Compecon – Competition Economics

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Compecon - competition economics.

ECONOMIC ANALYSIS OF A FUEL REBATE FOR BUS AND COACH OPERATORS.

Final Report

23rd January 2013

Private and Confidential

Contents.

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Page

Executive Summary 3

1:Introduction 6

1.1:Background to the Report 6

1.2:Structure of the Report 6

1.3:Disclaimer

2:Economic Importance of the Private Bus and Coach Industry 7

2.1:Introduction 7

2.2:The Private Bus and Coach Industry: Some Key Statistics 7

2.3:Scheduled Services 9

2.4:Tour Services 10

2.5:Private Hire 12

2.6:School Transport 13

2.7:Conclusions 13

3:Background to the CTTC Rebate Proposal 14

3.1:Introduction 14

3.2:Fuel Costs 14

3.3:Industry Performance 16

4:Estimating the Cost of Proposed Fuel Rebate 21

4.1:Introduction 21

4.2:Methodology 21

4.3:Estimating the Cost of the Proposed Fuel Rebate 22

5:Economic Benefits of the Proposal 29

5.1:Introduction 29

5.2:Benefits of the Proposal 29

6:Conclusions 31

Executive Summary.

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This report has been prepared by Compecon for the Coach Tourism and Transport Council of Ireland (CTTC). Compecon was specifically requested by the CTTC to report on the following issues:

(i) To estimate the likely cost of introducing a fuel rebate for bus and coach operators in respect of large public service vehicles (PSVs[1]); and

(ii) To outline the wider economic arguments in support of such a proposal.

The report estimates the likely costs of a rebate of 15c/l which is being sought by CTTC and of a lower rebate of 7.5c/l.

The private bus and coach industry plays a substantial role in the Irish economy. The industry is made up of over 1,900 SMEs which operate in every county in Ireland and between them employ between 6,500 and 7,000 people. The industry is a major provider of transport services with 276 scheduled services, 220 student services and 200 tour services. Coach tourism services make a very significant contribution to the Irish economy with 300,000 overseas coach tourists visiting Ireland in 2010 worth an estimated €180 million to the Irish economy and supporting employment in other sectors of the tourist industry. Private bus and coach operators account for 80% of school bus transport services.

The ESRI estimated that an excise duty rebate of 15c/l for large PSVs would cost the Exchequer €5.3 million per annum. In our view the ESRI figures overstate the likely cost because they assume that the fall in the price of fuel to bus and coach operators will have no effect on fuel consumption. We also suggest that it may lead to some slight switch from illicit to legitimate sources of supply.

Obviously estimates of the cost of a fuel rebate will be highly sensitive to assumptions about fuel consumption and fuel efficiency. CSO data indicate that private large PSVs operated 157 million kilometres in 2011. We assume that large PSVs achieve between 3.17 and 6 kilometres per litre of fuel in order to arrive at an estimate of total fuel consumption.[2] The results are summarised in Table 1. We estimate the gross cost of a fuel rebate of 15c/l at between €3.9 million and €7.4 million.[3] When the impact of increased fuel consumption and switching from illegal suppliers are included we estimate the net cost to the Exchequer of a rebate of 15c/l at between €2 million and €3.8 million. By any standards the costs involved are extremely modest.

A fuel rebate of 7.5c/l would result in a drop in excise duties of between €2 million and €3.7 million. When allowance is made for any offsetting increase in fuel consumption the net cost would amount to between €0.9 million and €1.7million. These figures need to be viewed in the context of the fact that private bus and coach operators contribute at least €23 million to the Exchequer in VAT and excise duties on fuel purchases.

Table 1: Estimated Net Direct Cost to Exchequer of Diesel Fuel Rebate for Large PSVs
15c/l Rebate / 7.5c/l Rebate
Low / High / Low / High
Fuel Consumption (km/l) / 6.0 / 3.17 / 6.0 / 3.17
Total Fuel Consumption million litres / 26.2 / 49.6 / 26.2 / 49.6
Reduction in excise duty 15c/litre / €3.94m / €7.44m / €1.97m / €3.72m
Less additional revenue due to 5% increase in fuel consumption by large PSVs
Excise duties. / €0.48m / €0.90m / €0.29m / €0.54m
Carbon Tax. / €0.09m / €0.16m / €0.04 / €0.08m
VAT / €0.38m / €0.72m / €0.19m / €0.36m
Less additional revenue due to reduced black market sales
Excise duties. / €0.48m / €0.90m / €0.29m / €0.54m
Carbon Tax. / €0.09m / €0.16m / €0.04 / €0.08m
VAT / €0.38m / €0.72m / €0.19m / €0.36m
Plus Additional Exchequer Cost of Carbon Credits / €0.03 / €0.07m / €0.01 / €0.04
Total Net Cost to Exchequer / €2.02m / €3.79m / €0.92m / €1.71m

