Bus Transport: Demand, Economics, Contracting, and Policy

Bus Transport

Demand, Economics, Contracting, and Policy

David A. Hensher

Institute of Transport and Logistics Studies, The University of Sydney Business School, The University of Sydney, NSW, Australia

Table of Contents

Cover image

Title page

Copyright

Dedication

List of previous sources of publication

About the author

Chapter 1. Introduction

Part I. Reviews

Chapter 2. Public service contracts in the bus sector

2.1. Introduction and background

2.2. Contract theory and risk

2.3. Efficient contracting

2.4. Why are performance-based contracts so rare?

2.5. An overview of contract regimes in passenger transport

2.6. Establishing a setting in which to compare the performance of operators

2.7. Conclusions

Chapter 3. Disruptive technology and moving people

3.1. Scope

3.2. Disruptive technological changes affecting land passenger transport

3.3. Assessing improvements in societal wellbeing

3.4. Some societal trends relevant to technological disruption in land passenger transport

3.5. Scenarios

3.6. Policy implications

Appendix 3.A

Chapter 4. The influence of the Thredbo series

Chapter 5. Competition and ownership in land passenger transport: the Thredbo story

5.1. Introduction

5.2. Market arbitration

5.3. Procurement mechanism

5.4. Asset ownership

5.5. Contract design

5.6. Risk allocation

5.7. Contract management

5.8. Looking to the future: the next 30 years

Part II. Contracting

Chapter 6. Contracting regimes for bus services: what have we learnt in recent years?

6.1. Background

6.2. Contract regimes: the case for negotiation

6.3. Contract completeness: why trust is fundamental

6.4. Building trust through partnership

6.5. Tactical level planning: the foundation for unleashing value for money

6.6. Conclusions

Chapter 7. Incompleteness and clarity in bus contracts

7.1. Introduction

7.2. A framework in which to identify contract incompleteness and clarity

7.3. Empirical application

7.4. Empirical analysis

7.5. Conclusions

Chapter 8. A simplified performance-linked value for money model for bus contract payments

8.1. Background

8.2. A proposed simplified performance-linked payment (SPLP) model

8.3. Establishing benchmark value for money outcomes

8.4. Using the benchmark value for money outcomes

8.5. Conclusions

Chapter 9. Bus contract costs, user perceived service quality and performance assessment∗

9.1. Introduction

9.2. Developing a service quality index

9.3. Results of the user preference model

9.4. The service quality index (SQI)

9.5. Linking service quality to cost and demand

9.6. The relationship between average cost per km and SQI

9.7. Determination of service performance standards and operator compliance

9.8. Conclusions

Chapter 10. Customer service quality and benchmarking in bus contracts

10.1. Introduction

10.2. Concerns about traditional likert scale metrics of customer satisfaction

10.3. Developing a customer service quality index

10.4. The user preference model results

10.5. The customer service quality index (CSQI) and benchmarking

10.6. Conclusions

Appendix

Chapter 11. Are there cost efficiency gains through competitive tendering or negotiated performance-based contracts and benchmarking in the absence of an incumbent public monopolist?

11.1. Introduction

11.2. A brief overview of negotiated performance-based contracts and competitive tendering

11.3. Approach to establishing benchmarked cost efficiency

11.4. A comparative assessment of NPBC and CT in Australia

11.5. Conclusions

Chapter 12. Efficient contracting and incentive agreements: the influence of risk preferences of contracting agents on contract choice

12.1. Introduction

12.2. Contract theory

12.3. Efficient contracting

12.4. Using choice experiments as a way of empirically investigating contract preferences

12.5. Designing the choice experiments for contract assessment

12.6. Conclusions

Appendix A. The experimental design of PT contract preferences

Chapter 13. Using contracted assets to undertake non-contracted services to improve cost efficiency

13.1. Introduction and background

13.2. A case study

13.3. Conclusions

Chapter 14. Disruption costs in bus contract transitions

14.1. Introduction

14.2. Accounting for reputational risk in the assessment of contracting offers

14.3. The mixed logit model

14.4. Development of the sample and the survey instrument

14.5. Descriptive profile of sample

14.6. Key findings

14.7. Conclusions and implications

Appendix 14.A: Background questions

Part III. Bus rapid transit

Chapter 15. Sustainable bus systems: moving towards a value for money and network-based approach and away from blind commitment

