International Urban Transport
February 1997 Revised July 1996 . Number 1
Summary of International Urban Transport Competition with Case Studies:
Copenhagen, London, and San Diego
Paper delivered at the
4th International Conference on Competition and Ownership
in Land Passenger Transport.
(Rotorua, New Zealand, July 1995)
By Wendell Cox, Jean Love and Nick Newton (formerly of London Transport)
The Competitive Tendering Revolution
Throughout the developed world, urban transport costs are considerably above market rates. As fiscal difficulties have mounted, governments of both the right and the left have converted their urban transport systems to competitive tendering (competitive contracting) to save money, keep fares affordable, and expand services. (In less developed countries that were not communist, most urban transport services are operated by private entrepreneurs without government subsidy.)
The following results have generally occurred:
The best results have been obtained where there is "separation of policy from operations" --- where competitive tendering is administered by an organization other than the urban transport operator. Competitive tendering organizations are referred to as marketing authorities or policy authorities. Separation of policy from operations has become routine, to ensure fair administration of the competitive tendering process. (It is difficult, if not impossible for an organization with operating division that competes for contracts to objectively administer the competitive tender process) Policy is (or will be) separated from operations in virtually all cases cited below except Denver and Los Angeles.
Note: In Copenhagen, the public operator has been prohibited from participating in competitive tendering, because policy was not separated from operations. Policy is now being separated from operations, and the public operator will be permitted to compete.
Competitive tendering is spreading to urban rail. Subway service has been competitively tendered in Stockholm. Rail systems will be competitively tendered in Adelaide and Perth.
The impetus for competitive tendering virtually always comes from outside the urban transport authority. In virtually no case has an urban transport operator undertaken conversion to competitive tendering on its own.
Competitive tendering is being implemented throughout Australia.
ADELAIDE began a 2.5 year schedule for conversion to tendered bus service in early 1995. (Competitive tendering was required by the newly elected conservative [Liberal Party] state government.) The urban rail system will also be competitively tendered. In preparation for tendering, costs per mile of the government bus system have been reduced by 25 percent. The government owned operating facilities and vehicles will be made available to operators at market lease rates with the eventual intention to sell unnecessary facilities. Policy is separated from operations.
BRISBANE: The Queensland government (socialist [Labour Party]) is requiring the Brisbane urban transport system to improve productivity by 30 percent or the entire system will be competitively tendered. The government owned operator has already reduced its costs per mile by more than 20 percent.
MELBOURNE competitively tendered most of its publicly owned bus system in 1993. (This was required by the newly elected conservative [Liberal Party-National Party coalition] state government). The government was recently returned to power, and intends to competitively tender the rest of the bus service, and to begin competitive tendering of rail services. Policy is separated from operations.
SYDNEY & NEWCASTLE: Since 1989, New South Wales has been competitively tendering bus services that replaced rural rail service and late night rail service in Sydney. At the same time, the urban transport operators in Newcastle and Sydney have been required to substantially reduce their costs per mile under threat of competitive tendering. (These actions were taken by the former conservative [Liberal Party-National Party coalition] state government.)
PERTH has begun competitive tendering with the intention of competitively tendering the entire bus system over a seven year period as required by the conservative (Liberal Party) state government. The urban rail system will also be competitively tendered. In preparation for competitive tendering, the government owned bus operator has reduced its costs per mile by 25 percent. The government owned system has also begun selling over-built or redundant capital facilities such as its central maintenance facility. Policy is separated from operations.
Under a 1989 Parliamentary mandate, KOBENHAVN (COPENHAGEN) has competitively tendered 45 percent of its bus service. Recently enacted legislation requires conversion of the remainder by 2002. Inflation-adjusted costs per mile of bus service declined 19.2 percent from 1989 to 1995 as a result of competitive tendering. The urban transport authority credits competitive tendering with reversing the downward ridership trend. Between 1992 and 1994, the public operator reduced its cost 12 percent in response to the competitive environment. As competitive tendering continues to be implemented, the public operator is prohibited from incurring unit costs above the average cost per mile of competitively tendered services. Policy is being separated from operations.
