Transport Perspectives 2011 2

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TRANSPORT PERSPECTIVES / Transport Perspectives / November/December 2011

This edition contains two articles:

In the rst article, Daniel Lawrence examines the potential or

expansion by overseas operators into three o the worlds rapidly

growing emerging markets - China, India, and Brazil.

In the second, Tim Ayling looks at recent technological

developments in transport ticketing and examines the impact

these have had on security, raud, and eciency.

November/DeCember 2011

KPMG International

Contents

Emerging GrowthOpportunities

Page 2

Playing on a Sticky Ticket

Page 9

Transport Perspectives


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Emerging GrowthOpportunities

The demographics o these emerging

markets are the key actors driving

opportunities or transport operators.

China, India and Brazil are especially

interesting due to their size and speed

o growth (see table 1). We have ound

opportunities or oreign operators in

all o these countries. However, in all

the sectors we discuss- passenger rail,

domestic aviation and urban transit-

there are also potential barriers to entry.

IntroductionMany transport operators will nd that the opportunities o the uture do not lie in their current

markets. Instead, the key sources o uture growth may well be ound in the worlds rapidly growing

emerging markets.

2 | Transport Perspectives / November/December 2011

Daniel Lawrence, Global Executive Transport and Logistics


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Transport Perspectives / November/December 2011 | 3

Table 1: Key Indicators1

Country GDP($bn USD 2010)

GDP Rank GDP Growth(average annual)

2007-2010

Gini inequalitycoefcient (2000-

2010). 0= highly

equal

Urban Population2009 (% o total)

Population 2010(m)

China 5,878 2nd 9.7% 41.5 44.0% 1,338.3

India 1,729 9th 7.9% 36.8 29.8% 1,170.9

Brazil 2,088 7th 4.0% 55.0 86.0% 194.9

Comparators

Russia 1,480 11th 0.5% 43.7 72.8% 141.8

UK 2,246 6th (1.2%) 36.0 90.0% 62.2

USA 14,582 1st 0.1% 40.8 82.0% 309.7

1 All data rom World Bank, except Gini Coecient (UN HDR 2010)2 United Nations http://esa.un.org/unup/p2k0data.asp

High growth. As can be seen in Table

1, all three markets are ast growing.

In China and India especially, thisis driven by a expanding, highlyeducated, middle class.

Urbanisation. Urbanisation will have

a proound eect on the demand

or transport rom citizens. Brazil is

already highly urbanised. Since 1978,Chinese urbanisation has more than

doubled, and is orecast to reach

73% by 20502. Indian urbanisation

is expected to increase to 55% by

2050. This will lead to increased

demand or urban transportsystems. The number o light rail

systems under construction in these

countries is testament to this. The

other major implication is that this

will enable development o transport

hubs. For example, a high speed

rail network, in order to be nanciallyviable, has to connect to a limitedamount o locations.

Where these limited locations

capture a larger proportion o the

population then the case or this

will grow.

Wealth Distribution (as measured

by the Gini coecient), in India

and China at least, is on a par with

major developed countries, such as

the USA and UK. The burgeoningtransport sector is no longer or a

privileged ew.

The one key non-demographic impact comes rom major sporting events, such as

the 2014 World Cup and the 2016 Olympic Games, which have given an impetus to

Brazil to invest in its transport inrastructure.

Demographic Trends

The three key demographic trends which drive opportunities in the transport

sector are:


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China

China is arguably the worlds largest

potential market. In 2010, Beijingsairport overtook Heathrow to become

the worlds second busiest ater Atlanta.

In April 2011, the IMF announced that

the Chinese economy would be larger

than that o the USA in Purchasing

Power Parity terms by 20163. And in

June 2011, one o the worlds astest

scheduled passenger train serviceswas launched between Beijing and

Shanghai, with an average speed o

300 kph. However a series o issues

were experienced by High Speed Rail

including a major collision in Wenzhou in

July 2011.

In China, most sectors are not

liberalised. The domestic aviation

sector was opened to private investors

in 2005, and a number o private

operators set up operations. However,

by 2009, most o these airlines had

either closed down, merged, or were

acquired by the big three state owned

operators. This is oten attributed to thesupport (tacit or otherwise) that the

Government gives to the state carriers.