15.1. Introduction

15.2. The appeal of BRT

15.3. Conclusions

Appendix

Chapter 16. Ridership drivers of bus based transit systems

16.1. Introduction

16.2. Data

16.3. Methodology

16.4. Sources of systematic variation in BRT ridership

16.5. Conclusions

Appendix 16.A: descriptive statistics and correlation matrix for variables in Table 16.2

Appendix 16.B: random effects ridership regression model with GDP per capita and population density

Chapter 17. Performance contributors of bus rapid transit systems within the ITDP BRT standard

17.1. Introduction

17.2. The ITDP approach

17.3. The ordered choice model

17.4. Data

17.5. Revealed predictors of the BRT standard

17.6. Applications: business-as-usual projection and what-if analysis

17.7. Conclusions

Chapter 18. Review of bus rapid transit and branded bus service performance in Australia

18.1. The BRT debate: what happened?

18.2. An overview of BRT and BBS in Australia

18.3. Gross performance comparison

18.4. Rationale for normalisation

18.5. Net performance comparison

18.6. Discussions and conclusions

Appendix: included routes in each service cluster

Part IV. Image

Chapter 19. Identifying resident preferences for bus and rail investments

19.1. Introduction

19.2. Drivers of community preferences for public transport

19.3. Overview of the random regret mixed logit model

19.4. Empirical study

19.5. Model results

19.6. Application to project planning

19.7. Conclusions and synthesis

Chapter 20. Cultural contrasts of preferences for bus rapid transit and light rail transit

20.1. Introduction

20.2. Literature review

20.3. The choice experiment

20.4. The samples and sources

20.5. Descriptive profile of sample

20.6. The mode preference model form

20.7. Model results

20.8. Willingness to pay

20.9. Community preference model: simulated scenarios

20.10. Conclusions

Appendix 20.A

Part V. Elasticities

Chapter 21. Assessing sources of variation in public transport elasticities: some warnings

21.1. Introduction

21.2. The data source

21.3. The evidence

21.4. Conclusions

Appendix 21.A profile of data by elasticity type

Part VI. Crowding

Chapter 22. A review of willingness to pay evidence on public transport crowding

22.1. Introduction

22.2. Valuation of in-vehicle crowding

22.3. Valuation of crowding in access-ways and platforms

22.4. Synthesis of WTP estimates

22.5. Conclusions and policy implications

Chapter 23. A review of objective and subjective measures of crowding in public transport

23.1. Introduction

23.2. Measures of crowding

23.3. Monitored crowding vs. experienced crowding: evidence from Melbourne and Sydney

23.4. Subjective or psychological components of crowding

23.5. Linking subjective and objective measures to measurable users benefits for inclusion in benefit-cost analysis

23.6. Conclusions and recommendations

Appendix 23.A: Measuring subjective evaluations of crowding or perceived crowdedness (Mohd Mahudin et al., 2012)

Chapter 24. The effects of passenger crowding on public transport demand and supply

24.1. Introduction

24.2. Effects of passenger density and crowding

24.3. Estimation of crowding and standing costs

24.4. Effect of crowding disutility on demand estimation

24.5. Summary and conclusions

Chapter 25. Multimodal transport pricing with extensions to non-motorised transport

25.1. Introduction

25.2. Setting public transport fares: first best and second best models

25.3. Results that matter

25.4. A three-mode pricing model

25.5. Summary and conclusions

Appendix

Part VII. Transport appraisal

Chapter 26. Estimating the wider economic benefits of the Sydney North West Rail Link project

26.1. Introduction

26.2. Welfare benefits

26.3. GDP impacts

26.4. Case study – North West Rail Link

26.5. Concluding remarks

Chapter 27. Clarifying the complementary contributions of cost benefit analysis and economic impact analysis in public transport investment

27.1. Introduction

27.2. Requirements for decision support

27.3. Contrasting analysis methods

27.4. Matching analysis methods to the context of decisions

27.5. The bus rapid transit (BRT) case study and its evaluation process

27.6. Analysis results

27.7. Discussion

27.8. Conclusion

Chapter 28. How well does BRT perform in contrast to LRT? An Australian case study

28.1. Introduction

28.2. The context for MetroScan's role

28.3. Case study: bus rapid transit and light rail transit

28.4. Benefit – cost and economic impact analyses

28.5. Economic impact analysis

28.6. Conclusions

Appendix

Part VIII. Energy

Chapter 29. Can bus be cleaner and greener than rail?

