Merchant Shipping (Civil Liability) Bill [B20-2013] and Merchant Shipping (International Oil Pollution Compensation Fund) Bill [B19-2013]; Southern Africa Bus Operators Association on subsidised commuter bus operators' financial issues

Meeting report

Presentation of the Merchant Shipping Civil Liability and the Merchant Shipping International Oil Pollution Compensation Fund Bills, 2013
Advocate Adam Masombuka, Chief Director for Legal Services: Department of Transport, delivered the presentation on the Merchant Shipping Civil Liability and the Merchant Shipping International Oil Pollution Compensation Fund Bills, 2013. The two Bills are interrelated and complement each other and would therefore be presented simultaneously. The first Bill creates liability while the second establishes the fund. The liability is that which results from damage caused by oil spilled from ships. The ship owners are mandated by the first Bill to take up insurance and pay an insurance fee into the Fund. The Fund would act as top-up insurance and pay the balance of the outstanding amount.

The purpose of the presentation was to request the Committee to consider and approve the Merchant Shipping (Civil Liability Convention) Bill, 2013 and the Merchant Shipping (International Oil Pollution Compensation Fund) Bill, 2013. The background, clause by clause provisions, consultations, financial implications and procedures would be treated individually.

Adv Masomboka said that the Merchant Shipping (CLC) Bill sought to enact the International Maritime Organisation Protocol of 1992, to amend the International Convention on Civil Liability for Oil Pollution Damage of 1969 (the Civil Liability Convention) into law.  It forms part of a package of measures designed to give effect to the Republic’s obligations under the Civil Liability Convention (CLC) and the International Maritime Organization Protocol of 1992, to amend the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage, 1971 (the Fund Convention).

Parliament has already approved the two protocols under section 231(2) of the Constitution of the Republic of South Africa, 1996 (the Constitution). The full package includes the Bill and the Merchant Shipping (International Oil Pollution Compensation Fund) Bill, which gives effect to the Fund Convention; Merchant Shipping (IOPC) Fund Contributions Bill -- which is a money Bill contemplated in section 77 of the Constitution -- and the Merchant Shipping (IOPC) Fund Administration Bill, which deals with the administrative matters of the money Bill.

The Civil Liability Convention was adopted under the auspices of the International Maritime Organization (IMO), and they both deal with the question of liability and compensation for loss or damage caused by contamination resulting from the escape or discharge of oil from tankers, such as ships constructed or adapted for the carriage of oil in bulk as cargo. Under the CLC, claimants are entitled to compensation from the registered ship owner or the provider of financial security for the ship owner's liability, for pollution damage suffered in the territory, including territorial sea, or exclusive economic zone of a contracting state.
The Fund Convention was also adopted under the auspices of the International Maritime Organization (IMO).  It establishes an international fund, called the International Oil Pollution Compensation (IOPC) Fund, the purpose of which is to pay compensation to victims of pollution damage. This fund receives its funds from cargo owners, specifically from persons who receive annually, in the ports or terminal installations of the contracting states, more than 150 000 tonnes of contributing oil.  Because the Fund Convention is supplementary to the Civil Liability Convention, a state cannot become a party to the Fund Convention without, at the same time, also becoming a party to the Civil Liability Convention. Therefore, a South African oil shipper will be a member of the Civil Liability Convention and also a member of the Fund Convention, as the Bills complement each other.

Adv Masomboka read through the Merchant Shipping (CLC) Bill clause by clause (see attached document for details).

With regard to consultation, the Bill was published on 15 April 2009 in Government Gazette No. 32103 for public comments. The Department of Transport had not received any comments. It had consulted extensively with the National Treasury from July 2009 to October 2012.  A notice of intention to introduce the Bill was published in Government Gazette No. 36561 dated 13 June 2013.  The Department had been repeatedly receiving letters from the South African Oil Shippers Association, requesting the Minister of Transport to fast track the adoption of the Bill, and it supported this Bill.

There were no financial implications for the state and the Bill guaranteed financial security for liability, and compensation for loss or damage caused by contamination resulting from the escape or discharge of persistent oil from oil tankers.

Adv Masomboka said that the State Law Advisers and the Department are of the opinion that these Bills must be dealt with in accordance with the procedure established by section 75 of the Constitution, since they contain no provisions to which the procedure set out in sections 74 or 76 of the Constitution applies. The State Law Advisers are further of the opinion that it is not necessary to refer these Bills to the National House of Traditional Leaders in terms of section 18(1)(a) of the Traditional Leadership and Governance Framework Act, 2003, since they do not contain provisions pertaining to customary law or customs of traditional communities

It was important to state that the Bill emanated from an international convention and the convention had been adopted and dealt with in accordance with section 75 of the Constitution. Internationally, South Africa is bound by this protocol, but domestic legislation is needed to bind domestic citizens within the country.

