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.