29.1. Introduction

29.2. Gathering the evidence on environmental advantage

29.3. The results of environmental advantage

29.4. Conclusions

Part-IX. Social exclusion

Chapter 30. The roles of mobility and bridging social capital in reducing social exclusion in regional Australia

30.1. Introduction

30.2. Some concepts and definitions

30.3. Key literature on regional mobility/accessibility and social exclusion

30.4. Data analysis

30.5. Discussion

30.6. Conclusions

Part X. Mobility as a Service (MaaS)

Chapter 31. Future bus transport contracts under a mobility as a service regime

31.1. Introduction

31.2. A brief overview of MaaS in practice

31.3. What might MaaS mean for future bus contracts?

31.4. Future service delivery options in the new digital age

31.5. Links to reducing traffic congestion and scalability

31.6. Conclusions

Chapter 32. Potential uptake and willingness-to-pay for mobility as a service

32.1. Introduction

32.2. Literature on MaaS

32.3. The choice experiment survey

32.4. Sampling and sample profile

32.5. Descriptive analysis and model specification

32.6. Estimation results and willingness-to-pay for MaaS

32.7. Conclusions and ongoing research

Chapter 33. Identifying broker/aggregator models for delivering mobility as a service

33.1. Introduction

33.2. Delivering mobility as a service

33.3. Methodology

33.4. Mobility contract design

33.5. The survey instrument

33.6. Preliminary results

33.7. Conclusion and next steps

Appendix

Chapter 34. What might road congestion look like in the future under a collaborative and connected mobility model?

34.1. Introduction

34.2. Smart shared mobility and potential implications for levels of congestion

34.3. The need for a governance framework to ensure smart mobility delivers congestion reduction

34.4. Data access and sharing – necessary to manage network congestion

34.5. Road pricing reform

34.6. Conclusions

References

Index

Copyright

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Dedication

This book contributes to the research program of the Volvo Research and Education Foundation Bus Rapid Transit Centre of Excellence (BRT+). We acknowledge the Foundation for partial funding support. It is dedicated to those who believe in the role of the Bus. With chapter co-author contributions from Camila Balbontin, Geoffrey Clifton, David Cosgrove, Richard Ellison, Chinh Ho, Loan Ho, Louise Knowles, Julieta Legaspi, Zheng Li, Corinne Mulley, John Rose, Neil Smith, John Stanley, Janet Stanley, Alejandro Tirachini, Baojin Wang, Glen Weisbrod and Yale Wong. Andre Pinto assisted me in preparing this volume.

List of previous sources of publication

Reviews

Hensher D.A. Keeping the debate informed on reforms in land passenger transport: the influence of the Thredbo Series.  Transport Reviews . 2015;34(6):671–673.

Hensher D.A. Public service contracts - the economics of reform with special reference to the bus sector. In: Cowie J, Ison S, eds.  The Routledge Handbook of Transport Economics . London: Routledge; 2018:93–107 Chapter 7.

Stanley J, Hensher D.A, Wong Y.Z. Disruptive technology: a better future for land passenger transport? In:  Bus and Coach Industry Policy Paper 11. Report prepared for Bus Industry Confederation . 2018.

Wong Y, Hensher D.A. The Thredbo story: a journey of competition and ownership in land passenger transport. In:  Paper Presented at the 15th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 15), Stockholm, Sweden, 13–17 August 2017). (Linked to VREF Centre) . vol. 69. Research in Transportation Economics (RETREC); 2018:9–22.

Contracting

Hensher D.A, Stanley J.K. Contracting regimes for bus services: what have we learnt after 20 years?  Research in Transportation Economics . 2010;29:140–144.

Hensher D.A. Incompleteness and clarity in bus contracts: identifying the nature of the ex ante and ex post perceptual divide.  Research in Transportation Economics . 2010;29:106–117.

Hensher D.A, Mulley C, Smith N.A. Towards a simplified performance-linked value for money model as a reference point for bus contract payments Presented at the 12th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 12), Durban, South Africa September 2011. Published in.  Research in Transportation Economics . 2013;39(1):232–238.

Hensher D.A. The relationship between bus contract costs, user perceived service quality and performance assessment, presented at Thredbo 12, Durban, South Africa, September 2011.  International Journal of Sustainable Transportation special issue . 2014;8(1):5–27.

Hensher D.A. Customer service quality and benchmarking in public transport contracts.  invited paper for inaugural issue of International Journal of Quality Innovation . 2015;1(1):4.

