How can a transport authority organise efficient and affordable public transport? Presentation on public transport regulation and contracting, including institutional framework, financial arrangements and different types of contracts. Presented as part of a UITP training programme for public transport experts, Johannesburg, October 2014.
2. CONTENTS
Part A – Public Transport REGULATION
• Actors
• Market
• Regulation
• Transport Authority
Part B – Public Transport CONTRACTING
• Types of contract
• Risk allocation
• Incentives
• Annual updating
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3. WHY PUBLIC TRANSPORT?
Developments in Africa:
• Fast growing cities
• Economic development
• Increasing congestion
• PT is needed to keep cities accessible
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Parked car Private car Motorcycle 12m bus 18m bus
Passengers per hour per lane
5. 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
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6. 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
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7. OPERATORS
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• 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
8. OPERATORS
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• 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
9. 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
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10. MARKET REGULATION
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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
Monopoly
Competition FOR the market
(tendering)
Competition
IN the market
Partly subsidizedPartly subsidized Not subsidizedNot subsidized
12. FINANCING OF PT
Model 1: open market, licence or concession, without
subsidies
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OPERATOR
OPERATOR
PASSENGERS
Transport Authority
OPERATOR
Fare revenues
13. FINANCING OF PT
Model 2: contract with subsidy
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OPERATOR
OPERATOR
PASSENGERS
Transport Authority
OPERATOR
Fare revenues
Subsidy
14. FINANCING OF PT
Model 3: contract with service fees
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OPERATOR
OPERATOR
PASSENGERS
Transport Authority
OPERATOR
Fare
revenues
Service
fee
If fare revenues < service fees,
then subsidy is needed to fill the gap.
15. 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).
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16. WHO DECIDES WHAT?
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OPERATIONAL
Short term
How to produce and deliver
these service?
TACTICAL
Medium term
Which services can help to
achieve the goals?
Level Focus Responsibility
STRATEGIC
Long term
What do we want to achieve?
With what resources?
Politicians
Operators
Transport Authority
17. WHO DECIDES WHAT?
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Level Actors Role
STRATEGIC
Long term
National Government
Legal framework
National transport policy
Financial support local government
Local Government
Transport policy
Budget
Fare Policy
Local regulations
TACTICAL
Medium term
Transport Authority
Public transport network
Service levels
Contracting operators
Ticketing system
Information and marketing
Investments in infrastructure
OPERATIONAL
Short term
Transport Operators
Transport operation
Investments in rolling stock
Customer services
18. 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)
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19. TRANSPORT AUTHORITY TASKS
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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
20. TRANSPORT AUTHORITY TASKS
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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
21. TA CHALLENGE
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Strike a balance between
‐ encouraging entrepreneurship of operators
‐ ensuring the social dimension of public transport
‐ ensuring service quality and customer satisfaction
22. TA COMPETENCES
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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
23. 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.
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24. CONTENTS
Part B – Public Transport CONTRACTING
• Types of contract
• Risk allocation
• Incentives
• Annual updating
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25. CONTRACTING
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Level Actors Role
STRATEGIC
Long term
National Government
Legal framework
National transport policy
Financial support local government
Local Government
Overall transport policy & strategy
Budget
Fare Policy
Local regulations
TACTICAL
Medium term
Transport Authority
Public transport network
Service level
Contracting operators (tenders)
Ticketing system
Information and marketing
Investments infrastructure
OPERATIONAL
Short term
Transport Operator
Transport operations
Investments in rolling stock
Sales and customer services
26. ContractingContracting
CONTRACTING
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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
Monopoly
Competition FOR the market
(tendering)
Competition
IN the market
Partly subsidizedPartly subsidized Not subsidizedNot subsidized
27. PROCUREMENT
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Contract
specifications
Service
execution
Monitoring,
payment
Negotiations Contract
Direct award
Service
execution
Monitoring,
payment
Call for
tenders
Pre-
qualification
Bid
preparation
Bid evaluation
& selection
Contract
Tendering
28. 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.
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29. 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
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30. 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.
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31. PUBLIC SERVICE CONTRACT
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defines
checks
fulfilment
of
receivesgrants
SERVICES
fulfils
CONTRACT
claims
granting
of
PAYMENT
Transport
Operator
Transport
Authority
32. PUBLIC SERVICE CONTRACT
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
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33. 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.
