Article: Caught in a public transport loop

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From the Melbourne Age click here!

Caught in a public transport loop

Caught in a public transport loop
KENNETH DAVIDSON
June 29, 2009

PPPs have a bad record at running public transport, yet here we go again.

HONG KONG'S rail system has more in common with Melbourne's urban network than those of Europe.

The most notable feature is that Hong Kong, like Melbourne, gets its power from overhead wires rather than a third rail, as in Europe. There is a good reason for this. The superb Hong Kong network ? which was built in the last couple of decades ? was largely engineered by Australian railway engineers who were made redundant by a succession of state governments infected by the corporatisation, privatisation and rationalisation bugs.

In Victoria in particular, the sacked public transport engineers were replaced by lawyers and privatisation jockeys recruited from merchant banks with expertise in setting up public-private partnerships (PPPs) or their near cousins, franchise agreements.

This is the kindest explanation for the inability of the Victorian Treasury and the Department of Infrastructure to make a realistic budget estimate of the cost of a few kilometres of rail track along an existing easement, such as between Epping and South Morang.

Now the wheel has turned full circle. Successive Victorian governments have believed that only foreigners are capable of running Melbourne's trains and trams. (The Kennett government set this out in the tender documents for the privatisation in 1997, which explicitly excluded tenders from Australian entities such as the relatively efficient Perth or Queensland rail authorities.)

Outsourcing public transport is only as good as the contract on which it is based. The OECD report on competitive tendering of rail services in 2008 gave a damming indictment on franchising or PPPs as a method of managing public transport based on its evaluation of the experience in Melbourne and London.

The report suggested that public transport is managed more efficiently through operating contracts where the strategic management and responsibility of the system remains explicitly with the authorities.

According to the OECD, one way of dealing with the problem is to "incorporate increasing prescription of the franchises, which undermines the ability of the franchisees for innovation and transfer of risk to the operator, which are the main benefits advanced for the system.

"Thus, as franchising evolved, it has come to lose its distinguishing characteristics ? the alternatives which made it superior to alternative forms of provision. In this circumstance, the main alternatives to franchising are, obviously, the retention of public sector production or undertaking operating contracts (where only the cost risk is transferred)."

The OECD report judged the franchising/PPP arrangements in Britain and Australia to be a failure because, among other things, both governments "completely underestimated skills required to design, implement and monitor such franchising systems".

By comparison, running a public transport system is easy provided that management is backed by political leadership committed to ensuring the finance is available to build, maintain and operate a first-class system that is competitive with road transport.

Premier John Brumby's claim that the new rail and tram franchisees "are committed to putting the needs of Melbourne's train customers first" is nonsense. The directors of the franchisee companies have a legal responsibility to put the interests of their shareholders first.

How well the competing objectives of meeting the needs of commuters and shareholders are met will depend on how well the franchise agreement is drawn up. And from what we know from the tender conditions, the franchise agreements are likely to be a handbook on how not to specify tenders.

According to the OECD report, contracts should be short, not long (as with Melbourne); contracts should be complete, not open-ended (as for Melbourne); and a state-owned operator should be the default operator to maximise competitive bids.

According to Public Transport Minister Lynne Kosky, the new rail operator would have more trains available through "a more proactive maintenance regime and improved contingency planning".

Maybe. But the main reason why there probably will be better train services is because the Government (taxpayer) is buying 18 new trains by next year and has another 20 on order, deliverable within four years. This simply underlines the point that it is the Government commitment, not who is the franchisee, that will determine the future quality of the service

The new CEO of MTM is Andrew Lezala, who was formerly CEO of Metronet, which was given the job of modernising two-thirds of the London Underground. Metronet was foisted on to London Council and the mayor at the time, Ken Livingstone, by the then British chancellor and now Prime Minister Gordon Brown as a PPP. Only two years later, in July 2007, it crashed into administration, leaving the British taxpayers ?170-410 million worse off.

It seems that the PPP was a classic "low balling operation" where the private partner or franchisee makes a low bid and creates unrealistic expectation in order to win the tender and, once ensconced, demands supplementary payments in order to perform the contract or threatens to walk away causing chaos to an essential service.

It happened in Victoria in 2002 when National Express pulled out of its franchise and negotiations with the remaining franchisees led to an increase in state budget allowance of an additional $1 billion in subsidies to franchisees over the next five years.

The bureaucrats who submitted to this blackmail are still responsible for Victoria's transport policy.