Designing Competitive Tendering Systems
for the Public Good:
A Review of the US Experience

Paper Presented by
Wendell Cox & Jean Love
to the
First International Conference on Competition and
Ownership in Public Transport
Thredbo, NSW Australia
May 1989


For two decades, most urban public transit services in the United States (US) have been provided directly by public authorities and supported by public subsidy programs. A substantial percentage of the public subsidies has been consumed by costs, which have escalated well ahead of the inflation rate.

Concurrently, the private bus industry experienced unit cost decreases (inflation adjusted). In response to the cost escalation of public transit and the cost control of the competitive market, public transit authorities have competitively tendered considerable amounts of public transit services to private bus companies.

As US competitive tendering has grown, various approaches have been tried. For example, some public transit authorities have provided revenue vehicles for the use in tendered services, while others have required private companies to supply their own vehicles. Tendering package sizes have varied considerably, from a single vehicle to more than 200. In some cases, public transit authorities have participated themselves in tendering, raising complex cost comparison and other issues. The success of or difficulties with tendering programs can be traced to such variations in competitive tendering system design.

There is an emerging consensus that two principles are crucial to ensuring that public objectives are met by public transit competitive tendering programs:

1. Public policy control should be retained over competitively tendered services to ensure that tendered services are operated consistent with public policy objectives.

2. A competitive supplier market should be fostered to ensure the most cost effective service.

A number of guidelines flow from these principles, relating to the size of tendering packages, advertisement for tenders, public disclosure, length of contract period, participation of public transit authorities in competitive tenders (including guidelines on public-private cost comparisons) and other issues.

These principles and guidelines were used by the author in drafting two legislative proposals. The Colorado public transit competitive tendering act was the first mandatory tendering legislation passed with respect to any public service in the US. The model Public Transit Consumer Protection Act has been adopted by the American Legislative Exchange Council (an association of state legislators).


An increasing share of transit service in the US is delivered through competitive tendering. This paper is a review of developments in the design of competitively tendered systems for bus service in the context of public policy objectives.

A. The Non-Competitive Environment

In a non-competitive environment such as a monopoly, a firm can obtain a higher price for its products than would be possible in a competitive environment. Non-competitive firm revenues, exceeding what would be obtained in a competitive environment, are referred to by economists as "monopoly rents" or the "welfare cost of monopoly." Generally, the more competitive a market, the lower is the price to the consumer, and the less competitive a market, the higher is the price to the consumer. Consequently, consumers spend more of their income than necessary for products produced by a non-competitive firm, lowering the standard of living and making society in general poorer. Through regulation and anti-trust laws, therefore, US public policy seeks to prohibit private firms from obtaining sufficient market power to set prices outside a competitive environment.

The lack of competitive incentives in public transit have produced the same price escalation (fares plus subsidies) as would be expected in private monopoly. For 20 years, most US public transit has been operated in-house by public transit authorities (non-competitively). During that time, inflation adjusted (real) costs per mile have escalated at twice the rate of inflation and double the rate of increase of the private bus industry.

B. Competition

In response to escalating public transit costs, public authorities have begun to use competitive strategies, primarily competitive tendering, to improve the cost effectiveness of public transit services. The results of incorporating competition have been substantially lower costs for the same or better service and improved cost control.

The public purpose of mass transit is to provide the maximum level of quality service for the minimum amount of money. There is no innate merit in either public or private provision of service. The crucial distinction is between competition and lack of competition rather than between private and public production or ownership. For example, prior to the public takeover, most US public transit services were provided through regulated private regional or local monopolies. While these companies controlled cost increases substantially better than the subsequent public authorities, they still experienced real cost increases (Cox, 1987). The private sector can provide service less expensively, not because its management is superior, but because it operates in a competitive market.

C. Public Control and Cost Effectiveness

Competitive tendering serves a public, not private, purpose. As a result, the public authority must retain full control and oversight of service design, service specifications and fares. The success of a competitive tendering program, then, relies on the following principles:

1. Public policy control should be retained over competitively tendered services to ensure that tendered services are operated consistent with public policy objectives.

2. A competitive supplier market should be fostered to ensure the most cost effective service.


Before considering the issues of competitive tendering design, it is useful to outline the unique context of public transit in the US and the experience of competitive tendering.

