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Following is a question by the Hon Fung Kin-kee and a reply by the Secretary for Transport and Housing, Ms Eva Cheng, at the Legislative Council meeting today (March 11):
Question:
Last year, based on estimated increases in fuel prices, staff salaries, tunnel tolls and other operating costs, the Kowloon Motor Bus Company (1933) Limited (KMB) applied for increase in fare by 9% on average, and the Government subsequently approved a 4.5% increase. On the other hand, international crude oil prices have continued to fall since the fourth quarter of last year, and has remained at a low level of US$30 to US$40 per barrel recently. In this connection, will the Government inform this Council:
(a) of the actual rate of increase in KMB's operating costs last year and the authorities' latest estimation of the change in such costs this year; whether the Government has assessed, having regard to factors such as the substantial drop in oil prices and rise in patronage during the economic downturn, if the fare increase approved by the authorities last year was too high; if it has, of the assessment results;
(b) of the "supportable fare adjustment rate" calculated with the latest data; and as the Government has emphasised that the formula employed to calculate such adjustment does not operate as an automatic determinant of the bus fare adjustment outcome, whether the Government has assessed if it may take the initiative to activate the mechanism to demand KMB to reduce fares when the formula yields a negative result or when there is a reverse in the "basket of factors for consideration" (e.g. a substantial reduction in operating costs due to the drop in oil prices or a decrease in household income); and
(c) in response to the substantial reduction in operating costs of bus companies as a result of the sustained low level of international oil prices, the anticipated increase in bus patronage due to the sustained economic downturn, as well as the falling trend in household income, whether the Government will take the initiative to demand KMB to lower fares, so as to assist the public in countering economic adversities?
Reply:
President,
Currently, a comprehensive mechanism has been in place to regulate the level of franchised bus fares. When determining the fare level, the Chief Executive in Council (CE-in-Council) takes into account a basket of factors, including:
(i) changes in operating costs and revenue since the last fare adjustment;
(ii) forecasts of future costs, revenue and return;
(iii) the need to provide the operator with a reasonable rate of return;
(iv) public acceptability and affordability;
(v) quality and quantity of service provided; and
(vi) outcome of the fare adjustment formula (0.5 Change in Wage Index + 0.5 Change in Composite Consumer Price Index (CCPI) – 0.5 Productivity Gain)
In assessing the franchised bus companies' applications for fare adjustment in 2008, the Administration considered all of the above factors on the basis of the latest available data. For changes in fuel cost, apart from considering the actual expenditure of the bus companies in the past, we also took into consideration international forecasts on changes in fuel prices. As a result, the Government has lowered the bus companies' forecast fuel prices and the magnitude of fare increases proposed in the applications from The Kowloon Motor Bus Company (1933) Limited (KMB), Long Win Bus Company Limited, Citybus Limited (Franchise 1) and New World First Bus Services Limited.
However, oil prices have been highly volatile in recent years. Take 2008 as an example. The crude oil price per barrel soared from about US$90 in early 2008 to about US$140 in mid 2008, representing an increase of more than 50%, far exceeding what was anticipated in the earlier market forecast on the oil price trend. Since the bus companies' fare increase applications were approved in mid 2008, the companies have been under pressure from escalating operating costs due to rising oil prices. Take KMB as an example. Its parent company, Transport International Holdings Limited (TIH) issued a profit warning in July 2008. According to the interim results announced by TIH in September 2008, the loss after taxation of KMB for the first half of 2008 was HK$50.2 million. Since October last year, the oil prices have continued to drop and remained at low levels. This has alleviated the pressure on the bus companies. We will keep a close watch over the oil price trend and its impact on the operating costs of the bus companies.
The audited financial report of KMB for the entire year of 2008 will be released by its parent company by around late March 2009. The financial data of KMB for 2008 that can be released to the public is not yet available.
On fare reduction, when the franchises were extended for a number of bus companies in 2006, we introduced an arrangement to enable upward or downward bus fare adjustment. Under the arrangement, bus fares can be adjusted upwards and downwards in the light of prevailing economic conditions and changes in operating costs. When the Government announced the arrangement, it was stated that, to avoid frequent fluctuation in bus fares which will cause inconvenience to passengers, fare change, be it upward or downward adjustment, will only be implemented if it amounts to 10 cents or more per bus trip on average. 10 cents per trip are equivalent to about 2% of average fare per trip. The fare adjustment formula would be applied on a quarterly basis. The Administration will proactively initiate a comprehensive fare review if the formula outcome reaches -2%. Taking into account the outcome of the formula and all relevant factors, the Administration will consider making a recommendation of downward fare adjustment to CE-in-Council.
Wage index is published on a quarterly basis. The most recent index available is the one for the third quarter of 2008 announced in late December 2008. The latest quarterly formula outcome based on the latest wage index and CCPI is –0.66%.
The current formula mainly reflects changes in the macro-economic situation. The components of the formula include the wage index and CCPI. Since the weighting of motor fuel in CCPI is 0.69%, substantial fluctuations in the oil prices will not cause significant upward or downward movement in the formula outcome. For example, during the period when the oil prices surged in 2008 and the bus companies had to cope with the pressure of escalating operating costs, the outcome of the formula did not show an increase of the same magnitude. This could avoid the impact on fare stability resulted from large magnitude of upward and downward changes in the formula outcome in response to short-term drastic fluctuations in oil prices.
We will continue to monitor the quarterly outcome of the formula. The Government can initiate a downward bus fare adjustment after taking into account the formula outcome and all relevant factors under the established mechanism.
Ends/Wednesday, March 11, 2009
Issued at HKT 15:18
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