November/DECEMBER 2011

KPMG International

Transport Perspectives

This edition contains two articles: In the first article, Daniel Lawrence examines the potential for expansion by overseas operators into three of the worlds rapidly growing emerging markets - China, India, and Brazil. In the second, Tim Ayling looks at recent technological developments in transport ticketing and examines the impact these have had on security, fraud, and efficiency.

Contents

Emerging Growth Opportunities

Page 2
Playing on a Sticky Ticket

Page 9

TRANSPORT PERSPECTIVES / Transport Perspectives / November/December 2011

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Emerging Growth Opportunities

Daniel Lawrence, Global Executive Transport and Logistics

Introduction
Many transport operators will find that the opportunities of the future do not lie in their current markets. Instead, the key sources of future growth may well be found in the worlds rapidly growing emerging markets.
The demographics of these emerging markets are the key factors driving opportunities for transport operators. China, India and Brazil are especially interesting due to their size and speed of growth (see table 1). We have found opportunities for foreign operators in all of these countries. However, in all the sectors we discuss- passenger rail, domestic aviation and urban transitthere are also potential barriers to entry.

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Demographic Trends The three key demographic trends which drive opportunities in the transport sector are:  High growth. As can be seen in Table 1, all three markets are fast growing. In China and India especially, this is driven by a expanding, highly educated, middle class.  Urbanisation. Urbanisation will have a profound effect on the demand for transport from citizens. Brazil is already highly urbanised. Since 1978, Chinese urbanisation has more than doubled, and is forecast to reach 73% by 20502. Indian urbanisation is expected to increase to 55% by 2050. This will lead to increased demand for urban transport systems. The number of light rail systems under construction in these countries is testament to this. The other major implication is that this will enable development of transport hubs. For example, a high speed rail network, in order to be financially viable, has to connect to a limited amount of locations.  Where these limited locations capture a larger proportion of the population then the case for this will grow.  Wealth Distribution (as measured by the Gini coefficient), in India and China at least, is on a par with major developed countries, such as the USA and UK. The burgeoning transport sector is no longer for a privileged few.

The one key non-demographic impact comes from major sporting events, such as the 2014 World Cup and the 2016 Olympic Games, which have given an impetus to Brazil to invest in its transport infrastructure.
Table 1: Key Indicators1 Country GDP ($bn USD 2010) GDP Rank GDP Growth (average annual) 2007-2010 9.7% 7 .9% 4.0% 0.5% (1.2%) 0.1% Gini inequality coefficient (20002010). 0= highly equal 41.5 36.8 55.0 43.7 36.0 40.8 Urban Population 2009 (% of total) Population 2010 (m)

China India Brazil Comparators Russia UK USA

5,878 1,729 2,088 1,480 2,246 14,582

2nd 9th 7th 11th 6th 1st

44.0% 29.8% 86.0% 72.8% 90.0% 82.0%

1,338.3 1,170.9 194.9 141.8 62.2 309.7

1 2

All data from World Bank, except Gini Coefficient (UN HDR 2010) United Nations http://esa.un.org/unup/p2k0data.asp

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China China is arguably the worlds largest potential market. In 2010, Beijings airport overtook Heathrow to become the worlds second busiest after Atlanta. In April 2011, the IMF announced that the Chinese economy would be larger than that of the USA in Purchasing Power Parity terms by 20163. And in June 2011, one of the worlds fastest scheduled passenger train services was launched between Beijing and Shanghai, with an average speed of 300 kph. However a series of issues were experienced by High Speed Rail including a major collision in Wenzhou in July 2011. In China, most sectors are not liberalised. The domestic aviation sector was opened to private investors in 2005, and a number of private operators set up operations. However, by 2009, most of these airlines had either closed down, merged, or were acquired by the big three state owned operators. This is often attributed to the support (tacit or otherwise) that the Government gives to the state carriers. For example, private airlines have very limited access to the Shanghai to Beijing route, the most lucrative in China. Foreign ownership of domestic airlines is permitted, although it is limited to 35% of equity. In addition, the foreign shareholder cannot be the largest shareholder. Finding a strong, reliable Chinese partner is the challenge for foreign operators. Should this be found, the Chinese domestic market represents a potentially significant opportunity, one that is relatively untapped by non-Chinese companies. In China, Heavy Rail remains closed to competition. The crash in Wenzhou has led to increased criticism of the current arrangements, though it is unlikely that any privatisation will occur soon. The main opportunity in the country is for supervisory and guidance work, as evidenced by Deutsche Bahns advisory role on the construction of High Speed Rail, where China plans significant investments.
3 4 5

