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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? - PowerPoint PPT Presentation

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  • * 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

  • *PRESENTATION OVERVIEW

    Brief history and backgroundWhy the tender contract system was stoppedCurrent situationChanging subsidy environment since 2009The need for interventionNational Public Transport Transformation PlanResponse to concerns by SANTACOConclusion

  • A BRIEF HISTORY OF TRANSPORT POLICY 1996-2005)91013248756960201989799000304051. Perpetuity permits1996 Introduction of competitive tendering1997 Signing of Interim Contracts1998 First Tendered Contracts
  • 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 ContractsThese 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 TCPlan: By end 2000 all services would be out on Tender ContractsThe first group of major tendered contracts came out in 1998 mostly in Gauteng and Kwazulu NatalHowever, 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 CONTRACTSSuccessful tenderers tendered at much lower wage and benefit levelsA massive drop in wages for employees (up to 75%)A huge reduction in the amount and levels of employee benefitsLarge scale outsourcing of functions by successful tenderers leading to serious job losses in the bus industryUp to 40% of the original number of jobs were lost in moving from IC to TCLabour 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 SOLUTIONSWages and Conditions of EmploymentJob Guarantees Clean Break ProvisionsBus Industry Restructuring FundRight of First RefusalAmendments to the Heads of Agreement (HOA)

  • CHANGED LABOUR CIRCUMSTANCESS197 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 LRATender 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.

    *

  • WHY DID THE TENDER CONTRACT SYSTEM STOP?3 main reasons-

    LACK OF TRANSPORT PLANS

    LABOUR PROBLEMS

    LACK OF FUNDING

  • COST OF TENDERED CONTRACTSAn 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

    Chart1

    20685001962054

    21727402045235

    22977532383660

    24603352695573

    25359973570395

    29841313688781

    35319093531877

    38630333860385

    41532324200742

    43172694390633

    Allocation

    Expenditure

    Period

    Amount

    Subsidy Allocation Trends

    Sheet1

    2003/042004/052005/062006/072007/082008/092009/102010/112011/122012/13

    Allocation2,068,5002,172,7402,297,7532,460,3352,535,9972,984,1313,531,9093,863,0334,153,2324,317,269

    Expenditure1,962,0542,045,2352,383,6602,695,5733,570,3953,688,7813,531,8773,860,3854,200,7424,390,633

    Sheet1

    Allocation

    Expenditure

    Period

    Amount

    Subsidy Allocation Trends

    Sheet2

    2003/042004/052005/062006/072007/082008/092009/20102010/112011/122012/13

    Annual Escalation9.25%1.00%8.00%8.50%8.00%10.00%-6.00%5.10%5.00%3.95%

    IC Escalation9.25%1.00%8.00%8.50%8.00%10.00%10.90%2.15%6.81%9.86%

    Baseline Increase12.00%5.04%5.58%7.08%3.08%17.67%18.36%9.37%7.51%3.95%

    Sheet2

    Annual Escalation

    IC Escalation

    Baseline Increase

    % increase

    Annual IC Increases

    Sheet3

    PTOG

  • * CURRENT SITUATION

  • CURRENT SITUATION: FUNDING PICTURE

    Contract typeNumberof contracts% of budgetNumberof busesTendered Contracts6630%1834Interim Contracts3966%3,849Negotiated Contracts104%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 routesLack of service level and quality specification (reliability, cleanliness, information, punctuality)Lack of monitoringNo value for moneyNo fleet recapitalizationAnnual escalation

  • *CURRENT SITUATION TC/NC Tendered/Negotiated contracts characterized by:

    Designed routes and servicesDesigned according to available fundingProvide service level and quality specification Monitored Value for moneyEscalation is paid on monthly basis

    Tendered/negotiated contracts are also extended on short term basis from as far back as 2005

  • *CURRENT SITUATION - FUNDINGThe 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

  • *CHANGING SUBSIDY ENVIRONMENT SINCE 2009The Department incurred a cumulative subsidy deficit of R1,2 billion during the 2008/09 financial yearNational Treasury provided a once off allocation of R1,2 billion on top of the annual baseline allocation to clear the deficitSubsidy 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 operatorsInterim Contracts were converted from ticket base to kilometer baseEscalation for Interim Contracts was fixed to the equivalent of CPI or baseline increase

  • *CHANGING SUBSIDY ENVIRONMENT SINCE 2009

    Chart1

    0.09250.09250.12

    0.010.010.0504

    0.080.080.0558

    0.0850.0850.0708

    0.080.080.0308

    0.10.10.1767

    -0.060.1090.1836

    0.0510.02150.0937

    0.050.06810.0751

    0.03950.09860.0395

    Annual Escalation

    IC Escalation

    Baseline Increase

    % increase

    Annual IC Increases

    Sheet1

    2003/042004/052005/062006/072007/082008/092009/102010/112011/122012/13

    Allocation2,068,5002,172,7402,297,7532,460,3352,535,9972,984,1313,531,9093,863,0334,153,2324,317,269

    Expenditure1,962,0542,045,2352,383,6602,695,5733,570,3953,688,7813,531,8773,860,3854,200,7424,390,633

    Sheet1

    Allocation

    Expenditure

    Period

    Amount

    Subsidy Allocation Trends

    Sheet2

    2003/042004/052005/062006/072007/082008/092009/20102010/112011/122012/13

    Annual Escalation9.25%1.00%8.00%8.50%8.00%10.00%-6.00%5.10%5.00%3.95%

    IC Escalation9.25%1.00%8.00%8.50%8.00%10.00%10.90%2.15%6.81%9.86%

    Baseline Increase12.00%5.04%5.58%7.08%3.08%17.67%18.36%9.37%7.51%3.95%

    Sheet2

    Annual Escalation

    IC Escalation

    Baseline Increase

    % increase

    Annual IC Increases

    Sheet3

    PTOG

  • *CHANGING SUBSIDY ENVIRONMENT SINCE 2009

    System performance improvementsChallengesRationalisation of current routes/services required to ensure efficient application of subsidies prior to funding increasesRationalisation that brings material changes to existing contracts will be challenged as bridge of contractsEnforce 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 availableOnly a few metros have the capacity to take over the contracting function. Provinces must make good the deficit incurred by operators on their contractsProvinces hav