Hensher D.A. Cost efficiency under negotiated performance-based contracts and benchmarking for urban bus contracts - are there any gains through competitive tendering in the absence of an incumbent public monopolist? Presented at the 13th International conference on competition and ownership of land passenger transport (Thredbo 13), Oxford September 15–19 2013.  Journal of Transport Economics and Policy . 2015;49(1):133–148.

Hensher D.A, Ho C, Knowles L. Efficient contracting and incentive agreements between regulators and bus operators: the influence of risk preferences of contracting agents on contract choice Paper presented at the 14th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 14), Chile, August 30 to September 3, 2015.  Transportation Research Part A . 2016;87:22–40.

Hensher D.A. Using contracted assets to undertake non-contracted services as a way to improve cost efficiency under negotiated or tendered bus contracts invited paper for the inaugural issue of.  Journal of Strategic Contracting and Negotiation . 2015;1(2):118–128.

Hensher D.A, Ho C, Mulley C.M. Disruption costs in contract transitions Paper presented at the 14th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 14), Chile, August 30 to September 3, 2015.  Research in Transportation Economics . 2016;59:75–85.

Bus rapid transit

Hensher D.A. Sustainable public transport systems: moving towards a value for money and network-based approach and away from blind commitment.  Transport Policy . 2007;14(1):98–102.

Hensher D.A, Li Z. Ridership drivers of bus rapid transit systems.  Transportation . 2012;39(6):1209–1221. .

Hensher D.A, Wong Y, Ho L, Clifton G. From workhorse to thoroughbred: review of bus rapid transit and branded bus services in Australia and future opportunities. In:  Report prepared for Bus Industry Confederation, 21 December 2018. Paper to be presented at 16th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 16), Singapore, August 2019 . 2018.

Li Z, Hensher D.A. Performance contributors of bus rapid transit systems within the ITDP BRT standard: an ordered choice approach. In:  Prepared for the 16th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 16), Singapore, August 2019 . 2019.

Image

Hensher D.A, Ho C, Mulley C.M. Identifying resident preferences for bus-based and rail-based investments as a complementary buy in perspective to inform project planning prioritisation.  Journal of Transport Geography . 2015;46(1):1–9.

Hensher D.A, Balbontin C, Ho C, Mulley C. Cross-cultural contrasts of preferences for bus rapid transit and light rail transit. Paper presented at the 15th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 15), Stockholm, Sweden, 13–17 August 2017. (Linked to VREF Centre).  Journal of Transport Economics and Policy . 2019;53(1):47–73.

Elasticities

Hensher D.A. Assessing systematic sources of variation in public transport elasticities: some comparative warnings.  Transportation Research Part A . 2008;42:1032–1043.

Crowding

Li Z, Hensher D.A. Crowding and public transport: a review of willingness to pay evidence.  Transport Policy . 2011;18:880–887.

Li Z, Hensher D.A. Crowding in public transport: objective and subjective measures (linked to ARC- DP 2012–2014).  Journal of Public Transportation . 2013;16(2):107–134.

Tirachini A, Hensher D.A, Rose J.M. Crowding in public transport systems: Effects on users, operation and implications for the estimation of demand.  Transportation Research Part A . 2013;53:36–52.

System wide multi-modal assessment

Tirachini A, Hensher D.A. Multimodal transport pricing: first best, second best and extensions to non-motorised transport.  Transport Reviews . 2012;32(2):181–202.

Transport appraisal

Legaspi J, Hensher D.A, Wang B. Estimating the wider economic benefits of transport investments: investigating the case of the Sydney north-west rail link project.  Case Studies on Transport Policy . 2015;3(2):182–195.

Weisbrod G, Mulley C, Hensher D.A. Recognising the complementary contributions of cost-benefit analysis and economic impact analysis to an understanding of the worth of public transport investment: a case study of bus rapid transit in Sydney, Australia Paper Presented at the 14th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 14), Chile, August 30 to September 3, 2015.  Research in Transportation Economics . 2016;59:450–461.

Hensher D.A, Ellison R, Ho C, Weisbrod G. How well does BRT perform in contrast to LRT? An Australian case study using MetroScan_TI. In: Ferbrache Fiona, ed.  Developing Bus Rapid Transit: The Value of BRT in Urban Spaces . Edward Elgar Publisher; 2019 Chapter 8.