Similarly in the Metro sector, operations are controlled by the state (municipal authorities). Some of these metros will have private sector operations, for example Shenzens Longhua line will be operated by Hong Kongs MTR. Municipal authorities still control most of the urban bus operations. In rare cases, there have been entry routes for foreign operators. Comfort DelGro has operated in China since 2005, and operates over 1,200 buses in Shenyang. Other foreign operators have found joint ventures to be a potential route to market. It is important to note that as part of its WTO membership, China has committed to gradually lift foreign investment restrictions increasing the prospects of a more competitive market in the future. India As the worlds second most populous country, India is often considered in the same breath as China by companies looking to target developing markets. Indias aviation sector was initially opened to the Indian private sector in the mid-1990s, however, only one company from the original private entrants, Jet, still exists. Further liberalisation encouraged other airlines such as Kingfisher, and Low Cost carriers including Deccan Airlines, IndiGo and SpiceJet, to enter. The domestic aviation sector is now more than 80% privately operated4, a stark contrast to that of China. Despite this success, the domestic aviation sector remains off-limits to foreign airlines. (However foreign nonairline companies are, legally, allowed to invest up to 49%5 of an Indian domestic airline and private equity firms have considered investing). The ministry of Civil Aviation have been considering relaxing these restrictions. If this happens, then joint venture companies including foreign airlines may be allowed to operate in India, possibly using existing brands. This would be of particular interest to airline groups with significant access to cash. Domestic

IMF , World Economic Outlook Database April 2011 Indian Directorate General of Civil Aviation http://dgca.nic.in/reports/MARKET.pdf Department of Industrial Policy and Promotion http://dipp.nic.in/English/Policies/FDI_Circular_012011_31March2011.pdf 

6 | Transport Perspectives / November/December 2011

airlines, often heavily debt-laden, would welcome this investment. Bus operations in India are generally run by different state or local Governments without major private national brands. Despite this, the sector is still of significant size- the Andhra Pradesh State Road Transport Company has one of the worlds largest bus fleets. The bus sector in India is, legally, open to 100% Foreign Direct Investment (FDI). However, perhaps due in part to poor road infrastructure across India, there has been little foreign investment in this sector to date. In terms of passenger kilometres6, Indias rail market is the worlds largest. However, the Indian Rail sector remains controlled by the state-owned monopoly Indian Railways. A small number of Public Private Partnerships (PPPs) have been put in place, usually between Indian Railways and others, e.g. the Surendranagar and Pipavav port rail line. Governments in India have floated the idea of further PPPs, though historically only Indian companies have been involved. India is planning high speed rail links, and is using international consultants to advise it on this. In light rail, the Ministry of Urban Development is keen to promote PPPs. One of these which has recently commenced operations is the Delhi Metro Airport Express Line. This was a PPP arrangement, and the line is operated by Reliance Infrastructure, an Indian-based company. The same company is also constructing the Mumbai Metro under a Build-OperateTransfer agreement, in a consortium with Veolia, a France-based transport service company. As India continues to urbanise, metro or light rail schemes are being constructed
 orld Bank, 2009, http://data.worldbank.org/indicator/IS.RRS.PASG.KM?order=wbapi_data_ W value_2009+wbapi_data_value+wbapi_data_value-last&sort=asc 7 CAPA, http://www.centreforaviation.com/news/2011/07/25/more-rapid-growth-for-brazils domesticaviation-market/page1
6 8 9

