Public transport usage in Israel has been on a downward trend for many years, despite the large budgets allocated to subsidies. The increase in the use of cars that congest the roads, along with a fall in service quality due to a severe shortage of at least 4,000 bus drivers, has led to a serious crisis in the bus company industry.
Back in 2001, the Ministry of Transport launched its bus company reform plan, aimed at increasing competition between operators. Until that year, 95% of the industry was controlled by just two companies - Egged and Dan.
As part of the reform, the ministry signed agreements with a series of private companies. The ministry takes pride in the fact that operating costs fell, and services improved. 28 companies currently operate bus lines and compete for tenders published by the Ministry of Transport. From time to time, the state publishes tenders for clusters of towns throughout Israel, and the companies submit bids to operate buses in that cluster for a decade or more. The state subsidy for bus services amounts to NIS 10 billion (of which NIS 3.5 billion goes towards operation of Egged and Dan's lines).
However, sources in the industry say many companies find it difficult to meet the tender conditions. According to them, the lack of drivers prevents them from meeting the requirements and harms their profitability, and that this is a sectoral problem that the Ministry of Transport is responsible for. The ministry is aware of these claims, and in the 2023-2024 state budget, NIS 300 million will be allocated for raising drivers' wages at the expense of additional lines and frequencies.
Yet the investment funds that have purchased bus companies are profitable due to the large amounts of money they receive from the state. So while companies pass the risks in the field onto the state and claim a lack of profitability, the opposite is true.
Companies get support even without meeting conditions
In the second half of 2022, over 2% of scheduled bus journeys in Israel did not take place - almost 330,000 journeys in total. In the second half of 2022, 5.37% of Metropoline's scheduled buses did not run, second to Dan (6%). The situation was also similar for Electra-Afikim, with 3% of buses not running. Meanwhile, the Ministry of Transport has not disqualified companies from managing bus routes for new clusters, even if they have not met concession terms. So apart from the sanctions which may not be significant enough, a change in the terms of tenders is also required to encourage bus operators to improve services.
Meanwhile the bus companies are enjoying increasing revenue. The Generation Capital (TASE: GNRS), an infrastructures investment fund which acquired the Metropoline bus company, explains the gap simply: because of the difficulty in hiring drivers, the Ministry of Transport approved reduction of bus lines by up to 3%, but revenue was not affected and the company was recompensed as if all the buses actually ran. Thus, Metropoline saw higher revenue last year totaling NIS 17.6 million.
"Over the years, Metropoline has had regular and stable cash flow and profitability. All this in an industry with low demand risks and protected contracts," they wrote to Generation Fund investors. The fund also notes that "the industry receives full government backing", and that there are protections against "changes in fuel and insurance prices, as well as partial protection against an increase in drivers' wages."
Metropoline is also proud of its low bids and notes that "it won the Ono-Elad and Sharon tenders with significantly lower financial bids than competing bids thanks to the quality of the operational and business plan." On the other hand, in the last half of 2022 it was ranked second from the bottom by the Ministry of Transport, almost 20 points below the national average (54 compared to 72).
In that tender, by the way, it was determined that "the basic salary presented by the bidder will reflect the reasonable salary that, in his opinion, will allow him to absorb, recruit and employ the number of drivers necessary to operate the cluster."
Distributing dividends and enjoying regular revenue
A similar picture emerges at Electra Group (TASE: ELTR), which owns Electra-Afikim. The company reports that the state grants "subsidies to the operator, including for raising driver salaries and equipping new buses", and that during the concessionary period "the operator benefits from significant cash flows from the state, which mainly do not depend on demand for the service, since the main payment is based on kilometers traveled and not on quantity It is possible that these data can explain why Electra paid NIS 74 million for control (51%) Amnon Mesilot, which owns Afikim.
"The companies that won the tenders and operate the buses are profitable companies that enjoy regular and stable income and even distribute dividends," says Adv. Ella Tamir Shlomo from Lobby 99. "They employ the drivers and not the state and so they must worry about the conditions of employment and especially the salary, which would allow them to hire the missing drivers and fulfil their obligations according to the tender, and not the Ministry of Transport. It should not be that while the companies pocket all the revenue, they continue to burden the public purse with the costs."
