Profitability of Public Transport Systems

Taking the Bangalore Metropolitan Transport Corporation (BMTC) as an example, this post explains why it is important even for public transport systems to be profit oriented. 

For the uninitiated, BMTC is perhaps the only city transport system in India that has a longstanding record of being profitable. Profitability implies that BMTC ends up adding to the state revenue rather than gnawing from it. This issue of the prudence of profitability for a public transport system and the corresponding fare structure flares up in any discussion related to Namma Bangalore’s lifeline.

BMTC’s fare structure is perceived as being expensive relative to the bus systems elsewhere in India. People hailing from Chennai and Pune often grumble that the bus fares in Bangalore are exorbitant compared to those in their home cities. Then there are renowned experts from Bangalore like Ashwin Mahesh who say that aiming for profitability in public transport is a stupidity on the grounds that it leads to inevitable fare hikes. These experts contend that since transport is a public good, it should be heavily subsidized and fares should remain immune to factors like oil prices, rush hour times and specific routes.

There is hardly any narrative on the other side which defends profitability of public transport. This post is an attempt to highlight why profitability is justified and how it can be achieved without hurting the consumers.

Why is profitability important?

In an ideal scenario where the governments are flexible enough to allocate quick funds in order to meet the growing transport demands, profitability of local transport might be under question. But that scenario is utopian. Governments have limited funds to allocate to a host of public service providers. A transport system that cannot generate funds on its own languishes in expansion and improvement of services. It becomes dependent on the political masters even for minor improvements. Bangalore is a classic example. BTC, BMTC’s predecessor was a loss making unit and had poor connectivity and pathetic service. If there is any service that has been able to match the exponential growth of the city, it is BMTC – and it’s profitability and autonomy are one of the major reasons enabling its expansion.

BMTC does get subsidies from the state and central governments but it is wisely being used for building capital rather than for footing running costs. In 2009, BMTC got funds under the Central government’s JNNURM scheme for building new depots and purchasing low floor buses after a period of sustained efforts. Through intelligent revenue generation, BMTC has evolved today to become one of the most modernized systems in the country. Volvo buses for the personal vehicle owning class and low floor buses easing the troubles of the elderly are just some of the improvements that justify its profitability. If it was dependent on doles from Delhi even for its operational costs, it would have been unable to think of taking its services to these levels and would be scrambling to provide the same tardy and unfriendly transport (Check Pune’s PMPML as a classic case of government funded-loss making-monster Luddite). If we need to take the transport to the next level like making it friendly for the disabled, allowing cycle racks on buses or extending it to the nearby villages, BMTC needs financial freedom and not doles based on government’s whims.

Profitability is also a good proxy for demand. Travelling safely and predictably on arterial roads in the city is a scarce possibility. A service that does so commendably should be charged appropriately. BMTC has does this by introducing many air-conditioned low floor buses on the IT corridor at market competitive prices. Its popularity in these areas shows two things – it has been able to woo the car owning people to use public transport, thus reducing the congestion on the roads and secondly the funds generated from these areas are being used for services like quick expansion into hitherto inaccessible rural outskirts.

Thus, profitability and resulting financial freedom is very important for public transport systems. A comment on the Bangalore local issues portal citizenmatters.in by user Ashwin Hegde summarizes this brilliantly:

Without the profit objective, BMTC could fairly quickly degenerate into lethargy. We then have a public transport system that ceases to be usable and hence useful. You then are forcing the poor to either waste even more time commuting, cutting into their earning potential, or forcing them off the system completely by buying a private vehicle like a moped or scooter, that is orders of magnitude more expensive.

How to be profitable?

Raising fares to generate revenue is just one of the many ways that transport systems can use. The MTR system in Hong Kong has made enormous money by intelligently selling its huge real estate assets to business and residences and offices and even shopping malls surrounding its stations. BMTC has tried the same by renting the space available in TTMCs as well. This can generate revenue without taxing the commuters.

The casual contract hiring system wherein private companies or groups can hire idle BMTC buses at market competitive rates is another smart way of generating revenue. The fact that many renowned companies prefer to hire BMTC buses rather than engage private operators speaks highly of BMTC’s credibility.

Conclusion:

The post is not meant to say that BMTC is the paragon of public transport. Poor connectivity and high travel times are still major issues with it. But by aiming for profitability, BMTC is on the path that other transport systems must emulate. And as it has been demonstrated, profitability does not necessarily imply a proportional hike in fares. There are many other ways to generate revenue and in turn improve services for the larger good.

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2 thoughts on “Profitability of Public Transport Systems

  1. skthewimp February 28, 2014 / 3:26 am

    One objection to profitability of the BMTC is that it is a monopoly! It can be argued that given that BMTC has a monopoly,if it also has a profit maximizing objective, then it wouldn’t really be in “public service”.

    Then again going back to my lecture on marginal cost pricing, it is important that BMTC at least breaks even. However, given its monopoly, we need to figure out a way that some unprofitable routes are also run in order to provide connectivity to people in these unprofitable areas. Maybe we can think of something similar to the USO fund in telecom?

    • pranaykotasthane February 28, 2014 / 4:35 am

      BMTC reports to the state government. Also, it gets funds through JNNURM. So, won’t it be better that government allows BMTC to generate profits but keeps conditions like:
      1. starting X number of new routes every year from sprawls/hinterland areas
      2. cross-subsidize profits with Y number of unprofitable routes.
      3. Keep a band for profit generation with lower and upper bounds.

      These conditions can be put in the USOF type of regulation indeed.

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