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ABSTRACT
Indias urban transport sector has realized the significance of engagement of private players in operating city bus
services. Urban Local Bodies (ULBs) confront perennial problems such as productive inefficiencies, capacity shortages,
financial constrains and so on and hence the private participation in the operation of city bus services in the form of Gross
Cost Contract (GCC) or Net Cost Contract (NCC) becomes inevitable.
Unlike privatization, where the ownership of assets is permanently transferred to private players, the GCC and
NCC routes are considered as better alternatives because the ownership rights remain jointly with government and private
player and operation are regulated substantially by the government. ULBs preferred NCC as it relieved ULBs from making
any payments to the bus operators. However, the sustainability of NCCs started to be questioned when the profitability of
the bus services was not achievable and frequent route changes and service quality went for a toss. This brought in GCC,
wherein the ULBs paid the bus operator on per kilometer basis and hence ULBs assuming the revenue risk.
This paper analyzes the challenges associated with City bus operations and the instrumentality of GCC and NCC
in overcoming city bus operation challenges. It highlights some shortfalls of GCC and NCC and recommends measures
that could make them more marketable.
KEYWORDS: Gross Cost Contract, Net Cost Contract, Bus Services, Urban Local Bodies
INTRODUCTION
Cities are very crucial for economic growth and development of a nation. They are considered as the engines of
economic growth. Modern economies are mainly made of contribution from secondary and tertiary sectors. Hence, to keep
this engine throbbing, it becomes very essential that its arteries and veins (urban transport) function seamlessly. Since the
migration from rural to urban settlements is catching up, Indian urban authorities are faced with double edged sword
challenges. On one hand, there is an existing deficit in urban services - both housing and urban transport in terms of quality
and quantity; and on the other hand there is northward pressure of augmentation and up gradation of facilities to withstand
growing demand from migrating population.The importance of urban transport can be highlighted from the excerpts of the
March 2011 report of High Powered Expert Committee commissioned by MOUD, GOI, wherein it is estimated that out
of total capital outlays of Rs. 39 crore on Indian urban infrastructure and services more than half is to be dedicated for
urban transport. In the same line, the Mckinsey Global Institute (MGI) estimated capital outlays of Rs. 26 lac crore for
urban transport by 2030 from the estimated total capital outlays of Rs. 53 crore meant for urban infrastructure (McKinsey
Global Institute, 2010).
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Indian cities are growing in leaps and bound whereas the urban public transport is in a piteous state of affairs in
most of the cities. Current urban transport infrastructure is not in a position to cater to the existing demand forget alone the
future demand. The major reason for this hapless state is that urban transport has been neglected since long. There are
many reasons for apathy of urban infrastructure, lack of resources, poor urban planning, poor systems and institutions and
others. The urban transport is managed by the state transport authorities, which in turn is overloaded with providing
transport facilities in both rural and urban area. Intra city transport has also been neglected as this service does not fall in
the list of mandatory services to be provided by the municipal corporations/ municipalities in India.
All categories of road users face problems in commuting. Common problems faced are long waiting periods,
uncertainty in travel time, difficult conditions of travel, lack of safe conflict-free and obstruction-free walking paths.
Adding to it, slow moving traffic causing congestions at traffic signals and road junctions create restlessness leading to
road rage, rash driving and accidents (NUTP, 2006) and (Working Group on Urban Transport 12th Five Year Plan, 2011).
The business-as-usual (BAU) scenario gives some alarming statistics for the urban transport sector. The BAU scenario
projected from 2007 to 2030 would lead to (a) increase in per capita trip rate for all modes from 0.8-1.5 to 1-2, (b) share of
public transit will move southward from 5-46% to 2-26%, and (c) expected average journey speeds on major corridors in
future will fall from 26-17 kmph to 8-6 kmph (MOUD, 2007). Such precarious situation has been because the public
transport, which ideally should have played very instrumental role in moving people in cities, was not existing in many
cities or was in very bad shape (both financially and operationally). In light of this situation, the National Urban Transport
Policy was framed in 2006 with an emphasis on making cities most livable in the world and enables them to become the
engines of economic growth.
In the aftermath of economic liberalization, the government in India has encouraged a policy to promote private
participation in provision of infrastructure. As a consequence of this policy private sector participation has also been
promoted in ameliorating quality of urban infrastructure as well. The benefits of an efficient urban transport are obvious. It
alleviates commodious movement of people at cheaper cost and makes cities less congested and less polluted. Hence it has
a lot of welfare benefits for its dwellers.