Egged's special terms
Egged, the longest-established bus company, also plans distributing a major dividend of NIS 500 million, representing 70% of its equity, to its new shareholders, the Keystone Fund, which holds a 60% stake. Egged has signed different agreements with the state than those of the other private operators. These agreements were intended to protect Egged and its employees. In the coming years, the part of the activity anchored in these agreements should be reduced, along with an increase in activity that will be based on tenders, so operating costs will be adjusted, according to estimates, to those used in the market. Another thing that distinguishes Egged from the other companies is its additional profitable businesses such as real estate.
Despite the significant differences, Egged itself states that most of its profitability is guaranteed thanks to agreements with the state, and that the company has a "very good level of operational profitability." It is also claims to have high ability to hire new drivers thanks to a signing on grant, driving schools it has opened, recruitment campaigns and remuneration as part of the agreement with the state. Consequently it has no problems hiring drivers.
Egged reports that only 0.5% of buses do not leave punctually, for which it pays several million shekels in fines, "which are considered part of the company's normal course of business."
Profitability is rising, service levels are falling
There are undoubtedly fundamental problems with buses in Israel that are not due to the bus companies, such as arduous journeys due a lack of bus routes. The shortage of drivers is also a basic problem that is part of a broader shortage in certain jobs in the economy. The bus companies are also exposed to other risks, such as the increase in interest rates that may affect profitability. Raising drivers' wages would not necessarily attract more workers to the industry, when violence against drivers has become routine, and conditions, such as breaks, are not exactly ideal.
Yet, it is difficult to ignore the data presented by the companies about their profitability, compared with the service they offer and in many cases do not live up to. "The OECD data show that bus services in Israel are the worst among the member states," says the organization "Power for Workers" which unionizes some of the drivers. "The fault here is twofold: on the part of the state that does not take responsibility, maintains the tender system as auctions to the lowest bid. On the other hand, the bus companies do not invest beyond the required minimum. The involvement of the funds indicates an investment in shareholders, but not in the public."
Sharon Ben-Yehuda, CEO of the Forum of Private Public Transport Companies, rejects the claims. "The issue of drivers is a root problem in public transport that leads to many other problems. Already today there is a huge shortage of at least 4,000 drivers. If someone found a solution, there isn't a company that wouldn't hire them. Bureaucratic procedures mean that only half of candidates survive the process, not because they are not suitable, but because of the duration of the process. Half of the candidates don't make it to the end because of the length of the process and that's after investment, money and resources."
She adds, "It is very important for the operators to comply with the rules that are required in the tender because they are subject to draconian fines. Unlike Egged and Dan, which have arrangements with the state, the private companies are in a difficult situation and since the Covid crisis the number of passengers has also decreased significantly. Therefore, most of the companies are in a difficult financial situation and most don't distribute a dividend, and the playing field is unbalanced because our operating costs are not lower than Egged's. To invest in the service, we need to solve the driver problem. This is a complicated situation and the state needs to sit down with us and think of solutions, but every tender adds another service and even today there are not enough drivers."
"National problem that depends on government bureaucracy
Electra Afikim said, "The financial statements that Electra publishes as a reporting company are in the name of the group, which naturally includes many subsidiaries and therefore reflect the financial data of Electra-Afikim. The shortage of drivers is a national problem that we have been dealing with for years, which stems from various reasons, most of which do not depend on the driver's salary, but in government bureaucratic processes that cause a situation where the training procedures for a driver take between six months and a year. Regarding the driver's salary, it makes sense to have a uniform basic salary, otherwise, a situation of cannibalization will be created between the companies, which will inevitably harm the driver in the end."
Egged said: "Even when Egged completes the downsizing process, it will still hold 25% of the market - more than any other operator. Egged did not start its downsizing process yesterday. Since it held over 80% of the transportation market in Israel, it has contracted to its current size (about 34%) and still maintains its competitive advantage and quality. There is no apparent reason that a drop of another 9% will make a difference."
No response has been received from the Generation Fund.
Published by Globes, Israel business news - en.globes.co.il - on July 16, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.