For example, private airlines have

very limited access to the Shanghai

to Beijing route, the most lucrative in

China. Foreign ownership o domestic

airlines is permitted, although it is

limited to 35% o equity. In addition,

the oreign shareholder cannot be the

largest shareholder. Finding a strong,

reliable Chinese partner is the challengeor oreign operators. Should this be

ound, the Chinese domestic market

represents a potentially signicantopportunity, one that is relatively

untapped by non-Chinese companies.

In China, Heavy Rail remains closed to

competition. The crash in Wenzhou has

led to increased criticism o the current

arrangements, though it is unlikely

that any privatisation will occur soon.

The main opportunity in the country is

or supervisory and guidance work, as

evidenced by Deutsche Bahns advisory

role on the construction o High Speed

Rail, where China plans signicantinvestments.

Similarly in the Metro sector, operations

are controlled by the state (municipal

authorities). Some o these metroswill have private sector operations, or

example Shenzens Longhua line will be

operated by Hong Kongs MTR.

Municipal authorities still control most o

the urban bus operations. In rare cases,

there have been entry routes or oreign

operators. Comort DelGro has operated

in China since 2005, and operates over1,200 buses in Shenyang. Other oreign

operators have ound joint ventures to

be a potential route to market.

It is important to note that as part

o its WTO membership, China hascommitted to gradually lit oreign

investment restrictions increasing the

prospects o a more competitive market

in the uture.

India

As the worlds second most populous

country, India is oten considered in the

same breath as China by companies

looking to target developing markets.

Indias aviation sector was initiallyopened to the Indian private sector

in the mid-1990s, however, only one

company rom the original private

entrants, Jet, still exists. Further

liberalisation encouraged other airlines

such as Kingsher, and Low Cost

carriers including Deccan Airlines,

IndiGo and SpiceJet, to enter. The

domestic aviation sector is now more

than 80% privately operated4,

a stark contrast to that o China.

Despite this success, the domesticaviation sector remains o-limits to

oreign airlines. (However oreign non-

airline companies are, legally, allowed

to invest up to 49%5 o an Indian

domestic airline and private equity

rms have considered investing). The

ministry o Civil Aviation have been

considering relaxing these restrictions.

I this happens, then joint venture

companies including oreign airlines may

be allowed to operate in India, possibly

using existing brands. This would be oparticular interest to airline groups with

signicant access to cash. Domestic

3 IMF, World Economic Outlook Database April 20114 Indian Directorate General o Civil Aviation http://dgca.nic.in/reports/MARKET.pd5 Department o Industrial Policy and Promotion http://dipp.nic.in/English/Policies/FDI_Circular_012011_31March2011.pd


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airlines, oten heavily debt-laden, would

welcome this investment.

Bus operations in India are generally run

by dierent state or local Governments

without major private national brands.

Despite this, the sector is still o

signicant size- the Andhra Pradesh

State Road Transport Company has oneo the worlds largest bus feets. Thebus sector in India is, legally, open to

100% Foreign Direct Investment (FDI).

However, perhaps due in part to poor

road inrastructure across India, there

has been little oreign investment in this

sector to date.

In terms o passenger kilometres6,

Indias rail market is the worlds largest.

However, the Indian Rail sector remains

controlled by the state-owned monopoly

Indian Railways. A small number oPublic Private Partnerships (PPPs) have

been put in place, usually between

Indian Railways and others, e.g. the

Surendranagar and Pipavav port rail line.

Governments in India have foated the

idea o urther PPPs, though historicallyonly Indian companies have been

involved. India is planning high speed

rail links, and is using international

consultants to advise it on this.

In light rail, the Ministry o Urban

Development is keen to promotePPPs. One o these which has recently

commenced operations is the Delhi

Metro Airport Express Line. This was

a PPP arrangement, and the line is

operated by Reliance Inrastructure,

an Indian-based company. The same

company is also constructing the

Mumbai Metro under a Build-Operate-

Transer agreement, in a consortiumwith Veolia, a France-based transport

service company.

As India continues to urbanise, metro orlight rail schemes are being constructed

or planned in many cities. Some othese are state unded, others based on

PPP arrangements. FDI o up to 100% is

permitted in Indian Mass Rapid Transit.