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34. FINANCIAL RISKS
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Cost risk Production costs
Labour costs
Energy/fuel costs
Maintenance costs
Overhead costs
Revenue risk Fare revenues (income)
Network and timetable
Service Quality
Fares
Transport Demand
Marketing
Fraud and Control
Type of risk Risk related to Derive from
Market risk
Development transport demand
Economic Development
Urban planning and mobility
Motorization, congestion, parking
Oil prices and salary levels
35. PERFORMANCE RISKS
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Type of risk Risk related to Derive from
Performance risk Quality of service provision On-time performance
Trips cancelled
Service Personnel
Cleanliness
Safety and Security
Productivity risk Operational Speed Congestion
Infrastructure
Traffic management
Infrastructure
risk
Availability of infrastructure Availability
Quality
Maintenance
Reputation risk Public Opinion Quality of services
36. CONTINUITY RISKS
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Type of risk Risk related to Derive from
Investment risk Investments for operation Contract duration
Contract termination
Regulatory risk Changes in regulation Environmental regulations
Tax regulations
Labour regulations
Transport regulations
Competition risk Competition other operators Exclusivity or competition allowed
37. BUSINESS MODELS
Definitions
1. Deficit Coverage
the 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 Contract
the Operator keeps the fare revenues and may receive a
previously determined, fixed subsidy.
3. Gross Cost Contract
the Transport Authority keeps all fare revenues and pays the
Operator a service fee for delivered services (mostly: amount
per vehicle kilometre).
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38. BUSINESS MODELS
Risk allocation
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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
39. BUSINESS MODELS
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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.
40. BUSINESS MODELS
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Concession
Public Service Contract
Deficit
coverage
Net Cost
Contract
Gross
Cost
Contract
41. GROSS COST CONTRACT
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Financing model 3: contract with service fees
OPERATOR
OPERATOR
PASSENGERS
Transport Authority
OPERATOR
Fare
revenues
Service
fee
If fare revenues < service fees,
then subsidy is needed to fill the gap.
42. 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
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43. CITY X
Situation 1: Operator
performs well; cost and
revenues are in balance
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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
44. CITY X
Situation 1: Operator
performs well; cost and
revenues are in balance
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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
Performance risk
Cost and investment risks
Revenue and market risks
45. CITY X
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Performance Fee (USD M)
10M km 10
Incentives 0
Total fees 10
Costs -10
Profit 0
Source Amount (USD M)
Fare revenues 10.5
Fees Operator -10
Result 0.5
OperatorOperator
Transport AuthorityTransport Authority
Situation 2: Operator is not
efficient
Operator: makes no profit
TA: makes profit
Passengers: satisfied
46. CITY X
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Performance Fee (USD M)
9M km 9
Incentives -0.5
Total fees 8.5
Costs -9
Profit -0.5
Source Amount (USD M)
Fare revenues 9.5
Fees Operator -8.5
Result 1
OperatorOperator
Transport AuthorityTransport Authority
Situation 3: Operator is not
efficient and performs less
Operator: makes small loss
TA: makes profit
Passengers: not satisfied
47. CITY X
Situation 4: Operator
performs well,
but passenger demand falls
(or politicians decided to
lower the fares)
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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 9.5
Fees Operator -10.5
Result -1
OperatorOperator
Transport AuthorityTransport Authority Operator: makes profit
TA: less revenues, subsidy
needed
Passengers: satisfied
48. 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
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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.
49. INCENTIVES & MONITORING
General
• Bonuses for stimulating performance above targets
(e.g. more passengers)
• Penalties for not complying with requirements
(e.q. clean vehicles)
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50. INCENTIVES & MONITORING
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)
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51. INCENTIVES & MONITORING
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.
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52. 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.
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53. 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
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54. CONTENTS OF A PSC
5. Requirements:
• Fares
• Ticketing
• Maximum % of canceled trips
• Replacement of defect vehicles
• Punctuality
• Traffic safety
• Customer services
• …
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55. 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
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56. 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
• …
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57. 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
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58. Thanks for your attention
and success in your work
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