Introduction
Overview of the Company
Saudi Public Transport Company (SAPTCO) is a company offering communal bus transport within and without the Kingdom of Saudi Arabia. SAPTCO covers ten major cities within the country which include Mecca, Riyadh and Jeddah.
The company also provides special services to the religious sites during the Islamic calendars. SAPTCO further provides transport to the neighbouring countries and other Arab states such as Egypt and Sudan. In addition, SAPTCO offers VIP transport between the capital city to Bahrain through Medina and school transport (SAPTCO, 2013).
The company has employed over 5000 workers of which 900 are for administration and fleet management. The bus drivers are also included in the above number of employees (SAPTCO, 2013). The company is governed by a nine member board of directors headed by the chairman. The chairman is appointed by the Prime Minister. The board consists of four representatives of state departments and four other members who represent the minority shareholders (Riyadh Economic Forum, 2005, p. 25; SAPTCO, 2013).
SAPCO was established in the late 70s by an act of parliament. Its headquarter is in the Saudi capital of Riyadh. The Saudi government initially spent nearly one billion riyals to establish the company and still remains a major shareholder up to date; the public only owns less than 20 percent of the shares.
The company has a fleet of almost 3000 contemporary buses which makes up to 600 trips a day and are connected to over 360 cities and villages within and without the Kingdom of Saudi Arabia (SAPTCO, 2013). The company’s vehicles are very modern, comfortable and charge considerably lower prices than their Western counterpart (Hassan & Al Hammad, 2010, p. 373).
SAPTCO has expanded its business to include freight service, parcel services and luxury car hire. The latter can be hired on short term and long term basis. The company has a wide range of luxury cars including Limousines which suits the needs of all and give clients a wide range of choice.
SAPTCO uses medium and heavy trucks to transport cargo and freight. The majority of the cargo and freight are transported between Riyadh and Dammam, where the short distance makes it more cost-effective than rail transport. Most of the cargo and freight transport also takes between Riyadh and Jeddah where alternative means do not exist (SAPTCO, 2013).
Purpose of the report
The main purpose of this report is to conduct a case study analysis of Saudi Arabia Public Transport Company (SAPTCO). The case study will involve exploring the background of the company, industrial analysis/porters five forces analysis, SWOT analysis and financial analysis. In addition, the report will explore the company’s business strategy, systems and structures put in place to match the strategy and make necessary recommendations.
Case Analysis
Industrial Synopsis
In Saudi Arabia, the public sector transport plays a significant role in the economy. This sector also makes every effort to create value in the same way as the private sector.
This strategy is both beneficial to the company and the passengers. The improvement in the service quality has also attracted other users, for instance, schools and tourists. In addition, the improvement in the public sector bus transport has helped to reduce perennial problems such as traffic congestion, noise and air pollution, and excessive consumption of fuel (Riyadh Economic Forum, 2005, p. 26).
The country’s transport sector is not centrally managed. Saudi Port and Railways are managed independently, whereas air transport fall under the ministry of defence and aviation. Roads and transport fall under the ministry of transport (Riyadh Economic Forum, 2005, p. 26).
The complex nature of the transport sector has resulted to high competition for budgetary allocation given the fact that most of these projects are funded by the government. Given the publicly-funded nature of the public transport sector, each segment has not achieved its full potential compared to their counterparts in developed economies (Riyadh Economic Forum, 2005, p. 28).
Since public transport is not operating and performing to a world class standard, Saudi government has been forced to spend huge sums of money to subsidize the transport system. The government subsidies have compromised the efficiency of the public transport infrastructure and services (Hassan & Al Hammad, 2010, p. 375). Therefore, the Saudi government has to facilitate public-private sector partnership to enhance efficiency and minimize heavy spending on this sector (Riyadh Economic Forum, 2005, p. 28).
The government has also pumped billions of Saudi Riyals in the development and maintenance of the road network in the last two decades. However, one of the major concerns is the budgetary allocation to the transport sector which is relatively lower compared to other sectors. Budgetary limitation has forced the government to rethink of how to reform the public road transport. To narrow the financing gap, the ministry of transport and ministry of finance has considered enhancing public-private sector partnership (Riyadh Economic Forum, 2005, p. 230).
Porter’s five forces analysis of the public transport sector
This model is based on the comprehensive stance on the company’s strategies that meets the opportunities and threats within and without the industry. The five forces as identified by porter include threats to news entrants, bargaining power of suppliers and customers, threat of substitutes, and the rivalry within the industry (Porter 2008, p. 78).