A. Public Transit Use

The public transit environment in the US differs from that of other nations. Generally, US urban areas have far lower ridership per capita than in urban areas of similar size in Australia, New Zealand, Canada and the United Kingdom (Chart: "Annual Transit Journeys per Capita by Nation"). Per capita ridership in all Australian state capitals, Canberra, Auckland and Wellington is more that of all US urban areas except New York, Chicago and Honolulu

US public transit has largely lost its discretionary market segment (customers who have automobiles, but choose instead to travel by public transit). Discretionary patronage primarily is limited to work trips to the largest central business districts, and even that is declining. From 1970 to 1980, the public transit's work trip market share declined by 30 percent. What remains is the small "captive" market, composed of people who have limited access to automobiles because of low income. Public transit has become a poverty program in many US urban areas, and it is dependent on public subsidies and public policy control for its continued existence.

B. Escalating Public Transit Costs

For two decades, most urban public transit services in the US have been provided directly by public authorities and supported by public subsidy programs. A substantial percentage of those public subsidies has been consumed by costs which have escalated well ahead of the inflation rate.

From 1970 to 1985, public transit operating costs per kilometer increased an inflation adjusted (real) 64 percent, an annual real rate of 3.34 percent annually (Chart: "Inflation and Excess Costs"). This cost escalation outpaced every element of the Consumer Price (inflation) Index --- even that of medical care, a field in which the US has obtained an international reputation for lack of cost control. If public transit costs had been contained within inflation, the same service levels could have been provided in 1985 for $A7.5 thousand million1, instead of the actual $A12.2 thousand million. While inflation accounted for $0.38 of each new public transit dollar, $0.49 was consumed by cost increases in excess of inflation, leaving only $0.13 for expanded services and lower fares

C. Competitive Cost Control

Concurrently, the competitive private bus industry experienced unit cost decreases (inflation adjusted). From 1970 to 1985 real costs per kilometer declined 8.3 percent, compared to the 64 percent real increase in public transit (Chart: "Public and Competitive Cost Increases"). The private bus industry operates more than 120,000 vehicles (four times the daily public transit requirement) and includes more than 3,000 firms, ranging from small local operations to large national companies (Cox, 1987).


In response to the cost escalation of public transit and the cost control of the competitive market, US public transit authorities have competitively tendered considerable amounts of public transit services to private bus companies. The incorporation of competitive tendering has become a national trend, and has received attention from the national media, such as The Wall Street Journal (Carroll, 1988).

A. Extent of Competitive Tendering

More than half of the paratransit service (dial-a-ride or demand responsive service, largely for the disabled and elderly) is competitively tendered (UMTA, 1985), while less than 10 percent of total bus service is competitively tendered (Teal, Giuliano and Morlok, 1986). (It is ironic that competitive tendering is used for a substantially larger percentage of the specialized service than for less specialized bus services. Specialized services represent a small percentage of all transit expenditures and is perceived by public transit managers or unions as a secondary activity.) While an increasing share of transit service is competitively tendered, the overall percentage remains small probably because of the reluctance of large public transit authorities to incorporate competitive tendering and the strong opposition of public transit unions.

B. The Basic Approach

Under competitive tendering in the US, the public authority retains the service franchise (ownership) and controls the service. The public authority specifies route alignments, service frequencies, fares schedules and any other requirements deemed to be in the public interest. Private transportation companies respond to requests for proposals from public authorities to provide specific services for a limited period of time (no more than five years). The public authority awards a contract to the lowest responsive and responsible proposer. The jobs of present public transit employees are protected by restricting the competitive tendering conversion to the natural employee attrition rate. (This can be substantial. AC Transit in the San Francisco Bay Area was able to reduce its driving staff by nearly 10 percent in a seven month period, without a single layoff or redundancy.) In some cases, the public authority leases the vehicles (buses, etc.) to the successful contractor, while in other cases the contractors supply their own vehicles.

The private company has incentives to perform effectively aside from the ultimate incentive, profits: the contract may be cancelled for unsatisfactory performance; many contracts provide for penalties for unsatisfactory performance; and the private company will be interested in being favorably considered when the contract is re-tendered at its expiration.

