ECONOMYNEXT – Sri Lanka’s rulers and bureaucrats are planning to poke their itchy interventionist fingers in to taxis and school vans, twin services that have rapidly evolved in unexpected market-based ways, partly due to price controls, rigid regulations and corruption in the state-regulated road bus system.

Higher living standards and a thirst for personalised travel are reducing demand for buses in many countries, but in Sri Lanka, the regulatory system has widened the quality gap between public and private transport, and is fast putting people off buses.

Sri Lanka’s regulated state and private buses are sweaty, smelly, seats uncomfortable, timing uncertain and expanding urban sprawl means that people have to walk longer to reach a bus stop with the existing rules keeping routes unchanged.

Little wonder that everyone crave for a motorcycle, a three-wheeler or a car.

Expropriation, Price Controls, Corruption

The rot began long ago, when bus companies started by the community were expropriated by the state. A state-run bus service, the Ceylon Transport Board and later the Sri Lanka Transport Board were built with taxpayer money.

It proved to be a vote – buying job factory and a source of procurement corruption for the elected ruling class, and a monster that ate up taxes collected from the people. State buses now eat up Rs1.35 billion a month in subsidies, according to the latest data.

In 1978, small entrepreneurs were brought to the public transport system using a route licensing system. Compared to a larger company that operates a single route, individual bus ownership has several drawbacks.

The bus system served some of the needs of the public, especially during the 1970s, when there were import controls and people had hardly anything to eat let alone buying a personal vehicle, and in the 1980s and 1990s, when rapid currency depreciation and inflation generated by the central bank robbed the living wages of workers and made large sections of the population almost destitute.

With low real incomes, buses were the only alternative transport.

Although the buses were privately owned, the system is licensed, regulated and price-controlled, and there is no free market with real competition to evolve.

In the 1990s, during the rule of President Chandrika Kumaratunga, price controls were so bad that leasing companies refused to give loans for a new bus unless the owner had another one or two paid-up buses to support repayments. As a result, during peak and off-peak, adults and school kids had to hang on to dear life from the foot board, which sometimes scraped the road when the rear wheel went over a pothole.

More investment came in the form of new buses after a cost-based price formula with annual revisions came into being from around 2002.

Meanwhile, school vans started to grow rapidly during this time. The government did some good regulations asking for rear glasses to be able to be slid back, giving air to children.

Taxis and Three-Wheelers

In 1977, when the economy was re-opened and controls were reduced giving freedoms to people, old Morris Minors and Austin Cambridge cars were the only taxis in existence.

Later Aitken Spence started a radio cab service, but it did not last long.

Then, three-wheelers burst into the scene. Diesel van-based taxi companies also started. This was due to a state intervention because diesel was subsidised and vans as commercial vehicles were taxed lower compared to cars. They operated with mobile phones.

Unlike buses, which were regulated with both price controls and route licenses with bureaucrats blocking innovation, three-wheelers and taxis were operating in a free market and could respond to public needs. Three-wheelers started appearing all over and near roads where new housing development were coming up.

Regulated route licenses of buses were not expanded to cater to these needs.

If the regulations were flexible enough to allow small vans to be operated with higher prices on smaller by-roads, it would have been more efficient. But, it was illegal due to regulations. Under the provincial council system, as a devolved subject, different areas could have experimented with new ideas, but clearly there is no knowledge or capacity anywhere to fulfil the needs of the people.

Only deep in rural agricultural areas would land-masters (hand tractors) and similar vehicles be used to serve the public. Of course, due to the route licensing system, these were technically ‘illegal’, but there was nobody to catch them.

But, in urban areas where the National Transport Commission or Provincial Transport Commission or police officers the community could only operate a three wheeler or taxi to solve their transport problem.

In Sri Lanka, rulers who get tax-free cars and their servants who get tax-slashed cars have pushed car taxes to prohibitive levels for ordinary citizens, and the community had only few options to fulfil their needs.

Now, the cabinet of ministers had passed a proposal from Nimal Siripala de Silva to try to push citizens to use ‘safe’ car taxis’ instead of ‘unsafe’ three-wheelers. No mention is made that it was prohibitively high taxes on cars that created this current situation in the first place.

