This background information can be used for educational purposes, and for obtaining more in-depth knowledge.
Authorities should carefully consider various ways to provide public transport service and types of private contracts.
The type of market regime and the responsibility of the public transport authority have a strong impact on the contractual design and should be considered accordingly. The number of lines being contracted, particularly relative to the size of the public transport system, may determine whether or not it is appropriate to have a regulated procurement. There are countries where the use of contracts is limited, e.g. in the UK and Ireland. Basic features of different market regimes are explained as ► Background information: Types of market regimes.
Three main types of contracts can be distinguished in the public transport industry:
Management contracts: The public transport authority pays the operator an annual remuneration including a fixed sum and a variable sum, which takes account of the quality of management. The public transport authority takes both the risk on the operating costs and the commercial risk on the commercial revenues
Gross Cost Contract:The operator is remunerated by a contribution of the public transport authority based on the costs. In case of an incentive scheme, the public transport authority can share the commercial risk with the operator. The operator takes the risk on the operating costs and the public transport authority takes the commercial risk on the commercial revenues.
Net Cost Contract:The operator is remunerated with the revenues and by a complementary compensation payment fixed by the public transport authority with or without adjustment. The operator takes the risk on the operating costs and the commercial risk on the commercial revenues.
Various performance based incentive schemes may be included in the gross contracts to provoke operator interest and development. The conclusion made so far in Norway is that the difference between gross and net cost contracts is largely nominal and of lesser practical significance than was previously assumed (Bekken et al. 2006). Gross contracts do not necessarily result in a poorer market adaptation. Experiences from Norway also suggest that regimes with a mixture of tenders and negotiated contracts may have a less favourable development than regimes that choose one over the other. For principles of gross and net contracts see ► Background information: Characteristics of different types of contracts.
Experiences from Scandinavia gained in public transport over the last 20 years indicate that tendering may contribute to cost effectiveness and increased cost coverage. Local public transport is tendered by the public transport authority in 61% of all PROCEED case study cities, whereas in the remaining cases the service is operated by a public bus company owned by the municipality without tendering.
Research in France has shown that creating a public-private partnership (PPP) via a semi-public company (a hybrid derived from a public company) turned out to be the worst organisational choice a local public transport authority could make in terms of technical efficiency (Roy 2007).
Norway: Transport Economic Institute in Oslo produces a series of studies analysing various contract types applied within public transport in Norway, e.g. Longva et al. (2007) and Fearnley et al (2006). By this ongoing analysis different contract types and their effects are discussed.
Roy, W., Yvrande-Billion, A. (2007) Ownership, Contractual Practices and Technical Efficiency: The Case of Urban Public Transport in France. Journal of Transport Economics and Policy 2007, 41(2), 257-282
Van der Velde, D., Beck, A., van Elburg, J-C., Terschüren, K-H. (2008) Contracting in urban public transport. V4.2. European Commission – DG TREN.
The type of market regime and the different public transport authority responsibilities have a strong impact on the contractual design. In a franchising or “area regulation” market structure the contract for provision of public transport services can be said to represent “a balanced attitude towards the management of public services between the two extremes of a public monopoly on the one hand and total deregulation on the other hand …” In a deregulated market a contract may also exist for the provision of services which the market would not otherwise provide. The major types of market regimes are:
Regulation - authority-initiated regime: In a regulated market, the public transport authority sets the rule for the operators. Within the ‘givens’ of such regulation of service provision the contract should be an efficient tool for the management of public transport services. Public transport authorities, which decide to delegate the delivery of transport services, must generally use tendering procedures (according to the EU procurement framework) under certain conditions depending on the amount of the contract.
Regulation - market initiative regime: This is common practice in Germany, for instance, where public transport is considered to have to fulfil public service requirements and it is considered that the product design cannot be left to the market. Therefore the Public Transport Authorities focus on organisation, monitoring and regulation of the transport services. A large share of the public transport is not tendered, but is operated with a concession to run a specific service with exclusive rights for exploitation.
Deregulation - market initiative regime: This is currently the norm in the UK outside London and Northern Ireland: commercial operation prevails on bus routes, according to what is financially attractive for the operator, and is in general completely deregulated without a formal contract between the public transport authority and the operator. However, there may be informal quality partnerships.
Also, the Transport Act 2008 made it easier for local transport authorities
to introduce both Statutory Quality Partnerships (SQPs) and Statutory
Quality Contracts (SQCs), where the operator has to perform to certain
conditions on a corridor or in an area.There are currently no SQCs in operation in the UK. Within commercial operation, operators are completely free to operate under their own conditions the service of their choice in terms of route, schedule, and tariffs, subject to fulfilling certain notification conditions. The public transport authority decides if these services meet the social needs or whether it is necessary to add non-commercial services. In this latter case, the public transport authority will use different types of contracts to organise the non-commercial services.
The different categories of regimes vary from fully competitive open entry regimes to strict authorisation regimes. However, market fairness requires transparency, and organisational development which is both sustainable and responsive to the needs of the travel market, in order to prevent monopoly characteristics.
Background information: Characteristics of different types of contracts
Gross cost contracts
Net cost contracts
Authority remunerates the operator for know-how and technical assistance, usually both a fixed amount and a variable component
Contribution based on the kms operated, index often updated in relation to changes in costs (diesel, gas, salaries, sales price of buses, etc.).
Operator remunerated by keeping the ticket revenues, compensation is paid by the authority (a fixed sum)
Revenues related to operation belong to the authority / operator
Operator collects revenues on behalf of the public transport authority
Revenues related to operation belong to the operator
Financial incentives can relate to productivity and quality
Quality or revenue incentives will encourage the operator to focus not only on the production / costs but also revenue / passenger satisfaction
Quality incentives frequently make use of stated minimum demands or results on customer surveys
Revenues are collected by the operator on behalf of the public transport authority
Operator retains ancillary revenues
Operator retains ancillary revenues
Authority generally monitors the operator regarding policy and budget
Authority monitors the operator regarding service performance through qualitative and quantitative assessments