Saudi Arabia transport industry is highly regulated and SAPTCO nearly controls the entire sector. Barriers to the new entrants are predominantly government legislation and policies.The law gives the company a near monopolistic right to provide intra- and intercity public bus transport services.
According to the law, the ministry of transport is given the responsibility to monitor and regulate the public transport sector. Competition in this sector is very limited. SAPTCO controls more than 80% of this sector and only less than 20% of the buses are privately owned (Riyadh Economic Forum, 2005, p. 25).
The company’s bargaining power in the transport industry in Saudi Arabia is considerably high. The bargaining power of the company in the public transportation industry is high because of minimal alternatives or due to its dominance in the market. The government has been trying to reduce this bargaining power through public-private sector partnership (Porter 2008, p. 80; Riyadh Economic Forum, 2005, p. 25).
On the other hand, the passengers in the Saudi Arabian public transport industry have less bargaining power and cannot impose pressure on the profit margins and volumes. Fare prices charged to the passengers are influenced by company’s policies and the prevailing economic conditions.
The industry is also characterized by a few transport companies and high number of passengers giving the former upper hand over the passengers. In addition, Saudi consumers are price sensitive but in matters of transport they don’t have a choice (Hassan & Al Hammad, 2010, p. 373).
As already been mentioned, the country’s public transport service is largely dominated by SAPTCO and this means that there are very few alternatives. Other companies (which occupy 20% share of the public transport) mainly handle freight and cargo and a sizeable number of taxi business (SAPTCO, 2013). Less than five percent provides public bus transport service and those who does operate within the city. For that reason, the public transport sector lacks rivalry at the moment (SAPTCO, 2013). But this situation is expected to change with liberalization of the transport sector and increased public-private sector partnership (Hassan & Al Hammad, 2010, p. 375).
SWOT Analysis
SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is commonly used in business studies to explore the existing conditions in order to come up with possible solutions or strategies of addressing both internal and external challenges. In this case, our SWOT analysis will focus on Saudi Arabia Public Transport Company. The main objective of the analysis is to have first hand experience of the problems facing the company and gain knowledge concerning probable developments and potentials.
Strengths
These are the core competences of the Saudi Arabia Public Transport Company. The main foundation of the company is their staff. SAPTCO boasts of highly trained and disciplined personnel whose main focus are passengers comfort and satisfaction. Service quality and customer satisfaction have always been the core of SAPTCO as enshrined in its vision and mission statement. The company has managed to achieve all these because of its highly competent staff, which includes the drivers and mechanics (SAPTCO, 2013).
The system used by the SAPTCO vary in some aspects, however they all provide superior services than the conventional bus transport. The high level of service is achieved through various ways including restricted routes, prepaid bus system, provision of real time information to the passengers at the station and restricted stops.
The company buses are exceptionally modernized to offer services for all walks of people including people with special needs. In addition, they are calmer, silkier and more comfortable than the conventional buses (SAPTCO, 2013).
SAPTCO transport system is highly integrated with the existing and anticipated infrastructure. For instance, its bus routes and stations are envisaged and implemented in a way that enhances productivity, reduces travel time and promotes inter-modal connection. In summary, SAPTCO’s system serves to optimize speed and to provide convenient high quality service to the passengers compared to the conventional bus services (Anh, Tanaboriboon & Hung, 2005, p. 352; SAPTCO, 2013).
The use of more than one driver for buses and trucks plying international routes and adhering to strict work regulations have also helped the company to minimize accident incidence and ensure safety of the passengers.
The work regulation requires that every drive takes at least five hours rest before taking another trip as well as one day off every week (Hassan & Al Hammad, 2010, p. 373). In addition, the company has always been strict on road safety regulations and have employed highly skilled mechanics who maintains their vehicles regularly (Hassan & Al Hammad, 2010, p. 373).
The strength of the company is also in the diversification of the transport business. The company operates a portfolio of buses, trucks and luxury cars. As a result, SAPTCO has been able to spread risks and maintain profitability in the public transport business (SAPTCO, 2013).
The company also offers a very reliable and regular transport given its large fleet of vehicle. There is no single day that SAPTCO’s vehicles have not been on the roads of Saudi Arabia and the neighbouring countries. Besides high quality passenger services and safety standards, environmental protection and conservation are also in the company’s undertaking (SAPTCO, 2013).
