Of buses that kill and untrammeled markets

Just as we auction out public utilities, why not apportion bus routes to the most professional and competent bidders?

With the release last week by the LFTRB of the Top 10 Killer bus companies, a very unsavory picture of the road transport sector seems to emerge. A total of 163 accidents were tallied in the course of a year. Topping the list was NOVA Auto Transport, the same bus line that was involved in the road accident which claimed the life of UP Professor Chit Estella-Simbulan.

That particular incident highlighted the public safety risk that buses posed not just in the provincial bus routes but in the metro as well. Upon issuing three lists of top ten offenders (distinguished in terms of number of accidents, number of fatalities and accidents resulting in damage to property), the partylist group 1-UTAK cried fowl declaring that officials from the bureau could be subjected to criminal and administrative prosecution for releasing such information to the public.

After originally announcing that recidivist bus operators would have their franchises cancelled, the LTFRB was put on the back foot defending their release of such lists as not a form of “blacklisting”. Such a feeble response to the overt threats posed on it is quite typical of a government that is not autonomous from private sector interests. Such a hapless state of affairs persists in which the public regulator lacks the teeth to discipline erring providers of public transport.

It is worth retracing our steps to see how we got here.

After 1986, in an averse reaction to the monopolistic crony capitalism fostered under the Marcos dictatorship, the new regime sought to strip any visible vestiges of the former dispensation. This included privatizing the bus routes in Manila which was previously the domain of the Metro Manila Transit Corp under Imelda Marcos’s Metro Manila Commission.

The plying of bus routes was then liberalized and the importation of second hand buses was encouraged through tariff reduction or customs exemption. Echoing the policy consensus en vogue in Washington, Manila’s elite sought to introduce the “magic of the market” in areas that had been dominated by a state owned enterprise.

The role of the government was revised to simply set the rules, lower the cost of entry into the industry, stand back, and let the market rip. Even now, if one visits the LTFRB website, one will find that the cost of entering the market are quite low with a bank balance of 30,000 pesos the only capital requirement needed from a prospective franchisee.

Fast-forward to the present, with the advent of mass transit light rail systems that offer quicker, cheaper trips around the metro, there is now a glut of bus operators vying for a more limited number of bus patrons. With their fares being regulated, the only way for them to maximize profits versus their competitors plying the same route is literally to jostle on the streets of Manila for them.

Under the pre-existing policy, the goals of attaining a free and open competitive market with many small operators unable to distinguish themselves on the basis of product or price and where the customer is king has been achieved. With diminishing profitability, bus operators and their employees have increasingly taken to very risky practices to shore up their market share by snaking through our roads picking up passengers indiscriminately from any particular point on their route.

The response of the government has been to promise a rationalization of bus operators (to reduce the number of buses) through an attrition program scheduled to take effect in the medium term and to rely on stricter traffic monitoring and enforcement by the Metro Manila Development Authority to catch unlicensed and erring bus operators. Meanwhile, life threatening practices and accidents continue to happen on our roads.

Changing Course

With the benefit of hindsight, it is clear what the policy stance of the government should have been. The government should have planned and managed the issuance of licenses to ensure that operators had a reasonable let alone a sustainable level of profit expectation. Instead of leaving it to the market to determine the number of operators, the state should have studied the transport capacity of the city and acted accordingly.

One study by two engineering undergraduate students has shown that the market on EDSA is currently 75% overcapacity or over-serviced compared to the DOTC’s own computation of 60%. This would tend to imply that quite drastic cuts are needed if for every bus that is required, there is another one to two buses competing for the same set of passengers. That would tend to mean a loss for both operators who would be running on less than half their normal capacity, thus leading to slimmer margins.

If correct, the study shows that the reduction through natural attrition cannot be relied on to achieve the required number of buses in the near term. What if the better behaving operators have their franchises cancelled simply because these are due to expire earlier than the worst offenders? There is nothing rational about a natural attrition policy.

What the government should do is simultaneously revoke or cancel all licenses for the same over-supplied routes at some future date and auction them out in the same way it intends to bid out projects under the PPP program for public transport.

This implies that the government needs to intervene in the market. Instead of relying on Adam Smith’s “invisible hand” to intensify competition which creates cut-throat business practices that puts the motoring public at risk, the government needs to show its “visible boot” and kick the industry back into shape.