In the last five decades (1950-2000) of the twentieth century one has encountered the journey of private players in
city bus services (CBS) in a cyclical fashion (Laghu & Gaurav kumar, 2011). However, from the beginning of the 21st
century Public Private Partnerships (PPPs) came into picture in Indian CBS. PPPs in city bus services take shape either in
Gross Cost Contract (GCC) or Net Cost Contract (NCC) and India has the presence of both the PPP models. The attempts
to rope in private players were being done since decades but have not reaped any substantial results. In the second half of
the twentieth century, it has been visible that post nationalization policy, the government allowed private participation
out of compulsion as the government was running out of funds to cater to increasing passenger demand through fleet
acquisition. Hence, the private participation found its way in providing bus services through franchising models (especially
the Net Cost Contract) wherein the revenue risk and cost risks were to be borne by the private players (Laghu & Gaurav
kumar, 2011). All the attempts made in the induction of private sectors, be it the NCC or GCC variants, could not sustain.
The present paper attempts to study how GCC and NCC have found its way in the city bus services and how they
address various challenges faced by city bus services.
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services in Bogota (Colombia) and train and tram services in Melbourne (Australia).
Private operation of public transport services was initially proposed to deal with the limitations of government
management and planning, including inefficiency, lack of accountability and the possibility of capture by vested interests.
In the case of Melbournes trams and trains, however, the cure may have proven worse than the disease (Mees, 2007).
Hence, due care is to be taken before one opts for PPP.
Gross Cost Contract in City Bus Services
The PPP contractual structure wherein the city bus operations and maintenance is carried out by the private player
(bus operator) and the payments are made per bus kilometers, per bus, per service hour or combination of any two or all. In
such model, the revenue risk (i.e. fare collection and retention) lies with the ULB/ SPV (i.e. government or the company
established to run city bus services). Routing and scheduling is also the responsibility of the ULB/ SPV and the operator is
obliged to run the buses as per the guidelines given by the SPV. Generally adopted by big cities (metropolitan cities or
municipal corporations) who either has sound financial health or has the power to raise finances from the market.
Cities like Ahmedabad (AMTS and BRTS bus services), Surat (BRTS bus services) Delhi (DIMTS bus services),
etc run on GCC basis. In Ahmedabad and Surat the payment to bus operator is on the basis of bus kilometers run. Whereas,
in case of DIMTS bus services in Delhi, the payment to bus operator is on the bases of combination of bus kilometers run,
number of bus and number of service hours. However, in all the cases the revenue risk is vested on the agency
implementing the project and not on the bus operator.
As far as Surat and Delhi are concerned, these cities earlier had NCC models. However, NCC models proved to
be a failure due to the problem of financial viability and the quality of services deteriorated. This forced the city authorities
to take the GCC routes.
As far as GCC is concerned, although the SPVs make financial losses, the system still runs efficiently,
consistently and with reliability. For instance, although the Ahmedabad Janmarg Limited (Ahmedabad BRTS) registered
an operating loss of Rs. 1.34 crore as on 31st March 2012 it can be observed that the system is growing by leaps and
bounds in terms of its capacity in commuters carried by it. Since, the payment to operator is not bound with the
profitability of the business, arm twisting and regulatory capture by operator is not visible and the system runs as per the
wish of the government. Hence, the welfare-profit objectives are met and the system seems to be sustainable over a longer
time horizon.
Net Cost Contract in City Bus Services
In NCC, the bus operator has the risk of collecting and retaining fare revenue. In return, the operator pays monthly
or yearly premium per route or per bus to the special purpose vehicle (SPV) or may ask for viability gap funding (for loss
making operations) for the rights availed to run the city bus services on specified routes. However, routing, scheduling and
fare setting and fare revision powers are vested with the SPVs. NCC at first instance seems to be lucrative for the
government as they saves a lot on upfront capital investments, manpower costs and also the revenue risk is on the
shoulders of the private bus operator (concessioner). However, close observation gives a clue that government / SPV is not
protected from risk and only the risks or losses that have to be borne by SPV are deferred in time. Generally adopted by
cities which are, smaller in size, financially strained, and have capacity constraints to raise finances from the market.