Administered properly, competitive tendering, by definition, results in the lowest costs. Where private costs are less than public costs, the service is operated privately. Where public costs are less than private costs, the service is operated by a public authority under the same terms and conditions as would have been imposed upon a private company. In either case, the service is operated the least expensively. Competitive tendering is analogous in the public sector to "make or buy" analysis in the private sector.

C. The Record of Competitive Tendering

Competitive tendering has consistently resulted in lower costs through direct savings and moderation of in-house public transit costs.

1. Direct Savings

Competitively tendered public transit services have exhibited average cost savings of 30 percent. Cost savings have ranged from 10 to 60 percent (Teal, Giuliano and Morlok, 1986; Cox, 1987). For example:

-In Denver, the first competitively tendered services mandated by a new state law have resulted in cost savings of more than 50 percent.

-In Fort Wayne, Indiana, competitive tendering of public transit service has resulted in a 25 percent reduction in overall costs over the last two years, permitting a 60 percent increase in service level and a 33 percent fare reduction.

-In Los Angeles, two large contracts resulted in average cost savings of 42 percent.

-In Houston, park and ride service is operated for 33 percent less than public costs.

-In Seattle, express service is operated for 37 percent less than the public costs.

Moderated In-House Cost Increases

A competitive environment improves public cost performance. (This is referred to as the "ripple" effect.) For example:

-Lower cost increases have occurred in San Diego and Norfolk. In San Diego, the public authority cost savings have been more than $A115 million over the past 8 years, compared to cost performance at similar public transit authorities operating without competitive incentives.

-The competitive environment has considerably improved labor settlements in San Diego, Los Angeles, San Antonio, Phoenix, and other cities as it has become clear that there are alternatives to public monopoly service provision.

D. Service Quality

The data on comparative service quality is very sparse and largely unquantified. Generally, administrators of competitively tendered services have rated such services as equal to or better than in-house public service provision.

E. Is Competitive Tendering Successful?

Competitive tendering is a fluid public policy initiative. Unlike most public policy initiatives, competitive tendering is routinely reconsidered every three to five years through the procurement process. It would be simple enough for public authorities to abandon competitive tendering of public transit service as contracts expire. The ultimate indicator of whether competitive tendering is a public policy success is the degree to which authorities choosing to competitively contract continue the practice. No US public authority that has used competitive tendering for bus service has discontinued the practice.

And the extent of competitive tendering is increasing. New public transit systems routinely competitively tender for services. Many public authorities not currently competitively tendering for service are considering the practice. Many other public authorities that competitively tender for service are planning to increase the amount of competitively tendered service. It has been estimated that a national competitive tendering program limited to approximately one-half the driver attrition rate could save between $A32 thousand million and $A51 thousand million over the next 15 years (Cox and Love, 1989 (#2)).


What follows is a distillation of research and experience in the design of competitive tendering systems in the US. The authors have had direct design experience in Detroit, Los Angeles, San Francisco, New Orleans, St. Louis, Minneapolis-St. Paul and Denver. Additionally, the authors have been involved in research of competitive tendering system design with respect to services in San Diego, Milwaukee, Chicago, Detroit, Kansas City, Sacramento, Los Angeles, Miami, Chicago Fort Wayne (Indiana) and other locations (Cox and Love, 1989 (#1)). Through this experience and research, the authors have developed a set of principles of competitive tendering design. These principles were used in drafting two legislative proposals.

Senate Bill 164 (Colorado), which was enacted in 1988, requires that 20 percent of Denver public transit service be competitively tendered over the next two years (Senate Bill 164, 1988). This is the first state law in the US requiring competitive tendering of any public service.

Model state legislation has been published by the American Legislative Exchange Council (ALEC) to provide guidance to legislators interested in competitive tendering (American Legislative Exchange Council, 1989), and is included as the Appendix. ALEC is a national organization of state legislators that publishes "model" state legislation.


Issues with respect to the design of competitive tendering systems are discussed below.

Qualification: The degree of competition for a given contract is directly related to both the quality of service provided and to the cost savings realized through competitive tendering. Competition is increased when the tendering process is open to public scrutiny.

An open process allows for maximum participation by all parties and reinforces the learning process for both the authority and the competitors. Service delivery is enhanced from the progression along the learning curve as firms compete on quality and service refinements as well as costs. Administrative and monitoring costs decrease as a function of the same learning process.

