Contracting regimes for bus services: What have we learnt after 20 years?

This paper reviews a number of themes that have played a crucial role in the debate on alternative contracting regimes for the provision of urban bus services. We have selected four crucial issues to reflect on: (i) contractual regimes (in particular competitive tendering as compared to negotiated performance-based contracts, as means to award the rights to provide service); (ii) contract completeness (focussing on ex ante and ex post elements); (iii) building trust through partnership; and (iv) tactical or system level planning for bus services. Experience in these areas suggests that competitive tendering has frequently not lived up to expectations and that negotiation is likely in many circumstances to deliver better value for money.     

‘Regulated deregulation’ of local bus services—An appraisal of international developments

The deregulation of the British bus sector (outside London) in 1986 was the start of a debate on the merits of ‘deregulation’ and ‘competitive tendering’. The period that followed was rich in lessons. New Zealand was at the time the only other country engaging in a reform based upon market initiative (implemented in 1991). Other countries chose for a less extreme and more consensual way to introduce competitive incentives, choosing the fundamentally different competitive tendering (CT) path. As a result, the so-called ‘Scandinavian model’ developed, based upon the London example of route tendering. Later the Netherlands adopted a network tendering approach, resembling the French practice of network tendering though with more operator freedom.     

Towards a simplified performance-linked value for money model as a reference point for bus contract payments

The burgeoning commitment to contracting the delivery of bus services through competitive tendering or negotiated performance-based contracts has been accompanied by as many contract payments schemes as there are contracts. We are now well placed to design a simplified performance-linked payment (SPLP) model that can be used as a reference point to ensure value for money, given the accumulation of experiences throughout the world which have revealed substantive common elements in contracts. Whether the payment to the operator is framed as a payment per passenger or as a payment per service kilometre, the SPLP identifies efficient subsidy outcomes that are linked to a proxy indicator of net social benefit per dollar of subsidy. We illustrate how the SPLP model can be applied to obtain the gross (subsidy) cost per passenger (or per passenger km) from measures of gross cost efficiency and network effectiveness. This model can then be used as part of a benchmarking activity to identify reference value of money prospects in respect of passengers per $ subsidy outlay by adjusting for influences not under the control of the service provider. A single framework to identify contract payments to operators, and to assess (i.e., benchmark) operator performance on critical KPIs, is provided by internalising critical key performance indicators (KPIs) in the design of the SPLP. The proposed SPLP model is sufficiently general to be independent of the procurement method (competitive tendered or negotiated, for example) and of the treatment of revenue allocation (net or gross based contracts), with the additional advantage of being able to assess value for money for government.     

Are we doing it wrong or do we expect too much? Forces that push authorities to become public transport designers

This paper presents a number of reasons that are responsible for the disappointment of authorities in their operators’ efforts to develop public transport (PT) to the advantage of their travellers. The lessons drawn in this paper are based upon the competitive tendering experience of the authors and upon the results of meetings organised with parties involved in competitive tendering and aimed at exchanging lessons. There appears to be three main causes: (1) there is freedom for the operator, but the contract is bad; (2) there is freedom for the operator, there is a good contract, but there is no market; and (3) there is freedom for the operator, but the operator is not able to use it. The paper concludes with a few perspectives for improvement.     

Incompleteness and clarity in bus contracts: Identifying the nature of the ex ante and ex post perceptual divide

In the transport sector, many types of contracts exist. Some are very precise, and strive for completeness; others are very ‘light-weight’ and are incomplete. Bus and coach contracts, won through competitive tendering or negotiation, are typically incomplete in the sense of an inability to verify all the relevant obligations, as articulated through a set of deliverables. This paper draws on recent experiences in contract negotiation, and subsequent commitment in the bus sector, to identify what elements of the contracting regime have exposed ambiguity and significant gaps in what the principal expected, and what the agent believed they were obliged to deliver. We develop a series of regression models to investigate the extent of discrepancy between the principal and the agents perceived ‘understanding’ of contract obligations. The empirical evidence, from a sample of bus operators, is used to identify the extent of perceived incompleteness and clarity across a sample of bus contracts. A noteworthy finding is the important role that a trusting partnership plays in reducing the barriers to establishing greater clarity of contract specification and obligations, and in recognition of the degree of contract completeness.     