To do that, it needs to parcel out bus routes and auction them out to the best bidder. This will tend to favor fewer numbers and much larger bus operators resulting in an oligopoly with a credible threat of cancelling and re-auctioning routes for poorly performing ones. Small operators will need to either form consortia or cooperatives to compete with large operators in terms of scale.

Among the criteria used to approve and renew bus licenses should be the safety record of bus liners, their compliance to traffic rules, their capacity for adequate repair and maintenance and their ability to service their routes well. Technocrats should be hired to determine a reasonable auction price range for specific routes that would still allow for an acceptable return to prevent a “rigged” auction.

With monopolies over certain bus routes, the operators will no longer need to engage in dangerous driving practices. Passengers should only be allowed to board and alight from buses at designated stops. Operators would be assured of sustainable passenger volume along their routes and would find it in their interest to schedule the deployment of buses along their routes. Traffic congestion would ease, and enforcement could be made much simpler to monitor and track.

The government should also embark on a training programs to educate drivers on safe driving practices by benchmarking with other jurisdictions. With a greater assurance of profits, bus operators should be made to provide decent work hours as well as comply with occupational health and safety standards.

Transitioning arrangements

With this new arrangement in place, the question remains what to do with the remaining operators and their assets. The cancellation of their franchise would result in lost income and livelihood for them. Wouldn’t the government have to compensate them for this?

On the loss of livelihood, the damage caused the industry may not be as big as one would imagine. To achieve sufficient scale, winning bidders might need to purchase or lease buses from unsuccessful companies. Secondly, the cost of compensating the remaining bus operators could be partially offset with the revenue earned from auctioning bus routes. Thirdly, the government could require metro and provincial operators to maintain excess buses for use during peak periods during the day or peak seasons during the year. A pool of reserve buses could be established to accommodate this. The remaining assets could potentially be used for chartered services to the tourist industry.

If need be, the LTFRB should be given “legal cover” to undertake this drastic policy shift by our legislators. It should be allowed to invoke “public safety” as a criterion for re-structuring the industry. It also needs to be granted the authority to auction out routes under the PPP arrangement found in other mass transit systems.

On the way to market

The chaos on our streets is emblematic of the state’s governance in our country as a whole. The ideology of the free market was adopted as a way to expand service at a time when the public sector was strapped for cash. On our way to achieving that ideal state of open market competition, we allowed the industry to become unwieldy. No forward planning was conducted when the mass rail transit system was constructed to determine whether bus routes would continue to be viable. As a result, the untrammeled market created perverse incentives for operators to put the public’s safety at risk with the burden of monitoring and enforcing traffic safety placed on toothless regulators.

After a period of stepping back and letting markets rip, it is now time for the public sector to govern the market to bring it back to a sustainable level. In a similar fashion, the government needs to identify strategic sectors in the economy that could do with similar industry structural adjustments and develop a plan for deepening and broadening their scope of activity.

It is quite ironic that the economic planner who coined the phrase “narrow, shallow and hollow” as a way to describe the Philippines and its industrial base was the same person at the proverbial wheel when tariffs were being indiscriminately lowered ahead of external commitments under WTO. “Asleep at the wheel” is probably the phrase we can use to describe this strategy.

Like our streets, untrammeled markets could simply foster cut-throat competition or lead to investments in unproductive sectors of the economy and impede investments in more productive ones. This could literally spell life or death for those that rely on them for a living.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • J_ag

    Markets require non-market institutions to exist.  Firstly the non-market institution that is critical in regulation would be dependent on having a wholistic policy of land use and zoning for which an overall transportation grid is planned. 

    That cannot be defaulted to private land developers as one can see the mish-mash of zoning policies. 

    The micro issue of the business model being used in our privately owned but regulated transportation system wherein owners of buses simply contract out their buses to drivers and conductors and they in turn race their adversaries on the road for passengers. 

    I have to admit though after a few rides on these buses that these drivers are highly skilled.  Unfortunately the condition of the roads and the buses itself are suspect. 

    We have a limited system of mass transit combined with buses, jeeps and tricycles that ply the streets. 

    A large portion of the working class actually live in rooming houses and go home sometimes weekly of bi weekly in the outskirts. Some actually commute for as long as 2-3 hours since housing is expensive in the core areas. 

    It is one big mess. 

  • Joe America

    I am told there is a bus line that instructed its drivers that, if they hit someone, run over him again to make sure he is dead. They cause fewer problems than injuries. I figured it was just rumor until I read how the bus companies are afraid of what might happen if facts. Say again, facts. Are discovered.