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Some of the cities which run city bus operations on NCC basis are Surat, Rajkot, Vadodara, Indore, Delhi Metro
Feeder Buses, and Municipal Corporations of various cities such as Kota, Udaipur, Jodhpur and Jalandhar. Most of them
are operational with sever quality and frequency issues. Payments to ULBs by the private operators are either premium per
route or premium per bus.
In most of the NCCs stated above, arm twisting and regulatory capture of SPVs is quite visible. Concessionaire
often demands for higher fares and new viable routes citing the reasons of operational losses. In most of the cities, the
quality of services is deteriorated because the concessionaire do not abide by schedules, pay less attention on maintenance
of buses and do not run sufficient number of buses in order to cut down on losses. These ultimately, in the long run lead to
a situation where in the system will not be sustainable and will collapse.
CHALLENGES FACED BY CITY BUS SERVICES AND THE EFFECTIVENESS OF GCC AND NCC
FRAMEWORKS TO ADDRESS THESE CHALLENGES
PPPs in urban transport are found in either Gross Cost Contract (GCC basis or Net Cost Contract (NCC) basis as
discussed above. In city bus services, where the bus operations and maintenance are carried out by private operators and
strategic and tactical decisions are taken by the urban local bodies and state governments (i.e. municipal corporations/
municipalities and transport department of the state), the success of PPPs can be achieved only when both the goals of
profit maximization for bus operators and welfare maximization for ULBs/ Government/ SPV are met (Joshi & Chaudhary,
2014). However, both these goals are contradicting to each other, it is very challenging to satisfy both the parties in PPP
structures; especially in NCC type PPPs wherein the revenue risks are on the shoulders of the bus operators (private
players). Some of the key challenges identified in PPPs in city bus operations are as discussed below.
Balancing between Social and Commercial Routes
Selection of routes to run the city bus operations lies with urban local bodies (ULBs). However, it has been
observed that ULBs do not adopt in most of the cases scientific method to choose routes that should be selected for city bus
operations. Very often ULBs decisions on routing are based on political or social grounds. Consequently, the challenge of
striking balance between social routes1 and commercial routes2 arises. Running buses on social routes is like adding fuel to
the fire. However, the government, which is under the pressure of providing public services with equity, has no options but
to render services even if it is loss making one. Elimination of social routes is not a desirable solution as it is against the
principle of social welfare, but a suitable solution needs to be worked out to reduce losses.
The experience says that in GCC the ULB can strike the balance between operating social routes and commercial
routes. This is because; the revenue stream of the city bus operator is not affected by the type of the routes. He is paid on
bus kilometers run by him. Ahmedabad Janmarg Ltd (AJL) and Ahmedabad Municipal Transport Services (AMTS) runs
on GCC structure.
However, the cities where the city bus services are operated on NCC basis striking a balance between social
routes and commercial routes are always a matter of concern. Vitcos which run its city bus services in Vadodara,
Gandhinagar and many other cities in Gujarat has claimed that it is financially bleeding and one of the reasons cited is that
1
Social routes: routes which are financially making losses due to insufficient passenger demand, but are made to serve the
society at large with the welfare perspective at the back of the mind.
2
Commercial routes: routes which are financially profitable because of sufficient passenger demand.
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route selection lies in the ambit of the ULBs. Hence, despite there being clauses which trigger to deactivate bus services on
a particular route if it makes losses, it is very time consuming to do so and by the time the company has to bear huge
financial losses.
Fare Setting and Its Variations
Technically, irrespective of the contractual framework adopted the decision of fare fixation lies with ULB. Since
the users of the public transport, especially the household with middle income groups (MIGs) and lower income groups
(LIGs), are very sensitive towards the prices (i.e. fares of buses), the fares are highly subsidized with a view that the
poorest of the poor should be in a position to afford the services. This view of welfare forces government to set bus fares
on marginal cost principle and not on average cost principle or the cost plus markup principle and subsequently fares do
not reflect the true economic cost of providing the bus services and at times lead to a situation that higher the services
rendered, higher shall be the losses made by the public transit system.
Adding to it, the fares are not revised regularly (i.e. annually). Fare revision is very hilarious task for the city
transport organizations run by ULBs. Very often, they succumb to the pressures of political parties and other interest
groups and fail to revise fares as and when required. The subsidies provided in the name of concession passes to students,
senior citizens, women, etc, also dampen the revenue earned by the ULBs.
Hence, if the city bus services are on GCC basis, the private player will not be affected by fare structure.
However, in long run the subsidized fare may affect the private players as it may result in late payments to the operator for
the services he has rendered to the ULB.
