Privatization of Rail and Tram Services in Melbourne: What Went Wrong?

Abstract

Melbourne’s urban rail and tram systems were privatized in 1999 using a concessioning or franchising model similar to that employed for British Rail in the 1990s. The Melbourne franchise agreements promised improved services, increased patronage, reduced government subsidies and no real increase in fares. However, within 2 years, it became apparent that these predictions had been over optimistic, and subsequent negotiations saw the departure of one of the three franchisees and a renegotiation of agreements with the remaining two operators leading to substantial increases in subsidy levels. The paper reviews the Melbourne privatization experience to assess the extent to which it has produced benefits, the reasons the original predictions were not met and the extent to which the problems were avoidable. It concludes that although the Melbourne franchises were expressly designed legally to transfer revenue risk to the private operators, they failed to achieve this as a matter of practicality.

Notes

1. All figures are in Australian dollars. At the time of writing (June 2004), Au$1.00 bought US$0.70, £0.38 or €0.57.

2. Despite its name, the Liberal Party in Australia is the equivalent of the Conservatives in the UK or Canada.

3. The author is grateful to Andrew Cole, who obtained this document under Freedom of Information laws for his thesis (Cole, 2003), for allowing him to access to it.

4. Stanley and Hensher (2003, p. 12) are more optimistic, but their conclusion is based on the Treasury assumption that patronage was increasing at 1% rather than 2% per annum before privatization (see the above discussion).

5. Approximately three‐quarters of the population of Victoria live in Melbourne, so the State government is effectively a ‘municipal’ operation.