Franchising: why privatising public transport doesn’t live up to the hype

By David Donaldson

Monday June 19, 2017

Public transport services can be made cheaper and better by contracting out the right to operate them, argues Infrastructure Australia.

“Governments should adopt a default option of exposing public transport services to contestable supply through franchising,” says the report.

“Experience both here and abroad shows that public transport franchising can deliver better services for commuters and significant savings for taxpayers. Re-investing these savings back into our public transport networks will help deliver the infrastructure Australia needs to meet our future growth challenges,” suggests Infrastructure Australia CEO Philip Davies.

“Modelling conducted by PwC for Infrastructure Australia found that franchising public transport services traditionally operated by state, territory and some local governments around the country could deliver up to $15.5 billion in taxpayer savings by 2040 — money which could be re-invested back into the network to deliver more and better services.”

That all sounds great — except that experience has been rather more mixed than the agency suggests.

To find an example of franchising in practice we need to look no further than Melbourne, a city that has had its ups and downs in service quality since its train and tram systems were contracted out to the private sector, a move one state government transport minister admitted was “no cheaper” than a fully public system.

What is franchising?

Franchising is a model of part-privatisation for monopoly government-owned services.

Although it has become fashionable in the era of small government, franchising is not entirely new. France and Spain have been letting out water concessions for over one hundred years, for example.

Franchising was proposed by Victorian-era social reformer Sir Edwin Chadwick as a solution to the challenges of natural monopoly. Where competition is not possible within an industry, he thought, competition for temporary rights to operate the service might be a good substitute. Monopoly franchises could be auctioned off to the bidder offering the most attractive terms, such as the lowest price for consumers.

Ownership of the infrastructure and strategic decisions, which in the case of public transport includes network planning, investment in new infrastructure, fare prices and timetabling, remains with the government or independent regulators.

Public transport is an obvious candidate for franchising. Very few cities in the world have sufficient density to make it possible for private providers to recoup investment, let alone turn a profit running train systems — Tokyo and Hong Kong being among the only examples — so most train systems require significant government support. If you’re a politician looking for a way to ease transport’s burden on the public purse or appease irate commuters, opening it up to the private sector while retaining ultimate control could look like a tempting option.

Melbourne’s experience

Melbourne’s metropolitan rail and tram systems are two of the key global examples of franchising in public transport. All other major metropolitan rail services in Australia are publicly run, while bus, light rail, regional passenger rail and ferry networks in most states are a mixture of private and public operation.

Many services across Australia are already franchised, though Melbourne uses this model most extensively. Source: Infrastructure Australia report.

The Victorian government started overhauling public transport in 1992, cutting staffing levels at the Public Transport Commission from 18,000 to 8400 in the space of a few years and eventually splitting it into five corporatised entities. The first franchises were awarded in 1999, but by 2002 franchisees were suffering from acute financial problems; one company withdrew from its contracts in December of that year.

Governance of the system has been through many iterations in that time, and may change again soon. Current franchise agreements are scheduled to expire in November 2017, with the government due to conclude negotiations with the current providers for another seven-year contract soon. It has stated that “if negotiations with the operators do not meet the Victorian Government’s expectations for delivering better outcomes for passengers, alternative options will be considered.” The Rail, Tram and Bus Union has been campaigning for the government to resume operation — and if there’s any government that would take the option, it’s the current Victorian one.

Service problems arose in the early contracts out of the providers’ efforts to cut costs and compete with companies controlling other parts of the system. The train system was initially operated by two different companies, and for a time patrons on Connex services were confronted with maps that only included the services run by that company, as though the other half of the system didn’t exist.

Melburnians have also had to deal with practices many see as contractors gaming the system to meet punctuality incentives, such as skipping certain stations or ending tram services in arbitrary places so they can turn around.