The two separate Bills being presented complemented each other, and a third Bill also complements them, but it is being processed by the Department of Finance, as it is a money Bill.

In terms of consultation, the Bill had been published simultaneously with the complementing Bill.  The Department had received positive comments from Transnet, Shell and the South African Petroleum Industries Association (SAPIA).  Opposite views to this Bill were not foreseen, as the affected parties had expressed their support.

Adv Masomboka requested that the Committee consider and approve the two Bills as presented, as they give effect to domestic legislation relating to the protocols.

Discussion
Mr I Ollis (DA) asked if the Bills conformed to international precedent and if it was the international best practice from all the examples elsewhere in the world.  One of the advantages of being a new democracy was that the best option could be chosen immediately and the Constitution was one of the world’s best because of this.

Adv Masombuka said that it was international best practice, because the IMO consisted of member states and the convention had been internationally adopted, meaning that various states had participated in the drafting of the convention. These states had gone to their own parliaments to request permission to adopt the convention. South Africa had followed this particular practice and was currently adapting the international best practices to be applicable to South African citizens.

Mr Ollis asked who was pushing to have the legislation done.

Adv Masombuka said that the Bills were industry-related and not applicable to citizens. The Bills served as top-up insurance for ship owners, but they were still expected to have their own insurance and contribute to the Fund. The international fund would pay the balance for oil spillage, if the ship owners’ personal insurance did not cover the damage. Oil companies were in support of this Fund because they understood that they sat with a particular risk without it.   The South African Petroleum Industry Associtation (SAPIA) was behind the Bill, with Shell, BP, Engen and all the oil industry leaders.

Mr P Mbhele (COPE) asked where the funds would be coming for the particular fund associated with the Bills.

Adv Masombuka said that cargo owners who received over 150 000 tons of petroleum contributed to the fund.

Mr Ollis asked how cargo owners were bound to accidents caused by ships, and why cargo owners would buy in if the ship owners were responsible for damages, and already paid insurance. He did not understand the legality of oil companies contributing, rather than shipping companies.

Ms Hamida Fakira, Deputy Director General: Department Of Transport, said that ship companies paid an insurance, which was normal to claim liability for when there was an accident, and the oil companies were the cargo owners, and only cargo owners importing petroleum had to contribute, as it was a pollutant. It was the same as a carbon tax, irrespective of the medium through which it was emitted. The owners would have to pay a certain percentage or levy, depending on the amount of petroleum imported and if it was above 150 000 tons.

Ms N Mdaka asked if the cargo owners were paying for the ship owners’ insurance.

Ms Fakira said that there were two separate payments for the ship owners and cargo owners. The ship owners paid insurance and the cargo owners contributed a levy to the IOPC fund for importing petroleum. In the case of major oil leakages, such as the Phoenix spill in 2011 which had cost R31 million, the Bills would ensure that the South African government would not have to pay for the damage, as this would come out of the Fund.

The Chairperson asked for advice from the law advisers.

The law adviser said that the Department had looked at international best practice and standards, and had adapted the Bills from there. The Australian system was not applicable.  The Bill was based mainly on the Canadian model, but adapted specifically for South Africa’s Constitution. The taxes that would be levied from the cargo owners would be paid to the government, which would then pay it out to the Fund. That was the only point of differentiation from the Canadian model.

The Chairperson asked if the consultations had included the oil companies, and if there had been a difference in opinion between the oil and shipping companies.

Adv Masombuka said that there had been no difference in opinion, and that every year, the Department was asked by both oil and shipping companies to finalise the Bills, as it was advantageous to them. 

The Chairperson said that the Committee would have to wait to hear public presentations on 2 August concerning the Bills.

Mr L Suka (ANC) asked if the consultation process had been done extensively, and with which shareholders.

The Chairperson said that advertisements had been placed in all leading newspapers, the website and other parliamentary channels, with complete information in English and Afrikaans.

Mr Ollis asked if any submissions had been received yet, and if copies were available.

The Chairperson said that there had been no submissions, but that the closing date was 2 August. However, there had been enquiries.

Adv Masombuka said that SAPIA was in constant touch with the Department.  It was aware of the process and happy with the progress. It would not be foreseeable that ordinary citizens would want to have a say, as the matter was industry-related.

