Outsourcing to Metro Trains Melbourne hasn’t improved public transport

By David Donaldson

Wednesday December 9, 2015

Contracting out the delivery of Victoria’s public transport to the private sector has remained costly but has not led to improvements in service quality, argues a paper to be released on Thursday.

Measures of punctuality and reliability of Melbourne’s trains and trams remained largely unchanged between 2004 and 2014. Yet government payments to private operators of Melbourne’s trains and trams increased by 40% in real terms between 2004-05 and 2012-13 — from $938 million to $1.33 billion.

Patronage, in raw numbers, has much grown faster than the rate of increase in services. Correcting for population growth, trips per capita have grown by 40%.

The authors highlight a range of problems undermining the effective functioning of the system, many of which will sound familiar to observers of public-private partnerships: inadequate performance indicators, a weakening of public sector strategic planning capability, regulatory capture, a shrinking pool of companies willing to take on contracts and a gradual shift in risk from the private sector onto government.

Victoria’s system of “franchising” — privatisation of delivery under contract, rather than the full sale of infrastructure — “is not bringing costs down or improving operational efficiency,” argue the report’s authors, John Stone and Yvonne Kirk of the University of Melbourne and John Odgers.

“This is despite significant patronage growth, and is contrary to the predictions of the early proponents of franchising,” they argue.

The franchising system has been renegotiated twice since it was put in place in 1999. In 2009 Victoria’s train and tram contracts were awarded to different companies following intense public dissatisfaction with train operator Connex.

The current system is due for review in November 2017, one year before the next Victorian election.

The failure to achieve the initial promises of outsourcing has been due in part to outsourcing costing more than was originally expected, thanks to companies having “over-promised patronage and revenue growth and operational cost-savings.”

But there are also signs of “some disturbing trends on the question of regulatory capture and diminishing public sector capability to make and carry through strategic planning initiatives”, which emerged during the reign of the last state government, they say.

Following initial problems, including one company pulling out, after responsibility for delivery of public transport services was first handed to the private sector in 1999, the state has taken back some of the risk from private operators. But as the Victorian Auditor General’s Office noted in 2005, while this may make such agreements more sustainable, it also reduces the benefits of outsourcing. The “opacity” of the contracts “makes it difficult to understand fully the changes in the distribution of risk under the 2009 contracts”, they add.

They argue there is a lack of accountability for the train franchisee, Metro Trains Melbourne, in how it uses government subsidies. Payments made to the company for maintenance have been growing, with little apparent oversight of what that money is being spent on.

Weaknesses in government management of the franchisee relationship are “not surprising” given that under the last government, Public Transport Victoria, the statutory authority charged with planning and coordinating Victoria’s public transport system, “had little active ministerial support in demanding higher performance from the operators, and staff resources were focussed on contract management at the expense of public transport planning skills,” they state.

If the franchise arrangements are to continue, say the paper’s authors, new contracts will need a wider range of performance indicators to improve operational efficiency and more clearly meet the needs of users. “Useful precedents can be found in European practices used to define and measure performance standards in contracts between operators (both public and private) and public transport authorities,” they point out.

The benefits of outsourcing are being damaged too by a decreasing level of competition in a market heavily populated by subsidiaries of state-owned companies:

“Beyond these local issues, public sector authorities are facing an increasingly difficult negotiating climate due to a dwindling international pool of companies willing to tender for complex rail-based franchises.  Most ‘private’ companies in this market are, in reality, subsidiaries of large state-owned rail operators. This is a global problem that requires further examination.”

The authors conclude that outsourcing is perhaps not as useful as was previously believed.

“If it wishes to continue with the current franchise model, the government still needs to make the case that this gives better value to taxpayers and to public transport users than returning the operation of Melbourne’s trams and trains to public sector organisations working under strong performance benchmarks,” they argue.

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