Chit Estella-Simbulan

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.