SAPTCO has put up necessary measures to mitigate emission of greenhouse gases and other forms of wastes, for instance, all their vehicles are installed with gadgets that regulate emission of toxic wastes. In addition, their old vehicles are either sold to private owners or recycled as scrap metals.
Lastly, Saudi Arabia is among the top global exporters of petroleum products. Hence, the cost of fuel is very low in the country. Fuel cost constitutes the largest share of transportation cost in many countries. However, SAPTCO enjoys lower fuel prices which translate to less operational cost (Hassan & Al Hammad, 2010, p. 381).
Weaknesses
These are factors that distract the company from achieving its main objectives. Given the publicly-funded nature of the public transport sector, SEPTCO has not achieved its full potential compared to its counterparts in the developed economies and the Asian giants. Since SEPTCO is not operating and performing to a world class standard, Saudi government has been forced to spend huge sum of money to subsidize it. The subsidies considerably compromised the efficiency of the company (Riyadh Economic Forum, 2005, p. 25).
SEPTCO has monopolised the country’s public transport and as a result has minimised the level of competition in the public transport sector.
The government, who is a major stakeholder in the company, has put in place stringent policies and regulations for the public transport sector barring private sector entry into the industry. Lack of competition is not only unhealthy for the industry but has also resulted in some form of inefficiencies like the one experienced in the company (Riyadh Economic Forum, 2005, p. 26).
Fluctuating demand is also a major problem facing the company. During the holy month of Ramadan and Hajj, visitors tend to flock the country and the demand for public bus transport is very high at that time. However, when the visitors are gone the demand normally goes down.
As a result, the buses are not optimally used during the low seasons. In addition, many Saudi citizens prefer to use private means of transport. This partly attributed to lower fuel prices in the country and the Islamic law that bars women from using public bus transport (Hassan & Al Hammad, 2010, p. 375).
Opportunities
This part explores the opportunities in the public transport sector that would be beneficial to the company. Public-private sector partnership provides an opportunity for transforming the country’s public transport sector. Over the last one decade, the government has sped up structural reforms to trounce barriers thwarting the participation of private sector in the transport business.
The government has sought help from other countries, for instance, Qatar who has succeeded in this field. Present trend shows a high level of privatization and increased participation of the private sector in the public transport business. Public-private sector partnership will not only improve the efficiency of the company but also avail the much needed funds for expansion and further developments (Riyadh Economic Forum, 2005, p. 4).
The Saudi Arabian government is planning to liberalize the public transport sector through a public transport policy reform. These reforms are aimed at restructuring the public bus transport sector to allow for large private-sector buses in order to enhance competition in the industry.
The reforms are also aimed at eliminating obstacles that hinder the entry of private sector in public transport (Riyadh Economic Forum, 2005, p. 5). Competition will be regulated through appropriate legal and strategic framework. Public transport policy reforms will help to eliminate the inefficiencies experienced in the company and improve SAPTCO to international standard (Riyadh Economic Forum, 2005, p. 25).
Public transport is one of the sectors the Kingdom has had a competitive advantage. Saudi Arabia is also located in strategic trade routes. For this reason, the government is planning to export transport service to the neighbouring countries. Export of public transport to the neighbouring countries will provide the company with an opportunity to optimize on the use of its vehicles, especially during the low season.
This will also help to improve trade between the country and its neighbours (Riyadh Economic Forum, 2005, p. 29). Owing to the growing economy, the government is also planning to increase budgetary allocation to its key ministries. The company should take advantage of these funds to improve and strengthen its performance. This is necessary because the entry of the private sector into the industry will lead to stiff competition and only the strong will survive (Riyadh Economic Forum, 2005, p. 31).
A recent increase in the price of oil in the global market and subsequently local market has forced many people to leave their cars at homes. This has not only reduced overall emission of greenhouse gases in the cities but also decongest the city from heavy traffic. In addition, the city councils recently hiked packing fees and private motor vehicle licenses. This has led to increase in the number of people using public transport (Riyadh Economic Forum, 2005, p. 31).
In 2012, Saudi Arabia witnessed the highest number of visitors and tourists in the country. According to the tourism ministry, this number is expected to increase even further in the coming years. Most of these tourists and visitors are Muslim pilgrims and foreign students (SAPTCO, 2013; Riyadh Economic Forum, 2005, p. 31). In addition, majority of them are from Africa and other muslim nations.
