Where's the transparency in fare increases?

Where's the transparency in fare increases?

David O'Brien, Jakarta

The process of passing through fuel prices to consumer end
products, particularly public transport fares seems particularly
secretive. The process seemed to occur with an ambit claim from
operators, a subsequent assessment by a private panel and a final
fait accompli.

There is no allowance made for public hearings or publication
of how the fares are determined. The NGO consumer organization
(YLKI) has estimated the proportion of household income directed
to transport has risen from 12 percent to 20 percent. Such
transparency would make the public much more comfortable if they
had an understanding of the process and could contribute to it.

It is not just the seeming lack of transparency in the process
but the inherent contradiction from the petitioners for rises in
the transport fare levels. The Jakarta Post recently published
details of the Jakarta chapter of the Organization of Land
Transport Owners (Organda) petition to raise taxi fares by an
average of 136 percent following the fuel price increase.

In the same story Ateng Aryono, the Organda DKI taxi division
head, stressed that fuel accounts for 17 percent of the
operational costs of a taxi company. The Jakarta taxi fleet
predominately runs on regular gasoline. This saw a price increase
from Rp 2,400 per liter to Rp 4,500 per liter. This amounts to an
87.5 percent increase.

Given the previously stated fact that fuel accounts for 17
percent of costs, I calculate the increase directly attributable
to fuel would be in the region of 17 percent of the 87.5 percent
increase, or a little under 15 percent. The balance of costs,
i.e. the other 83 percent is assumed to consist of depreciation,
interest, operations and maintenance costs, wages and the owners
return on capital invested. These costs could be assumed to
increase by a maximum of 10 percent. To an uninformed outside
observer I have "guess timated" the price increase for taxi
operators is likely to be in the region of 25 -- 30 percent,
assuming the fuel component increases as an overall proportion of
costs.

The operator that seems to have it about right is TransJakarta
busway. They did not increase fares after the 30 percent hike
earlier in the year. Given the 127 percent in diesel fuel on
October 1, this brings the total increase for the year to nearly
157 percent. Applying the same 17 percent as a fuel cost
proportion, this would amount to 27 percent. Assuming the balance
of costs at 10 percent once again the total is 37 percent. The
increase granted was 40 percent which appears reasonable based on
the simplicity of my assumptions. This evenness may reflect the
Jakarta Governor's personal commitment to the success of the
project.

It is difficult however to follow the contradiction in that
approved increase and the increase being argued by Organda. The
history of Organda with other bus fares in Jakarta highlights
their approach. Initial ambit claims in excess of 100 percent in
many cases and a final settlement of 25 percent to 58 percent
depending on the style of bus. The style of bus reflects the
depreciation allowance that will be allowed. It is difficult to
see how an operator can earn a return on a smoke spewing Metro
Mini, unless it was for mandated emissions work.

Given the owners are provided a license and face a regulated
return, one could assume a regulated revenue cap approach is
suitable. This is where the price is set in line with economic
principles which balance the need for investors to gain a
sufficient return to make investment, balanced by the need to
ensure there is no price gouging of consumers.

The approach is therefore to calculate the total costs
attributable to the business, which is usually tested against a
benchmark. The regulator will also usually impose minimum
performance levels upon the operator which may result in either
bonuses or penalties. A form of regulation known as CPI-x is
often instituted. To promote productivity gains, the full CPI
increase is not passed through; it is rather reduced by an x
factor. The operator will earn greater returns via productivity
improvements in excess of the x factor.

The price cap will be established by calculating a charge for
depreciation, a reimbursement of all operating costs
(appropriately benchmarked) and a Weighted Average Cost of
Capital (WACC) return on the assets employed. This WACC allowable
return may be reduced by an x- factor to promote efficiency gains
for consumers.

By way of an uninformed example, let's go back to the taxi
cab. Let's assume that a new cab is presently priced at Rp 130
million and is 18 months old. Post price rise let's assume it is
to rise to Rp 145 million. The depreciation allowance will be
calculated on a depreciated replacement cost basis. It will be
the new price, less 18 months of depreciation. If a cab is
usually depreciated over three years, the annual allowance will
rise from Rp 43 million to Rp 48 million. If the cab is more than
three years old there will be no allowance as it is fully
depreciated (assuming a three year useful life for a cab).

Operational costs will be allowed for as benchmarked. With no
detail, I assume that it is in the region of Rp 100 million. This
would be salaries of Rp 24 million, maintenance of Rp 12 million
and fuel 70 million. The cost of capital applied at 50 percent
debt and 50 percent equity could be up to 20 percent in the
current environment (before any X factor). Assuming cabs are
replaced every three years the allowance will be 26 million.

Total maximum revenue available to operator will therefore be
approximately Rp 180 million. Estimated total travel per year is
90,000 km or 250 km per day. The average per kilometer would be
Rp 2,000 under such a scenario. This is about 10 percent more
than the current charge but has not allowed for a flag fall or
waiting fee component. With such returns available, it clarifies
why a businessman such as Peter Sondakh is exiting the steadily
more cut throat telecommunications business and strengthening his
Ekspress taxi business.

My calculations may well have some incorrect assumptions as
this is all an example with estimates that I have not proven.
However an open and transparent process of calculation with
public dialogue would aid confidence in government in Indonesia
more fully than AA Gym on the TV.

The writer is a Technical Advisor at CSA Strategic Advisory.
CSA helps businesses through a combination of "soft" behavioral
and "hard" financial advice. He can be reached at
dobrien@csadvisory.com.