    My sense is that the entire transportation industry is a mish mash of regulation and subsidy, not really free market. It is managed to favor the favored and support the indigent, with no rational in between that makes sense as an industry.

    Fine article. Thanks.

    • Thanks, JoeAm. You’ve pointed out something that many in the West take for granted, and that is that when we talk of free markets, we often mean regulated markets, even though it might mean regulation with a light touch or toothless regulation.
      At any rate, it is more of a managed or developmental market that the country needs to be heading in this sector.

  • Manuelbuencamino

    let me see if I get this straight. Marcos straightened out the transpo problem but Cory had to come along and screw things up.  Now let’s fast forward to the present …Noynoy is asleep at the wheel…so what happened between cory and noynoy, three presidents who were wide awake at the wheel but decided they had other things to attend to? 

    By the way, were those love buses of Marcos making money, breaking even or bleeding? What were the policies or aven just policy pronouncements of the three presidents who came after Cory? 

    My point is if we are going to retrace our steps to see how we got here, let’s not hop, skip and jump to our pre-conclusions. Because it might not the be Washington Concensus that is responsible for the mess, maybe it’s the boundary system. Give them a fixed salary and award bonuses based on their driving and on making stops on time and at the designated bus stops.

    • GabbyD

      “By the way, were those love buses of Marcos making money, breaking even or bleeding? ”  –> so whats the answer to this? that would be interesting.

      part of cusp’s argument is that it would be difficult to un privatize bus systems once they are privatized. so, once cory made that choice, it was over. 

      but i agree with you. we can replicate a public transport monopoly by regulating consumer prices, as well as driver income. 

      the deeper problem is this will probably need to be legislated. the productivity of congress leaves much to be desired. 

    • Uhm, I never said that, MB. Perhaps what happened post-Marcos was that the country swung to the opposite end of the spectrum. In between the state/crony capitalism of FM and the unbridled markets on the other side lie many dependable alternatives.

      Cory and Noynoy weren’t in charge during the intervening years. Hence we cannot say they were asleep at the wheel. However, it was under FVR that we took the free market model to extremes and GMA was the successor of that policy direction. Habito was blaming GMA for the consequences of the trade policies he helped to implement under FVR. Tsk, tsk.

      Finally, one cannot separate the external environment from the internal structure of incentives here. The reason why companies have adopted those cut-throat internal compensation policies is because they are faced with an industry where cannibalization of markets has occurred. The solution lies in re-structuring the market, and then healthy personnel policies will re-emerge.

      • GabbyD

        “The reason why companies have adopted those cut-throat internal compensation policies is because they are faced with an industry where cannibalization of markets has occurred.”
        what do you mean? who cannibalized whom?

  • They could have titled it more subtly, “Top ten killer bus companies”sounds like something taken from a tabloid. Even bus companies that have worse records would be offended by labeling them as a killer bus company.

  • GabbyD

    off topic — there is something wrong with this website. not just with the comments, but there’s a redirect from the homepage. it must be a virus

    • Anonymous

      AVAST  has been flagging  propinoy-dot-net  for the past many weeks as “DANGER!!!” — virus.   The  virus (I think a worm)  may disappear for a day or two, then it gets past PropiNoy’s antivirus shields  and  gets activated again.

      • Karl

        I agree Upn, baka me naglagay ng trojan horse or something.ok na naman ngayon.

  • Manuelbuencamino

    You have accidents because it is a rat race for passengers. Drivers have to meet boundaries before they can take home anything. Because the mass transport business, jeepneys and buses, operates like taxis. The franchise holders are actually renting out their vehicles to drivers. 

    So you have to change the game. Change the franshisee-driver relationship. Put those drivers on a fixed salary. Absolutely no bonuses or incentives for higher “sales”. That’s the way to end the rat race. And only the most efficiently run  companies will survive.On decongesting the main arteries, provincial bus companies must not be allowed to have depots within the city. Maybe the circumferential road (EDSA) can be designated as the boundary. No depots within the circumferential road. City buses in the city. Provincial buses outside the city. Just have one giant depot for northbound provincial buses and another for southbound buses.

    • Anonymous

      The boundary system is the practice for metro-Washington DC  system and many other USA areas and it works (as far as safety is concerned).  Taxicab drivers rent a taxicab from the cab-owner/medallion owner for a fixed $$$ per day hoping that fares less “boundary” and gasoline results in a profit. And yes ( I’ve talked to enough)  some cab drivers do end up with $10-dollars net after a ten-hour day.   But don’t try to talk them into reckless driving because you are rushing to get to the airport. 