The proposed measure would support a number of government targets in related policy areas, in particular:

  1. It will support employment in a sector which involves SMEs located right across the State and provides employment in areas where alternatives are limited.
  2. It encourages public transport as opposed to the use of private cars, leading to significant environmental benefits.
  3. It will promote tourism, and encourage visitors to travel around Ireland rather than staying in urban centres.
  4. Coach transport operators are widely dispersed around the country. They provide essential services to people in rural areas, and they allow tourism to reach non-urban areas. Supporting coach transport in this way will, therefore, promote balanced regional development, and preserve rural communities.

1:Introduction.

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1.1: Background to the Report.

This report has been prepared by Compecon for the Coach Tourism and Transport Council of Ireland (CTTC). Compecon was requested by the CTTC to conduct an economic analysis of its proposal for the introduction of a fuel rebate for bus and coach operators in respect of large public service vehicles (PSVs).[4] This follows the announcement by the Minister for Finance in his 2013 Budget speech of proposals for the introduction of such a fuel rebate for the road haulage industry.

Compecon was specifically requested by the CTTC to report on the following issues:

(i) To estimate the likely cost of introducing a fuel rebate of 15c/l for bus and coach operators in respect of large public service vehicles (PSVs); and

(ii) To outline the economic arguments in support of such a proposal.

Compecon estimated the likely cost of a fuel rebate of 15c/l which is being sought by CTTC and a lower level of rebate of 7.5c/l.

1.2: Structure of the Report.

The report is structure as follows. Section 2 provides a broad overview of the importance of the private bus and coach industry. The background to the CTTC proposal for an excise duty rebate on diesel for large PSVs is outlined in section 3. In section 4 we estimate the likely direct cost to the Exchequer of the proposal. The wider economic case in support of the proposal is outlined in section 5. The report’s main conclusions are contained in section 6.

1.3: Disclaimer.

This report is the sole responsibility of Compecon Limited and is solely for the use of the client. Where the report is based on factual material provided by the CTTC, any conclusions are conditional on the accuracy of the information supplied. Compecon will not, by virtue of having prepared this report, or otherwise in connection with this assignment, assume any responsibility in contract, tort (including without limitation negligence) or otherwise in relation to this assignment and shall have no liability to third parties. Nothing in this report constitutes legal advice or opinion on the proposal or any other matter.

2:Economic Importance of the Private Bus and Coach Industry.

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2.1: Introduction.

The private bus and coach industry is very significant in overall economic terms. Its activities include a range of diverse services which can be grouped under four broad headings:

(a) Scheduled passenger services;

(b) Private hire services;

(c) Coach tourism; and

(d) School transport.

2.2: The Private Bus and Coach Industry: Some Key Statistics.

CSO data indicates that there are approximately 1,900 private bus and coach operators in the State.[5] Private bus operators operate approximately 6,600 large PSVs which is almost four times the size of the combined Dublin Bus and Bus Eireann fleets.[6] Table 2.1 gives a breakdown of private bus operators by county for 2011. The table shows that the private bus and coach industry is widely dispersed throughout the country with significant numbers of private bus operators located in every county. While Dublin has the largest number of private bus operators with 240, only one in every eight private bus operators is based in the capital. 43% of private bus operators were located in Leinster, 27% in Munster and 30% in Connacht/Ulster.

A survey carried out by Goodbody Economic Consultants estimated that the private bus and coach industry employed a minimum of 7,200 people in 2008. Even allowing for some decline in total employment in the industry over the past few years, it nevertheless seems reasonable to assume that, at a minimum, the industry currently employs in the region of 6,500-7,000. The widely dispersed nature of the industry means that it provides employment in many rural areas where alternative sources of employment may be limited.