Within the US, most states and the federal government require open records for all entities that receive state or federal funds. These public information laws require the dissemination of final contracts, proposals and prices to all requesting interested parties. Initially passed to protect the taxpayers by ensuring public review of government, these laws increase the speed with which potential contractors and authorities improve the competitive process and help to ensure the integrity of the procurement system.

The following presupposes that competitive tendering occurs in an open environment.

A. Preparation

Public authorities have generally consulted with private transportation providers before designing and issuing requests for proposals. This consultation may be through informal meetings, hearing or through formal committees of private providers under the sponsorship of public authorities. Advance consultation permits the public authority to consider alternatives for service and contract design that take full advantage of private sector capabilities, consistent with public requirements. As time goes on, the consultive process is becoming more routine as public authorities gain experience and increase their communication with private transportation providers.

B. Request for Proposal Information

Requests for proposal should contain a complete description of the service to be purchased, including schedules, service kilometers, service hours and any applicable service or safety standards. Further, requests for proposal should contain a clear description of the required proposal format. In some more recent cases (New Orleans and Denver), public transit authorities have provided detailed questionnaires and cost forms, which once completed are the private company's proposal. This approach has considerable advantages. It reduces uncertainty about what is required in the private company's proposal and greatly simplifies the preparation of proposals. This simplification increases the likelihood that companies that have not previously proposed on public transit service will submit proposals. Requests for proposals should, at a minimum, contain detailed cost proposal forms to be completed and submitted as a part of the proposal.

C. Length Of Procurement Process

The time span between issue of the request for proposal to submittal of proposals may be the single greatest deterrent to the number of competitors. There should be sufficient time between issuance of the request for proposals and the submittal date for all potential proposers to solicit and receive copies of the request for proposal, to attend any pre-proposal conferences and to prepare their proposal. In general, the amount of time allotted should increase with the size of the service to be proposed and to the extent that the contractor would have to provide facilities, capital equipment, and vehicles.

Public authorities should allow adequate time for a thorough evaluation of the proposals received. The amount of time allowed between the award of the contract and service provision is usually specified in the request for proposal and the ensuing contract. Insufficient lead time will deter competent service providers from proposing.

D. Proposal Evaluation

Most public authorities divide the evaluation process into two parts: evaluation of service qualifications and specifications; and determination of the most cost effective proposal. For a company's price proposal to be considered, it must meet the service qualifications and specifications. Some public authorities require separate sealed envelopes --- one with the service proposal and qualifications and the other with the price. The price envelope is opened only for companies that have qualified in the first step. This approach is useful in building the confidence of private providers in the procurement process and minimizes the potential for challenges by unqualified companies.

E. Fair Cost Comparison

Public transit authorities often compare in-house operating costs with proposed competitive costs before determining whether to award a contract to a private proposer. Private providers have alleged that public transit authorities have not fairly evaluated private proposals relative to in-house costs. Some public transit authorities have determined their in-house costs only after having reviewed the competitive proposals. In other cases, public authorities have understated in-house costs. As a result, a general mistrust has arisen in cases where public authorities administer competitive tendering processes in which they are also competitors. Because of these concerns, the authors of Senate Bill 164 did not provide for operation of competitively tendered services by the public transit authority.

Two public transit authorities took special steps in 1988 to assure objectivity:

-In Cincinnati, the Southwest Ohio Regional Transit Authority (SORTA) hired an accounting firm to prepare its internal proposal and submitted its sealed proposal by the deadline required of the private providers. Personnel assisting in the development of the internal proposal were not permitted to participate in the evaluation of proposals.

-In St. Louis, the Bi-State Development Authority separated the internal preparation of a proposal from the evaluation process. Bi-State did not permit personnel who prepared the internal proposal to participate in the evaluation of proposals.

It has also been reported that public transit authorities have made cost proposals below their true costs in procurements administered by organizations other than themselves (third parties), such as universities or employers. Third party administrators have become more concerned about this problem and have required a more detailed accounting of costs by public proposers to eliminate cross subsidization of below cost proposals (which results in higher overall public costs). In response to this concern, the US Urban Mass Transportation Administration recently ruled that public transit authorities must offer no less than fully allocated capital and operating costs when proposing on third party procurements (Chief Counsel, 1988).