Then there are Melbourne’s much-maligned buses. The Public Transport Users’ Association — a non-profit and regular commenter on the city’s public transport — says it’s receiving a growing number of complaints about Transdev, which is halfway into a seven-year contract to operate about a third of Melbourne’s buses. It was recently revealed that one in five Transdev services runs more than 5 minutes late. There is also a perception that cleanliness is taking a back seat.

A 2015 paper by academics from Melbourne University and RMIT highlighted 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 franchising setup “is not bringing costs down or improving operational efficiency,” argued the report’s authors, John Stone, Yvonne Kirk and John Odgers.

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

What drives patronage changes?

Giving responsibility for risk to the party best able to manage it is an important part of contracting. Yet Melbourne’s experience suggests the primary drivers of patronage and service quality — two of the most important measures — have not been anything in the control of franchisees, but broader demographic trends and the underlying amount government invests in infrastructure.

Change in patronage on Melbourne’s train and tram services. Source: Infrastructure Australia report.

Patronage on Melbourne’s rail system has grown significantly since the early 1990s. Nearly twice as many people catch trains now as when services were first franchised, and tram use has grown by about 45% in the same period. The upward trajectory began during the pre-franchising period, however, as public transport services were being corporatised and punctuality and reliability were improved.

Performance struggled for a while as services adapted to this increase. An unexpected surge around 10 years ago caused overcrowding and dissatisfaction, though things have improved. But it’s widely agreed that despite incentive payments for service quality, this growth has not been primarily due to anything the contractors have done to encourage people to switch modes, but rather Melbourne’s growing population and the sharp increase of jobs in the CBD.

Punctuality on Melbourne’s train and tram systems. Source: Infrastructure Australia report.

Even service quality and regularity are not as reliant on the contractors as one might be led to believe. The Victorian Auditor General noted last year that the main factors behind improvements to train performance since 2009 are fourfold: more taxpayer investment in the network, new rolling stock, stable patronage growth, as well as franchisee performance initiatives — though it argued weaknesses in the design and implementation of the performance regimes were still causing problems.

Same cost, less accountability?

The reputation of franchise operators has waxed and waned over the years, explains Public Transport Users’ Association spokesperson Tony Morton.

“The basic truth is that the level of public investment and support for public transport operations plays a much greater part in its relative success compared with the type of ownership or the method of contracting,” he told The Mandarin.

“Melbourne’s train and tram services suffered under political neglect in the years leading up to the 2010 election, when government failed to respond to a patronage boom by pushing for greater efficiency and investing in service expansion.  Improvements since that time are largely due to increased public investment.”

Infrastructure Australia’s main argument for expanding the use of franchising is that it would save money — a lot of money, in their view. But then-Victorian public transport minister Lynne Kosky admitted in 2009 that it wouldn’t cost any more to run Melbourne’s system publicly (though she did argue it brought increased innovation).

Asked about the benefits of the privatised setup, she said: “It’s no cheaper. We have had to put a lot more money into the system.”

Though they think some money could be saved by using the model, public transport academics John Stanley and David Henscher think the $15.5 billion savings figure being promoted by Infrastructure Australia is probably wide of the mark. Other types of contracting with the private sector were ignored by IA, they argue, as was reforming the governance of publicly-run systems — something that brought improvements to Melbourne’s system during its pre-franchising corporatisation phase in the early 1990s.

And there are likely tradeoffs. The first round of competitive tendering can deliver windfall gains, they argue, though depending on how well-run the service already is the saving could be relatively small, and “this will be partly at the risk of service quality”.

Public vs private not the main game

The PTUA is sceptical of claims of big savings.

“We don’t see any evidence that franchising has actually led to cost savings,” says Morton — though he adds it’s also unclear if it’s more expensive. It does appear “to have reduced transparency in allowing public agencies to scrutinise how money is spent,” however.

Morton is also unconvinced that privatisation boosts innovation. “We’ve seen substantial innovation in public operations in Europe, Canada and indeed Australia (led by Perth) — all with better records of transport mode shift and passenger satisfaction than Melbourne,” he says.

