Delivering Value for Money to Government through Efficient and Effective Public Transit Service Continuity: Some Thoughts

Abstract

This paper documents some thoughts on the reform agenda in public transit that is occurring throughout the world. The specific focus is on a growing commitment to competitive regulation through competitive tendering, and the efforts by a few governments (notably in Australia) to take control of the tangible assets used by private operators as a mechanism to exercise the opportunity, if so taken, to put services out to competitive tender. The paper reviews the theoretical arguments and empirical evidence on contracting regimes and asset ownership, and the role that government and the operator might play in a setting in which building trusting and collaborative partnerships has merit in delivering services that are in the main funded from the public purse.

Notes

1. The series was co‐founded by David Hensher and the late Professor Michael Beesley, and is now recognized globally as the premier conference on competition and ownership of land passenger transport.

2. This phrasing avoids the ambiguity of subsidy since government is also investing in the system.

3. One is often told that the incumbent tends to win back the tendered contract. If this is the case, then why is tendering being undertaken instead of seeking out efficient solutions through negotiated performance‐based contracts? (Hensher and Houghton, 2004, 2005).

4. It is true that there are plenty of examples of mistrust that lead to a loss of performance, e.g. aspects of the UK rail regulatory regime and the operator collusion that occurred in France (Yvrande‐Billon, 2007)—the latter linked to a lack of expertise within the public authorities; however, this should not be read that the ‘solution’ lies in competitive tendering, but in a better aligned trust chain conditioned on clear contractual obligations, incentives and non‐compliant conditions.

5. Often with assumed grandfather’s rights.

6. I am reminded of what happens when a private plumber as a service provider services one’s hot water system. One does not argue that the equipment he uses, which I am paying for in part, belongs to me. It is capitalized in the price charged and he keeps the equipment. So why should not the cost of a transit service provided by an operator be treated the same (as the cost of providing a service), with the service charged back to the government through a funding model? Indeed, even if one goes to competitive tendering, this should apply.

7. The Adelaide and Perth success under competitively tendered management contracts appears to be due in the main to the patronage and service incentive payment schemes and not tendering per se (except in the initial round of moving from public to private service provision). It is also noteworthy in a growing number of countries that the average number of bidders is declining. For example, the average number of bids per route tender in London is currently three but was 4.5 in the late 1990s. One would expect more interest in less risky route‐based contracts. For area‐wide contracts in New Zealand, the average number of bids is 1.2 with the incumbent winning nearly 90% of the contracts.

8. Operators in Sydney have to apply to the government for permission to purchase new vehicles, and the government will decide if this is supported. The operator will then offer quotes from suppliers, and the government will choose one and provide funding over the life of the asset. The asset life is government‐determined, in contrast to allowing an operator to determine the write‐off period according to the financial state of their business. A related matter that arises when determining the cost of capital is the opportunity that exists for either party to recognize ways in which one party might have a comparative advantage in the ability to raise capital to fund assets. This will depend on the performance rating of a specific government (AAA, etc.), the taxation regimes in place for private and public‐sector loans, and interest rate cycles. Importantly, the source of funds can be treated in such a way that the party best placed to get the most attractive financial deal for the sector can then make the assets available to the operator (unless the operator is the best financier), at an agreed price, without having ownership transfer along the lines being implemented in Sydney.

9. Hart and Moore (1990) show that this provides incentives to act in the asset owner’s interests.

10. For example, when a private operator does not invest in service planning and employs lower quality tangible and intangible assets.

11. See note 8.

12. In France, 90% of the local authorities delegate the operation of urban transport services to private or semi‐public companies.

13. Market is herewith understood as the virtual arena where producers place their products or services to attract the same set of consumers.

14. Hart uses car manufacturer and electricity supply to illustrate his reasoning, but the rational and arguments are largely valid for urban mobility systems and are what enable us to establish the parallel between Hart’s formulation and our urban mobility problem.

15. This problem is extensively developed in the field of psycho sociology of organizations, but falls beyond the borders defined for this work, which is the reason why we limit ourselves to point out the importance of enclosing it within the factors affecting the contractual dynamics between agents.

1. The PPP (public private partnership) is a means by which responsibility for maintenance and renewal of the infrastructure and rolling stock of London Underground was transferred to three private sector ‘infracos’ over a thirty‐year period from 2003 (while direct operations remain in the public sector). In practice, only two companies—Metronet (controlling two infracos) and Tube Lines—were successful in bidding. The contracts run for a thirty‐year period, with reviews every seven and a half years. While a long‐term approach to renewal investment is thus made possible, there is virtually no scope for competitive bidding (other than work sub‐contracted by the infracos) once the contract period has commenced.