The model state legislation permits public transit authorities to compete in competitive procurements, but contains provisions to ensure fair competition and fair proposal evaluation (Section 7).

To obtain the maximum level of competition and, therefore, the lowest price, it is important for public authorities to encourage the confidence of the private sector in the fairness of the procurement process. This is best accomplished by requiring that proposing public authorities be subject to the same rules as private companies and that public authorities propose no less than their true costs.

F. Pre-Proposal Conference

Many public authorities hold one or more pre-proposal conferences with potential proposers after issuance of the request for proposals. Pre-proposal conferences often result in changes in the proposal package as the public authority makes corrections in the original specifications or, as a result of questions from the potential contractors, becomes aware of alternative ways to deliver the service. Pre-proposal conferences can assist both the public authority and the private providers by improving the understanding of the service required, and this results in lower costs and more responsive private proposals.

G. Types Of Contracts

Most US competitive contracts involve the quotation of fixed prices by private providers, while others have permitted manipulation of contract prices under certain circumstances. Generally, to the degree that any negotiation or cost arrangement between the public authority and the contractor is conducted without competition, there is the potential for unduly increasing public authority costs. This is because in a non-competitive situation the supplier of the service (the contractor) has a degree of market power over price. For this reason manipulation of unit prices is becoming more rare.

1. Fixed Price Contracts

The extensive use of fixed price contracts has been instrumental in maintaining the cost effectiveness of competitive tendering. The most important characteristic of fixed price contracts is that contract rates (prices) cannot be non-competitively manipulated. Fixed price contracts involve the proposal of a certain price for a given amount of service over a specific contract length, usually expressed in cost per unit of service, such as service kilometers or service hours. There are two basic forms of fixed price contracts, pure fixed price contracts and indexed fixed price contracts. (Both are permitted under Senate Bill 164 and the model state legislation.)

Pure Fixed Price Contracts: From the public perspective, the optimum level of competition and, thus, the lowest costs are likely to be achieved through "pure" fixed price contracts. Proposers are required to quote fixed prices for basic contract terms, for all option periods, and for downward or upward adjustments in service level. There is no price negotiation after execution of the contract and, therefore, no provision for adjustment of unit prices.

Indexed Fixed Price Contracts: Fixed price contracts may include forms of indexation that permit contract price adjustments based upon the change in generally accepted indices such as measures of inflation or fuel cost increases. Indexing can reduce the risk for private contractors as they attempt to predict future costs. Potential contractors propose basic unit prices, but the unit prices are increased or decreased periodically according to specified indices. The price variation may be a percentage of the index's change and/or be invoked only when a certain level is reached, such as a 10 percent increase or decline from a base level. Indexing can increase public costs since private sector costs often increase slower than inflation. On the other hand, indexing can provide a simple tool for dealing with major variations in cost that are outside the control of the contractors, especially fuel costs. Another function that would lend itself well to indexing is insurance, however no reliable index has been developed. As in fixed price contracts, indexed fixed price contracts do not provide for price negotiation after execution of the contract --- reimbursement can be changed only according to the movement in the appropriate indices.

2. Manipulation of Contract Prices

Unit price manipulation has been permitted in two situations, for elements of cost that rise extraordinarily and universally and for periodic price negotiation. (Provisions of Senate Bill 164 and the state model legislation (Section 5.D.) prohibit any manipulation of unit prices.)

Extraordinary and Universal Cost Increases: Because of fears that a private contractor might not be able to maintain service in an environment of general and extraordinary cost escalation in certain functions, some contracts have provided for reduced private risk, either through negotiation or "pass through" treatment of such costs. For example, a contract might provide for negotiation or pass through to reimburse cost escalation of a function that is beyond the control of the contractor and has universally impacted public and private providers (such as the insurance escalation in 1985-6).

Periodic Price Negotiation: Another form of unit price manipulation is periodic price negotiation. Generally, price negotiation is annual and begins in the second year of the contract. Periodic price negotiation can be costly, because price competition is limited to only a part of the contract (such as the first year) and the winning contractor has a degree of market power over price in subsequent negotiations, which are non-competitive. Further, such negotiation consumes additional administrative time. Periodic price negotiation can lead to large auditing burdens, as well, to verify contractor cost changes.