Both motorcycle and three-wheeler ownership rapidly expanded. In East Asia, where motorbike cultures took off early, two-wheeler taxis also emerged. But, in Sri Lanka, three-wheelers were the most popular solution.

Three-wheelers evolved in market-based ways. With new three-wheelers coming to the market every year, competition kept prices down. Eventually, in each area, the parking places were limited and it was hogged by a group of people who formed an association and kept out new entrants.

Call Centre Evolution

The market solved this entry barrier and obstacle to free competition with call centre-based taxi services. Call centre-based Budget Taxi and Fair Taxi type operations began, finding a way to beat the cartelization. A call centre-based three-wheelers could be anywhere. The call centres charge a monthly fee from independent taxi owners.

Unlike three-wheelers based in a single location who had to wait their turn and return empty, call centre-based taxis could operate with a passenger on both journeys, improving productivity and keeping costs down. Small car-based taxi services followed.

Now, mobile app-based PickMe-type services have evolved. Many out-of-town three-wheeler drivers now roam Colombo streets with the app, free from the need to have a parking place. If the sector was regulated like buses and there were price controls, none of these things would have happened.

Uber has also come into the country. Uber operates by taking a share of the revenue and having peak and off-peak prices.

Metered Taxis

The advent of metered taxis, provided another boost to the sector, as it reduced the likelihood of arbitrary pricing and did away with the need for haggling. Metered taxis have different rates. Location-based three-wheelers generally have higher fares than call centre-based ones.

Three-wheelers were a boon to females, because they no longer had to put up with perverts in crowded public buses. Girls and ladies also patronised three-wheelers in the neighbourhood and kept a record of the telepone numbers of regular drivers.

A familiar driver was a useful mode of transport even in the night. Some three-wheeler drivers even bought and delivered gas cylinders and medicines to their customers, while others dropped kids at school, especially when the journey is not long.

In East Asian countries, where motorcycles are cheap, it’s easy for a girl to buy a scooter. But, in Sri Lanka, the elected ruling class has imposed high taxes, making them 50-100% more expensive than, for example, countries like Vietnam.

The burdens imposed on people by the control-oriented elected ruling class and a corrupt bureaucracy have helped the growth of three-wheelers, as members of the community, squeezed by interventionists and regulations, looked for ways to solve their day-to-day problems.

One of the most interesting aspects of metered and call centre taxis is that fares have remained static at around Rs32-40 (per km) for many years, compared to annual rising bus fares, where capital stock is under-utilised.

Interventionists who have no idea about how markets work have called for price regulation when three-wheelers hike prices when fuel prices go up. This is despite the elected ruling class slamming more taxes on new three-wheelers and the rupee being busted by the Central Bank.

Meanwhile, regulated prices of buses, supposedly by a formula, has kept going up. This is the difference between ‘regulated’ so-called cost-based prices and free market ones.

In a free market, there is no such thing as a cost base. Like cost-push inflation, it’s a myth. Innovation and productivity coming from a competitive system can bring down costs.

Anyone who cannot adapt or are not allowed to adapt by state regulation will lose market share and eventually be put out of business. That is what is happening to buses.

School Vans

It is in this context that school vans also evolved. According to state estimates, there are 30,000 such vehicles. School vans have various pricing. In popular routes, prices are competitive.

On others, where vehicles go meandering through urban sprawl, prices are higher. Higher prices and higher profits can however can bring additional competition.

School vans also charge during holidays, just like private and state schools. People continue to pay taxes during holidays to pay the salaries of state school teachers. There is no reduction in VAT during holidays either. It’s the same with private schools.

Some charge a lower fee on holiday months. This practice has to widen. As there is no fuel cost, certainly a lower fee is justified. But, the school van owner still has to pay the lease and the driver.

JVP Leader Anura Dissanayake has called in parliament to impose price controls especially on holiday months. This will simply lead to higher prices on ordinary months. Any such move will prevent competition and new school vans coming in.

It is in this context that the danger posed to students and parents from the proposed new regulations on ‘quality standards’ of three-wheelers and school vans have to be viewed.