While if it is on the NCC basis, the fare fixation will definitely be the bone of contention as the burden of fare box
revenue is on the private player.
Competition from Para Transit Mode
Para transit modes of commutation; especially shared auto rickshaw and taxies, also takes a share from the
passenger demand pie. Shared autos and taxies price marginally higher than the city bus services; however, para transits
provide facilities like dropping the passenger wherever he or she wants on the route and not necessarily at the station. Also
the headways of para transit are comparatively lower than the city bus services. One of the key reasons why better
headways are offered by para transit modes is that shared autos need not necessarily terminate its trip at the said
destination. If they find in between that there is only one passenger who needs to drop at the final station, they could shift
that passenger to some other auto going to the same destination and share the fare accordingly based on mutual
understanding. In such cases, passenger shall not bear any extra fare. This type of facility is not provided by organized city
bus services. Hence, commuters often prefer para transit services than the city bus services. Only the commuters who are
extremely sensitive towards fares shall wait for city bus services in such circumstances.
Here too, the private player under NCC mode is at disadvantage and the ULB needs to take action to regulate
supply of IPT. Section 73 of Central Motor Vehicle Act, 1988 gives power to ULB to regulate this supply. For running the
city bus services efficiently, ULBs need to accept that para transit should not be treated as competitors. Efforts should be
made toward route rationalization wherein city bus services cater to the trunk routes and para transit serves the feeder line.
This will ensure that the dent created in the form of operational losses is minimized or eliminated in totality.
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CONCLUSIONS
From GCC and NCC models studied and discussed here above it is observed that the challenges discussed above
are neither address in its entirety by implementation of GCC or NCC. However, GCC framework is in a better position to
manage the challenges compared to its counterpart NCC.
The welfare-profit objective is better attained in GCC since the revenue risk is not on the shoulders of the
concessionaire. There cannot be panacea for all ills and hence the importance of both the models needs to be appreciated.
For instance, in small cities and towns, which are financially constrained, it is advisable to run bus operations on NCC
basis. However, one needs to see whether there are any takers for it from the private operators side too.
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Since India have cities which are well experienced in city bus services with or without budgetary constraints and
cities which are new to city bus services and with budgetary constraints, we need to have both GCC and NCC models. In
order to make GCC and NCC more appealing following measured could be taken.
Bus fares should reflect true cost of running the services and fare revision mechanism should be on place. The
government/ ULB/ SPV which wants to have concession passes for passengers may definitely opt for it, but
should pay the bus operator (in case of NCC) for balance amount so that the payment received by the operator
reflects the true cost of services.
Operators shall have access to the advertisement revenues on buses and bus-stations in partial or in complete
when NCC is adopted. Although the advertisement revenue is meager it still improves financial viability
marginally. Also, the option of viability gap funding in NCC needs to be given a serious thought. This may be a
boon for a private player where the passenger demands are on the lower side.
There should be a mechanism in place to balance the social routes and commercial routes. If the government feels
that the social routes are significant due to some political or social pressure, they may still opt to run it. However,
in case of NCC structure, some threshold passenger traffic needs to be worked out and if the average passenger
traffic lies below the threshold passenger traffic level, the government/ ULB/ SPV shall compensate the operator
for the services rendered. This shall avoid the issue of regulatory capture and frequent route changes which is
undesirable for the system in the long run. In case of GCC too there should be benchmark which automatically
terminates the route if it does not function according to expected benchmarks. This will keep interference from
political masses at bay.
Ideology should not triumph over understanding. In other words, although competition is efficient and effective in
most of the markets, it could have catastrophic results if practiced in public transport. History of penny-war in
Bogota city transport and the problems associated with public transport in Melbourne due to multi operators are
the illustration where the competition has boomeranged very badly. Hence, multi operator NCC model should be
adopted with great care. However, in GCC the multi operators shall have no negative impact as seen in NCC as
the payments are not based on passenger trips.
Controlling leakages is very important for business which operates on very thin margins. Technology (ETVMs
and ETMs) should be adopted to check the leakages at the conductor end and frequent on board inspection should
be done to minimize travelers travelling without ticket/ pass.
Theft, especially by pickpockets can be avoided by reducing the congestion in buses pick hours. I.e. by increasing
the bus fleet. If this is not stopped people will stay away from using the bus services and the losses would be
much higher. Also, regular announcements to make passengers on board more alert have to be taken into
consideration.
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