or planned in many cities. Some of these are state funded, others based on PPP arrangements. FDI of up to 100% is permitted in Indian Mass Rapid Transit. Some of these schemes are welcoming foreign investment, such as the tender for the Chennai metro. Brazil Brazil is the smallest of these three emerging economies in GDP terms, but is a significant economic power. Brazils domestic air sector is the fourth7 largest in the world and it was the fastest growing domestic air sector in the world as of June 20118. All airlines are privately owned. The sector is free from the presence of major state monopolies, and as such is more similar to the domestic airline sector in India than the sector in China. There is strong regulation, but there have been some changes to reduce the intensity of regulation in the last decade. FDI is restricted in Brazil to 20% of domestic airlines9. However, as can be seen through the ongoing merger of LAN and TAM, the competition authorities in Brazil are open to innovative ways of merging. The deal is structured in a way that meets the 20% FDI regulation10 while allowing LAN to have 70% control of the combined entity11. It remains to be seen whether this arrangement is easily replicable for other foreign airlines wishing to merge with or acquire Brazilian airlines. Additionally, the board of directors of the airline must be formed by Brazilian citizens. Considering the size of the country, Brazils rail network is limited. The rail network was privatised in the 1990s, with concessions given to various freight operators, some of whom offer very limited passenger services. The length of the concessions is 30 years, and so there may be

 ATA, http://www.iata.org/whatwedo/Documents/economics/MIS_Note_June11.pdf I US State Department http://www.state.gov/e/eeb/rls/othr/ics/2009/117415.htm  LATAM http://www.latamairlines.com/downloads/English/Home/LAN-TAM_presentation.pdf  11 LAN http://www.lan.com/en_un/about_us/info_inversionistas/pressrelease/20110119_acuerdo_  vinculante.html
10

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opportunity for foreign investors when these concessions are re-bid in the 2020s. There is no restriction in Brazil for a foreign company owning a domestic rail operation. In metro, some systems are run by private sector operators, others by public sector operators. This is at the discretion of the state or city responsible. Foreign operators have had success, for example French operator RATP is part of a consortium that operates So Paolo metro. One major opportunity in rail is that of Brazils High Speed Rail (HSR) proposals. Foreign Consortia were invited to bid for the first of the HSR lines to be put up for tender, between Rio and So Paolo. This was to be a Build, Operate and Maintain concession with the Government having a 1/3 interest in the company. Unfortunately, no bids were received. The Government plans to split the consortium into one for construction and another for operation and maintenance. This could offer a much more attractive opportunity for foreign operators. Brazils bus sector is highly fragmented, with an estimated 2,000 companies operating in urban areas alone12. There

are no restrictions on foreign ownership of bus companies, yet foreign companies have been slow to attempt market entry here. Conclusion Aviation, particularly in Brazil and China, represents an attractive prospect for foreign investors under current regulations. Brazil, though the smallest market of the three, combines Chinas openness to foreign operators and Indias absence of state carriers, to offer the most attractive market for overseas investors. While Indias market is closed, to airlines at least, should the existing Indian carriers successfully lobby for investment by foreign airlines in aviation, they would be keen to find foreign partners. Should this happen, India will be the most attractive market of the three. The heavy rail sector is essentially closed in China and India. Given the power of the state monopolies, there is little opportunity for foreign operators beyond an advisory capacity. Again, Brazil, through HSR, may offer the biggest opportunity. In bus, operations are either state owned or highly fragmented, yet foreign

operators have had success, such as Comfort Del Gro in China. In all three markets, it is metro/light rail that offers the best immediate opportunity for foreign transport companies, who need to move quickly to secure the best local partners and bid for concessions. While the market potential of these three countries is considerable, they are still perhaps too closed for foreign investment. These markets need to open up to foreign investment and foreign knowledge in order to become the leading transport markets which they have the potential to be. Table 2 summarises the findings of this article.