New regulations, especially if price controls are brought in, can drive away operators who will simply sell the vans or run a taxi service. It will force parents to seek other means to send their children to school. The sorry fate of public buses can befall three-wheelers and school vans as well.

Buses

Bus use is in decline in many countries. As East Asia developed and motorcycle use went up, people no longer had to depend on buses. A side effect was congestion. This is usually solved by mass rapid transit system (MRT) systems, at least in urban areas. In more out of the way areas, taxis and private vehicles take over.

In Sri Lanka, it’s clear that buses have been hit by bad regulation, in addition to the economic forces that operate in many countries.

Here, the National Transport Commission issues long distance inter-provincial route licenses and provincial authorities within them. The process of issuing licenses is opaque and mired in allegations of corruption.

As passengers declined, existing bus owners lobbied to stop new licenses being issued, to protect their market share. This is what happens where there is regulation. This is similar to three-wheelers in the junction stopping new ones from coming to the road.

There has been strong demand for buses on the new expressway to the South. Gemunu Wijeratne, who heads a bus owners union, has called for route licenses to be auctioned.

The pro-state Rajapaksa regime said initially that no citizen-owned bus will be allowed to ply on the expressway. The Rajapaksa regime started an international quality state bus service with Chinese buses imported for the Commonwealth Heads of State summit.

With ticket prices of Rs500 or more, large profits can be made. The company was part of the Road Development Authority. However, private buses then appeared. It is not clear how these licenses were issued.

Up to now, licenses seem to have been given through the back door. A ‘temporary’ route license fee of Rs2,500 a day is believed to paid to the government, according to sources. According to sources, a large bus on the expressway makes a pure profit of Rs40,000 every day. A bus may cost up to Rs13 million.

This year, an auction was called in July for 140 licenses with a base route license fee from around Rs1.2 million with two daily runs to various destinations. The auction had now apparently been cancelled.

The markets are beautiful and the community has found a way around this regulation.

‘Office buses’ from Elpitiya, Galle and Matara to Battaramulla, Borella and Kollupitiya have suddenly mushroomed. An estimated 300 or more such buses are now said to be plying the expressway. There are either air conditioned and standard office buses.

This is how the market evolves to serve the public despite regulations and controls through which rulers try to make life difficult for ordinary people in an interventionist, statist nation.

Stifled

The regulated bus service seems to be in decline, except on expressways, where there may be more demand. In expressways and elsewhere, there is no room for innovation or productivity improvement with daily runs being limited. In 2003, the Central Bank’s annual report said a government bus ran 200 kilometres a day while a private bus ran only 132 kilometres a day.

The load factor of a state bus was 105 percent. It was 150 percent in a private bus. As was shown through the auctioned route licenses for the Galle expressway, a bus is not allowed to run more than twice a day, even though the journey is only an hour.

As a result, a bus bought with a capital of Rs13-15 million is unnecessarily idling. Only buses on very long routes like from Colombo to Kataragama or Jaffna can be efficiently used in such a scenario. Buses running with two crews is unheard of in Sri Lanka.

This is one of the problems with giving restricted licenses to individuals. A bus company can operate as many times as it likes on a single route if there are no government restrictions on the runs.

In many city routes, passenger numbers are declining. The unofficial ‘secondary market price’ of route licenses is also falling on some routes.

On Galle Road, the route license of a large bus on the Moratuwa-Ratmalana-Colombo route is now said to be around Rs500,000. The price is estimated to have halved from around 4 years ago. The Colombo-Maharagama-Homagama 138 route is still said to be worth around Rs1.3 million.

According to Central Bank data, registered private buses rose to a peak of 20,421 in 2014, of which 19,534 were operated. In 2015, it dropped to 18,397, and 16,942 were operated. In 2016, there was an increase to 19,614, and 17,131 were operated.

In 2016, intra-province route licenses had dropped from 16,503 to 16,332, while long distance ones had grown from 3,114 to 3,212.

Private buses are idling in the off-peak partly because of regulations limiting their use (either because the state imposed them or cartelised owners wanted them), and regulations do not permit peak and off-peak pricing.