In effect, periodic price negotiation is a "cost-plus" form of contracting. The net impact of periodic price negotiation can negate the very purpose of competitive tendering -- to obtain service for a competitive price. For this reason, there is a general trend away from this approach in the US.

H. Renewal Options

Contract duration can be defined in two ways by public authorities. Some public authorities offer contracts that have a specified term, such as three years, while other public authorities may award contracts for a basic term plus renewal "options." For example, a public authority may award a three year contract with a two year renewal option for a total contract term of five years. At the end of three years, the public authority may decide to exercise the two year option and have the incumbent company continue to provide the service. On the other hand, the public authority may decide to competitively procure the service again at the end of three years. The use of options can increase the incentives to the contractor to provide quality service and can give the public authority a way to change contractors without invoking termination. Senate Bill 164 and the model state legislation permit a maximum contract duration of five years including options.

I. Contract Duration

Costs are likely to be higher for shorter contract durations because the risks will be greater, since proposers must recover fixed costs over a shorter period of time. Further, "start up" costs are incurred when a new private provider assumes a service. Costs will also tend to be higher because the number of proposers will decline as the risk increases. Contract duration can be shorter in cases where the public authority provides vehicles for the private contractor. Some contracts have been for only one year, while most have been at least two years. Where the contractor supplies the vehicles, contracts should be at least three years.

Alternatively, contract periods can be too long. Longer contracts require greater risks for both parties, since it is extremely difficult to project costs. Generally, contracts, including options, do not extend to beyond five years. (This is the maximum duration permitted by Senate Bill 164 and the model state legislation.) The primary reason is that, as contract lengths extend beyond five years, it is necessary to rely more on negotiated price increases and adjustments, which, in the absence of competition, are likely to result in higher public costs.

Finally, it is important to observe the same contract duration, regardless of whether the contract is awarded to a public authority or a private company. Failure to competitively reprocure a contract represents an abandonment of competitive incentives and is likely to result in higher public costs.

J. Rotation of Contracts

Where a public authority competitively tenders for multiple service packages, it is customary for procurements to be rotated in such a manner that no more than one service package is being procured at the same time. Limiting the percentage of service under procurement at any particular time reduces the incentive for an incumbent company to seek undue political advantage in the award process.

K. Contract Size

Contract size is an important consideration because of the large number of small private providers and the important influence that these companies have on minimizing costs. The smaller the proposal package, the more likely that smaller companies will be among the proposers.

Competitive contracts have generally been relatively small with only a few cases involving more than 50 vehicles. Nonetheless, there are cases of competitive contracts of from 100 to 200 vehicles. While only a limited number of companies are able to propose on such large contracts, there is no evidence as yet that the costs have been significantly higher than in smaller contracts. However at least two public authorities that have procured service in large increments are now considering multiple and smaller future procurements to increase competition. The advantage of larger contracts for public transit authorities is that they can be simpler and less expensive to monitor.

Senate Bill 164 requires that "each individual request for proposals shall reflect the district's determination as to the appropriate size for each such request in order to maximize the number of qualified bidders without causing undue operating inefficiencies." The model state legislation contains a provision limiting procurement size (Section 6.F.).

A number of public transit authorities have sought a middle ground in which requests for proposals are structured to permit large contracts, if they are more cost effective, while permitting smaller companies to compete. This is accomplished by the issuance of a single request for proposal while permitting companies to submit proposals on part or all of the package. A variation of this approach involves the provision to propose a discounted price for the entire package. This approach has been adopted by the Regional Transportation District in Denver and the University of Minnesota in Minneapolis.

L. Market Share Limitation

Market share limitations have been designed to limit the ability of a single company to gain market power and thereby limit competition. Senate Bill 164 limits individual contractors to no more than 50 percent of competitively procured service, while the model state legislation imposes a 25 percent limitation where more than 60 vehicles of service are operated under competitively under the sponsorship of the public authority (Section 6.I.).

M. Service Specifications

Public authorities clearly describe the service on which proposals are requested. This includes specification of route alignments, public timetables, estimated annual service miles and service hours, and vehicle descriptions. The public authorities also specify what ancillary services are to be provided, such as marketing, telephone information, etc. Public authorities also generally specify vehicle appearances (liveries).

