public transport regulation and contracting

UITP

PUBLIC TRANSPORTREGULATION & CONTRACTING

Eric TrelJohannesburg 10 October 2014

CONTENTS

Part A – Public Transport REGULATION

• Actors

• Market

• Regulation

• Transport Authority

Part B – Public Transport CONTRACTING

• Types of contract

• Risk allocation

• Incentives

• Annual updating

UITP training 10 October 20142

WHY PUBLIC TRANSPORT?

Developments in Africa:

• Fast growing cities

• Economic development

• Increasing congestion

• PT is needed to keep cities accessible



0

1,600

3,000

6,000

9,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Parked car Private car Motorcycle 12m bus 18m bus

Passengers per hour per lane

WHY REGULATE?

• Fast growing demand for transport

• Informal sector cannot meet transport demand

• Daily competition does not lead to good transport

• An integrated network requires management

• Better quality and bigger scale require investments


WHAT IS NEEDED

1. Transport planning:

• design a network and define the service level to meet transport demand

2. Organisation of the transport market:

• licenses, concessions or service contracts

3. Operators need access to bank credits:

• bank requires long term concession or contract


OPERATORS


• Identified by authority

• Routes and services approved

by authority

• Pays taxes

• Requirements on service

quality and safety.

• Professionalization

Formal Operator

• Not known by authority

• Operator focuses on profitable

routes and times

• Often pays no taxes

• No requirements

Informal Operator

OPERATORS


• Public ownership

• Dependent of government

• Focus on political demands

and budget

• Focus on customer satisfaction

and public opinion

Public Operator

• Private ownership

• Dependent of shareholders

• Focus on profit and return

on investment

• Focus on fare revenues

Private Operator

TRANSPORT MARKET

• Open market:

• Daily competition,

• Each operator optimizes his own business,

• Based on fare revenues only

• Regulated market:

• Transport Authority = regulator

• Competition is limited to tendering of transport concessions or contracts

• Operators have a stable business and access to credit

• Customers profit from an integrated network


MARKET REGULATION


Direct Management

Delegation (out‐sourcing)

Public company

Public company

Private company

Authority initiative Market initiative

Authorization(concession)

Open Market (or licenses)

Public company

Private company

Private company

MonopolyCompetition FOR the market

(tendering)Competition

IN the market

Partly subsidizedPartly subsidized Not subsidizedNot subsidized

TREND


FINANCING OF PT

Model 1: open market, licence or concession, without subsidies


OPERATOROPERATOR

PASSENGERS

Transport Authority

OPERATORFare revenues

FINANCING OF PT

Model 2: contract with subsidy


OPERATOROPERATOR

PASSENGERS

Transport Authority

OPERATORFare revenues

Subsidy

FINANCING OF PT

Model 3: contract with service fees


OPERATOROPERATOR

PASSENGERS

Transport Authority

OPERATOR

Fare revenues

Service fee

If fare revenues < service fees, then subsidy is needed to fill the gap.

WHY SUBSIDY?

• In urban transport the operating speed is low and that makes transport costly. Lower speed means more vehicles and more drivers for the same service.

• If salaries rise due to economic development, operating costs will increase.

• Better quality transport leads to higher operating costs (e.g. BRT, LRT).


WHO DECIDES WHAT?


OPERATIONALShort term

How to produce and deliver these service?

TACTICALMedium term

Which services can help to achieve the goals?

Level Focus Responsibility

STRATEGICLong term

What do we want to achieve?

With what resources?Politicians

Operators

Transport Authority

WHO DECIDES WHAT?


Level Actors Role

STRATEGICLong term

National Government Legal framework National transport policy Financial support local government

Local Government

Transport policy Budget Fare Policy Local regulations

TACTICALMedium term

Transport Authority

Public transport network Service levels Contracting operators Ticketing system Information and marketing Investments in infrastructure


Transport Operators Transport operation Investments in rolling stock Customer services

TRANSPORT AUTHORITY

• A Transport Authority plans and manages the transport (on urban or regional level)

• Tasks include the management of public transport and may also include roads, traffic management, parking and NMT.

