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LCQ5: Fuel prices and public transport fares
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     Following is a question by the Hon Frederick Fung and a reply by the Secretary for Transport and Housing, Professor Anthony Cheung Bing-leung, in the Legislative Council today (June 22):

Question:

     Under the Passenger Reward Arrangement of the Fare Adjustment Mechanism for franchised buses, where the return achieved by a franchised bus operator results in a rate of return on average net fixed assets exceeding 9.7 per cent, 50 per cent of the surplus return must be maintained as "Passenger Reward Balance" to be used for providing fare concessions or relieving the pressure for future fare increase. Last year's final results just released by the Transport International Holdings Limited show that the fare revenue from its two franchised bus companies recorded a year-on-year increase of 3 per cent, amounting to $6.973 billion; among them, the Kowloon Motor Bus Company (1933) Limited achieved a profit of $488.2 million after taxation, representing a soaring increase of 148 per cent when compared with the year before, and the growth in profits was mainly attributable to a drop in fuel costs by more than $500 million over the year. Given that international crude oil prices remained at low levels in the past year and a half, quite a number of members of the public have relayed that there is room for operators of the various public transport services to reduce their fares to reward their passengers. In this connection, will the Government inform this Council:

(1) whether it has assessed independently the rate of return on average net fixed assets of each of the franchised bus companies on the basis of the final results recently released by such companies or their holding companies, and whether the companies have adopted certain financial arrangements to accomplish a lower rate of return on the book; if it has assessed, of the outcome; if not, the reasons for that;

(2) whether it knows the respective amounts to be credited into the "Passenger Reward Balance" by various franchised bus companies this year, and whether the authorities will request the franchised bus companies concerned to directly reduce the fares under the passenger reward arrangement instead of offering some restrictive concessions (such as concessions that could only be enjoyed together with other promotion schemes) with limited coverage under all sorts of pretexts; if they will not, of the reasons for that; and

(3) whether it has assessed if the operators of other modes of public transport (including green minibuses and taxis) have recorded sizeable profits due to the low fuel costs last year; if it has assessed and the outcome is in the affirmative, whether it will request the operators concerned to lower their fares to reward the passengers, or to set aside a portion of the profits in a reserve account or to set up a fund for relieving the pressure for future fare increase; if it will, of the results; if not, the reasons for that?

Reply:

President,

     It is the Government's policy that public transport services should be run by the private sector in accordance with commercial principles for greater cost-effectiveness. The fares should be fair to both passengers and operators having regard to public affordability and sustainability of operation.  The Government has been closely monitoring the impact of fluctuations in fuel prices on the fares of public transport services. Franchised buses, green minibuses (GMBs) and taxis are fueled by oil products. Their fares are subject to regulation and none has any fuel surcharge. Each of them has its respective fare adjustment mechanism which has worked well.  

     Fuel prices can be very volatile within a period of time. In recent years, fuel prices started to fall from a high level in mid-2014 (Note 1). The drop was over 70 per cent by the beginning of this year. Prices then started to rally and have doubled so far (Note 2). Although fuel expenses would inevitably affect operating costs, they only account for about 20 per cent of the operating costs of franchised buses, GMBs and taxis at present. Other operating cost components include wages, repair and maintenance, insurance, etc. The costs for these have basically been increasing in recent years. For franchised buses and GMBs, expenditures on wages account for over 50 per cent and over 30 per cent of their operating costs respectively. In the past three years (2013-2015), franchised bus drivers had a cumulative wage increase ranging from around 13 per cent to 17 per cent. Meanwhile, the expenditures on wages of GMB drivers had increased by an average of around 8 per cent. Currently, manpower for drivers is tight in the public transport trades. In order to retain and recruit staff for a healthy development of the industry, there is a need for the trades to increase the income of employees gradually.

     My consolidated reply to the various parts of the Hon Frederick Fung's question is as follows:

     Both the Public Bus Services Ordinance and franchise stipulate that a franchised bus company should prepare and submit to the Government accounts verified by professional and independent auditors in respect of gains from franchised bus services or other related financial returns on an annual basis. There are clear requirements stipulating what the receipts in relation to franchised bus services, expenditures and fixed assets (Note 3) should comprise. There is also a clear definition under the franchise on how the value of fixed assets should be calculated. A franchised bus company must calculate its annual rate of return on average net fixed assets (ANFA) in accordance with the statutory and franchise requirements. If the holding company is a listed company, it should comply with the relevant requirements on accounts under the Listing Rules (Note 4).