Table 2.1: Private Bus Operators Licences by County
Number / % of Total
Carlow / 26 / 1.4
Cavan / 58 / 3.0
Clare / 71 / 3.7
Cork / 145 / 7.6
Donegal / 134 / 7.0
Dublin / 240 / 12.6
Galway / 141 / 7.4
Kerry / 112 / 5.9
Kildare / 95 / 5.0
Kilkenny / 36 / 1.9
Laois / 39 / 2.0
Leitrim / 24 / 1.3
Limerick / 71 / 3.7
Longford / 21 / 1.1
Louth / 48 / 2.5
Mayo / 102 / 5.3
Meath / 96 / 5.0
Monaghan / 43 / 2.3
Offaly / 40 / 2.1
Roscommon / 37 / 1.9
Sligo / 35 / 1.8
Tipperary / 80 / 4.2
Waterford / 35 / 1.8
Westmeath / 39 / 2.0
Wexford / 69 / 3.6
Wicklow / 74 / 3.9
Total / 1,911 / 100.0
Leinster / 823 / 43.1
Munster / 514 / 26.9
Connacht/Ulster / 574 / 30.0
Source: CSO; Transport Omnibus 2011, Table

2.3: Scheduled Services

According to the National Transport Authority private bus and coach operators held 698 route operating licences as of January 2012. Information on passenger road service licences held by private bus and coach operators is given in Table 2.2.

Table 2.2: Details of Private Bus and Coach Service Licences
Type of Service / Number
Scheduled Services Licences / 276
Of which continuous / 171
Student Service Licences / 222
Tour Service Licences / 200
Total / 698

Source: National Transport Authority.

The table shows that 276 of these licences were in respect of scheduled services of which 171 were continuous services. The CIE companies between them operate between 450 and 500 routes. Private bus and coach operators are thus major providers of transport services throughout the State. In many instances private bus and coach operators provide services in rural areas which would not have a regular bus service otherwise. In addition private bus and coach operators held 222 student service licences and 200 tour service licences.

2.4: Tour Services.

Coach tourism services make a very significant contribution to the Irish economy. There were approximately 620 coaches approved under the Fáilte Ireland coach tourism approvals scheme in 2011. It is estimated that the coach tourism sector employs almost 2,000 people.[7] This figure represents approximately 30% of total private bus and coach industry employment. The sector’s employment is heavily concentrated within the driver category as they make up 77% of all staff, with support staff making up the balance of 23%. Three out of every four working the sector are full-time, with one in four on part-time hours.[8]

According to Failte Ireland 300,000 overseas coach tourists visited Ireland in 2010 and these visitors contributed an estimated €180 million to the Irish economy. Some further information on overseas coach tourists is given in Chart 2.1.

Source: Failte Ireland: Coach Tourism: A Sectoral Study, May 2012.

The average length of stay of coach tour visitors in 2010 was 8 nights with North Americans having the longest stay at 9 nights and British visitors the shortest at 6 nights. 86% of coach tourists stay in hotels in Ireland and are an important source of business for hotels particularly at the present time.[9]

Coach tour holidays are an important component of Ireland’s overall tourist business for several reasons:

  • No other tourism ‘product’ achieves the same regional distribution of trips. This is an important attribute at a time when the prevailing trend towards short-stay city breaks works against spreading tourists’ spending power across all regions. (See Chart 2.2).
  • The seasonal spread of coach tourists across the shoulder season is relatively good which means that they contribute to the sustainability of tourism SMEs throughout the year and they improve the year round utilisation of Ireland’s tourism infrastructure. (See Chart 2.3).
  • In terms of activities engaged, 90% of coach tourists actively engage with Irish culture and visit sites of historical interest which again improves the utilisation of Ireland’s existing tourism infrastructure.[10]

2.5: Private Hire.

Private hire encompasses a wide variety of services. It includes a significant level of corporate, conference and incentive coach services. This type of service is a well-established form of business for many private operators in the country. In addition to the above, sporting fixtures, social outings, school trips, weddings and evening functions provide private hire business for private bus and coach operators throughout the whole of Ireland. Travel club arrangements are also a feature of the private hire market.

2.6: School Transport.