Energy

Mulley C.M, Hensher D.A, Cosgrove D. Is rail cleaner and greener than bus?  Transportation Research Part D . 2017;51(1):14–28.

Social exclusion

Stanley J, Stanley J, Balbontin C, Hensher D.A. Social exclusion: the roles of mobility and bridging social capital in regional Australia.  Transportation Research Part A . 2019;125:223–233.

Mobility as a service

Hensher D.A. Future bus transport contracts under mobility as a service regime in the digital age: are they likely to change? Presented at the 15th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 15), Stockholm, Sweden, 13–17 August 2017.  Transportation Research Part A . 2017;98:86–96.

Ho C, Hensher D.A, Mulley C.M, Wong Y. Potential uptake and willingness-to-pay for Mobility as a Service (MaaS): a stated choice study Paper presented at the 15th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 15), Stockholm, Sweden, 13–17 August 2017.  Transportation Research Part A . 2018;117:302–318.

Wong Y.Z, Hensher D.A, Mulley C. Mode-agnostic mobility contracts: Identifying broker/aggregator models for delivering mobility as a service (MaaS). In:  World Conference on Transport Research - WCTR 2019, Mumbai, 26–31 May 2019. Also accepted for presentation at the January 2019 Transportation Research Board Annual Conference, Washington D.C . 2019.

Hensher D.A. Tackling road congestion – what might it look like in the future under a collaborative and connected mobility model?, Invited paper from an eminent academic on invitation from Editor in Chief Tae Oum.  Transport Policy . 2018;66:A1–A8.

About the author

David Hensher is Professor of Management, and Founding Director of the Institute of Transport and Logistics Studies (ITLS): The Australian Key Centre of Teaching and Research in Transport Management in The Business School at The University of Sydney. ITLS is ranked under Excellence in Research Australia (ERA) at level 5 (‘well above world standards’). Educated in Kenya (Parklands, Lord Delamere), England (Lindfield, Oxford) and Australia (UNSW), David is a Fellow of the Academy of Social Sciences in Australia (FASSA), Recipient of the 2009 IATBR (International Association of Travel Behaviour Research) Lifetime Achievement Award in recognition for his long-standing and exceptional contribution to IATBR as well as to the wider travel behaviour community (http://iatbr.weebly.com/award-winners.html), Recipient of the 2006 Engineers Australia Transport Medal for lifelong contribution to transportation, Recipient of the 2009 Bus NSW (Bus and Coach Association) Outstanding Contribution to Industry Award, and Recipient of the 2012 best paper released by the International Association of Maritime Economists (IAME). David is also the recipient of the Smart 2013 Premier Award for Excellence in Supply Chain Management, and recipient of the 2014 Institute of Transportation Engineers (Australia and New Zealand) Transport Profession Award to an individual who has made a significant contribution to the development of the transport/traffic engineering profession over a sustained period; recipient of 2016 Award for Outstanding Research as part of the inaugural University of Sydney Vice-Chancellor's Awards for Excellence. David is also the recipient of the 2019 John Shaw Medal which honours an industry champion who has made a lasting contribution to Australia's roads. Selected in 2018 by The University of Sydney as one of 25 research stars for the ARC Inaugural Engagement and Impact submission (ranked one of 12 with High Impact). A Director of Volvo Educational and Research Foundation Centre of Excellence in Bus Rapid Transit (2010 onwards), Emeritus Member of Singapore Land Transport Authority International Advisory Panel 2007–2010 (Chaired by Minister of Transport), Honorary Fellow Singapore Land Transport Authority Academy, Past President of the International Association of Travel Behaviour Research and a Past Vice-Chair of the International Scientific Committee of the World Conference of Transport Research. David is the Executive Chair and Co-Founder of The International Conference in Competition and Ownership of Land Passenger Transport (the Thredbo Series http://www.thredbo-conference-series.org/), now in its 30th year. David is on the editorial boards of 17 of the leading transport journals. David was appointed in 1999 by one of the world's most prestigious academic publishing houses - Elsevier Science press - as series and volume co-editor of a handbook series Handbooks in Transport. In 2010 he was appointed by Routledge Publishers (UK) as Editor of a four-volume major works in Transport Economics as well as Edward Elgar Publishers as Series Editor for volumes on Transport and the Environment. He has published extensively (over 635 papers) in the leading international transport and economics journals (such as The Economic Journal, Review of Economics and Statistics, Journal of Econometrics, Journal of Applied Econometrics, Applied Economics, Empirical Economics, Transportation Research Parts A, B and E) as well as 16 books, and is Australia's most cited transport academic. David has over 54,000 citations of his contributions in Google Scholar (seventh most cited academic at the University of Sydney in all disciplines). David is ranked third in the world for economists in the field of discrete choice models, as of August 2019 (https://ideas.repec.org/top/top.dcm.html) and ITLS (and the Business School at Sydney) is ranked second. His books include the Demand for Automobiles, published by North-Holland, the Bus and Coach Business (with Ann Brewer published - Allen and Unwin), Transport: An Economics and Management Perspective (With Ann Brewer – Oxford University Press), Stated Choice Methods (with Jordan Louviere and Joffre Swait – Cambridge University Press), Applied Choice Analysis - a Primer (with John Rose and Bill Greene – Cambridge University Press, first and second editions), Ordered Choice Models (with Bill Greene – Cambridge University Press) and Understanding Mobility as a Service (MaaS) - Past, Present and Future (with Corinne Mulley, Chinh Ho, John Nelson, Göran Smith and Yale Wong).