No bus owner is was allowed to charge higher prices in the night, owing to government regulation. The only change occurred when Transport Minister Srimani Athulathmudali allowed air-conditioned buses at double the price.

If higher night tariffs were allowed, buses could have been operated in the night and a more active night economy could have developed. In the night, three-wheelers have filled the gap when buses stop plying after 6.30pm or 7pm on most routes.

  Some supermarkets are now open late due to higher levels of car and motorcycle ownership, which bring in customers. Land prices have gone up off the main roads and bus routes because of higher car and motorcycle ownership.

Bus Companies

There have been top-down attempts to re-create private bus companies in the style of more technically competent ones that were lost to expropriation as the native rulers started violating property rights of the people after getting hold of a law-making machinery built by the British.

  At the moment, there is little room for consolidation to occur through market-based ways. Although route license are changing hands, there is no clear cut transparent procedure for secondary market trades.

D S Gunasekera Transport, based in Anuradhapura has developed into a large long-distance operator.

Others are mostly individuals with the larger ones having about half a dozen buses. For companies to emerge, there should not be any ‘picking winners’ by corrupt bureaucrats.

If trading route licenses are made legal and if an informal OTC exchange is set up, allowing sellers to auction their licenses and making prices transparent, more competent bus operators may start to collect route licenses, setting off a process of consolidation.

With passenger numbers falling, it may now be cheaper to acquire route licenses. The market is infinitely innovative. Sans bureaucratic controls, some solution that is unimaginable at present – like what happened with Uber or three-wheelers – can happen.

Other solutions could be simple. For example, two existing licenses could be used to operate one bus, increasing runs – provided there is no regulation to prohibit it. If a company owns an entire route, they can operate it with fewer buses, doing more runs and employing less capital.

Meanwhile, private bus owners are also proposing to set up a company operating electric buses using smart payment cards. Each route licensee will be a shareholder, and run the bus and get money based on kilometres operated and not passengers carried.

The idea is to spread the peak hour revenues to off-peak. They are also proposing night services at the same price.

While it’s a good idea, the only problem is that there is no incentive for passengers to use the system in the off-peak to get the advantage of off-peak low prices. At the moment, less crowded buses is the only incentive.

Hands Off

Whatever the solutions that can be found to de-regulate bus transport and allow market forces to work, it is essential that the sticky fingers of an interfering state be kept off three-wheelers and school vans.

If price controls are brought, competition and innovation can disappear, and parents will get into further difficulties. The entire sector can be killed off as well.

Taxi pricing is working perfectly and has worked well for many years without any regulation. While the killer regulation will be prices, there can be other problems with any state regulation imposed to satisfy control-oriented politicians.

A key danger of regulation is that, like it has happened in private buses, some kind of licensing system will impose costs, and existing players will quickly engage in regulatory capture and try to place barriers to entry. A cursory chat with any older three-wheeler driver will show that this is their intention. They want younger drivers buying three-wheelers to be stopped.

Any type of bureaucratic ‘quality standard’ standard can also stifle the sector and put burdens on members of the community.

The ‘quality’ of a three-wheeler that makes it attractive for users is not just a comfortable seat so many centimetres across, but the ability to go from doorstep to doorstep without walking, rapid response to a call, and being able to use it personally or at night.

There was also a suggestion to create a separate authority to regulated school vans and three-wheelers. This new bureaucracy will cost money, and fees will have to be collected to support it, further burdening the public.

What is needed is not regulating three-wheelers and school vans (or office buses for that matter), but de-regulating the bus system after careful study to allow consolidation or other innovations to take place.

In Malaysia, Singapore and elsewhere, multiple operators run virtually the same route but offer different comfort levels. There are standard A/C, VIP travel with food and drink service, and so on at different price points.

The new expressways are a good place to start de-regulation. Like telecom did in the last two decades, a better transport system can expand economic growth and boost overall efficiency of the economy.

Comments and queries to BellwetherECN@gmail.com

This column is based on ‘The Price Signal by Bellwether‘ published in the September 2017 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.