• Examples:

• Gauteng Transport Commission (envisaged in the Gauteng Transport Master Plan)

• Transport for London (TfL)


TRANSPORT AUTHORITY TASKS


1. Market organisation

Elaborate market regulation and procurement strategy

Elaborate a standard contract

Give advice on the regulatory framework

2. Management of budgets and assets

Elaborate fare revenues, operating costs and need for subsidy

Define fares and revenue allocation

Define ownership of infrastructure, fleet and systems

3. Defining level of service

Define the route network and transport modes

Define operating hours and frequencies per route

4. Procurement and contracting

Elaborate tender documents

Tender procedure and evaluation of bids

Contracting

TRANSPORT AUTHORITY TASKS


5. Monitoring and payments

Monitoring of operators’ performance

Determination of service fees, bonuses and penalties

6. Integrated approach

Ticketing

Information, marketing and promotion

7. Infrastructure

Bus terminals and bus stops

Dedicated bus lanes and priority at traffic lights

8. Possible other tasks

Traffic management

Parking management

Promotion of Non-Motorised Transport

TA CHALLENGE


Strike a balance between

‐ encouraging entrepreneurship of operators

‐ ensuring the social dimension of public transport

‐ ensuring service quality and customer satisfaction

TA COMPETENCES


Multidisciplinary and highly skilled team

Transport planning

Transport operation and infrastructure

Intelligent Transport Systems (e.g. electronic ticketing)

Procurement expertise

Financial expertise

Legal expertise

Asset management

GET STARTED

1. Check the budget: room for subsidy or not?

2. Check the legislation: are you in the position to regulate the transport market?

3. Start in one part of the city (call it a pilot).

4. Elaborate demand forecasts, network design and service level.

5. Calculate fare revenues and operating costs. If necessary, go back to step 4.

6. Define route packages.

7. Elaborate a standard contract.

8. Tender route packages.


CONTENTS

Part B – Public Transport CONTRACTING

• Types of contract

• Risk allocation

• Incentives

• Annual updating


CONTRACTING


Level Actors Role

STRATEGICLong term

National Government Legal framework National transport policy Financial support local government

Local Government

Overall transport policy & strategy Budget Fare Policy Local regulations

TACTICALMedium term

Transport Authority

Public transport network Service level Contracting operators (tenders) Ticketing system Information and marketing Investments infrastructure


Transport Operator Transport operations Investments in rolling stock Sales and customer services

ContractingContracting

CONTRACTING


Direct Management

Delegation (out‐sourcing)

Public company

Public company

Private company

Authority initiative Market initiative

Authorization(concession)

Open Market (or licenses)

Public company

Private company

Private company

MonopolyCompetition FOR the market

(tendering)Competition

IN the market

Partly subsidizedPartly subsidized Not subsidizedNot subsidized

PROCUREMENT


Contractspecifications

Service execution

Monitoring, payment

Negotiations Contract

Direct award

Service execution

Monitoring, payment

Call fortenders

Pre-qualification

Bid preparation

Bid evaluation & selection

Contract

Tendering

CONCESSION VS. OUTSOURCING

Concession for public transport

• Gives the Operator the RIGHT to deliver services on certain routes (or in certain areas).

• The Operator takes the revenues and operates on his own account. There are no subsidies involved.

• The Operator focuses on profitable routes and hours.

Public Service Contract (PSC) for public transport

• The Authority BUYS services from the Operator.

• The Transport Authority defines network and services.

• The contract specifies services, service fees, risk allocation and incentives to steer the focus of the Operator.


CONCESSION VS. OUTSOURCING

Concession:

• If a city has ONLY ONE operator

• If there is no subsidy involved

Service contract:

• If a city has MORE THAN ONE operator and the Transport Authority design the network

• If subsidies are involved


PUBLIC SERVICE CONTRACT

Definition

A Public Service Contract is an agreement

between a competent authority and an operator

on the delivery of public transport services

for a specified service fee

and under specified conditions.




defines

checksfulfilment

of

receivesgrants

SERVICESfulfils

CONTRACT

claimsgranting

of

PAYMENT

Transport Operator

Transport Authority


Public Service Contracts can be arranged regardless of:

• Ownership: public or private companies

• Award procedure: direct award or competitive tender

• Financial support: with or without subsidy


CONTRACT DURATION

• The recommended contract duration for bus transport is 10 years, equal to the economic lifetime of a new bus.