His particular interests are transport economics, transport strategy, sustainable transport, productivity measurement, traveller behaviour analysis, choice analysis, stated choice experiments, process heuristics, and institutional reform (PPPs, privatisation tendering and contracting) and Understanding Mobility as a Service (MaaS) - Past, Present and Future (with Corinne Mulley, Chinh Ho, John Nelson, Göran Smith and Yale Wong - Elsevier). David has advised numerous government and private sector organisations in many countries on matters related to transportation, especially matters related to forecasting demand for existing and new transportation services; for example the Speedrail high speed rail project, fast rail in regional NSW, the Fiji Travel Survey, the Liverpool-Parramatta Transitway, the North-West Rail project, West Connex, the Sydney Metro, public transport elasticities, and numerous toll road projects throughout Australia and internationally. David is regarded as Australia's most eminent expert on matters relating to travel demand and valuation and transport reform. Appointments include: a member of the executive committee that reviewed bus transport bids for the Olympic Games, the NSW Government's Peer Review Committee for the Sydney Strategic Transport Plan, Peer reviewer for Transfund (NZ) of the New Zealand project evaluation program, Peer reviewer of the NZ Land Passenger Transport Procurement Strategy for Land Transport NZ, member of the executive committee of ATEC, a consortium promoting a freight rail system between Melbourne and Darwin; economic adviser to Gilbert+Tobin Lawyers on valuation methods in IP context; panel member of Transport NSW benchmarking program; specialist toll road project adviser to Thiess, member of Infrastructure Australia's reference panel on public transport, adviser to the West Connex toll road Project, adviser to Deloitte Access Economics, Transport for NSW and peer reviewer for Southern Water (UK) regulatory pricing reform, and member of Board of Advice of ITLS (Africa). In 2014 David was appointed as a Panel Member to Review The Faculty of Management at The University of Johannesburg and in 2016 to review the Department of Management Sciences at the City University of Hong Kong. Member of Transport for NSW Connected and Automated Vehicle Stakeholder Reference Group (formed in 2017) and Infrastructure NSW Smart Cities Working Group.

Chapter 1

Introduction

Abstract

This introduction to a book on Bus Transport provides a brief synthesis of the focus of the book and acknowledges the source of the original pre-edited version of each chapter. It also lists contributors to each chapter and acknowledges those who have contributed over many years to the authors knowledge on bus transport economics.

Keywords

Author recognition; Bus transport; Intelligent mobility; Planning; Policy; Public transport contracting

Public transport is a theme of enormous importance in all societies. The bus is the most patronised of all land–based public passenger modes. It is however seen as a somewhat unglamourous means of supporting mobility and accessibility (in contrast to rail – heavy and light), yet offers so much to the travelling public as well as offering attractive sustainability opportunities. We recognise however that attracting and retaining public transport patronage in general, and bus in particular, is a growing challenge in many countries, developed and developing, rich and poor, and will be further exacerbated in economies that are moving towards a high level of economic efficiency and wealth, where the desire and ability to own and use an automobile will continue to impact the future of all forms of land-based public transport, especially for the majority of urban and regional travel. This future may be at further risk with the introduction of autonomous cars.