      USA’s Commercial Drivers Licensing laws are strict.  The taxicab driver (or a bus driver or a truck driver) gets their licenses suspended (either for a week, a month, a year, 6 years, for life) based on a well-defined set of rules.   Speeding is enough don’t have to hit another car or a pedestrian — speeding can result in CDL suspension. Considering that the CDL is the livelihood — you bet the drivers are diligent about safety.

      • Anonymous

        Everyone seems to believe there are too many buses but these guys are businessmen — meaning, they won’t get into the business unless there is money to be made.  Maybe time to raise the cost of doing business, like Malacanang to actively push for former Senator Noynoy Aquino’s idea — that by force of law, 10% of the businesses’ profits should be given to the employees or contract-workers.

        • UPnnGrd that brings out an interesting element in all this, which often happens in laissez-faire regimes, which is similar to a Prisoner’s Dilemma in which everyone pursues a dominant strategy of taking when what they ought to do is cooperate.

          Unfortunately, private firms with limited information about the market will not openly coordinate their efforts. The result is that everyone loses out, because the result of self-interested action leads to mutual destruction.

          This provides the rationale for the state to enter and perform the function of coordination–meaning planning the market which means technically assessing the size of the market and the ideal number of players within it and forcing the industry to consolidate to remain sustainable. 

      • GabbyD

        actually, DC doesnt yet have a medallion system. 

      • Manuelbuencamino

        Up,

        I lived in DC for over a dozen years. Bus drivers in DC are on a payroll. They are on the clock. Onc I took a DC bus. The driver pulled to a stop and walked out of the bus. He said his day was over and sorry but the next shift is late. Have a safe trip. 

        Another thing, bus stops have schedules posted. Buses are supposed to make those stops on time. Fares are not the problem of drivers because they do not pick up passengers outside of designated bus stops.

        One more thing, they do not have conductors in DC buses because it is pay as you enter. Exit is at the back. No need for a barker, no need for a runner to go out and pay “parking” fees to metro aides.

        Taxi drivers are obviously on boundary. You can see that from the way they drive. They also pick-up and drop fares wherever and whenever. There are no taxi stops except in front front of hotels and in airports, train stations etc. where they are supposed to queue. In those places, the man manning the queue makes a lot more money than the cabbies. I knew a guy manning the queue in one of the Hyatts. He was being offered a promotion. He refused. Because he made more money being the king of the cab queue in front of the hotel.

        • MB, I too loved using the DC Metro. It is one of the best in the US, second busiest in fact. But who operates it? The Washington Metropolitan Transit Authority (the government in short) which handles both the metro rail and metrobus. That’s what I mean by the fact that we cannot separate industrial organization from internal personnel policies. One definitely drives the other.

          To simulate this result without creating a government entity to takeover the buslines, the LTFRB should apportion each of the bus routes to single operators who would then have the incentive to upgrade and professionalize their service or risk losing their franchise.

          • Manuelbuencamino

            Doy,

            But you have to get rid of the boundary system. Because even if a bus line enjoyed a monopoly, drivers would still be pressed to meet minimum sales targets.

          • Anonymous

            The economics of within-metro-area bus rides in USA makes boundary system not feasible (to  make money,  a private firm has to price the service above cost or car-ownership).  Same in Paris, London, other countries.

            In Pilipinas (this is my opinion) the cost of operating a private passenger-bus-company is very low because (1) depreciation is not a big factor (one can operate a bus that is 25 years old);  (2) govt regulations do  not raise costs, e.g.  every-3-months safety inspections not required;  (3) cost of failure not a big factor — driver continues to drive/franchise not lost even with killing/maiming by a bus run amuck.  (4)  Cost-of-entry is very low  —(a) to own a franchise — P30,000 (see blogpost)),  (b) to be a bus-driver — very low.

          • Of course. My point is that the boundary system is used to ensure maximum effort by drivers (in transactional cost analytic terms – a way to minimize monitoring costs through variable contracts that shift risk onto the agent) because of the highly competitive nature of the business.
            The industry structure, if it were fixed along the lines I spoke of above would allow greater predictability of income for the bus companies and with that the ability of owners to assume more of the risk through more fixed compensation contracts with their personnel.