Since 1967, private independent operators have operated as sub-contractors to CIE, who hold the contract for school transport from the Department of Education and Science. According to the Department of Education and Science, there are 2,300 privately owned vehicles providing school transport services on a contract basis to CIE. Thus approximately 80 per cent of the total fleet used in the provision of school transport services is privately owned.

2.7: Conclusions.

The private bus and coach industry plays a substantial role in the Irish economy. The industry is made up of over 1,900 SMEs which operate in every county in Ireland and between them employ between 6,500 and 7,000 people. The industry is a major provider of transport services with 276 scheduled services, 220 student services and 200 tour services. Coach tourism services make a very significant contribution to the Irish economy with 300,000 overseas coach tourists visiting Ireland in 2010 worth an estimated €180 million to the Irish economy and supporting employment in other sectors of the tourist industry. Private bus and coach operators account for 80% of school bus transport services.

3:Background to the CTTC Rebate Proposal.

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3.1: Introduction.

The Minister for Finance announced proposals to introduce a fuel rebate of for road haulage firms in his 2013 Budget speech. The CTTC is seeking to have the rebate extended to include large PSVs. The CTTC has sought a rebate of 15c/l.

A fuel rebate scheme was in operation up to October 2008. The scheme which was originally introduced in the mid 1950s in respect of scheduled road passenger services was gradually extended over time. Following the introduction of the school transport scheme in 1967, the repayment was applied to the fuel used by CIÉ in the provision of these services. Private bus companies providing school transport services under contract to CIÉ were not eligible for the rebate.

The Finance Act 2000 extended the rebate to include the provision of school transport services by the private sector under contract to Bus Éireann. The Finance Act 2002 further extended the repayment to include certain coach tourism activities, but related only to the fuel used while passengers were on board the vehicle. Approximately 70 – 90% of total coach tour vehicles’ mileage qualified for the rebate.

The 2003 European Commission Energy Tax Directive 2003/96/EC however, introduced minimum excise duty rates for energy products including diesel used in the provision of local transport services. The Directive provided special derogations which allowed specific excise duty reliefs to be applied in a number of member states including Ireland where the derogations permitted reduced rates of excise duty in the case of fuel used for scheduled transport services, school transport services and tour group rates. At the time the rebate was abolished, the rate of excise duty on road diesel was 36.8 c/l of which 34.5 c/l was refunded to qualifying public transport services. Compecon understands that a fuel rebate is not inconsistent with EU legal requirements but that there was a problem with the way the former rebate scheme in Ireland was structured.

3.2: Fuel Costs.

Trends in the retail price of diesel over the past decade are illustrated in Chart 3.1.

The chart shows that the cost of diesel has risen almost continuously over the past decade apart from 2009 when there was a significant fall in the price but this has since been reversed. The average national retail price of a litre of diesel for the first 10 months of 2012 was €1.565 which was exactly double the average price in 2002.

Up to 31st October 2008 private bus and coach operators received a fuel rebate of 34.5c/l as described above. Thus the actual cost to private bus and coach operators up to that date was the price net of the rebate. Chart 3.2 illustrates how fuel prices net of the fuel rebate for private bus and coach operators have evolved over the past decade.

The chart shows that when the removal of the fuel rebate is taken into account, private bus and coach operators have been faced with a very substantial increase in what is a major component of their overall business costs. It is estimated, for example, that fuel costs represent 24% of total costs for coach tour operators and 34% of their operating costs.[11] Diesel prices for bus and coach operators in 2012 were 3.5 times (255%) higher than in 2002. The temporary drop in fuel prices in 2009, partly compensated for the removal of the rebate in the short-term but by 2012 diesel costs were 61% higher than they had been in 2008. This represents a dramatic increase in the cost of a major input to the industry.

The sharp increase in fuel costs has hit private bus and coach operators at a time when the economic downturn has had a negative impact on demand thus placing many operators under severe pressure. For example, 54% of coach tour operators reported that revenues had declined between 2006 and 2011. 55% reported a drop in profitability with profitability declining to a greater extent than revenue due to increased costs. A recent survey by Fáilte Ireland and the CTTC shows that average daily hire-out rates do not cover running costs once fixed costs are factored into the calculations. The daily rates being achieved by coach tour operators are not sufficient to cover the substantial fixed cost of fleet replacement. Clearly this position is not sustainable and unless action is taken operators will be forced to close down and make staff redundant.[12] There is evidence that this has already happened to some extent.