Operator changes through competitive tendering: Empirical evidence from German local bus transport

In this paper, we empirically investigate operator changes and the structural conditions in competitive tendering of bus services in Germany. We show that the focus has been on regional services, which has led to a loss in market share for the incumbent DB Stadtverkehr companies and gains for private companies, whereas municipal services have rarely been tendered out. The high average number of bidders (5.1) and the high probability of an operator change (58.2%) are positively influenced by tendering in larger volumes and longer contractual lengths. Tenders in early years have been more likely subject to an operator change. By contrast, complexity drivers such as the number of lines and mixed urban and regional transports exhibit a negative influence on competition.     

Regulation,trust and contractual incentives around transport contracts – Is there anything bus operators can learn from public air service contracts?

This paper compares recent experiences in contract negotiation and subsequent commitment in public air services with the bus industry. The heart of the paper is a survey of European and Australian regional airlines, which we mirror with revealed experiences of bus operators. We aim to identify a number of elements in the contracting regimes that have exposed ambiguity and significant gaps in what the principal (e.g., transport department) expected, and what the agent (airline or bus operator) believed they were obliged to deliver. Ultimately airline and bus services are similar in that public authorities procure transport services that are desirable for the society but would be unprofitable without government involvement. In both sectors (theoretically fairly similar) public transport contracts are used, and those usually include obligations and performance measurements. In terms of similarities, one of the surveyed contract details that had a perceived high clarity in both industries was “payment procedures” and amongst those with rather poor clarity was also in both industries “incentives to improve performance and grow patronage”. We also show differences between regional air services and bus operations with regard to performance measurement and pre-specified obligations. Because of the strong safety culture around air services we find that regulation and trusting partnerships are even more important to aviation than to the bus sector. Because of the high level of trust but also because of simpler and more complete contracts in aviation, there is much less (re-)negotiation going on compared to the bus operations.     

Goal achievement with trusting partnerships at the tactical level

Recent Thredbo Conferences have begun to explore the importance of the relationship between public transport service purchaser and provider in the development of successful public transport services. However, practical examples to test the trusting partnership model are rare. Bus service planning and delivery in Melbourne, Australia, has pioneered the trusting partnership approach, from agreement about desirable service standards and requisite operator qualifications (at the Tactical level) to detailed service delivery contracts. New negotiated performance-based metropolitan bus contracts commenced in January 2009, embodying principles discussed in previous Thredbo Conferences. This paper reports on the Tactical planning process that agreed service standards and the subsequent contract negotiation process, reflecting a trusting partnership between purchaser and provider, while remaining transparent and accountable and maintaining performance pressure on the provider. It shows how patronage growth rates have increased dramatically and identifies areas where further enhancements should be explored in the contracting area.     

Workshop report - Beyond competitive tendering

Most countries contemplating the introduction of competition-based organizational forms did not perceive the British deregulated bus regime to be the way forward. A deeper analysis of facts and an international coverage of the local successes of that regime remained marginal and, as a result, the reputation of deregulated regimes remained bad or - at best - a contentious issue. The rush for competitive tendering was further stimulated by the European Commission’s endeavour to enact a Regulation that put forward competitive tendering of exclusive contracts as the preferred way to organise local public transport markets. Yet, as discussed in this workshop, deregulation in various guises may well play a growing role in local and regional transport. This is already visible in long-distance coach transport and in (international) European railway markets as from 2010. The workshop paper discusses whether such competition-based institutional alternatives to competitive tendering can provide efficiency and service improvements, how such competition-based alternatives should be ‘regulated’ and, alternatively, how a non-competitive direct award could perhaps still guarantee good performance.     

Commercial public bus transport services in Germany: How a market in motion struggles with its regulatory framework

After decades of stagnation, the competitive market for commercial public bus transport services in Germany is beginning to move. Nevertheless, compared to the total market volume, the number of cases where competition is observable remains small. An empirical analysis of competition in the commercial services market as compared to competition in the non-commercial services market confirms that entry barriers do exist. These barriers clearly impede competitive developments in this embryonic market, which relies on the market initiatives of operators to develop. The paper identifies a key entry barrier in the institutional framework: for potential market entrants, the overall uncertainty regarding competitive procedures for commercial services is significantly higher than usual in tendering procedures. This high uncertainty poses the main disadvantage for newcomers as compared to incumbents.     