Table 2: Summary Country China Domestic Aviation 35% Ownership Permitted. State dominated sector makes competition difficult. Foreign Ownership by airlines not permitted, but under consideration. Competitive and privatised sector. Privatised sector. Foreign companies can enter under restrictions. Heavy Rail Currently closed to foreign investment though ambitious plans for HSR. State Monopoly. Light Rail/Metro Rapidly developing. Opportunity for concessions in some regions. Rapidly Developing. PPP arrangements offer opportunity. Bus Foreign Operators have entered in rare cases.

India

Investment permitted but poor infrastructure presents risks.

Brazil

Future ambitious HSR plans open to foreign consortia.

PPP arrangements offer opportunity.

Fragmented sector but foreign ownership is permitted

12

 hredbo 6 Conference, http://www.thredbo-conference-series.org/downloads/thredbo6_papers/ T thredbo6-theme4-Aragao-Brasileiro.pdf

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Playing on a Sticky Ticket

Tim Ayling, Associate Director, Information Protection and Business Resilience

The notion of requiring a ticket for transportation systems has been a given for decades. However, as technology has advanced, the tickets themselves have changed. E-tickets, including smartcards, offer significant advantages for transport operators, and passengers. However, with technology comes risk, and operators must be aware of the need for stringent security controls to reduce fraud, and protect passengers.
Recent demographic changes have changed customer priorities. Priorities such as a lower environmental impact and an efficient use of time and resources are becoming prevalent. Ticketing has become central to meeting these priorities, and recently we have seen operators respond successfully to these demands through smartcard tickets, internet retail, and the use of mobile phones for checking in to flights. During the days of paper tickets, tickets would be issued based on factors such as the travellers identity, age, individual concession (e.g. student) and means of payment. The business model has not changed consumers still pay money for a ticket, which is used to prove the right to travel but the means of ticketing has. What is Your Priority? Security experts often fail to understand that the core drivers for electronically readable tickets are not securityfocused. The integrity and authenticity are a nice addition, but not the main reasons for expensive roll-outs. However, when technology is used, especially where physical security is so important, the information security of the new ticketing solutions must be at least as secure as the methods it is replacing. While solutions need to be fast and cost-effective, they must provide protection of the data that is stored and transmitted. Security breaches can cause irreversible brand damage, and one major breach can break the travellers, trust with the operator. The emphasis should not be on one solution to provide security, but a layered approach of many. Done well, the scenario of having a wide selection of cards being shown to a gate to authorise travel becomes realistic. These may not necessarily be tickets from the transport industry, but could just as easily be bank cards or mobile phones. Touch & pay products such as Mastercard PayPass cards have much in common with transport tickets they have a proximity interface, they are single factor, are fast and are used for low value purchases. This could well be the future. Mobile boarding passes- changing the security threat While it is natural to think of the land transport system when we think of this technology, it is increasingly important to airlines. In January 2011, analysts1 forecasted that the number of mobile boarding passes delivered directly to customers handheld devices will grow from 280 million in 2011 to 480 million by 2013. This innovative approach streamlines the customer experience while heightening the ability to detect fraudulent boarding passes. Each mobile boarding pass is displayed as an encrypted two-dimensional bar code along with passenger and flight information. Security officers then validate the authenticity of the boarding pass at the checkpoint.

