Franchising public transport: the lessons and way forward


June 22, 2017

Following the release of Infrastructure Australia’s paper, Improving Public Transport: Customer Focused Franchising, there has been healthy and robust discussion about the merits of exposing public transport services to contestable supply. The latest contribution to this debate — featured in The Mandarin by David Donaldson — is welcomed but should be put into context for the benefit of readers.

Our report shows that that franchising public transport services provides governments with a pathway to address growing demand pressures, and deliver an enhanced service for customers at a lower cost to taxpayers. Under a franchising model, governments still own the assets and have responsibility for important decisions like investment in new infrastructure, fare prices and timetabling. It’s just that the operation of the services is put through a competitive tender process.

Our report recommends that all public transport operators in Australia should to be routinely exposed to a competitive process through franchising.

Learning from international and domestic experience

However, Infrastructure Australia’s advocacy of franchising is based on a practical understanding of the complexities involved in the reform. As we acknowledge openly in our paper, a poorly executed franchising arrangement can result in unnecessary cost and financial instability.

For this very reason, the report includes a detailed analysis of the domestic and international experiences of franchising. Many important lessons, as Donaldson rightly points out, can be found in Melbourne and our paper includes a balanced case study on the outcomes experienced in that city under franchising.

We acknowledge that since rail and tram service were franchised in Melbourne in 1999 problems have been experienced. In particular, we highlight the issues which emerged in the first round of reform as a result of overly ambitious patronage and revenue projections and issues with the public sector bid assessment process.

But we conclude that challenges like those experienced in Melbourne should not prevent Australian governments from capitalising on the opportunity to improve service and deliver operating efficiencies. On the contrary, Australian public transport customers have an unparalleled opportunity to reap the rewards of well-structured, well-delivered franchising, taking advantage of the experiences gained and lessons learned from Australia and around the world.

Best practice principles for competitive tendering

Alongside the experiences of Melbourne there is now a long track record of competition reforms in passenger transport both domestically and globally. Governments can learn from the reform history of others, capturing best practice and avoiding pitfalls.

That is why Infrastructure Australia has included a series of best practice principles in our paper, which tease out the key lessons to be learned by Australian governments when undertaking this reform process.

Specifically, we call on governments to do the following:

  1. Design a contract with appropriate incentives. Good contract design is essential to the success of a franchise. The contract should incentivise the goals and priorities of the government and public transport customers.
  2. Allocate risk to those best able to manage it. A balanced allocation of risk between operators and government will ensure financial stability and the retention of performance incentives.
  3. Periodically refranchise and choose an appropriate contract length. Periodic re-franchising is required to ensure that competitive pressures are maintained. The appropriate length of a franchise term should depend on the local context and the type of service being franchised.
  4. Ensure the assessing and management agency is appropriately informed and skilled. The assessing agency should have the necessary information, expertise and time at its disposal to ensure it can judge the operators’ financial robustness, track record, skill base and the plausibility of its bid.
  5. Ensure selection criteria are transparent. The process for selection, its criteria and weighting should be made as transparent as possible. This is to ensure consistent advice is provided to bidders and to avoid perceptions of favouritism.

If followed closely these principles can help Australian governments learn the lessons of past franchising experience, maximise competition, encourage contracted incentives and better manage risk.

Reform is required to maintain and enhance the quality of our public transport

It is widely acknowledged that investment and reform are needed across the board to maintain and enhance the quality of our public transport and sustain our much envied quality of life. With demand for public transport in Australia’s cities expected to increase by 30% from 2011 to 2031, we can no longer afford to sit on our hands.

Franchising is by no means a silver bullet and delivering benefits for customers and taxpayers is contingent on the structure and delivery of the specific reform. But with the right settings in place it is one valuable reform piece in what is a very complex puzzle to prepare our cities for the 21st century.

Adrian Dwyer is executive director, policy and research at Infrastructure Australia.

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