N. Vehicle Provision

Vehicles for competitively tendered transit services may be provided by public authorities or by the private companies. Under public vehicle provision, the private company is given use of the vehicles under a contract to provide the specified transit service. An advantage of private provision is that the private company has a greater incentive to properly maintain the vehicles to maximize their value in the used vehicle market. A disadvantage is that private companies have to finance such capital acquisitions, which can increase the cost of capital (interest). Avoidance of interest charges is a particular advantage of public vehicle provision (US transit vehicles are generally purchased for cash with public grants). A disadvantage of public vehicle provision is that the public authority incurs additional costs to inspect the maintenance records of the private company operating the vehicles.

Standard transit buses are a special case in the US because they have little value in the secondary (resale) market. The rapid decline in market value of these buses is much more steep than their customary capital depreciation, and, as a result, provision of such vehicles is more risky for the private sector. In Miami, New Orleans and Denver, public transit authorities have made or plan to make public vehicles available for use by private contractors to reduce costs and to increase competition.

O. Insurance Coverage

Most public authorities require contractors to maintain accident and liability insurance limits at least as high as the public authorities carry themselves and similar to those required by the US Interstate Commerce Commission ($A5.8 million per accident). Any requirement above this industry practice, even where it may be justified, adds to the costs of the contract.

P. Performance Bonds

Many public transit authorities require contractors to post performance bonds. Performance bonds serve two primary functions: to demonstrate the contractors business soundness and to compensate the public authority for any losses resulting from a contractor default.

Performance bonds probably represent the most simple and reliable indicator of the contractor's ability to perform. Public authorities are not skilled in judging the fiscal condition of private businesses and it can be unwise for a public authority to perform such a task. Bonding companies are skilled in corporate financial analysis and a private company that is unable to obtain a performance bond of a reasonable size may not be competent to provide competitively tendered transit service. Performance bonds can be an easy, cost effective way for public authorities to minimize risks.

It is generally held that performance bonds should be limited to the maximum potential loss to the public authority in the event of a default by a private transportation provider, and a consensus is arising that a the maximum performance bond amount should be no more than three months' of the contract value. Even this may be excessive, since the nationally lost service days have been reported at fewer than five in the last decade. Since public transit service is readily available from the competitive market, the maximum foreseeable loss from a contractor default is the incremental cost of purchasing substitute service while a new procurement process is undertaken. Added to this incremental cost should be the public cost of the unscheduled procurement process. San Diego County has developed its performance bond requirement by making such a calculation.

Nonetheless, the necessity of ensuring the performance of private contractors must be balanced against the higher costs that are likely to occur from the requirement of performance bonds---their value should be no greater than the foreseeable loss.

Q. Performance Standards

Most contracts provide for some standards of performance. These may include indices for service quality (cleanliness, color, lettering, and decor of the vehicle, driver attire, and driver courtesy), on-time performance, trip completion, record keeping, and safety. Interestingly, the standards set for tendered services routinely exceeded those of the previously provided public sector service.

-Safety: Most public transit contracts require that contractors include safety standards and vehicle maintenance standards.

-Service Quality: Various service quality standards are customarily included in contracts, such as on-time performance, trip completion, vehicle cleanliness, driver courtesy, passenger complaint rates.

R. Penalties and Incentives

Many public authorities specify financial penalties for unsatisfactory performance (in addition to the ultimate penalty, cancellation of the contract). Judiciously administered, financial penalties can enhance the likelihood that tendered service maintains high standards of quality and performance. Excessively high penalties or penalties based upon unreasonable standards impose additional costs on both the public authority and the contractor. Potential contractors will calculate the costs of excessive penalties and increase their proposal prices to compensate. Public authorities must evaluate the total costs and benefits of each penalty. Incentives generally have not been used in competitively tendered bus services because public authorities have assumed that the profit motive will be incentive enough for a responsible private provider.

S. Public Supervision

Public transit services require extensive supervision, whether they are provided by the public authority itself or a by private contract. The additional costs of supervising competitively tendered services are small. London Regional Transport has reported that its incremental contract monitoring cost was 2.5 percent of contract value for a program that involves more than 20 contracts and 800 competitively tendered buses. Ann Arbor (Michigan) reported incremental supervision costs of less than 2.0 percent. Common sense would indicate that the costs of supervision would be directly correlated to the extent of the monitoring effort. This is usually, but not always, the case. Public transit authorities have been innovative with regard to supervision. Miami uses temporary help to do random monitoring of on-time performance and service quality, permitting a higher degree of monitoring than would otherwise be possible. Carson (California) performs random monitoring but supplements this with routine calls to frequent riders for comments on performance issues.


