YSW Ferry Services Report 3 June 2010

Response to the Transport Department’s “Review of Ferry Services for Outlying Islands”  dated 23 April 2010

In February of this year, Living Lamma wrote to the Financial Secretary outlining our concerns about the provision of ferry services for Lamma residents. In that letter we said:

1. Life for everyone on the outlying islands relies upon the ferry services. These are currently not subsidised in any way, nor do they receive financial support from Government in the form of capital injection other than through the provision of ferry piers.

2. This is a missed opportunity. There would be significant environmental and commercial gains were the ferry services to be given greater support. The boats themselves could be improved to cut emissions and the ferry piers could be renovated to include more retail/restaurant space. There could also be more inter-island services to support tourism.

3. Other forms of transport receive support, be it directly or indirectly. Buses, taxis and trams are given free, well-maintained roads. Some have received cash injection to allow them to use modified fuel, which is better for the environment. The MTR receives capital grants and is allocated property to develop.

4. To date, the Transport Department has held the view that a policy does not allow subsidies to be given to public transport. However, whichever way the Government chooses to word this, it is still clear that the ferry services are out on a limb whilst other modes of public transport are given assistance to ensure their safe, regular and ongoing operations.

5. The last ferry tendering process turned out to be a debacle and has resulted in total inequality of services on different routes.

6. We on Lamma suffer a long and very uncomfortable journey if we need to travel to Aberdeen. The service is infrequent and as a result is less frequently used, causing commuters to clog up the roads unnecessarily when traveling to Aberdeen via Central. Effectively, there is no convenient access for Lamma residents to Aberdeen shops and facilities, schools in the areas and Ocean Park.

7. The direct service to Central is much more acceptable but we are all waiting with bated breath to see how the next tendering process will be handled and if indeed we will be made to suffer a further reduction in this essential service. Ferry routes to other islands are also troubled by lack of Government support.

We welcome the Transport Department’s efforts (outlined in the “Review on Ferry Services for Outlying Islands” of April 2010) to enhance the long-term financial viability of services and maintain fare stability on the six major trunk routes, which include Central to Yung Shue Wan and Central to Sok Kwu Wan. However, we have concerns over some of the assumptions made in the paper. These are:

ASSUMPTION 1: “The outlying islands ferry services are faced with chronic problems of a lack of growth in demand and highly volatile fuel costs which lead to the pressure of continued fare increase.”

On Lamma, we see no evidence of lack of growth in demand. In fact, property prices continue to rise at a time of increased supply indicating more demand, not less. In addition, it is not uncommon to find boats from Central full at the weekends and passengers turned away, though the ferry company will provide additional unscheduled sailings at these busy times.

Demand may have fallen on the Pak Kok – Yung Shue Wan – Aberdeen route, but this is perhaps more a consequence of the deterioration in service and increased fare, with many people now opting to commute to the South side of Hong Kong Island via Central (it is cheaper, more comfortable and takes less time). Perhaps if the service to Aberdeen were better, patronage would be encouraged.

Volatility may not be an issue. The price of fuel can also come down (and this has been the case recently), yet we have seen no corresponding decrease in fares. The paper suggests that Government would conduct a mid-term review to adjust fares downward when fuel costs are projected to fall. Surely this would just increase bureaucracy (and therefore cost) and uncertainty for the ferry companies? By the time such a review was conducted, the ferry companies could be into the last year of their tender and what happens if oil prices suddenly rise again?

This leads us to question another assumption on which the Government’s paper rests:

ASSUMPTION 2: “Whereas fuel cost constitutes a significant portion of total operating expenditure, it is outside the operators’ control and putting the business at high risk.”

Many businesses have to deal with volatile fuel costs, but are able to hedge to mitigate against sudden unexpected rises in the price of fuel. We assume that the ferry companies are not currently doing this, or hedged at a higher price than can be met by revenue and are therefore arguing for increasing fares. The government could make it a requirement that ferry companies hedge against fuel prices to remove the risk caused by sudden upswings in prices for the period of the tender.

ASSUMPTION 3: “There is not much room for cost cutting and revenue generation or cost containment.”

This statement may be true given the current level of investment in ferry services. However, it is difficult for ferry companies to shoulder this investment given that the short tender contract and the lack of consolidation of ferry service routes. Under the current system, there are few opportunities for economies of scale or scope. Those companies that are awarded less profitable routes in the tender lottery cannot cross subsidise unless they also win a route that provides a big enough margin to do this.

On revenue generation, the Central ferry piers sit on prime real estate, yet for the most part the piers themselves are underutilized. There could be rooftop gardens with bars and/or restaurants on every pier. The second floors could be used for retail space. Some of the ferry companies perhaps do not have the resources to facilitate retail businesses in the way that the MTR has done, or perhaps it would not be worth the effort given that they run the risk of losing their tender every 3 years.

Some time ago, in response to requests from Lamma residents for an additional weekend sailing after 12.30 am from Central, the ferry company piloted a 2.30 am sailing over a period of 2 months. Surprisingly the pilot scheme was operated every night of the week. The results were averaged out over all the additional sailings during the period and (unsurprisingly) it was concluded that demand was too low to justify extending the service.

Had the pilot been run only on Friday and Saturday nights, the results would have been very different. If the ferry company was able to select an appropriate vessel and charge an appropriate amount for a late night sailing, there may have been an opportunity for revenue generation. If the company was able to conduct proper market research, they may have found that by changing the time by 30 minutes, they could increase the number of passengers.

ASSUMPTION 4: “We have looked into the option of the Government providing hardware. It would involve a very huge capital expenditure but would not reduce pressure on fare increases because it would not help enhance revenue or reduce operating costs except for depreciation.”

We are concerned at the way Government views capital expenditure. We believe cleaner, faster, more fuel-efficient ferries would encourage patronage, as well as reduce emissions. The Government’s paper makes no mention of the environment or emission reductions.

The Government also seems to infer that hardware must be purchased outright. It does not. Interest rates are currently low, making it a good time to invest in capital equipment. Of course, interest rates may rise in future. However, in a similar way that enterprises deal with oil price fluctuations, measures can (and should) be taken to minimize exposure to interest rate fluctuations.

Some Conclusions

The Transport Department’s paper states that the Government, “Undertook to study the long-term development of outlying islands ferry services,” yet the paper does not take a long-term view of such basic elements as oil prices, interest rates or emission targets. The current system provides little opportunity for cross-subsidization of routes or allow the companies to have a planning horizon of more than 3 years.

The Government paper does not adequately explain why the other options explored were not found to be acceptable. We would very much like to see details of the Government’s study outlining the routes and times of hopper services, the types of route and service standardization proposed, forecasts of possible rental income should the use of the ferry piers be optimized, the length of the franchises proposed, and so on. Without these details it is impossible to support the Government’s position on these points.

We would like to see a more holistic approach that provides fuel-efficient services on all routes. Other countries are able to achieve this and still provide an affordable service, so why can’t Hong Kong? The ferry piers, particularly on Hong Kong side, represent huge missed opportunity for revenue generation through restaurant and retail space. There is a missed opportunity to increase the flow of visitors between the islands, thus increasing revenue for the ferry operator(s) and bringing business to island communities. There is also a huge opportunity to cut the cost to the environment through investment in more eco-friendly vessels. Through the MTR, Hong Kong has a world-class underground and overland rail network of which it can be proud. Why can’t we do the same with our ferry services?

Authors: Jo Wilson & Jos Vernon