operator business models in a BRT is the financing
thereof. Due to a shortage of time cities will have to order and buy the BRT buses themselves.
Once these vehicles have been procured by the cities and operators have been appointed to render
the BRT services, the vehicles will either have to be bought from the cities by the newly appointed
BRT operating entities or leased or rented from the cities by the operators.

Both these scenarios raise some interesting questions from a financing point of view.




The magnitude of the financing requirements becomes clear if one considers that the total cost of
the 640 BRT vehicles in the Joburg BRT for phase 1A, which is earmarked to be operational within
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13 months, is estimated at R900 million. The total cost of the 1,190 vehicles for the total phase 1,
including trunk, complimentary and feeder service buses is estimated at R1.7 billion rand.




It is important to understand how financiers and banker will view the BRT systems. In a recent
presentation to the newly established BRT Roundtable Discussion Forum, Mr. Graham Smith from
HSBC Investment Bank in London, who is the world’s leading provider of finance for bus rapid transit
projects, provided some guidelines as to how financiers would typically approach BRT financing.




In assessing the Operator Risk, they would ask questions such as:-

                    o    What happens if things go wrong?
                    o    Are there experienced BRT operators involved?
                    o    Do the operators have experience in running and maintaining large numbers
                         of buses?
                    o    Do they understand cost control and pre-emptive maintenance ?
                    o    What are the potential problems/risks associated with the workforce
                         culture?
                    o    Does the operator have competent and experienced maintenance staff?
                    o    Do the chosen operators have a strong capital base and cash reserves?
                    o    Do they have access to sufficient working capital?
                    o    Do they have robust cash flows to survive cost shocks or surprises?



It should be obvious to anyone who is familiar with the current taxi and bus operations in South
Africa that these issues will present some serious challenges to the BRT authorities and potential
role players.




The last point I wish to deal with, is the role and potential impact of organised labour in BRT’s in
South Africa. The lessons learned and experiences with organised labour in the transport sector and
especially the tendering system in the bus industry, cannot be ignored in planning BRT systems.




Issues to be dealt with include the following:-
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    o     How will staff move from existing bus and taxi operators to new BRT entities?

    o     How will wage rates and conditions of employment be handled for such staff?

    o     Will accumulated service be transferred and honoured by new BRT entities?

    o     Will there be a uniform pay structure between different BRT operators?

    o     Will the BRT staff fall under the South African Road Passenger Bargaining Council?

    o     Will there be job losses in current bus and taxi operators as BRT’s are rolled out?

    o     Will section 197 of the Labour Relations Act (dealing with transfers of staff to new entities)

          apply ?


The fact that almost all BRT Systems in other countries resulted in large scale staff dismissals during
the initial period of operation, must be noted. BRT Employers must be ready to recruit, select and
train large numbers of staff in a very short period to cope with the demands of a modern BRT
system.

The success of any BRT system is hugely dependent on handling the people issues effectively and
successfully. In the words of Lee Lacocca (former CEO of Chrysler)

    ‘In the end, all business operations can be reduced to three words:- people, product and profits.
    Unless you’ve got a good team of people, you can’t do much with the other two’

With just about a year before the first BRT wheels must start turning in most of the BRT earmarked
cities, the challenge of finding solutions to the operator business models, looms large over almost
every BRT project in our country. The time has come for this matter to be dealt urgently if we hope
to have a successful implementation of BRT systems prior to FIFA Soccer tournaments in 2009 and
2010.

I hope that this paper will contribute even if it is in a small way, to expedite the process where
planning authorities, bus operators and taxi operators, get around the same table to start exploring
options and alternatives in this regard. I THANK YOU




                                                   -o0o-

				
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