German cities are preparing to competitively tender their urban transport systems with implementation beginning within the next year. Commuter rail services will be competitively tendered in the Rhine- Ruhr urban area. Policy will be separated from operations.
Conversion of all bus services in the HELSINKI metropolitan area to competitive tendering began and were completed in 1995. The conversion was encouraged by an act of the national parliament. Policy is separated from operations.New Zealand
A 1990 act of Parliament (socialist government [Labour Party]) required that all urban transport services be provided commercially or through competitive tendering. More than 75 percent of services are competitively tendered. There has been a 30 percent reduction in per mile costs among public operators. Policy is separated from operations.
Competitive tendering has begun in smaller urban transport systems and is expected to spread to larger systems in the near future.
WARSAW plans to convert its bus system to competitive tendering, and approximately 70 buses are now operated through competitive tendering. Policy is separated from operations.
In 1989, parliament (socialist government [Social Democratic Party]) enacted legislation to encourage competitive tendering. Fifty percent of bus service is currently competitively tendered in STOCKHOLM with plans to increase tendering to 100 percent. Outside Stockholm most counties have competitively tendered three rounds (1989, 1992, 1995) and average a decrease in costs of 10 percent with each round. Overall cost savings have been nearly 20 percent. In GOTEBORG (GOTHENBURG), competitive tendering reduced costs per mile by nearly half from 1989 to 1993. Competitive tendering has been extended to rail services:
The Social Democrats have been returned to power and continue to strongly support competitive tendering. Policy is separated from operations.
Most urban transport services in the United Kingdom are either competitively tendered or operated commercially (without public subsidy).
LONDON: Through the London Regional Transport Act (1984), Parliament strongly encouraged competitive tendering of bus services. In consequence, London Transport undertook a deliberate program of competitive tendering and adopted the following policy:
LT's policy is to (use public-private competition) for the provision of goods and services where similar or greater efficiency can be obtained at lower cost without compromising safety. Internal departments, in some cases, are allowed to bid for this work.
More than one-half of all bus service is now competitively tendered (2,500 buses). London's competitively tendered services carry more passengers than the bus services of any North American urban transport authority except for New York (more than 500 million annually). Full conversion to competitive tendering will be completed by 2000. Since 1985, bus service has been increased 26 percent, while the total cost of bus service declined 27 percent (inflation adjusted) principally as a result of competitive tendering (42 percent reduction in costs per vehicle kilometer). The operating ratio (percentage of operating costs covered by fares) for all bus services climbed from 60 percent in 1985 to 89 percent in 1995. As a result, government operating subsidies have been reduced by 87 percent. London saved $3.4 billion from 1985 to 1995 in bus operating costs from the combined effects of competitive tendering and competitive pressures. And by 1995, the annual savings relative to inflation were $590 million (1985 base). Publicly owned operating divisions have been privatized, and policy is separated from operations.
OUTSIDE LONDON: All bus services were deregulated in 1986 as required by an act of Parliament. Non-commercial services are competitively tendered by local authorities. More than 75 percent of services are provided commercially (without subsidy). Operating costs per vehicle kilometer have declined by 45 percent (inflation adjusted).
COMMUTER RAIL SERVICES: All British Rail services, including commuter rail services, are being converted to competitive contracting through a competitive franchising system.
European Union: The Citizen's Network, a "green paper" issued by European Commission Minister of Transport Neil Kinnock (former British Labour Party leader) supports the expansion of competitive tendering in urban transport:
... the concession system - where services are subject to open tender but within a defined operational framework - is well suited to providing an environment which gives incentives to operators to raise standards whilst safeguarding system integration which is particularly important to urban and regional transport. The Commission considers that tendering concessions should be based on transparent, Europe-wide public tendering and will look at ways of promoting the concession (competitive tendering) system.
