One Bus Away: How unbundling bus provision from operation can support bus modernization programs

The World Bank is supporting the Government of Sri Lanka’s efforts to create a roadmap for the modernization of urban bus services in the capital, Colombo. We have discussed ways in how cities with high-quality public bus networks have approached the issue: the public sector is responsible for infrastructure development, network and service planning, and regulating and monitoring of operations, while efficiency-oriented bus companies operate the services according to well-defined contracts.

Looking specifically into the how and who of bus service operations, the models vary, but I usually find two broad categories:

Bundled procurement, operations and maintenance of buses: 

• State-owned bus company: procures, operates and maintains buses. Examples: Barcelona, Jakarta, Medellin, Sri Lanka’s SLTB.
• Private operating company: procures, operates and maintains fleet as per contract requirements (as in Chile, Colombia, Mexico, Nigeria, Tanzania.) 

Unbundled fleet Provision, bus O&M:

Fleet provision contracts for buses have borrowed lessons from the airline and railway sectors. For railways, the rolling stock operating companies (ROSCOs) own and maintain engines and carriages, and lease them to train operating companies. Examples of ROSCO models for urban buses include:

1. Fleet management contracts: Public sector procures and provides private operators the fleet under lease and operating contract. Private operates and maintains fleet according to standards set. Examples include:

• Transport for London – New Routemaster Bus: TfL commissioned the development of the bus and has exclusive buying rights. In 2013, 600 new units were gradually put in service. The buses are owned and leased by TfL to eligible bus operators.
• Bangalore, India: The Bangalore Metropolitan Transport Corporation, BMTC procured 1,500 clean natural gas buses that are leased to private firms operating in the city. The private firms must meet conditions set by BMTC in carriage permits.

2. Unbundled concessions for fleet provision and fleet operation: Public sector awards different private independent concessions for fleet provision and fleet operation. Examples:

• Santiago, Chile: The Santiago Bus fleet comprises nearly 6,500 buses. As of 2018, the city is structuring fleet provision contracts for as much as 2,700 buses for up to 4 fleet providers.
• Bogota, Colombia: In February 2018, Bogota’s BRT system opened the bidding process to select up to 6 different fleet providers with a total investment capacity of USD $161 m. The estimated length of the contracts is 15 years, and around 1,400 buses are to be leased to up to private bus operating concessionaires. 
• Cartagena, Colombia: In 2015, Cartagena began operations of its BRT network, with phase 1 aiming at mobilizing nearly 450,000 daily passengers on up to 658 buses. With support from the IFC, Cartagena has set up 2 private fleet providers, one of them partly financed by IFC, the other partly financed by FDN, a Colombian Development Financier.

For the unbundled cases, private bus operating firms are responsible for maintenance and operation costs, and are remunerated with performance-linked payments (i.e. per operated kilometers, ridership).

Let’s look closer at the opportunities and challenges of the unbundled fleet provision scheme:

Opportunities

• Reallocating risk: In a bundled scheme, bus operators depend on operational revenues to service debt acquired to procure the fleet, and transfer demand and operating risk to financiers.  In an unbundled scheme, the transport authority can reallocate demand an operational risk by ensuring payments are made to the fleet provider independently of the results of the bus operating company.
• Defining independent contract lengths: This allows longer (i.e. 20 year) contracts for capital-intensive fleet provision, while having shorter operating contracts (i.e. 7-8 years) to ensure operators maintain a good performance record for subsequent competitive selections.
• Reallocating fleet among different operators, as needed: A fleet provision contract can allow reshuffling buses across different bus operating companies, in case one of the companies faces difficulties meeting its obligations or is required to downsize its fleet, for example, if a new metro line affects the company’s concession.
• Economies of scale (investment and maintenance): a fleet provision contract can purchase a larger, standardized fleet if compared to smaller individual operators.
• Attracting a wider audience of investors: fleet provision schemes can attract investors not linked to the bus sector, who can commit to larger investments and raise capital from other sources, including Multilaterals, Bilateral or National Development Banks. 

Challenges:

• Risk Allocation and coordination mechanisms: Typically, the fleet provision contract gives the transport authority rights to allocate buses across eligible operators. This requires perfecting contracts and allocating risk between who procures (and owns) the fleet and who operates and provides service to customers.
• Remuneration and incentives for actors with different interests: Fleet providers seek to minimize investment and reduce demand risks, while operators take operational risks and expect high fleet reliability and lower maintenance costs. These imbalances should be reflected in the contract by defining fleet specifications and availability, manufacturer representation, warranties, maintenance and insurance.
• Political economy of private operators: Designing an unbundled fleet provision scheme can change the perception of the attractiveness of the business. Experienced operators with good access to financing might be less interested in a business where they do not own the fleet. On the other side, cities aiming at introducing bus sector modernization programs can leverage on fleet provision schemes to support informal operators with limited access to commercial financing by giving them access to bus fleet as an incentive to transition towards corporatization, unified fare collection and quality-incentive operating contracts.

As you see, unbundled bus provision and operation schemes might be suitable for cities seeking to upgrade their (formal or informal) bus systems, despite the need for a more sophisticated contractual framework. The effort can be worth if there is a need to innovate in attracting private capital to support bus modernization initiatives.

Do you think this option is viable in your city?