Summary of International Urban Transport Competition with Case Studies:
Copenhagen, London, and San Diego
Wendell Cox Consultancy, U.S.A.
Wendell Cox Consultancy, U.S.A.
Office of Passenger Rail Franchising, U.K.
Fourth International Conference on Competition and Ownership
in Land Passenger Transport, Rotorua, N.Z., July 1995
UPDATE ON THE INTERNATIONAL EXPERIENCE
1. Before 1980, most public transport was delivered by government monopolies. Today, several of the largest transport systems are providing bus and other transport services through competitive tendering. This paper provides new information on international competitive tendering of public transport service and represents a supplement to papers presented at the three previous conferences. It also includes case studies on competitive tendering in Copenhagen, London, and San Diego.
2. Since 1989, New South Wales has been competitively tendering bus services that replaced rural and late night rail service. (Gilmour, 1994.) Melbourne tendered its entire system in 1993. As a result of a change in government, Adelaide developed a two-and-a-half year schedule for conversion to tendered bus service in tender packages of 50 to 80 buses. The first portion of service was tendered in March 1995. Perth is competitively tendering with small tender packages. And Brisbane has required the public transport system to improve productivity by 30 percent or the entire system will be competitively tendered.
3. Legislation to allow for competitive tendering was passed in 1991. Three packages have already been tendered this year in Helsinki; the fourth round of tendering in September will complete the conversion to competitive tendering. There is a separation of policy from operations, and YTV, the regional coordinating council, handles the tendering.
4. Competitive tendering has begun in Mastricht and is being considered in The Hague and Utrecht.
5. A 1990 act of Parliament required that all public transit services be provided commercially or through a "competitive pricing procedure." Despite New Zealand's small population, the country-wide move to tendering and deregulation attracted foreign competitors into one of the most geographically isolated countries in the world. There has been a 30 percent reduction in unit costs among municipal public operators. (Wallis, 1992.) Christchurch reduced its system-wide costs by 32 percent in the initial round of contracts.
6. Oslo has competitively tendered temporary bus service to replace metro and light rail service during construction. Negotiations are underway to sell the bus operating division of the public transport authority, which would establish separation of policy from operations. It is likely that the Oslo system will be converted to competitive tendering should Liberal political interests win the next municipal election. Lillehammer has now competitively tendered 20 percent of its bus system under authority granted by the 1991 Transport Act. (Kjalstad, 1995.)
7. This formerly communist city has developed a program to convert its bus system to competitive tendering; currently, approximately 70 buses are tendered. Because of its high costs, the municipal authority failed to win tenders. (Martin, 1995.)
The United States
8. In 1989, parliament passed legislation to encourage public-private competition. (See Andersen, 1994.) Fifty percent of bus service is currently competitively tendered in Stockholm with plans to increase tendering to 100 percent. Portions of Stockholm's metro have been tendered -- the winning bidder was a French firm. The nation's regional commuter rail service is fully tendered with savings of 30 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. (Finnveden, 1995.) Overall cost savings have been nearly 20 percent. In Gothenburg, competitively tendering reduced costs per kilometer by nearly half from 1989 to 1993. (Andersen, 1994.)
9. Competitive tendering has faced formidable legal and political barriers in the United States. (Love and Seal, 1991.) There is evidence that the environment is becoming far more favorable to competitive tendering, especially because of the election of a national Congress and many state legislatures that are more favorably inclined toward competitive tendering.
10. Competitive tendering has expanded little since the 1993. Two states that seemed likely to require competitive tendering have been unable to amass the political support for tendering. However, there have several developments that bode well for the expansion of tendering over the decade.
11. The change in the composition of Congress and its emphasis on reducing the national debt have focused attention on federal funding of local public transport. It is likely that federal funding will be greatly reduced if not curtailed.
12. Pressure to eliminate the federal transport labor protection law -- Section 13(c) is the biggest single barrier to competitive tendering -- is coming from two sources. Congress is attempting to curtail unfunded mandates, such as 13(c), on state and local governments. And public transport authorities, which were previously indifferent to 13(c), have begun to lobby for its elimination now that reduced funding seems likely.