     According to the Fare Adjustment Arrangement for franchised buses (FAA), when the rate of return on ANFA of a bus company for a certain year exceeds the threshold of 9.7 per cent, the passenger reward arrangement will be triggered automatically. The bus company will have to share the profit above the threshold on a 50/50 basis with passengers through fare concessions. As at the end of the accounting year ending in 2015, the accumulated passenger reward balance amount under all franchises ranges from $1.5 million to $59.8 million. Details are at Annex. The Transport Department (TD) and franchised bus companies are in discussion on how to make use of the passenger reward balance in 2016.

     Whether there is any room for improvement in the operation of the above rate of return on ANFA (i.e. 9.7 per cent) which triggers the passenger reward arrangement will be looked into under a new round of review on the FAA under the Public Transport Strategy Study which is currently in progress.

     The annual revenues and expenditures of franchised bus companies, and hence the amount of passenger reward balance, would vary from year to year (Note 5). We therefore need to exercise certain flexibility in vetting proposals for using the passenger reward balance to provide fare concessions so as to make the best use of a limited amount of money. An across-the-board direct reduction in fares may not be the most appropriate arrangement as it may only last for a short period of time. This would give rise to frequent fare adjustments and may even cause confusion.  Generally, a better arrangement is to offer fare concessions to passengers taking long-haul journeys. The number of beneficiaries and duration that the fare concession can be on offer would also need to be taken into account.

     In the past three years (2013-2015), examples of fare concessions funded by the passenger reward balance include same day return discount on cross-harbour routes (Note 6), discount on every same day second trip on local routes (Note 7) and concession on "Airbus Services" and "Overnight Services" routes to Airport staff (Note 8). The longest concession period in 2015 lasted 16 weeks.  A total of around 53 million passenger trips benefitted during the three-year period.

     For GMBs, there are a total of around 500 routes under 160 route packages in operation in Hong Kong. This practice is to ensure that routes with unsatisfactory returns but of passenger demand will be awarded together with other routes. This enables a route package to be financially sustainable. In 2014/15, close to 60 per cent of the route packages could not balance their books. The drop in fuel costs helps reduce operating costs. The actual effect is that the pressure for fare increases is being mitigated. Yet, the rise in other costs does not make room for fare reductions. In 2015, TD received fare increase applications from 219 GMB routes. This is as opposed to 249 routes in 2013.  

     For taxis, the reduction in Liquefied Petroleum Gas price also helps reduce operating costs and has the actual effect of delaying fare increases. The last taxi fare increase applications were made over three years ago.

     President, in processing fare increase applications of franchise buses, GMBs and taxis, the Government will, as an established practice, make assessments using a basket of factors. They include the overall changes in operating costs and revenue as well as public acceptability. We would not just consider the change of a particular cost component (e.g. fuel) or revenue item. The drop in fuel costs will be reflected in the overall changes in costs and eventually the approved rate of increase. Fare adjustment does not have retrospective effect. If fares should be reduced every time fuel costs temporarily reduce, should there be prompt fare increases whenever fuel costs go up? This may not be to the benefits of passengers. Fare level would also become highly unstable.

Note 1: In mid-2014, the Brent oil price was about US$111 per barrel.

Note 2: At present, the Brent oil price ranges from about US$40 to US$50 per barrel.

Note 3: According to the Public Bus Services Ordinance, fixed assets are "the stocks of capital items of stores and spares, investments in land, buildings, buses and other motor vehicles, plant, machinery and equipment, furniture, fixtures and fittings and other fixed assets (including assets in the course of construction, goods in transit and payments on account) used or kept by a grantee for the purposes of or in connection with its franchise".

Note 4: If the holding company is a listed company, it has to prepare reports on financial results in accordance with the Listing Rules of the Stock Exchange of Hong Kong. Financial statements should provide a true and fair view of the financial results of the company and disclose transactions with connected persons.

Note 5: In the past three years (2013-2015), there were cases in which bus companies ended up with no passenger reward balance at the end of the financial year. There was also a case in which a bus company ended up with a passenger reward balance of $59.8 million.

Note 6: Concessions from $0.4 to $6.6.

Note 7: Reduction of $2 for the second trip.

Note 8: Concessions of $2 to $21.

Ends/Wednesday, June 22, 2016
Issued at HKT 15:45

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