Mr Ollis said that there would be four interested parties that should be heard from: oil companies, shipping companies, environmental organizations and the National Treasury. If the Committee had heard from those four parties, then it would have done its job. If one of the four parties had not given input, the Committee should ask them for input. As there was international agreement regarding the Bills, there should be very few complaints.

The Chairperson asked why the Treasury would be involved, and what their interest would be.

Mr Ollis said that the law adviser had said that the Fund would work in the way of the Canadian model, so the government would be involved in receiving levies from the oil companies before distributing it to the Fund.  Therefore the government and Treasury were implicitly involved.

Adv Masombuka said that the Department had been in constant consultation with the Treasury, as it was interested in tax-related matters and it was happy with the progress of the Bills. The two Bills had been worked on with the Treasury, and it was satisfied that they complemented each other.

Committee Minutes
The minutes for Tuesday, 11 June 2013 were adopted, after they had been proposed by Mr Mbhele and seconded by Mr Suka, with no objections.

The minutes for Tuesday, 18 June 2013 needed to include an amendment for apologies, but were adopted after they were moved by Mr Ollis and seconded by Mr Suka, with no objections.

Presentation from SABOA on financial issues experienced by subsidised commuter bus operators
The Chairperson said that this presentation was called for due to a letter received from the Southern Africa Bus Operators Association (SABOA).  She apologised for not having given them a platform to address the Committee previously, as the agenda had been full, and she hoped that it was not too late.
Mr Sidwell Nche, President of SABOA, thanked the Chairperson and the Committee for the opportunity to speak, and handed over the presentation to Professor Jackie Walters, Strategic Advisor to SABOA.

Prof Walters said that the industry wais critical for South Africa and was used by commuters extensively. The nature of the industry meant that it is subsidized. It is the second largest mode of transport, behind only taxi transport and it performed a critical role in balancing demand and the pricing system within the public transport system. The presentation would go through the background of the issues and focus on two or three areas, including an overview on the impact of the Division of Revenue Act (DORA), including its unintended consequences, why the industry was not coping financially, five options and the way forward.

It was government policy to grow affordable, accessible and safe public transport operations in the country, based on previous supporting policy and strategy documents such as the White Paper on National Transport Policy (1996), the Moving South Africa Strategy (1997) the National Land Transport Transition Act (1999), Department of Transport Strategy documents (2007) and the National Land Transport Act (2009).  Despite the objectives taken from these documents, the commuter bus industry was collapsing in front of our eyes. It may not be visible, but below the surface, companies were in serious financial difficulty due to externalities beyond their control. The industry consisted of private and publically-owned bus companies. These were all under stress due to the unintended consequences of DORA and the bus contracting system to the government, which was supposed to provide for industry financial stability

There were different types of contracts in the industry. In 1997, the Department concluded interim contracts that were subsidized, and which were now 17 years old. These were supposed to have been transformed after three years with competitive tendering and negotiation of contracts. The service areas had also not been changed. Operators had been on unreasonable, short-term month-to-month contract extensions since 2003, with six-month extensions being granted recently. Nowhere else in the world was there a similar situation where a service provider was expected to provide services on a month-to-month basis. Since 2001, no expansion of the commuter bus system had been allowed, managed by the Department and provinces, despite significant in-migration and increasing populations.

Prof Walters explained the difference between three different types of contracts. The interim contracts were concluded in 1997 and make up 68% of the subsidy budget and provide the majority of the services. The tendered contracts make up 28% of the subsidy budget. The remaining portion goes to negotiated contracts, amounting to approximately 4%. There are 39 interim contracts in operation, 66 tender contracts and 10 negotiated contracts. The contract types in operation were based on a use-to-pay principle regarding the subsidies. The interim contracts were based on a passenger-based subsidy and the tender and negotiation contracts on a per kilometre subsidy. The objective is to convert all contracts to kilometre-based services.

Prof Walters said that the negative impact of the DORA Public Transport Operation Grant (PTOG) on the financial well-being of the industry was at the heart of the current financial problem. DORA aimed to ring-fence bus subsidies at the provincial level, so that provinces could spend the budget only on subsidized commuter services. SABOA thought this aim was good.  DORA aimed to limit an ever-increasing subsidy budget, focusing mainly on restructuring the interim contracts that were based on the passenger subsidy basis, as interim contracts were able to increase capacity on existing routes and claim higher subsidies. This caused an unpredictable subsidy budget every year.

To achieve these aims, all interim contracts were converted from passenger-based to kilometre-based contracts, the actual contract kilometres were capped for all contracting firms, and a three-year rolling budget was introduced. Today, all contracts were kilometre-based, which was in line with international experience.