13. Several of the largest bus systems may be closer to competitive tendering. The Massachusetts Bay Transit Authority was to start conversion when serious barriers were erected by the labor controlled state legislature. New York City transit is seeking legislation to permit competitive tendering; they estimate annual savings from tendering at $160 million. (Read, 1995.) In Los Angeles, the new labor contract allows competitive tendering, and Los Angeles transport officials claim the mere repeal of 13(c) would save the agency $100 million annually.
SOME LESSONS TO DATE
14. While there has been little increase in the use of competitive tendering in the last two years, there have been elections of new governments in Alberta, Newfoundland, and -- most recently -- Ontario that are more favorably inclined toward competitive tendering.
THE CASE STUDIES
15. While the stimulus for competitive tendering has been savings, the focus has tended to be on value for the money. None of the successful instances of competitive tendering have awarded contracts based solely on the lowest price.
16. Support for competitive tendering has emerged from both sides of the political spectrum; similarly, resistance (and even outright obstacles) to competitive tendering finds support from both sides.
17. The size and strength of the private market prior to competitive tendering has little effect on the success of tendering or the level of competition if tendering authorities encourage competition and if barriers to entry are low.
18. While threatened competition has been shown to reduce the costs of providing transport service, cost reductions -- at least in the public sector -- have not been sufficient to equal the unit costs achieved through direct competition.
19. The market price of public transport service cannot be known without genuine competition (such as through competitive tendering). Limited use of tendering often produces lower savings than more extensive tendering, although it is unclear whether this is a function of the learning curve (for both the public and private sector), whether limited tendering does not produce the same degree of competition, or whether it is some combination of both.
20. Gross tendering appears to be less costly to the transport authority than net tendering. (White and Tough, 1994.)
21. There appears to be a growing consensus that, properly administered, tendering does not result in a diminution of safety or service quality and -- most often -- leads to improvements.
22. Declining public transport ridership has stabilized or ridership has increased when competitive tendering has resulted in improved performance or when savings have been used to increase service levels.
23. In 1989, the Danish parliament divided the Copenhagen public transport authority into two separate departments -- policy and operations, changed its governing system and pared the board of directors, and required that 45 percent of Copenhagen public transport be provided through competitive tenders by 1994.
Results of Tendering
24. The public transport authority, Hovedstadsomradets Takikselskab (HT), completed the mandated 45 percent of competitive tendering on schedule in four rounds of tendering beginning in August 1989. Tender packages were small but could be grouped and tended to be geographically concentrated. (Package sizes range from three to 28 buses. In 1994, there were 32 tender packages for 328 buses.) HT specified fares, service standards, schedules and routes, and applied penalties and incentives. Tenders were for four or five years.* Price was only one criteria for winning bids. Tenders averaged 20 bidders per package. (Jansson, 1994.) By January 1995, 46 percent of bus service was provided by eight private operators through competitive tender. (Hovedstadsomradets Takikselskab, 1995.)
25. Because the public operator was prohibited from bidding, each successful round of bidding reduced the size and scope of public operation. Winning bidders were required to hire needed employees, and HT offered the sale of its vehicles to winning bidders. Small private operators provided less than 20 percent of service through non-competitive contracts with HT prior to the competitive tendering process. They were not prohibited from participating in competitive bidding, but they were not very successful. Like HT, DSB, the Danish public bus operator outside of Copenhagen, was prohibited from bidding, but both privately-owned and publicly-owned foreign bus operators were allowed to compete. By 1995, the Swedish private bus company operated one-quarter of tendered service. (Hovedstadsomradets Takikselskab, 1995.)
Keys to Success
25. Inflation-adjusted costs per kilometer of bus service has declined 19.2 percent -- 4.4 percent annually -- from 1989 to 1995 as the direct and indirect result of competitive tendering. (See Fig.1.) In addition, the public transport authority credits competitive tendering with reversing its downward trend in ridership. (Hovedstadsomradets Takikselskab, 1992.)
27. Between 1992 and 1994, the public operator (HT's Bus Division) reduced its cost almost twelve percent to be competitive. The Bus Division submitted a tender in 1994 and would have won one-third of the tendered services in 1994 if it had been eligible. As a result, HT's board applied to the Traffic Minister for an exemption but was refused.