Some o these schemes are welcoming

oreign investment, such as the tender

or the Chennai metro.

BrazilBrazil is the smallest o these three

emerging economies in GDP terms,

but is a signicant economic power.

Brazils domestic air sector is the ourth7

largest in the world and it was the

astest growing domestic air sector in

the world as o June 20118. All airlinesare privately owned. The sector is

ree rom the presence o major state

monopolies, and as such is more similar

to the domestic airline sector in India

than the sector in China. There is strongregulation, but there have been some

changes to reduce the intensity o

regulation in the last decade.

FDI is restricted in Brazil to 20% o

domestic airlines9. However, as can be

seen through the ongoing merger o LAN

and TAM, the competition authorities

in Brazil are open to innovative ways o

merging. The deal is structured in a way

that meets the 20% FDI regulation10

while allowing LAN to have 70% control

o the combined entity11. It remainsto be seen whether this arrangement

is easily replicable or other oreign

airlines wishing to merge with or acquire

Brazilian airlines. Additionally, the board

o directors o the airline must be ormed

by Brazilian citizens.

Considering the size o the country, Brazils

rail network is limited. The rail network was

privatised in the 1990s, with concessions

given to various reight operators, some

o whom oer very limited passenger

services. The length o the concessionsis 30 years, and so there may be

6 World Bank, 2009, http://data.worldbank.org/indicator/IS.RRS.PASG.KM?order=wbapi_data_

value_2009+wbapi_data_value+wbapi_data_value-last&sort=asc7 CAPA, http://www.centreoraviation.com/news/2011/07/25/more-rapid-growth-or-brazils-

domesticaviation-market/page1

8 IATA, http://www.iata.org/whatwedo/Documents/economics/MIS_Note_June11.pd9 US State Department http://www.state.gov/e/eeb/rls/othr/ics/2009/117415.htm10 LATAM http://www.latamairlines.com/downloads/English/Home/LAN-TAM_presentation.pd11 LAN http://www.lan.com/en_un/about_us/ino_inversionistas/pressrelease/20110119_acuerdo_

vinculante.html


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opportunity or oreign investors when

these concessions are re-bid in the 2020s.

There is no restriction in Brazil or a oreign

company owning a domestic rail operation.

In metro, some systems are run by

private sector operators, others by

public sector operators. This is at

the discretion o the state or cityresponsible. Foreign operators have hadsuccess, or example French operator

RATP is part o a consortium that

operates So Paolo metro.

One major opportunity in rail is that

o Brazils High Speed Rail (HSR)proposals. Foreign Consortia were

invited to bid or the rst o the HSR

lines to be put up or tender, between

Rio and So Paolo. This was to be a

Build, Operate and Maintain concession

with the Government having a 1/3interest in the company. Unortunately,

no bids were received. The Government

plans to split the consortium into one or

construction and another or operation

and maintenance. This could oer a

much more attractive opportunity ororeign operators.

Brazils bus sector is highly ragmented,

with an estimated 2,000 companies

operating in urban areas alone12. There

are no restrictions on oreign ownership

o bus companies, yet oreign

companies have been slow to attempt

market entry here.

Conclusion

Aviation, particularly in Brazil and China,

represents an attractive prospect

or oreign investors under currentregulations. Brazil, though the smallestmarket o the three, combines Chinas

openness to oreign operators and

Indias absence o state carriers, to

oer the most attractive market or

overseas investors. While Indias market

is closed, to airlines at least, should the

existing Indian carriers successully

lobby or investment by oreign airlines

in aviation, they would be keen to nd

oreign partners. Should this happen,

India will be the most attractive marketo the three.

The heavy rail sector is essentially

closed in China and India. Given the

power o the state monopolies, there is

little opportunity or oreign operatorsbeyond an advisory capacity. Again,

Brazil, through HSR, may oer the

biggest opportunity.

In bus, operations are either state

owned or highly ragmented, yet oreign

operators have had success, such as

Comort Del Gro in China.

In all three markets, it is metro/light

rail that oers the best immediate

opportunity or oreign transport

companies, who need to move quickly

to secure the best local partners and bid

or concessions.

