THE OECD report Competitive Tendering of Rail Services contains a damning indictment of the 15-year franchising agreements for Melbourne's rail and tram services that are due to be decided next year.
Reading between the lines, it is clear from the chapter on the pitfalls of competitive tendering that, based on the experience of franchising in Britain and Victoria, the authors believe public transport is managed more efficiently through operating or gross-cost contracts where the strategic management and responsibility for the system remains explicitly with authorities.
According to the Organisation for Economic Co-operation and Development, "the British and Australian experience suggest there are very significant pitfalls in franchising that can limit the value of pursuing the model.
"Competitive tendering has been sidelined in Melbourne. In Britain, the response to each problem has skewed or muted the incentives that are pivotal to the success of franchising."
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 characteristics 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 gross-cost contracting (where only the cost risk is transferred)."
According to the OECD, purists will argue that gross-cost contracts — where the government has responsibility for rolling stock and timetabling and take the revenue from fares — do not give incentives for the operators to encourage patronage.
But "modest incentive payments could be added to encourage such behaviour … a sober analysis of the current franchising track record reveals extremely poor performance in getting all the other incentives right in a franchise: incentives not to undertake tactical bidding, incentives to deliver a service to the standard expected by the franchisor and contract incentives that ensure that the franchisee takes on the risks it has committed to. In this context, the simpler, less ambitious gross contract looks a more realistic alternative to public provision than franchising," the OECD report said.
The report described the perverse outcomes of rail franchising in Australia and Britain. "Bidders recognise that they do not win auctions by basing their bids on conservative patronage forecasts. So, bidders take a gamble that a financially distressed operation will be rescued because government will not wish to face the political consequences of service disruption arising from franchise failure.
"Given the fantasy nature of some of the projections (in the British and Victorian franchising competitions), it is difficult to believe that those negotiating on the government side genuinely believed that risk would be transferred successfully," the OECD said.
The people responsible for establishing the failed Melbourne rail franchise system in 1999 under the Kennett government have remained in control of the franchise system. They have successfully blocked an independent inquiry that could have looked at the alternative of allowing Melbourne's trams and trains to revert to operating contracts without risking compensation claims when the current franchises expire at the end of November.
As with so many strategic and highly controversial infrastructure decisions by the Brumby Government, the decision to persist with the failed franchise system was taken without any debate or a batsqueak of protest by the Opposition, which, together with the Greens, hold the balance of power in the Legislative Assembly. Continued…