The increase in the number of tourists and visitors in the country is attributed to the growth of the tourism sector and the expansion of the economy. The growth and development of the economy have enhanced opportunities in the country and as a result many people, especially from Africa, are streaming into the country in search of greener pastures. This provides the company with an opportunity to improve and expand its local transport services (Hassan & Al Hammad, 2010, p. 374).
SAPTCO can embrace the use of Geographical Information System (GIS) to improve its services (Blonn, Carlson & Mueller, 2006, p. 6). GIS can be employed in two ways: First, computerized integrated geographical information system can be used to identify deficiencies in various routes.
Second, data and information related to the bus network route are stored in a database and can be used in the future decision-making process. In other words, GIS not only helps in identifying route network deficiency but also help to enhance service and resource use (Blonn, Carlson & Mueller, 2006, p. 7).
Threats
This section considers the overall difficulties or external challenges that the company is facing or is anticipated to face. One of the major threats facing the company is government policies in the transport sector that are more political rather than economic. Political interference in the affairs of the company has had a negative impact on the company.
For instance, board and staff appointment in many occasions are not based on merits but on political affiliations. Due to political interference the company occasionally do experience the problem of mismanagement and corruption. In addition, the budgetary allocation to the company is always insufficient (Riyadh Economic Forum, 2005, p. 26).
Although the Kingdom is among the top exporters of oil, changes in the global oil prices also affect the local prices. An increase in the price of petroleum products in the global market may force the Saudi Arabian government to hike fair prices, which could hinder the residents from using public transport (Riyadh Economic Forum, 2005).
The government is also expected to enact necessary laws that would allow private-sector buses in the Saudi public transport industry. As a result, there will be stiff competition which may negatively impact the company or drive it out of business if left uncontrolled (Riyadh Economic Forum, 2005, p. 28). Last but not least, the principle of reforms in the transport sector has always been deemed as vague by the critics.
SAPTCO’s corporate strategy, structure and control system
The company plans to expand its market share by venturing into the neighbouring countries’ markets, especially during the holy months of Ramadan and Hajj (Riyadh Economic Forum, 2005, p. 31). The company’s strategy is to further enhance private sector participation in the public transport.
They intend to achieve this by expanding their fleet and enhancing service quality to the general public through operation and maintenance. The company is currently undertaking fleet upgrading and addition of new network routes. This is anticipated to further minimize profits and result in shortage of funds. This is where the private sector is needed to fill up the financial gap (SAPTCO, 2013).
However, there are a number factors that have been discouraging private sector participation in the company. They include: first, without state financing, the company’s overall performance is supposed to worsen. Second, low demand routes may be phased out due to pressure to cut down cost.
Third, an increase in the number of buses may result to poor loading and increased costs and fares. Fourth, excess number of buses may cause traffic jam, leading to high operational costs and time wastage. Last, Increased competition as a result of private sector entry may lead to unsound schedules, inconsistencies, safety challenges and fluctuating fare prices (Riyadh Economic Forum, 2005, p. 45).
To avert these challenges, the company has put in place necessary structures and control system. They include: first, the proposed merger with large private-sector companies. This will not only minimise competition but also regulate profit and cost. Second, competition will also be minimised through suitable planning and policy frameworks, for instance, an urban transport policy.
The policy will ensure stable fare prices and upgrading of the current transport system (Riyadh Economic Forum, 2005, p. 50). Others include operating within a limited network to accommodate private-sector and attaining autonomy. The latter will see the company generating its own finances, for instance, by floating shares and limit the use of government subsidies. All these are expected to boost efficiency in the company and improve service delivery (Riyadh Economic Forum, 2005, p. 51).
SAPTCO’s financial analysis
Financial analysis is a very significant aspect of case study analysis. Analysis of SAPTCO’s financial statements will greatly enhance our case study. In any case, financial analysis reflects on the performance of the company in relation to its strategies and structure. Even though analyzing companies financial positions is somehow difficult, ratio analysis is generally preferred.
The financial ratios are normally categorised into groups. These groups include profitability ratios, Liquidity ratios, activity ratios, debt/leverage ratios, and equity-return ratios. The case study will only focus on the first four ratios since SAPTCO is nearly a monopoly with no real competitor in the public transport sector. The report will compare ratios for financial year 2012 and 2011 (Saudi Joint Stock Company, 2012).
Profitability Ratios
These ratios show whether the company is making progress or going down. Profitability ratios include Return on Total Assets (ROA) and Return of Stakeholders Equity (ROE). ROA= Net Profit/ Total Assets. ROA for the financial year 2011 and 2012 are 0.036 and 0.35 respectively.