Impact of regulation on the performances of long-distance transport services: A comparison of the different approaches in Sweden and Norway

Despite the many socio-economic similarities between Sweden and Norway, differences in jurisdiction, organisation, cooperation, and financing of long-distance passenger train and coach services have led to the development of four distinctively different ways of serving the markets. This paper describes how the train and coach markets have developed in the two countries, with emphasis on regulatory and industrial structure and a couple of performance variables.Looking at passenger rail, both countries separated infrastructure from operation over a decade ago. However, while Norwegian rail is characterised by an almost monopoly supplier, rail services in Sweden are partly decentralised to the responsibility of county authorities and are widely subjected to competitive tendering. The rest of the network is about to be opened up for on-the-track competition. Swedish Rail (SJ) has spent the last decades consolidating its core business (passenger rail) and sold out its other businesses. In contrast, the Norwegian state rail (NSB) has expanded its business to become a major bus operator and property owner, with extensions also into the Swedish market.The coach industry was more recently deregulated in both countries. The Swedish coach market is dominated by privately owned companies operating services to and from Stockholm. In Norway, state-owned NSB is a major coach operator on medium distance routes, and is also the largest partner of Nor-Way Bussekspress which totally dominates long-distance coach services. Further, the Norwegian coach market is characterised by cross-ownership and cooperation which has enabled an extensive route network which covers most of Norway.We find distinct differences in achievements in the two modes and in the two countries. Swedish rail services have succeeded in winning market shares and in renewing and developing both infrastructure and service levels to a greater extent than the Norwegian model. On the other hand, the Norwegian coach market seems to be more developed and efficient compared to its Swedish counterpart.The paper concludes with a discussion on the possible links between the different approaches and the performance observed, with the aim to stimulate further and more detailed research on some important issues.     

Regulating the regulator: The impact of professional procuring bodies on local public transport policy and its effectiveness

During the past 15 years competitive tenders have become a common procedure when procuring local bus services in Europe. In particular, tenders with gross cost contracts and the so-called Scandinavian model have gained popularity, resulting in a vast amount of research on optimal contractual relationships between government and operators. This paper pays attention to a rather neglected part of the Scandinavian model: the construction of professional procuring bodies and their relationship to the local public administration, focusing on its implications for policy steering and service performance.The paper outlines briefly two different perspectives of analyses of organisational models: one perspective is anchored in principal-agent theory and institutional economics; and the other perspective in political science. Empirically, the article is based on an evaluation of the relation between two Norwegian counties and the administrative company responsible for planning and procuring public transport services. This evaluation indicates, firstly, important common challenges for the county administration due to lack of regional administrative competencies in relation to the administrative company, which also hampers the county’s role as coordinator of policy areas of importance for public transport. Secondly, due to increased transaction costs, the establishment of administrative companies does not seem compatible with contracts relying on net cost solutions with huge scope for operator initiatives.     

Risk and reward in public transportation contracting

The workshop discusses and documents a number of countries’ experiences regarding risk and reward in the delivery of public transport and determines the way in which competitive pressures actually work (or not) to deliver efficient and effective services. Papers are grouped into three main themes, i.e., public versus private management; negotiated versus competitively tendered contracts; and measures to improve performance. This chapter begins with a brief overview of each of the eight papers. This is followed by a section that out the discussions that emanated from the papers. Finally, the main policy and research recommendations are presented.     

The 2008 New Zealand public transport management act: Rationale, key provisions, and parallels with the United Kingdom

In January 2009, following a lengthy industry review and consultation process, the New Zealand Public Transport Management Act (PTMA) came into force. The Act allows Regional Transport Authorities, as the primary procurers of public transport services, to place either a control or a contracting requirement upon services that are registered as commercial requiring no subsidy. The imposition of either the control or the contracting requirement is designed to facilitate greater system integration, improve service continuity and enhance services to the customer, andallow the Authority to invest in key strategic projects, such as integrated fares and ticketing, so as to grow patronage.The PTMA’s other objective is to ensure improved value for public subsidies. Recent years have seen significant subsidy inflation for seemingly little commensurate benefits. The Act will allow the Regional Transport Authority to achieve greater value for money through improved farebox, a shift to longer, larger contracts to increase competition in the market, a more appropriate allocation of risk, and the removal of the ability of operators to ‘game’ the current system by using strategically placed commercial services as barriers to competition.Similar concerns have also stimulated new legislation in the UK and this paper illustrates the parallels in the environment and proposed response.     