What was happening was that Treasury decided what the annual DORA escalation would be, with the intention that the provinces would pick up the differences when compared to the agreed escalation rate. Each contract had an escalation clause in it, agreed between the government and the industry, making provisions for labour costs, fuel costs and inflation. At the heart of the problem were statements in DORA regarding supplementary funding for provinces. Treasury expects provinces to make good on funding, and the intention of the Act is to make provinces pay the difference between the agreed escalation rates and the actual rates. The reality is that provinces claim that they do not have funds to supplement public transport services, and the only money received is from the DORA fund. The provinces do not budget for bus service subsidies or the difference between the supplementary grant and the actual costs of running the bus services, based on escalation formulae in the respective contracts. This issue of the devolvement of the Department’s subsidized bus services to provinces has been the cause of many policy delays, and DORA has not helped the issue.

The impact of DORA’s PTOG over the last four years is that commuter bus operations have been capped at a fixed number of kilometers, irrespective of passenger demand, but public pressure forces bus companies to offer non-subsidised services at a loss or experience overloading and overcrowding. The markets cannot be served adequately, as many areas are in need of new and additional services and there is serious under-funding compared to the agreed contractual escalation formulae.

Prof Walters described the typical cost structure of a bus company. The major industry cost drivers will vary by areas of operation and type of company, but typically they are employment, fuel and maintenance costs. The employment cost is around 35%, fuel cost is about 25%, maintenance cost is 20% and other costs are about 20%.

Labour costs over the past four years have increased by on average of 8.9%.The protracted bus strike this year (2013) lasted for three weeks, making it the longest ever bus strike and the Bus Industry Bargaining Council had to agree to a 10% increase. This contributed the biggest share to bus company costs.  From 2008 to 2012, there was a 44% increase in a bus driver’s basic salary. The diesel price had increased by 88.5% from 2009 to 2012, from R6.54 per litre to R12.33 per litre.  Maintenance costs have increased on average by 7.55% over the last four years, with a total increase of 33.37%. The Consumer Price Index (CPI) inflation averaged 5.35% in this period, or a 23.16% increase from 2008 to 2012. There were significant increases to all the major costs to the industry.

Prof Walters described the actual increase versus contract escalation in subsidies received since DORA was implemented for operators in Gauteng. In 2009/2010, the industry should have received a 10.99% increase in subsidy but had actually received a 6% decrease because of a lack of funds. The contracts had then needed to be amended, but it was not allowed to be. The Department bases its increase mainly on the CPI, and not other industrial indices. The cost of a ticket is below its actual value, but the consumer cannot see that it is subsidized.  The subsidy portion of the ticket is one of the lowest in the world, and the passenger contributes much more than in other countries. The average increase was 1.78% for the actual subsidy increase, compared to 7.45% for the contractual subsidy increase. The actual versus contract escalation for Golden Arrow Bus Services in the Western Cape was also described, with an average actual increase of 2.39% compared to the contractual subsidy increase of 8.68%. Differences result from DORA having equitable share differences in different provinces. In the industry, the Bargaining Council sets rates for the whole country and does not discriminate against provinces, but DORA does not recognize this.

Prof Walters displayed the graphical impact of DORA, showing that the subsidies received were well below what should have actually been received from 2008 onwards, with the gap increasing over time. All the contracts were negotiated with the government, and the government should honour its contracts.

The PTOG does not reflect, nor take into account, the cost increases that bus companies are experiencing in the real world. Passenger fare levels and structures are prescribed by the Department and provincial departments in the contracts, but the funding of the contracts is the PTOG. There is also a requirement that the fare level increases every year. It is determined without considering increases in operational costs, such as fuel increases, maintenance increases, wage increases and inflation. The equalisation principle further reduces the funding for operators in more developed provinces, yet operators experience the same cost pressures throughout the country. Therefore, operators in more developed provinces suffer more than in less developed provinces. Provinces see commuter bus subsidy issues as a national Department of Transport funding matter, as they do not have the funds to either fully fund or supplement current funding levels, as they feel that they have more pressing needs.

The DORA PTOG has a significant impact on commuters. Current services are inadequate to serve the existing demand for bus services and most are seventeen years old. This also gives the industry an artificially low market share and does not allow growth of the industry.  New markets are not served by commuter bus services, inconveniencing passengers that want to travel by bus, and fares on other public transport could be artificially high in these areas due to a lack of alternative public transport. Some companies had to introduce fare increases that were more than twice the inflation rate in 2013 to recover operational costs, which was costly for commuters. Bus frequencies on existing routes do not match the demand for services, causing overloading and overcrowding. Older bus fleets result in less reliable bus services, which can result in breakdowns. Passengers had to endure a three week national strike, as the industry could not afford what labour was demanding, but companies had been forced to settle at the 10% level.