• 10 years is a long time …Should it be 10 years fighting or dancing? A lot depends on the quality of the contract.

• 10 years is a long time … and meanwhile a lot can change (transport demand, fuel prices, new developments , …). The contract needs to have a procedure for annual adjustment of services and annual indexation of service fees.


FINANCIAL RISKS


Cost risk Production costs

Labour costsEnergy/fuel costsMaintenance costsOverhead costs

Revenue risk Fare revenues (income)

Network and timetableService QualityFaresTransport DemandMarketingFraud and Control

Type of risk Risk related to Derive from

Market riskDevelopment transport demandEconomic Development

Urban planning and mobilityMotorization, congestion, parkingOil prices and salary levels

PERFORMANCE RISKS



Performance risk Quality of service provision On-time performanceTrips cancelledService Personnel CleanlinessSafety and Security

Productivity risk Operational Speed CongestionInfrastructureTraffic management

Infrastructure risk

Availability of infrastructure AvailabilityQualityMaintenance

Reputation risk Public Opinion Quality of services

CONTINUITY RISKS



Investment risk Investments for operation Contract durationContract termination

Regulatory risk Changes in regulation Environmental regulationsTax regulationsLabour regulationsTransport regulations

Competition risk Competition other operators Exclusivity or competition allowed

BUSINESS MODELS

Definitions

1. Deficit Coveragethe Operator keeps the fare revenues and may receive an additional subsidy to cover the deficit (if any). Deficit and subsidy may differ per month.

2. Net Cost Contractthe Operator keeps the fare revenues and may receive a previously determined, fixed subsidy.

3. Gross Cost Contractthe Transport Authority keeps all fare revenues and pays the Operator a service fee for delivered services (mostly: amount per vehicle kilometre).


BUSINESS MODELS

Risk allocation


Business model Revenue risk Cost risk

1. Deficit Coverage Transport Authority Transport Authority

2. Net Cost Contract Operator Operator

3. Gross Cost Contract Transport Authority Operator

BUSINESS MODELS


Pros and cons

1. Deficit Coverage

This model is common in Eastern European and former Soviet countries.

The Transport Authority bears all risks.

2. Net Cost Contract

This model is applied in some cities, e.g. in France, Netherlands.

The Operator bears all risks.

Condition: the Operator is allowed to optimize the fares and the network.

3. Gross Cost Contract

This is the most widely applied model. E.g. all bus transport in London.

Each risk is allocated to the party most equipped to manage the risk.

The Transport Authority holds all keys for optimizing the urban transport.

Condition: Electronic Ticketing System is used by all Operators.

BUSINESS MODELS


ConcessionPublic Service Contract

Deficit coverage

Net Cost Contract

Gross Cost

Contract

GROSS COST CONTRACT


Financing model 3: contract with service fees

OPERATOROPERATOR

PASSENGERS

Transport Authority

OPERATOR

Fare revenues

Service fee

If fare revenues < service fees, then subsidy is needed to fill the gap.

GROSS COST CONTRACT

Example City X

• 1 bus operator

• 10,000,000 bus km per year

• Gross Cost Contract, 10 year

• Service fee: USD 1 per vehicle km (+ annual indexation)

• Contract value: USD 10M per year

• Bonuses for performance above target

• Penalties for performance below requirements


CITY X

Situation 1: Operator performs well; cost and revenues are in balance


Performance Fee (USD M)

10M km 10

Incentives 0.5

Total fees 10.5

Costs -9

Profit 1.5

Source Amount (USD M)