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So how does this affect security? There appears to be a perception of mobile phones that they are insecure. However, the mobile phone is actually no less secure than a paper boarding pass, and is probably more secure as consumers are used to guarding their valuables. The barcode itself is a more robust means of identification than magnetic stripes because it is very difficult to fake. If a barcode is sent to someone not on the flight, there are at least two backup identity checks. Firstly, the name is encoded in the barcode, and the passport will not match. Secondly, there is a check against the passenger list. This ensures there is a real-time and comprehensive evaluation of passenger identification. Therefore, a move to mobile boarding passes offers an improvement on two of the top priorities for passengers and operators - security and efficiency. Despite these benefits, the traveller will always be concerned about the security of a technological solution to an old problem. Dependency on technology brings with it risks that are now headline news. There are numerous examples of a failure of a network infrastructure having brought checking-in procedures to a standstill, there are many instances of malicious attacks on core systems, and the threat of identity theft remains real. Transport operators need to ensure they are aware of the potential issues, and constantly review and monitor the protection they have. As an example, despite years of security experts reminding consumers to not click links they do not trust, users continue to do so. This can easily translate to barcodes. While barcodes are not as familiar to end users today, their use is on the rise. They may never become a mainstay of malware distribution, but it is reasonable to expect malware distributors at a

minimum to experiment with barcodes, especially while consumers are still learning about them. Transport operators must protect against this. How can an airline protect against a barcode directing travelers to a malicious website in their name? Lessons can be learned from phishing scams that have occurred over the years. Fraud and Ticketless Travel An enduring problem of transport systems has been those who seek to travel without paying. This is not a technology issue, but a societal one. It should not be a surprise to anyone that with the introduction of technology, there are people who seek to profit from security holes. Ticketless travel is the main issue, especially in bus and rail. The goals have not changed, just the means to do so. However, there is not much attraction to a fraud when the gain is small compared to the effort of doing so. In addition, the experiences gained from monitoring the old paper ticket systems are still applicable in the paperless ticketing world. Therefore, it is unlikely the move to new ticketing will increase the propensity to commit fraud. In some cases it may reduce fraud, as there are technical controls to prevent large-scale fraud. Tickets now present an identity that can be monitored and blocked by back office systems far easier than before. Back office systems can monitor and reconcile payments for travel with actual travel usage and block suspicious cards. Of course, revenue protection officers still exist, and they can verify tickets just as easily with e-tickets as paper tickets. E-tickets provide additional functionality however, such as their ability to check travel history. Whats Next? There are public details concerning Transport for Londons plans to introduce contactless bank cards ticketing. They

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would work instead of or alongside the Oyster card. These contactless transactions are cheaper to process than one with a PIN, and as the bank card can buy a consumers travel, newspaper and lunch, many individuals will only carry one card reducing the risk of theft and fraud. The use of contactless cards in retail outlets that have introduced the system has been limited, with some suggesting security concerns are holding consumers back from taking it up. However, Transport for London expects the new cards to be cheaper and easier easier to manage than the Oyster system. According to Transport of Londons own statistics, for every 1 collected from Oyster card ticket sales, 14 pence is spent on the system. A contactless card system would not require Transport of London to issue cards or involve card readers having to hold and transfer fares information. The

success of the system may still come down to the publics perception of its security. Conclusion No system is risk-free, and these measures are no different. However, they do move the fraud patterns towards higher-value services, and increase the skill level needed for attacks. Security is a layered approach and a system is only as strong as its weakest link. As soon as an operator feels comfortable with its risk level, troubles will occur. Travellers care about security, but they also care about stress-free travel. If either of these is weakened, a real impact on revenues can be expected as passengers stay away. That means security must be almost invisible at the technical level, leaving passengers to only care about battery chargers and wireless signals.

Contact us

Dr Ashley Steel Global Chair - Transport and Logistics T: +44 (0)20 7311 6633 M: +44 (0)7802 806404 E: ashley.steel@kpmg.co.uk Daniel Lawrence Global Executive - Transport and Logistics T: +44 (0)20 7694 8348 M: +44 (0)7785 396959 E: daniel.lawrence@kpmg.co.uk Tim Ayling Associate Director - Information Protection and Business Resilience T: +44 (0)20 7694 4071 M: +44 (0)7786 100402 E: tim.ayling@kpmg.co.uk

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