The DORA PTOG has also impacted the industry greatly. Bus replacement programmes have been curtailed or aborted. Service levels and reliability have come under pressure due to an ageing bus fleet. Overloading or overcrowding of buses occurs on a regular basis as operators are not allowed to increase capacities to deal with demand. Increased pressure from communities for additional services has forced many operators to introduce non-subsidised services at great financial loss. The financial sustainability of the industry is being put under severe pressure and resulting in companies reporting financial losses.

Prof Walters said that bus companies are struggling to survive because, in other businesses, management has certain levers to ensure sustainability but the bus contract system has removed these. These include growing the business, rationalizing the business and increasing prices. Under the current contract conditions, bus operators cannot grow their service due to caps, cannot cut costs due to fixed schedules, cannot increase fares without approval from the Department or because of provincial resistance or consumer reaction, and cannot reduce the scope of services and cover cost increases with the current PTOG funding levels.

Other factors compounding the problem include interim contract escalation being retrospective, where companies operate for a year and then get compensated for the increases from the previous year, short-term contract extensions causing huge uncertainty, as financial institutions see the industry as a risk, the changing of origin and destination points, and additional unsubsidized trips.

Prof Walters said that the escalation in contract rates for interim contracts is different from the escalation in the tendered contracts, as a tendered contract escalates monthly, which is less burdensome for the bus operator, while an interim contract is escalated only once a year in retrospect. This means that the interim contract bus operator receives an escalation in the contract rate only from 1 April in the financial year following that in which it had incurred the increased labour, fuel and other operating costs. Graphically, the retrospective escalation showed bus operators carrying costs for up to twelve months afterwards, and all fluctuations have to be carried by the operators themselves.

The extension of contracts for short time periods creates uncertainty and a lack of long term sustainability. This makes investment decisions difficult -- such as new buses, depots, ticket machines or equipment -- and banks are reluctant to provide funding because of uncertainty over the future of the contracts. Any major business cannot work on this basis, as it affects the ability to plan for the long term and to take capital investment decisions.

There have been changing origin and destination points, as starting points and destinations were determined by passenger demand at the time when the current contracts commenced in 1997 to 2000. Factors including large in-migration and development have changed these. Bus operators must now load and off-load passengers at points further than the original points in the contracts concluded 15 years ago to meet the demand of passengers. Contracts have never been adjusted since inception, and requests for an extra subsidy on additional kilometers have been refused. Therefore, operators must run additional kilometers at their own cost, resulting in contracts operating at losses, which are not sustainable moving forward.

Prof Walters said that there is a major need for subsidized bus services because of the major growth in interim contract operations before DORA, in terms of passenger volumes. The industry cannot serve increasing urban populations shown in the 2011 Census, as it is not allowed to, despite the emphasis of the National Development Plan 2030 to increase affordability and accessibility of public transport.  There is increasing household expenditure on food, water, electricity and transport, and a lack of alternatives to the car and walking. Government has promised to improve public transport and has introduced the Gautrain and two BRT lines, but these are limited and the government has not attended to the bulk of existing services. There has been an inability to focus on and improve the status quo, while investing billions of rand in the BRT systems. SABOA is not against the BRT systems, but believe it has caused the focus to be shifted away from the existing services.

An urgent solution is required, as the current situation is not sustainable and will cause the industry to fail. Service quality, road safety, fleet condition, training of drivers and legal compliance is being further compromised. The Department published four Model Contracting Documents this year that contained escalation clauses, but DORA overrides these and no operator can run under these conditions.

SABOA believed that there are five options available. More funding must be made available and the agreed escalation formulae must be honoured, while the way money is spent must be looked at. Should this not be possible, higher and more regular fare increases must be approved and jointly communicated by operators and government.  SABOA would not like to go there, as passengers would struggle to afford higher fares, but might have to.  Non-subsidised trips must be discontinued and the scope of the system must be curtailed, but this would also not be ideal, as the intention is to grow public transport to de-congest the roads.  There is a need to negotiate longer term contracts, such as seven-year contracts, and the DORA PTOG matter must be addressed, as the industry cannot work under the grant, as all the risk is transferred to the operator and there is no risk with the government.