28. In six years, gross savings from tendering could finance 10 months of bus service.
Fig. 1 -- Copenhagen: Estimated Operating Costs of Bus Services
29. Copenhagen's success in competitive tendering is the result of several factors. The Danish government was fully committed to competitive tendering and reduced conflict of interest by creating separate divisions for policy and operations and by precluding the operating division from bidding during the initial rounds. Tender packages were designed to appeal to small and large operators to stimulate the creation of a viable market. HT clearly specified standards and used penalties (monetary and contract termination) and incentives (bonuses based on passenger satisfaction) to encourage good performance.
30. In 1994, the Danish Parliament passed an amendment to the HT Act of 1989 that required all bus service be provided through competitive bid by July 1, 2002. The amendment also required that the HT Bus Division become a separate corporation with its own board of directors and allowed the new corporation to participate in bidding. While the conversion to competitive bidding is in progress, the Bus Division will be required to provide services at unit costs limited to the average unit costs of the private contractors.
31. Prior to the 1984 London Regional Transport (LRT) Act, London's bus system was an increasingly costly public monopoly. Inflation-adjusted costs per bus mile grew 65 percent -- or 3.4 percent per year -- from 1970 to 1985. (Calculated from Department of Transport, 1985, and London Transport, 1986-1994.)
32. To maintain performance and ensure public safety while reducing costs, the LRT act disaggregated main functions, devolved operations into thirteen subsidiaries, and required competitive tendering of bus service until full deregulation of passenger transport at an unspecified future time. Tendering, which was managed by the administrative body, began in 1985-1986 and increased approximately five percent each year until 1994 when the operating subsidiaries were fully privatized. The entire bus network will be provided through net-cost tenders by the year 2000; the current Parliament has no plans to deregulate London.
Fig. 2 -- London Transport: Average Annual Change in Cost/Bus Mile
33. Prior to full conversion to competitive tendering, London Transport's policy was "to tender for the provision of goods and services where similar or greater efficiency can be obtained at lower cost without compromising safety." (London Transport, 1993) The London Transport Tendered Bus Division specified service, set fares, took revenue risks, monitored performance, and applied remedies. Gross cost tenders generally covered three years, and negotiated extensions were initially granted for two years based on satisfactory performance and cost reduction of at least 2.5 percent or for three years based on satisfactory performance, at least a 2.5 percent cost reduction, and value-added supplements such as newer vehicles. (For further information on the tendering process, see Newton, 1994.) Created in 1994, London Transport Buses now similarly administers the tendering process.
Results of Tendering
34. Until they were fully privatized, the publicly-owned subsidiaries were allowed to bid. Initially, because of high costs and low productivity, London Bus operating subsidiaries had difficulty winning competitive tenders. By 1994, London Bus had reduced costs by 40 percent, and 54 percent of tendered service was provided by subsidiaries of the former public monopoly. But unit costs (£2.61) remained higher than for tendered services (£2.32), on-time performance (96.3% vs 98.5%) remained slightly inferior, and the operating ratio (91 percent vs 96 percent) was lower than for tendered operations.* (London Transport, 1994.) Service quality has improved, even where the former public monopoly is awarded service it previously operated non-competitively. The contracted services division has achieved London Transport's best operating performance. (London Transport, 1993.)
35. Forty-eight percent of bus service (based on mileage) was provided through competitive tenders by early 1994. London provided as many bus miles through tender -- 90 million bus miles -- as were provided by government operated bus networks in New York, Los Angeles, or Paris. Tendered bus services carried 500 million passengers in FY 1993-1994 -- more passengers than were carried by all forms of public transport in Los Angeles and Chicago.
Keys to Success
36. Competitive tendering has been successful in London. Direct savings from competitive tendering have averaged 15 to 20 percent. (Newton, 1994.) But for the system as a whole, inflation-adjusted costs per bus mile declined 40.4 percent, or an annualized rate of -5.6 percent from the introduction of competitive tendering to 1994. Some of the decline in costs -- no more than half -- is the result of the reduction in the size of the operational crew and the use of smaller midi-buses and their less-costly drivers to increase service frequency.