While the market potential o these

three countries is considerable, they

are still perhaps too closed or oreign

investment. These markets need toopen up to oreign investment and

oreign knowledge in order to become

the leading transport markets which

they have the potential to be. Table 2

summarises the ndings o this article.

Table 2: Summary

Country Domestic Aviation Heavy Rail Light Rail/Metro Bus

China 35% Ownership Permitted.State dominated sectormakes competitiondicult.

Currently closed tooreign investment thoughambitious plans or HSR.

Rapidly developing.Opportunity orconcessions in someregions.

Foreign Operators haveentered in rare cases.

India Foreign Ownership byairlines not permitted,but under consideration.Competitive and privatisedsector.

State Monopoly. Rapidly Developing.PPP arrangements oeropportunity.

Investment permittedbut poor inrastructurepresents risks.

Brazil Privatised sector. Foreigncompanies can enter underrestrictions.

Future ambitious HSRplans open to oreignconsortia.

PPP arrangements oeropportunity.

Fragmented sector butoreign ownership ispermitted

12Thredbo 6 Conerence, http://www.thredbo-conerence-series.org/downloads/thredbo6_papers/

thredbo6-theme4-Aragao-Brasileiro.pd


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Recent demographic changes havechanged customer priorities. Priorities

such as a lower environmental impact

and an ecient use o time and

resources are becoming prevalent.

Ticketing has become central tomeeting these priorities, and recently

we have seen operators respond

successully to these demands through

smartcard tickets, internet retail, and the

use o mobile phones or checking in to

fights. During the days o paper tickets,

tickets would be issued based onactors such as the travellers identity,

age, individual concession (e.g. student)

and means o payment. The businessmodel has not changed consumers

still pay money or a ticket, which is

used to prove the right to travel but the

means o ticketing has.

What is Your Priority?

Security experts oten ail to understand

that the core drivers or electronically

readable tickets are not security-

ocused. The integrity and authenticityare a nice addition, but not the main

reasons or expensive roll-outs.

However, when technology is used,

especially where physical security is

so important, the inormation security

o the new ticketing solutions must

be at least as secure as the methodsit is replacing. While solutions need to

be ast and cost-eective, they must

provide protection o the data that

is stored and transmitted. Security

breaches can cause irreversible branddamage, and one major breach can

break the travellers, trust with theoperator.

The emphasis should not be on one

solution to provide security, but a

layered approach o many. Done well,

the scenario o having a wide selection

o cards being shown to a gate toauthorise travel becomes realistic.

These may not necessarily be tickets

rom the transport industry, but could

just as easily be bank cards or mobile

phones. Touch & pay products such

as Mastercard PayPass cards have

much in common with transport tickets -

they have a proximity interace, they are

single actor, are ast and are used or

low value purchases. This could well bethe uture.

Mobile boarding passes- changing

the security threat

While it is natural to think o the land

transport system when we think o this

technology, it is increasingly importantto airlines. In January 2011, analysts1

orecasted that the number o mobile

boarding passes delivered directly to

customers handheld devices will grow

rom 280 million in 2011 to 480 millionby 2013. This innovative approach

streamlines the customer experience

while heightening the ability to detect

raudulent boarding passes. Each

mobile boarding pass is displayed as

an encrypted two-dimensional bar

code along with passenger and fight

inormation. Security ocers then

validate the authenticity o the boardingpass at the checkpoint.

Playing on a Sticky TicketTim Ayling, Associate Director, Inormation Protection and Business Resilience

The notion o requiring a ticket or transportation systems has

been a given or decades. However, as technology has advanced,

the tickets themselves have changed. E-tickets, including

smartcards, oer signicant advantages or transport operators,

and passengers. However, with technology comes risk, and

operators must be aware o the need or stringent security

controls to reduce raud, and protect passengers.


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So how does this aect security? There

appears to be a perception o mobile

phones that they are insecure. However,

the mobile phone is actually no lesssecure than a paper boarding pass, and

is probably more secure as consumers

are used to guarding their valuables.

The barcode itsel is a more robust

means o identication than magnetic

stripes because it is very dicult to

ake. I a barcode is sent to someone

not on the fight, there are at least two

backup identity checks. Firstly, the

name is encoded in the barcode, andthe passport will not match. Secondly,

there is a check against the passenger

list. This ensures there is a real-time and

comprehensive evaluation o passenger

identication.