The success of competitive tendering rests on two fundamental principles: public control and cost effectiveness. First, the public authority has a responsibility to the riders and taxpayers to ensure that public services meet quantity and quality standards that are set by government --- this requires public control. Second, competitive tendering programs must foster the development and maintenance of a truly competitive market so that costs are kept under control. There is an increasing consensus among US public transit officials on these principles. The implications of these two principles are described below:

Principle #1. Public policy control should be retained over competitively tendered services to ensure that tendered services are operated consistent with public policy objectives:

a. Public authorities should design the service consistent with schedules, standards, and performance criteria that it has established, and at the fares it has established.

b. Public authorities should closely monitor service contract compliance as a routine activity, whether the contract has been awarded to a public authority or a private company. Public authorities should be prepared to invoke contract provisions such as may be required to ensure public service of specified quality and quantity.

c. Contracts should be awarded to the lowest responsible and responsive proposer: the public authority should ensure that it is obtaining service from a company that is capable of providing the service, having proven its financial and management responsibility in similar services (responsible). Further, the public authority should ensure that it awards the contract to a company that understands the service package, having submitted a proposal that is sufficiently responsive to the public request for proposal that was issued for the service.

Principles #2. A competitive supplier market should be fostered, to ensure the most cost effective service:

a. Requests for proposals should be provided to all potential proposers in sufficient time to permit well considered responses.

b. Each request for proposal should cover the smallest increment of service practicable so that the maximum number of qualified proposers may respond.

c. Requests for proposal should clearly specify all service requirements and contain clear and concise information on the required format of proposals.

d. Service contracts should be subject to new requests for proposal at least every five years, whether the incumbent operator is a private company or a public authority.

e. Contract expiration dates should be rotated to minimize the increment of service being competitively tendered at a particular time.

f. No single private company should be permitted to obtain contracts covering an excessive percentage of the public transit service. (This may not be feasible for public authorities a very small amount of service subject to competitive tendering.)

g. Contract prices should be subject to negotiation after contract award only in extreme cases: No payment adjustment should be permitted except as specified in the contract according to the provisions of the request for proposal, or where extremely unusual circumstances have resulted in cost increases that are both outside the control of the contractor and have similarly impacted all potential contractors in the supplier market.

h. Public authorities should participate fairly in the procurement process

1. Individuals and departments involved in preparing a public authority proposal should not take part in the evaluation of proposals.

2. Public authorities should submit sealed proposals subject to the request for proposals deadline.

3. Public authorities should be subject to the same proposal and contract terms, conditions, and performance criteria as would apply to a private company including termination provisions.

4. Public authority proposals should include the attributable fully allocated operating and capital costs for the functions proposed for purchase through the request for proposal.

5. Public authorities should include cost saving innovations in their proposals only to the extent that such innovations are used in other services provided by the public authority. (To permit otherwise encourages public authorities to reduce proposal costs for the purpose of winning contracts without reducing overall public costs.)

i. Where there are public capital facilities, they should be made available to the successful public or private proposer to provide the specified service. This will minimize capital and financing costs.

j. Public authorities should impose no contractor employee requirements beyond compliance with applicable labor laws.

(c) 2001 --- Wendell Cox Consultancy --- Permission granted to use with attribution.
The Public Purpose
Demographic Briefs
Government Cost Review
Gov't Employment Fact Book
Highway & Motorway Fact Book
Intercity Transport Fact Book
Labor Market Reporter
School Transport Fact Book
Transport Fact Book
Urban Policy
Urban Transport Fact Book
Competitive Tendering Website
Intl Comp. & Ownership Conference
Alternatives to Light Rail in Seattle

Contact by E-Mail
Subscribe (Free)
Corrections Policy & Rights

The Public Purpose     WENDELL COX CONSULTANCY     Demographia
P. O. Box 841 - Belleville, IL 62269 USA
Telephone: +1.618.632.8507 - Facsimile: +1.810.821.8134<