He described SABOA’s vision of the way forward. The funding shortfall needed be addressed in the short term, and there is a need to stabilize the industry and for clear policy signals to ensure adequate investments in equipment, infrastructure and manpower. Clear policy signals are required about the future state of subsidized commuter bus transport.

Prof Walters said that this presentation previously been presented to many other entities, including the Department of Transport, the National Treasury, the Western Cape Provincial Government, the previous Minister of Transport, COSATU and at the SABOA Annual Conference, and requests had been made to the MEC for transport in Gauteng and the Minister of finance.  It was vital to address the issues of the base subsidies, escalation clauses and the disproportionate attention and funds to the BRT systems, moving forward.

Discussion
The Chairperson said the small bus operators, as well as the taxi industry, have also approached the Committee in the past, but all of their proposed solutions differ. Different political parties within the Committee also have differing views on what needs to be done. The Committee needs to find a solution that will address the issues in a manner that will not hurt other industries. She defined public transport as the heartbeat of social and economic development, meaning that where there is no transport infrastructure or services, everything comes to an end. Therefore solutions needed to be found.

Prof Walters said that SABOA represents about 900 companies, large and small, publicly-owned and privately-owned, and acknowledged thatwhile  there are other associations representing bus operators, it is the largest.

Mr Ollis said that the Committee is aware of the fact that South Africa’s public transport funding models were not working and that the system has to change. However, there was disagreement on how to change the system. He asked if in 17 years, there has not been an additional kilometer of bus routes funded through DORA.  Government has to review the routes and the subsidies on these routes, as the country has changed drastically in this time, and there cannot be caps in a rapidly urbanizing country. He commented that SABOA had said that subsidies are less effective every year because they are making up a smaller portion of the cost to run the bus companies, and this needed to be addressed. These matters needed to be raised with the Department and the Treasury.

Mr Ollis asked, if government changed the funding model, SABOA would be able to incorporate the technology on the BRT and rail systems to the bus operations, so that a common ticketing platform could be introduced. The integrated ticketing system is the right thing to do from a commuter point of view -- and a political point of view, if it works.

Prof Walters said that the industry is in favour of a single ticketing regime, but it would still have to look at the contracts and go through a whole new contracting regime. There are currently no gross-cost contracts, except for the Johannesburg and Cape Town BRT systems. Gross-cost contracts dominate throughout the world because of the flexibility it offers authorities in terms of amending routes and changing frequencies on routes. The contracts are currently net-gross contracts as opposed to gross-cost contracts, with some hybrid contracts.  There are so many ticketing plans that can be implemented, but SABOA does not know what the authorities will prescribe, and it is a taker of technology rather than a pusher. Government tenders public transport contracts, and contract services are usually in integrated public transport systems (IPTs) in other countries. These are not being developed in South Africa. There was silo-based planning for taxis, metrorails, BRT and buses, with no integration in South Africa. Funding streams are disjointed and government does not have the authority to implement them. The current funding streams require non-integration from government contracts. He questioned whether there would be the expertise and infrastructure in place when integration occurred.

Mr Ollis asked, if government changed the policy to subsidizing commuters and not routes, SABOA would be able to deal with that change, where commuters could change their mode of transport within their route, as the whole funding model would need to change.

Prof Walters said that there had been many studies on user-paid subsidies. The cost of administrating this and identifying people who are in need of specific amounts of money is very difficult, and it is difficult not to discriminate. Administration costs are between 12-15% higher, compared to the current administration values of the contracting system. Industries have different cost structures, as the bus industry is formalized and fully-unionized, while some are informal. If it goes this way, there may be a total deterioration of services and quality and this system does not occur anywhere in the world, as it is normally based on formal gross-cost contracting systems.

Mr Ollis asked what would be SABOA’s first prize in the new financial year to solve the problems, as it had presented several options in its presentation, and subsidy increases, route extension and area changes would need to occur again and again, and were not a long-term solution.

Prof Walters said that first prize would be adherence to contract conditions, particularly the escalation conditions. There are short-term and long-term solutions, but these short-term solutions are necessary to get to the proposed IPTs in the future. The existing, traditional bus services need to be sustainable and it is important to get Treasury to acknowledge the contracts, not leaving it to provinces. The current contracting regime still includes DORA, which is problematic and does not address the fundamental issues.