37. While bus service increased 22 percent, the total cost of bus service declined 25 percent. (Calculated from London Transport data 1985-1994.) The operating ratio for all bus services climbed from 60 percent in 1985 to 91 percent in 1994. London saved £1.8 billion from 1985 to 1994 from the combined effects of competitive tendering and competitive pressures. And by 1994, the annual savings relative to inflation were £353 million. Had costs continued to escalate at the 1970 to 1985 rate, London Transport would have needed £3.0 billion more than it spent to operate the bus system over the period and more than double (£1,110 vs £521) the amount of money it actually spent to run the system for FY 1993-1994.
38. Alternatively, if all bus service had been operated by tender or if non-tendered service had been required to operate at the average costs of tendered service (as in Copenhagen), London Transport would have spent 10 percent or £52 million less to provide bus service in 1994.
39. Bus ridership remained stable from 1985 to 1994 probably as a result of increased service and improved performance. (Public transport ridership declined in the UK as a whole over the same period as it did in most industrialized countries.) Without the cost savings that have resulted from competitive pressures, service may have been cut.
40. Prior to the use of competitive tendering, there were probably not more than three bus operators in and around London. By 1993, there were 32 operators, although half were the result of organizational changes. London Transport averaged five bids per request for tender by 1993. (Newton, 1994.)
41. Gross savings in nine years could finance 3.5 years of bus service.
42. Competitive tendering has been successful in London for a variety of reasons. Because the government was fully committed to privatization in some form, transport staff had nothing to gain -- and potentially much to lose -- from prolonging or interfering with the privatization process. There was a rapid and complete separation of policy from operations, which eliminated conflict of interest. (For more detail on separation of policy from operations, see Cox and Love, 1991.) Tender size was varied to increase the number of bidders and expand competition. The extension policy attracted entrants into the previously small market by increasing the long-term stake. LT clearly specified standards and used penalties (monetary and contract termination) and incentives (extensions) to encourage good performance. (Newton, 1994.) Finally, LT contract management was strongly committed to the procurement and monitoring of high quality, cost-effective service and the creation of a viable, competitive market to ensure long-term success.
43. All London bus service is to be competitively tendered by 2000. LT will require net-cost tenders, which can be expected to increase tendering costs and lower the savings that might have been achieved through gross-cost tendering. White and Tough (1994) found there were higher costs per mile associated with net-cost tenders, which reduced competition particularly among smaller bus operators.
44. LBL has been privatized into 11 separate companies. These companies have negotiated non-competitive net-cost contracts for portions of service that are not yet competitively tendered. All new contracts will be net-cost, and LT is planning to convert current contracts from gross-cost to net-cost during extensions.
45. In 1979, the San Diego Public Transit Corporation (SDT) signed a costly labor settlement that brought bus driver wages to the highest in the US. Local jurisdictions, which provided financial support for SDT services, were concerned about the labor settlement and its effect on the steadily increasing SDT costs that had increased 45 percent (inflation-adjusted) since 1970. To control rising costs, local jurisdictions began to competitively tender for public transport bus services in 1980. The Metropolitan Transit Development Board (MTDB) was designated the policy board in 1985, and it, too, began to competitively tender.
46. Because of Section 13(c), the federally-imposed transit labor protection law, (see Love and Seal, 1991) conversion to tendering has been slow but steady. By FY 1993-1994, 35 percent of revenue miles or 56 percent of routes were provided through competitive tender. This includes all general and specialized paratransit services and much of the feeder and suburban routes as well as some urban routes.
47. San Diego is the only regional US transport authority with an on-going commitment to tendering.
Results of Tendering
48. Like Copenhagen and London, San Diego separates policy from operations, and the transit policy agency facilitates, rather than operates, service. All services are provided by public and private operating companies. The MTDB fulfills the role of catalyst; it supervises the metropolitan transport and sets a unified fare, transfer policy, route structure, and common logo for public and private carriers. Tenders are generally for three to five years, and bid packages range in size from 10 to 50 buses. MTDB uses both penalties and incentives to encourage quality and performance. Most often, because of federal funding, San Diego provides vehicles and sometimes provides facilities for winning bidders.
