KMB makes no headway in push for fuel subsidy
Hong Kong's largest bus operator, Kowloon Motor Bus, is eager to talk to the government about using public money to set up a fare stabilisation fund - but the government is not in favour of the idea.
In two weeks' time the bus operator's parent company Transport International - a subsidiary of big developer Sun Hung Kai Properties - will announce what is expected to be a loss for the first half of the year.
Sun Hung Kai Properties in March announced a 36 per cent rise in interim net profit, to HK$21.01 billion. KMB got short shrift when it said two weeks ago it required government aid to keep the business sustainable.
Evan Auyang, KMB deputy managing director, says that for every HK$6 the bus operator made last year, it pocketed only 10 HK cents as rising fuel prices ate into revenues.
'Fuel used to make up just about 8 per cent of our expenses. Now it is 23 per cent,' Auyang said. 'The government said we are a commercial operation and we should carry our own risks - but we have no control over setting fares; we are controlled by strict regulations on bus acquisitions and we cannot effectively rationalise our network. So what is so commercial about the business?'
Auyang conceded that the earnings did not include income from advertising and other investment activities, and if those revenues were taken into account KMB earned 40 HK cents per average HK$6 fare and had a gross profit margin of 6.67 per cent - though that still short of its permitted rate of return on average net fixed assets of 9.7 per cent.
Moreover, local bus operations generated HK$243.3 million in profit for the firm last year, or almost a third of group net profit of HK$866 million.
Auyang said the company proposed the fund to ensure that volatile fuel prices would not have a significant impact on the fares it charges. Bus operators can apply for fare rises under a formula calculated based on staff pay and the consumer price index, but not fuel prices.
The company never gets to fully cover increases in costs because the government doesn't grant in full the fare increases it asks for.
Two weeks ago, Secretary for Transport and Housing Eva Cheng said subsidising a business operation with taxpayer money needed careful consideration. Government sources said they would not talk to KMB about a stabilisation fund unless the company had a solid plan.
Auyang said that in Singapore the government established a stabilisation fund in 1992. Officials set a reference fuel price and when oil prices exceed it, bus operators withdraw money from the pool to cover their expenses.
The bus company wants the government to provide seed money to start up such a fund. It says if such a fund were set up it would pay into it half of the profits it earned over and above its permitted 9.7 per cent rate of return. Currently it uses profits over and above this rate to offer fare concessions and other benefits.
Legislators oppose putting up any public money, and economist Andy Kwan Cheuk-chiu agrees.
'It made millions of dollars profit in each of the past 12 years. Now it's projected one year of losses and demanded government subsidies right away? This does not sound like a fair game,' he said.
A person close to the government said officials did not believe they should help a business entity bear its risks.
'With low risk comes low return. If the government is to bear one of the biggest uncertainties for KMB, I don't see how it should still be allowed a 9.7 per cent return,' this person said. Any company given a franchise should look at its profitability over the entire franchise period, not for a single year.
KMB first proposed such a fund in the first half of 2008 when oil prices hit record levels. But the company quickly returned to profit when oil prices fell amid the global financial crisis.
Crude oil prices receded from a one-month high of US$99 a barrel to US$91.73 yesterday.