Mr  Suka said that surely South Africa does not need one approach to fix the problems, or a one-size-fits-all approach, in terms of the subsidies. The fix should not be a piecemeal approach, and it needs to be comprehensive. Stability and long-term planning are crucial. The issue of under funding needs to be discussed with Treasury. The solutions not being sustainable are an issue, and there needs to be an in-depth discussion with all stakeholders, including the Department and the private sector, to solve the problems. There should not be a situation where the problems are worse in three years time. He sympathised with the executive members of SABOA, but said the Committee needs to sit down, analyse and reflect on the larger issues, but needed to move with speed and urgency on the matter. The Passenger Rail Agency of South Africa (PRASA) was also pushing for the same clients as SABOA, so this in-depth discussion was needed. There should be solutions found in the meantime on the issues raised to ensure the bus businesses do not collapse, as the running costs are too high.

Mr Suka asked for clarity on the requirements of DORA at the CPI rate, and what is expected by the Treasury.

Prof Walters said that the problem with DORA is that it does not even acknowledge CPI, or is in line with CPI escalation. There is no rationale in the DORA escalation.

The Chairperson asked whether SABOA is thinking out of the box or in the box with its solutions, but was not expecting an immediate answer. SABOA is a part of the transport family, and there is a National Development Plan that needs to be taken into consideration when proposals are made for an integrated transport plan on the modes of transport.

The Chairperson said that in the late 1970s and early 1980s, she started marketing as part of her community development training and was presented with an assignment on what made railway transport fail in South Africa at the time. She received 91% because her analysis was that railway transportation failed to define properly the nature of business that it was in. It saw itself as railway transport and not as people providing transport. During this period, illegal taxi operators became more convenient and efficient as bus operators had to make diversions to pick up post from postboxes. SABOA needed to think out of the box. Solutions must look not only at the current situation, but also the future direction and situation. The presentation only mentions the BRT system and not fast trains, which will be more influential in the future as they will be quicker. SABOA should think about who are going to be the operators of the high-speed trains and what roles it can play rather than doing nothing. In community development, the difference between private companies and co-parities is that private companies will run to the government for a bailout when they do not make a profit, while co-parities can establish a second co-parity and their own value change and work their way around problems. Countries with strong co-parities are not affected as much by financial crises.  With private companies, such as bus operators, they will not think of how to reduce the cost of fuel. This comes back to the new ticketing system, and SABOA should think how this system would affect it, as costs could be saved with the sharing of tickets and the single ticket system. SABOA needs to think of the future. Its solutions were only as bus operators, and it was not defining the business correctly in the whole transportation business, so the solutions were limited.

Prof Walters said that in terms of thinking out of the box, the industry is a service-rendering industry and this is often not possible. A company can within itself, think out the box, but the industry is dependent on government to determine the services that it can render on behalf of the government. If the services are subsidized, it must adhere to contracts with government which come with many conditions, like any service provider to government. The industry would respond to out of the box thinking and IPT plans, but this needs to come from the government. The industry is waiting for services to be developed, but in the meantime the industry needs to survive

The Chairperson said that Prof Walters missed the point, as SABOA should be thinking out of the box in relation to the National Development Plan and the future direction of the company, including the introduction of fast trains and integrated transport plans, and not only as bus operators.

Mr Nic Cronje, Council Member of SABOA and Chief Executive Officer of Golden Arrow Bus Services, said that the industry can operate only within the rules and the playing field created by government. Within those parameters, there are a limited number of options to manage companies. It is not possible for the industry to set the rules and create the environment and South Africa has had a checkered career. In Cape Town, a newspaper article in the Cape Times in the 1880s said that Cape Town would bury itself in horse dung with all the horses operating in the city centre. Fortunately this did not happen, as electric trams were introduced and the problem of the horse dung went away. Importantly, companies themselves could not make the change to electricity if the playing field and environment was not created by the Cape Colony government back then, and bus operators have to work within a specific environment. He acknowledged past mistakes that the bus industry had made in the 1970s with the taxi industry’s development, but said  that there are now many forms of transport, and national transport policy is needed to rule across all modes of transport and the whole industry. This will help public transport develop much faster, and demand could be coped with.
One of the problems is that in certain areas we have demand or supply problems. In Cape Town, the silo effect and the focus on the BRT system has allowed the City of Cape Town, with the support of the Department and Treasury, to spend R4.5 billion on a BRT system that still operates only 142 buses. This money, from the view of bus operators, should have been spent on trains, as Cape Town has the best lines and could even transport people from outside of Cape Town who do not have bus services.  More people would benefit from public transport if the trains received the money relative to the minute number that benefit from the BRT systems. People forget about the passenger or the commuter, who is most important to bus operators. He asked what was being done to benefit the passenger and to make their lives easier. A survey in Cape Town was done in 2012 with Golden Arrow’s passengers, and more than 60% of the passengers earn less than R3000 a month. It costs approximately R100 a week from Khayalitsha to Cape Town which is more than 10% of their income to get to work. During the strikes this increased to R300 a week. The Department and the industry needs an overall plan and to understand that the passenger is important.