Thereore, a move to mobile boarding

passes oers an improvement on two

o the top priorities or passengers

and operators - security and eciency.

Despite these benets, the traveller will

always be concerned about the security

o a technological solution to an old

problem. Dependency on technology

brings with it risks that are now headline

news. There are numerous examples

o a ailure o a network inrastructurehaving brought checking-in procedures

to a standstill, there are many instances

o malicious attacks on core systems,and the threat o identity thet remains

real. Transport operators need to ensure

they are aware o the potential issues,

and constantly review and monitor the

protection they have.

As an example, despite years o security

experts reminding consumers to not

click links they do not trust, users

continue to do so. This can easily

translate to barcodes. While barcodes

are not as amiliar to end users today,

their use is on the rise. They maynever become a mainstay o malware

distribution, but it is reasonable to

expect malware distributors at a

minimum to experiment with barcodes,

especially while consumers are still

learning about them. Transport operators

must protect against this. How can

an airline protect against a barcode

directing travelers to a malicious

website in their name? Lessons can

be learned rom phishing scams that

have occurred over the years.

Fraud and Ticketless Travel

An enduring problem o transport

systems has been those who seek

to travel without paying. This is not a

technology issue, but a societal one. Itshould not be a surprise to anyone that

with the introduction o technology,

there are people who seek to prot rom

security holes. Ticketless travel is the

main issue, especially in bus and rail. The

goals have not changed, just the means

to do so. However, there is not much

attraction to a raud when the gain is

small compared to the eort o doing so.

In addition, the experiences gained rom

monitoring the old paper ticket systemsare still applicable in the paperless

ticketing world. Thereore, it is unlikely

the move to new ticketing will increase

the propensity to commit raud.

In some cases it may reduce raud, asthere are technical controls to prevent

large-scale raud. Tickets now presentan identity that can be monitored and

blocked by back oce systems ar easier

than beore. Back oce systems can

monitor and reconcile payments or

travel with actual travel usage and block

suspicious cards. O course, revenue

protection ocers still exist, and they can

veriy tickets just as easily with e-ticketsas paper tickets. E-tickets provide

additional unctionality however, such as

their ability to check travel history.

Whats Next?There are public details concerningTransport or Londons plans to introduce

contactless bank cards ticketing. They


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would work instead o or alongside

the Oyster card. These contactless

transactions are cheaper to process than

one with a PIN, and as the bank card canbuy a consumers travel, newspaper and

lunch, many individuals will only carry

one card reducing the risk o thet and

raud. The use o contactless cards in

retail outlets that have introduced the

system has been limited, with some

suggesting security concerns are

holding consumers back rom taking

it up. However, Transport or London

expects the new cards to be cheaperand easier easier to manage than the

Oyster system. According to Transport

o Londons own statistics, or every

1 collected rom Oyster card ticket

sales, 14 pence is spent on the system.

A contactless card system would not

require Transport o London to issuecards or involve card readers having to

hold and transer ares inormation. The

success o the system may still come

down to the publics perception o itssecurity.

Conclusion

No system is risk-ree, and these

measures are no dierent. However,

they do move the raud patterns towards

higher-value services, and increase theskill level needed or attacks. Security

is a layered approach and a system is

only as strong as its weakest link. As

soon as an operator eels comortable

with its risk level, troubles will occur.

Travellers care about security, but they

also care about stress-ree travel. I

either o these is weakened, a real

impact on revenues can be expectedas passengers stay away. That means

security must be almost invisible at the

technical level, leaving passengers to

only care about battery chargers and

wireless signals.


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Contact us

Dr Ashley Steel

Global Chair - Transport and Logistics

T: +44 (0)20 7311 6633

M: +44 (0)7802 806404

E: [email protected]

Daniel Lawrence

Global Executive - Transport and LogisticsT: +44 (0)20 7694 8348

M: +44 (0)7785 396959


Tim Ayling

Associate Director

- Inormation Protection and Business

Resilience

T: +44 (0)20 7694 4071

M: +44 (0)7786 100402


www.kpmg.com

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