Fare revenues 10.5

Fees Operator -10.5

Result 0

OperatorOperator

Transport AuthorityTransport Authority Operator: makes profit

TA: no subsidy needed

Passengers: satisfied

CITY X

Situation 1: Operator performs well; cost and revenues are in balance



10M km 10

Incentives 0.5

Total fees 10.5

Costs -9

Profit 1.5


Fare revenues 10.5

Fees Operator -10.5

Result 0

OperatorOperator

Transport AuthorityTransport Authority

Performance risk

Cost and investment risks

Revenue and market risks

CITY X



10M km 10

Incentives 0

Total fees 10

Costs -10

Profit 0


Fare revenues 10.5

Fees Operator -10

Result 0.5

OperatorOperator


Situation 2: Operator is not efficient

Operator: makes no profit

TA: makes profit


CITY X



9M km 9

Incentives -0.5

Total fees 8.5

Costs -9

Profit -0.5


Fare revenues 9.5

Fees Operator -8.5

Result 1

OperatorOperator


Situation 3: Operator is not efficient and performs less

Operator: makes small loss

TA: makes profit

Passengers: not satisfied

CITY X

Situation 4: Operator performs well, but passenger demand falls (or politicians decided to lower the fares)



10M km 10

Incentives 0.5

Total fees 10.5

Costs -9

Profit 1.5


Fare revenues 9.5

Fees Operator -10.5

Result -1

OperatorOperator

Transport AuthorityTransport Authority Operator: makes profit

TA: less revenues, subsidy needed


WHO OWNS WHAT?

Typically, in urban transport with more than one operator and competitive tendering:

• Authority owns the infrastructure (bus lanes, stops, stations, e-ticketing system, …)

• Operator owns the fleet and depot


Many exceptions:

• Authority may own also fleet and depot, operator only brings in staff and management.

• Light rail: mostly the Authority owns infrastructure, fleet and depot.

INCENTIVES & MONITORING

General

• Bonuses for stimulating performance above targets (e.g. more passengers)

• Penalties for not complying with requirements (e.q. clean vehicles)



Focus

Incentives may focus on input, output or outcome.

Example clean vehicles:

• Input: vehicles should be cleaned every day (based on inspection)

• Output: vehicles should be clean(based on inspection and/or complaints)

• Outcome: customers should be satisfied about cleanliness of the vehicles (based on customer satisfaction survey)



Conditions

• Requirements, targets and performance should be reasonable, objective and measurable.

• Bonuses and penalties should be applied regularly, in order to influence Operator’s behaviour.

• Awarding of bonuses and penalties should be based on a monitoring programme.


ANNUAL ADJUSTMENT

10 years is a long time …

The contract should contain a procedure for annual adjustment (instead of amending the contract):

• Adjustments of network and timetables (within a margin of x%).

• Adjustment of the service fee by means of indexation.


CONTENTS OF A PSC

1. Scope: lines, operating hours, frequencies (operation plan in appendix)

2. Duration of the contract and start of operations

3. Right and obligations of the Operator:

• e.g. the right to propose timetable changes,

• e.g. the obligation to implement network changes after Authority’s decision.

4. Rights and obligations of the Authority:

• e.g. the right to inspect vehicles on safety,

• e.g. the obligation to coordinate with traffic police on measures to ensure operating speed


CONTENTS OF A PSC

5. Requirements:

• Fares

• Ticketing

• Maximum % of canceled trips

• Replacement of defect vehicles

• Punctuality

• Traffic safety

• Customer services

• …


CONTENTS OF A PSC

6. Use of systems:

• e-ticketing,

• passenger information,

• vehicle tracking,

• traffic priority

7. Ownership and maintenance of assets:

• infrastructure, fleet, depot, systems

8. Procedure and time schedule for annual adjustments


CONTENTS OF A PSC

9. General conditions:

• Applicable law

• Arbitration in case of disputes

• Termination of the contract in case of repeated non-compliance

• Farce Majeure

• …


A GOOD CONTRACT …

An effective service contract requires a good balance between the interests and risks of:

• Customers

• Transport Authority

• Operator

And a good balance between:

• Technical aspects

• Commercial aspects

• Legal aspects


Thanks for your attention

and success in your work


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