Implementation of competitive tendering has been slow in the United States, largely hampered by restrictive a federal urban transport related labor law that requires up to six years severance pay for laid off employees (this law may be repealed by the new Congress). Nonetheless, progress has been made. It is estimated that approximately 10 percent of US bus services are now competitively tendered. Many urban transport agencies are now considering competitive tendering for the first time. New York has estimated that it could save $160 million annually by competitively tendering bus services. Policy is generally not separated from operations.
SAN DIEGO: San Diego is the only US urban area with a systematic commitment to competitive tendering, and policy is separated from operations. The impetus for competitive tendering first came from local governments that were subsidizing the urban transport operator and later from the urban transport marketing authority (which is prohibited from operating service). The urban transport marketing authority has adopted the following policy:
Constructive competition for provision of services will be encouraged. An annual review of ...(non-competitive)... services for potential tender award will be included in the ... plan development process.
Competitive tendering started in 1980 and now accounts for 35 percent of service. The conversion has been accomplished within the driver attrition rate to avoid the costly federal labor mandates. Yet, savings have been substantial. Competitively tendered bus services are 44 percent less costly than non-competitive services. In response to the competition, the public operator has reduced its costs per mile by 23 percent (inflation adjusted) in contrast to the significant cost escalation that has occurred among US urban transport agencies. System wide bus costs per kilometer declined 33.2 percent between 1979 and 1995 with annual savings of $34 million and total savings of $275 million (inflation adjusted). The reduction in unit costs has made it possible to increase bus service levels by 55 percent, while overall bus expenditures have increased only 4 percent (inflation adjusted).
LOS ANGELES: Los Angeles competitively tendered routes that were threatened with cancellation as a result of financial constraints. The impetus for competitive tendering came from local governments and from a policy organization that oversaw urban transport in Los Angeles until the early 1990s (the Los Angeles County Transportation Commission). Ridership on the competitively tendered routes increased 150 percent in contrast with the overall downward tend in Los Angeles. In an independent audit, Price Waterhouse reported:
In addition, fares on the competitively tendered services have been kept lower than on the regional system because of the lower costs. An expanded program is now underway, which will involve competitive tendering of an additional 100 buses in 1995 and 1996, which will bring competitive tendering to over 20 percent of bus services.
DENVER: In 1988, the Colorado legislature enacted legislation requiring Denver's urban transport system, the Regional Transportation District (RTD), to competitively tender 20 percent of its bus service. A recently completed management study by Mundle & Associates and Wendell Cox Consultancy estimated 1995 operating cost savings at more than 39 percent. Competitive tendering is credited with sharply improving cost performance. In the first six years of competitive tendering, financing overall service levels (hours) increased by 18.9 percent --- $75 million in service. At the same time total operating costs increased 1.5 percent. This contrasts with the six years before competitive tendering when service hours increased by 17.5 percent while operating costs increased by 18.8 percent. Virtually all of this improvement is attributable to competitive tendering. The report confirmed service quality findings in an earlier report by KPMG Peat Marwick which had noted that "No relationship was found between safety and quality of service and higher bus operator turnover. In most measures, the contractors performed as well or better than RTD despite lower (market determined) wages."
LAS VEGAS: Las Vegas is the largest U.S. urban transport system to have been fully converted to competitive tendering. Costs per service hour are among the lowest in the nation --- approximate 30 percent below the average of systems of similar size. Ridership has nearly tripled in three years (to nearly 30 million annual unlinked trips). Las Vegas, which is the 40th largest metropolitan area in the US, is among the nation's top 25 metropolitan areas in ridership (carrying more passengers than larger cities such as Cincinnati, Kansas City, and Salt Lake City)
COMMUTER RAIL: Approximately 15 percent of commuter rail services in the United States are competitively tendered, including systems in Baltimore, Boston, Los Angeles, San Diego, San Francisco, and Washington.