The Chairperson said that the National Development Plan had been set, but SABOA needed to define its role within this and solutions must be aligned with it.  In the proposals that SABOA made, it is only looking at its current situation and not future plans.  It needed to familiarise itself with the Transport Master Plan which takes South Africa to 2050.  The Committee needed to find long term solutions and SABOA should not propose solutions that look only at the short term.

Mr J Vanqa, Council Member of SABOA, said that his expectation is that the industry should not be destroyed in the mean time, and interim arrangements can be made to sustain it.  It needed to solve current problems to move forward, such as meeting the contract escalation terms. If the current situation was not addressed, there is no point in looking forward three years.

Mr Nche said that the IPT network remains a vision. There is no one who can give a realistic horizon of when integration will be realized, or its viability,given the arrangements that exist. One cannot start thinking about South African cities in a similar manner to New York, London or Moscow, because the arrangements are different. Solutions need to address the National Development Plan, and be dependent on things that relate to development of a country. It is good to dream but the IPT network is way into the future.

He said that his Christmas present or first prize would be a situation where the industry could afford the level of revenue to meet the drivers of the cost. There must be a margin above that cost, and it has to allow the industry to capitalize buses at the end of their economic life. There is no certainty about whether this would be after ten years or twenty years. His second present would be to consider the terms of the contracts, as that was related to the decisions to capitalize. SABOA would like contracts that are for ten to fifteen years, which would help businesses to make decisions.

Mr Ollis suggested that three proposals and recommendations be made to the Department. The first was that the Department discuss with Treasury the issues of three year contracts, and to review the contracts for bus operators in South Africa across all provinces. This is necessary because, as shown by the Census 2011, populations have changed and people have moved, and there have been no new routes for 17 years. The second was for the Department to work with Treasury to harmonise annual subsidy increases with inflation factors. The third was that within three years, all contracts be harmonized with the National Transport master plan, to provide certainty so operators can invest in new buses.

Mr Suka said that he neither agreed nor disagreed with the proposals, as the Committee needed to meet with the Department to get more information and its side of the story on why current arrangements that compromised bus operators, existed. This did not need to be protracted.

The Chairperson said that the Committee had not yet heard the Department’s side of the story, so no decisions would be made yet. The Department needed to explain the contract handling, in view of the fact that the contracts issue caused uncertainty, and what informed 11 years of month-to-month contracts, which was not in line with the Public Finance Management Act. It also needed to explain why there had been no extension or expansion in kilometers covered by subsidies for 13 years.

She took SABOA’s points, and did not want to see a total collapse of the industry, and interim arrangements might be needed. While interim arrangements could be made for immediate needs, there was a more pressing need for lasting solutions. The bus industry was the only industry subsidised by the people that had come forward to the Committee, as taxis and small bus operators were not. Scholar transport operators were also not receiving enough money and complaining about the road infrastructure where they operate, which destroys big vehicles
The Chairperson said that, taking the issue to a broader level, the Committee had also heard from low-fare airlines, which had no universal access, despite being aimed at the lower-income groups. The class division within society had to be looked at, as aviation was still a preserve of a particular class, as the racial demographic was disproportionate on flights. It was worrying that low-fare airlines collapsed in South Africa, but it was also worrying that the passenger make-up did not reflect the racial demographics of the country. These were complex issues that needed to be discussed. There might be more conflict created from not subsidizing specific modes of transport.

The Chairperson said that the government had an obligation to the commuter, not to the service provider, and would prefer a one-ticket system. She was concerned about the lack of consultation with the major players in the industry from the commuters’ side, such as the South African Commuters’ Organisation. Commuters should be able to choose their mode of transport, based on quality.

Closing Remarks
The Chairperson said the Department would make a presentation before the Committee would hear from SABOA again.  Thereafter, a meeting with the whole industry, including the taxi industry and commuter organizations, could take place where the Committee could hear how subsidies affect all stakeholders and role players, including the Department and Treasury. In a second follow-up meeting, the Department would explain the National Transport master plan and the Integrated Public Transport System. The subsidised contracts would also be dealt with.

Mr Suka said that he endorsed the way forward, but said that the Committee also needed to analyse this presentation for issues not touched on.

Prof Walters said that SABOA supported this way forward, and offered its thanks for the opportunity.

A representative from the Department was happy with the way forward, and would begin preparation.

The meeting was adjourned.