49. Also like London, San Diego has a routine program for injecting competition into its system: "Constructive competition for provision of services will be encouraged. An annual review of ...(non-competitive)... services for potential contract award will be included in the ... plan development process." (Metropolitan Transit Development Board, 1993.)
50. In contrast to both London and Copenhagen, San Diego did not have support for competitive tendering from the national government, which provided obstacles to conversion to tendering. Also in contrast to London, San Diego had access to a viable private sector market.
51. The public transport operator has been allowed to tender and has won a small number. However, bids generally range between 30 and 60 percent of the fully-allocated costs of the public transport operator and are frequently below its marginal costs. (Hurwitz, 1995.)
Keys to Success
52. While US public bus transport unit costs have continued to climb at the inflation-adjusted rate of 1.7 percent annually, San Diego has experienced an annualized 2.1 percent reduction in overall bus transport cost since the introduction of competitive tendering. Relative to inflation, costs declined 30.6 percent between 1979 and 1994 with annual savings of $30 million and total savings of $245 million. Costs per mile for the public transport operator have declined 20 percent in real terms, and real savings from efficiencies were $130 million.*
53. Competitive tendering costs per mile are 46 percent less than non-tendered service, although a small portion of the difference may be due to differences in services. From 1979 to 1994, bus services have increased 50 percent, yet total inflation-adjusted costs have increased just four percent. Bus ridership, which declined in major US systems, increased 11 percent. (San Diego, like most US cities, had no public transport ridership culture prior to tendering.) It is unlikely that this would have occurred without the increases in services that were possible as a result of savings. The increased ridership and lower costs boosted San Diego's bus operating ratio from 31 percent in 1979 to more than 50 percent -- only New York has a higher bus operating ratio.
54. (During the same period, San Diego developed the most cost effective new light rail system in North America. Its initial, and most successful, line was developed wholly with local funding and cost less per mile than other US lines. Fares cover more than 65 percent of operating costs. The savings from competitive tendering have been an important source of revenue for the development of San Diego's light rail system.)
55. (By comparison, cost escalation has been considerable in Los Angeles, 150 miles from San Diego. As a result, major service cuts have been implemented. While Los Angeles has undertaken some competitive tendering projects with great success, the cost escalation of the large transit monopoly has more than consumed the savings. Los Angeles has scaled back its plans for rail development, largely due to escalating bus costs. Los Angeles costs per mile have risen so rapidly that 95 percent more annually ($300 million) is needed to operate the system than would have been needed if costs had been controlled as in San Diego.)
56. San Diego spent $68 million to provide bus service in 1994. If costs had continued to escalate at the 1970 to 1979 rate, San Diego would have needed an additional $210 million to operate its system in 1994. Over the 1979-1994 period, San Diego would have needed $750 million more.
57. If San Diego service costs had escalated at the national rate, $48 million more would have been needed. Over the entire period, San Diego would have needed $360 million more to operate the system.
58. If, like Copenhagen is now requiring, non-competitive bus service had been required to operate at the average cost of tendered service, 1994 costs would have been lower by $25 million or 37 percent.
59. Gross savings in 15 years could finance 3.6 years of bus service.
Fig. 3 -- San Diego: Annual Change in Cost per Mile
60. Competitive tendering succeeds in San Diego because of local commitment to cost-effective, quality bus service. While federal regulations have hindered tendering, separation of policy from operations has helped the process.
San Diego varies tender size to stimulate a competitive market, clearly specifies standards, and carefully monitors performance.
61. San Diego is tendering as quickly as possible under the constraints of Section 13(c); if they converted at a faster rate, they would have to lay off drivers and pay labor protection. While most of the tendered routes have been suburban, the program will involve more tendering of urban (SDT) routes in the future.
62. Some conversions to competitive tendering are rapid; other conversions progress slowly. The skills needed for successful competitive tendering appear to be learned fairly rapidly. Viable markets are created rapidly when encouraged by properly-designed bid packages as in the three case studies. The key variable in speed of conversion appears to be political will and the presence of enabling legislation (or the absence of legislative barriers).
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