This shows a decline of 0.001. ROE=Net Profit/Stakeholders Equity. ROE for the financial year 2011 and 2012 are 0.045 and 0.050 respectively. This represents an increase of 0.005. Decrease in ROA is a result of the falling trend of revenue due to the inefficiencies being experienced in the company. However, the company is still performing relatively well.
Liquidity Ratios
These ratios gauges the company’s capacity to pay interim debts. Liquidity ratios include Current ratio and Quick ration. Current ratio=Current assets/Current liabilities and it should be more than one. The current ratio for the financial year 2011 and 2012 are 0.818 and 0.696 respectively.
The two ratios show an alarming trend in the company and it is even worse in 2012. In real sense, the company cannot meet short term obligations unless it continues to borrow. Quick ratio=Current Assets-Inventory/Current Liabilities. Quick ratio for the financial year 2011 and 2012 are 0.577 and 0.53 respectively. This means that the company cannot pay the claims of short term creditors and the trend is getting worse.
Activity Ratios
These ratios show how the company is overseeing the use of its assets. These ratios include stock/inventory turnover and Average Collection Period. In our case, we will only look at inventory turnover. Inventory turnover= Cost of goods sold/Inventory. Inventory turnover for the financial year 2011 and 2012 are 7.02 and 8.23 respectively. The ratio shows a positive trend in the turnover rate.
Leverage Ratios
These ratios show the amounts of debt or equity used to finance the business. Businesses are highly leveraged if they use more borrowings than equity. The balance between the two is normally referred to as capital structure. Leverage ratios include Debt to Asset ratio, Debt to Equity ratio and Time Covered ratio.
The case will only focus on the first two. Debt to Asst ratio= Total debt/Total assets. Debt to asset ratio for the financial year 2011 and 2012 are 0.2613 and 0.3094 respectively. The ratio shows increased rates of borrowing to finance the business. Debt to equity ratio=Total debt/Total equity. Debt to equity ratio for the year 2011 and 2012 are 0.3276 and 0.4481 respectively. This also shows an increasing trend of leverage.
Conclusion
SAPTCO is a government funded company which offers public transport within and without the country. The company was formed through an act of parliament in 1979. SAPTCO is a near monopoly in the public transport sector and therefore has no real competitor.
This is due to government stiff regulations which hinder the entry of private sector in the public transport sector. Overdependence on government subsidies has really compromised the company’s efficiency and performance. As a result, the company has not been able to exploit its full potential.
To enhance the efficiency and performance of SAPTCO, the report recommends necessary reforms in the public transport sector to allow entry of the private sector. The government should also ensure that SAPTCO becomes an autonomous entity which can run its own affairs without state interference and minimise reliance on subsidy. Lastly, the company should go on with its plan of enhancing its partnership with the private sector.
References
Anh, T.T., Tanaboriboon, Y., & Hung, B.Q. (2005). Analysis of Bus Service in Hanoi, Vietnam. Proceedings of the Eastern Asia Society for Transportation Studies, 5, 352-362.
Blonn, J., Carlson, D., & Mueller, P. (2006). Transport 2020 Bus Rapid Transport: A cost Benefit Analysis. Madison, Wisconsin: Madison Area Bus Advocates.
Hassan, M.K., & Al Hammad, A.A. (2010). Intercity Bus Scheduling for the Saudi Public
Transport Company to Maximize Profit and Yield Additional Revenue. Journal of Service Science and Management, 3, 373-382.
Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 78-93.
Riyadh Economic Forum. (2005). Saudi Arabia — Regional and Global Transport Hub: A Public-Private Partnership Opportunity. Riyadh, Saudi Arabia: Riyadh Chamber of Commerce.
SAPTCO. (2013). Saudi Arabia Public Transport Company. Web.
Saudi Joint Stock Company. (2012). SAPTCO Interim Finacial Statement. Limited Review Report to the Shareholders of Saudi Public Transport Company, 31 March 2012. Retrieved from https://www.tadawul.com.sa/wps/portal/tadawul/home/.
Appendices
Appendix 1: SAPTCO’s Balance Sheet As at 31st December 2012
Source: Saudi Joint Stock Company (2012)
Appendix 2: SAPTCO’s Statement of Cash Flow
Source: Saudi Joint Stock Company (2012)
Appendix 3: Income Statement
Source: Saudi Joint Stock Company (2012)