Is the bus transport contracting system in South Africa leading to trusting relationships between contracted parties? An analysis of funding issues and the impact on relations between government and operators

The 1996 South African White Paper on National Transport policy provided the guidelines for the restructuring of the commuter bus industry. The restructuring objectives were based on improving the competitiveness of and service levels within the industry through a competitive tendering regime, the selective implementation of negotiated contracts and the general transformation of the industry to also include improved transparency in the funding arrangements between government and operators.In order to set the context of the paper, a brief overview is provided of the progress made with policy implementation and the background to funding issues that are experienced in the bus transport sector. To gauge the impact of the funding issues on the relationship between government and operators, a survey of the largest contracted operators was undertaken to determine, amongst other, how these funding issues have potentially impacted on trusting relationships between contracted parties.     

Risk and reward in rail contracting

This workshop considered the role of risks and rewards in rail transport by considering evidence on the impacts of industry structure, franchising and infrastructure charges. A schema for the allocation of risks and rewards was developed, which indicated that strategic risks should be borne by authorities and operational risks by operators, but that tactical risks were more difficult to allocate and appropriate reward mechanisms more difficult to design. The extent to which these difficulties can be addressed by competitive tendering and alternatives such as trusting partnerships and negotiated performance based contracts was considered.     

Workshop report - A successful contractual setting

Successful public transport service contracts can be judged against procedural and outcome criteria, located within an integrated strategic, tactical and operational level framework for planning and delivery. Clear goal setting at the strategic level sets the basis for supportive tactical system planning and for service delivery that meets goals. The workshop considers relevant success criteria and key matters that need to be resolved for their achievement. Market growth potential and the governmental attitude to supporting service growth are important issues shaping the contractual environment. The growing interest in negotiated performance-based contracts and the role of trust between the operator and the authority are also matters for particular attention.     

Workshop report - Benchmarking the outcome of competitive tendering

Workshop 1 was concerned to identify the real results of competitive tendering, and experience on how to make it work better, using evidence from the rail and bus sectors in a large number of countries spread around the world. It was found that competitive tendering had generally been successful in terms of quality and costs, but problems had occurred in a number of cases, so careful attention must be paid to the design of tendering exercises, details of the contract, risk-sharing arrangements and the approach to any re-negotiation found to be necessary. As a result, an important conclusion is that the tendering authority needs a high degree of expertise in these issues; any thought that competitive tendering relieves the public authority of the need for expertise in public transport is mistaken.     

Long-term development of express coach services in Britain

Express coach services compete for longer distance market with car and rail, and largely cater for the leisure, tourism, and visiting friends and relatives. markets. Britain deregulated its express coach system in 1980, and it is now opportune to examine long-term impacts of that change. The initial impacts were reviewed by the authors in 1986 (Robbins & White, 1986) but such impacts do not necessarily match long-term outcomes. Monitoring of the British system has been conducted by examining service changes and data on ridership, together with financial performance of the main operator groups and technical press coverage. It can be shown that a dominant position has been retained by the major operator (National Express), with a continued decline in the role of smaller independent operators in the all-year-round daily network. However, new competition has emerged from other large groups (most notably Stagecoach ‘Megabus’ in 2003). The paper analyses the operating and marketing strategies of the new operator and contrasts these strategies with those adopted in the 1980s. Implications for the future development of the network in Britain are outlined.     

Results so far and prospects of Kazakhstan passenger rail franchising

From 1991 till 2004 passenger rail transportation in Kazakhstan was organized by a public company without financial contribution from the state budget. As in any post-Soviet country losses from passenger sector in the integrated rail company were covered at the expense of the freight transportations. From 2005 the Government is trying to introduce competition in passenger rail industry by competitive tendering rights to operate on particular route and providing subsidies.This paper reviews the Kazakhstan passenger rail franchising policy from statement and implementation with analysis of results so far. To get sense about the current policy’s perception survey among managers of the government bodies and railway companies had been performed. It indicates respondents’ opinion about main concerns and suggestions for improvement in passenger rail industry. According to provided analysis there are opportunities for improvements in operation of public and private companies as well as in the Government policy.