The PTUA reckons the question of who is in charge is not really important — it’s the quality of governance and underlying amount of government investment that actually makes a difference. This echoes debates in other fields, such as education, where arguments about public versus private can overshadow reforms for which there is much stronger evidence.

“Franchising appears to us a solution in search of a problem — it hasn’t lived up to its promise in Melbourne,” Morton says.

“At best it can do no harm, if there is a strong public planning culture in place that keeps the system responsible to the public interest, backed up with strong audit and accountability mechanisms that ‘follow the money’ into the private operations themselves.

“Otherwise, you’re likely to wind up with something much like the status quo, but with less direct responsibility to the travelling public and to taxpayers.”

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4 years ago

Didn’t really agree, if you want to see how public ownership of railway can turn into a complete catastrophe, just look at Queensland Rail.

1. The Government of the day decided to convert QR from a government owned business back into a government authority. This changed the status of all QR employees back into public servants, where they were now eligible to be included in a public sector cuts program. A number of staff were thus let go, including trainers. With a private operator, this is not possible.

2. This caused a massive timetabling chaos that saw Christmas day train services cancelled and multiple new timetables (around five now?) with reduced services. In a private company, politicians do not direct the number and allocation of staff.

3. The government at the time (Newman) appears to have overridden the selection of QR CEO, something that would not be possible if the operator was private. This led to a cascading effect where other “old guard” people were promoted, which lead to more problems. This was covered in a Courier Mail article by Kelmeny Fraser, The Courier-Mail on January 7, 2017. Again, CEO choice and override would not happen in a private operator.

4. It was also revealed that QR’s job advertisement wording had been past the Deputy Premier’s office and that the wording was altered in such a way so as to restrict hiring of train crew to previous QR employees. In effect, a “closed shop”. Again, in a private operator, job ad wording isn’t micromanaged by political offices.

5. Despite QR having set service standards between itself and TransLink, if it does not meet these standards then there is no real consequence. Being a public operator that cannot be removed means that the enforcement of service standards becomes impossible and a fines and penalty regime ineffective. The contract it has just gets extended, no matter what the performance is like.

6. Without a profit motive and with a government happy to just allocate whatever funds, Queensland Rail incurred quite a lot of overtime bills.

7. The article does not determine why there was no cost reduction in the Melbourne case. Perhaps it is due to the fact that more services were put on in Melbourne over time, and in addition to this, the model chosen was a franchise model (where the operator keeps revenue based on passenger numbers). There is nothing in a privatisation model that says this has to be the way it must be. An operator could be paid on the basis of the number of services it provides, rather than the number of passengers it carries, and that would very likely lead to a reduction in costs over time.

4 years ago

Great article. I think one thing that is often overlooked about removing the service delivery from the Minister’s control is that there is less opportunity to make short-term, political appeasment decisions on services. Those “I got a letter from a constituent” conversations will inevitably lead to distortions in efficient network design and subsequent cost increases. Also, when a service is under direct Government operation, there is a cost of being a Government agency that is inefficient – the cost of being able to keep records to FOI and State Records standards, having staff to respond to ministerial correspondence, producing the myriad reports required of a State entity. They may be desireable, I make no judgement, but they are costs that are real. Private sector providers can dispense with that layer.
Government must, I believe, still be the integrator and system designer to the point of outlining what are acceptable minimum levels of service, coverage and quality. They also need a single payment and information standard across all PT networks. The private sector in NSW has definitely provided examples of both great and average services under the same contract conditions, no different to having different depot managers in the public system.
In the end it is ideology. The only constant is that a Government can never contract out its political risk, and management of political risk is the public leverage to ensure services are sufficient. Any Government that disappoints in transport is at risk of not governing, and so bears the cost of ensuring the services get delivered, and that is often over and above initial contract savings.

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