BEST’s Contracting-Out of Bus Services: A Case Study in Privatisation

According to the currently dominant ideology, privatisation is identified with greater ‘efficiency’ (the meaning of which is kept vague). Privatisation may take different forms: the handing over of existing public sector assets to private investors; permitting private investors to enter sectors hitherto reserved for the public sector; opening up exploration and mining of mineral wealth to private investors; promoting insurance schemes in place of universal provision of basic services; contracting out to private firms jobs hitherto done by the public sector; and so on.

But whatever the form, the dominant ideology claims that privatisation delivers the goods more effectively, and more cheaply. Private firms are said to be driven by profit motive to lower costs and compete with other firms. Even if the activity to be privatised is a monopoly, it can be awarded to a private firm through competitive bidding, in which the State can specify the fulfilment of various criteria / targets as part of the contract. A firm which does not fulfil its contract can be penalised or replaced with another firm. In this way, we are told, the building of a public sector institution, with an experienced workforce developed over years of stable employment, is no longer necessary. The magic of the ‘market’ will do the job.

The actual provision of services by private parties has to be assessed over a longer period, during which some sections of people may gain and others may lose, some aspects of those services may flourish and others disappear. These changes have far-reaching consequences, and require careful study. Nevertheless, one prominent claim of the pro-privatisation lobby should not go unchallenged in the process: that privatisation saves public funds.

Here, we look at the decision of Mumbai’s public bus service, the Brihanmumbai Electric Supply and Transport (BEST), to contract out bus services to private firms. The Municipal Commissioner and the management of BEST claim that this policy will yield large savings and reduce BEST’s financial deficit. We look more closely at this claim.

(i) On the face of it, it appears that by contracting out (‘wet-leasing’), BEST’s total expenditure per midi-bus would fall by 26 per cent. This appears to be a big saving.

(ii) Where are the ‘savings’ coming from? Are they coming from greater efficiency and more attention to costs? Unfortunately, there are no data regarding the break-up of contractor costs. So we try to find out where these savings could be made. Let us assume that fuel efficiency rises to the best levels of metropolitan bus services in India. Let us eliminate some overhead costs completely, and keep others to a minimum. Even after this, these heads can account for only a small part of the claimed savings.

The simple fact is that contractors will make the overwhelming bulk of the cost reductions by cutting wage costs, whatever be the impact on the employees and the general public. That is what goes under the name of ‘greater efficiency’.

(iii) In recent times, in many ‘public–private partnership’ ventures in infrastructure, the private partner wins the contract by deliberately putting in unrealistically low bids. Once having captured the deal, they start lobbying for a change in the terms of the contract. Since it is now more expensive and time-consuming to replace them, the authorities are under pressure to make concessions. This of course makes nonsense of the entire elaborate process by which the private firms were selected.

So it is important to examine in advance whether the winning bid is really sustainable. In the case of the winning bids by BEST contractors, they do not appear to be sustainable. Despite assuming such drastic cost reductions, the rates of the winning bids leave very little room for profit. Given the low rates of the winning bids, contractors may in future lobby for a revision in rates; or they may cut expenditures on wages or on maintenance even further, at the cost of the safety, reliability and quality of services.

(iv) Moreover, the claim of large savings in expenditures turns out to be based on a wrong comparison. Contract buses are to run 160 km/day. If we look at the costs of existing BEST buses running 160 km or more a day, it emerges that the cost of contracting out would be only 5–6 per cent lower than the cost of the comparable BEST buses. This is a trivial saving  for which to destroy a long-established public transport institution with an experienced employee base. These data merely underline the need for the BMC and BEST to ensure that each bus is able to complete a longer distance every day, by reducing traffic congestion and providing BEST right of way / access. If that is done, the cost per km will automatically fall.

(v) Further, if the purpose of ‘wet-leasing’ is to reduce BEST’s financial deficit, we must take into account not only expenditures, but earnings as well. In this particular case, the wet-leased buses are smaller, and hence their earnings will be lower. The gap between earnings and expenditures would in fact expand. It is quite possible, then, that the deficit will  actually rise with the wet-leasing of midi and mini buses in place of the existing standard buses.

(vi) Finally, we look at some other Indian cities which have already contracted out some part of their bus services. Contracting does not appear to prevent falling ridership or rising losses. Bangalore’s performance alone was better till 2014–15, but has since sharply deteriorated. Pune shows that multiple problems can arise with contracting out—poor services, frequent breakdowns and fires, disputes with contractors, even as subsidies rise and ridership falls. The subsidies to Delhi’s private buses in the cluster system amount to Rs 10 per passenger; indeed, a similar subsidy to BEST would eliminate its present annual deficit!

In sum, then, BEST’s decision to engage private contractors to provide bus services, in place of its own services, cannot be justified even in narrow financial terms. This is apart from the permanent damage that would be done by dismantling an important institution which has provided Mumbai a critical public service for decades.