There is no doubt that the role of urban public transport is continuing to change. The gradual loss of market share in large metropolitan centres, typical of many western cities (despite some promising signs of a reversal in some cities), is a product of public transport being unable to be responsive to the changing needs of the market, while the car, due to its inherent attributes of flexibility and convenience, keeps pace with people's ever changing transport needs. If there are three overriding characteristics portraying the current market profile, it is increasing real wealth for most groups but not all, greater complexity of activities undertaken in the daily life cycle, and the flexibility offered by alternative forms of transport (and non-transport responses such as working from home). These are strong forces of change, which move conventional regular fixed route public transport even further away from meeting many mainstream demands. Certainly, there are some signs of increasing use of public transport, although modal shares are going the other way – for many reasons such as longer train trips to lower priced residential locations, but the impact on the overall transport task is often small.

In many western societies and a growing number of developing economies, motorised urban public bus and rail transport is a niche market provider and looks like being so for the foreseeable future, even with new opportunities enabled by the increasing availability of digitally supported technology to better inform the public of the service opportunities provided by public transport. It is also unclear what role the bus might play in and future multi-modal developments associated with Mobility as a Service (MaaS), although there is a growing sense that without public transport at the centre of MaaS, it will be nothing more than a car-based offering that will be opposed by governments globally. But what market niches are we talking about? The answer lies in the realm of the diversity of customer needs (both real and latent) and the types of services that can be offered through public transport to capture some (even if small) amounts of particular passenger markets. For example, commuters with a fixed workplace, travelling during the morning and evening peak between two locations with plenty of traffic, and who have no commitments before or after work, other than to get to and from home, are good candidates for public transport use; school children; adults on very low household incomes; special events (sporting, cultural etc.), and the elderly in declining health who cannot drive.

This book reflects the author's perspective on issues of importance to the preservation and health of the bus sector. The thirty four (34) chapters are edited versions of papers and reports written over the last twelve years, many of which have been published in journals and edited conference proceedings, while some are reports commissioned by transport authorities and associations. The research presented in this volume is intended to capture the debate on the role and relevance of the bus sector.

In preparing this document, I have selected papers that cover the themes of institutional reform, performance measurement and monitoring, service quality, travel choice and demand, integrated bus-based systems (referred to a bus rapid transit, busways, transitways), energy contrasts between PT modes, challenges in promoting bus over rail, and public transport policy, especially challenges in growing patronage, disruptive technology and mobility as a service (MaaS).

I have been privileged to work with many fine researchers who have co-authored earlier versions of many of the chapters. I am indebted to Yale Wong (Chapters 3, 5, 18, 32 and 33), John Stanley (Chapters 3,6 and 30), Corinne Mulley (Chapters 8, 14, 19, 20, 27, 29, 32 and 33), Neil Smith (Chapter 8), Chinh Ho (Chapters 12, 14, 19, 20, 28 and 32), Louise Knowles (Chapter 12), Zheng Li (Chapters 16, 17, 22 and 23), Loan Ho and Geoffrey Clifton (Chapter 18), Camila Balbontin (Chapters 20 and 30), Alejandro Tirachini (Chapters 24 and 25), John Rose (Chapter 24), Julieta Legaspi (Chapter 26), Baojin Wang (Chapter 26), Glen Weisbrod (Chapters 27 and 28), Richard Ellison (Chapter 28), David Cosgrove (Chapter 29) and Janet Stanley (Chapter 30).

I also wish to thank the many researchers who have provided an opportunity for dialogue on the many issues discussed in this book. In particular, I acknowledge the support of Michael Apps, Bill Greene, Sergio Jara-Diaz, Chandra Bhat, Ian Wallis, Juan de Dios Ortuzar, Juan Carlos Munoz, Ricardo Giesen, Jackie Walters, John Nelson, Darryl Mellish, Matt Threlkeld, Stephen Rowe, Didier van de Velde, John Preston, Chris Nash, Neil Smith and David Bray.

Part I

Reviews

Outline

Chapter 2. Public service contracts in the bus sector

Chapter 3. Disruptive technology and moving people

Chapter 4. The influence of the Thredbo series

Chapter 5. Competition and ownership in land passenger transport: the Thredbo story

Chapter 2

Public service contracts in the bus sector

Abstract

The chapter draws on the wider literature in economics that explores the role of contracting in the delivery of efficient and effective services as a way of revealing the potential strengths and weaknesses of alternative ways to garner greater performance from the delivery of bus services that are primarily under the control of the public sector, but which are increasingly delivered by the private sector on behalf of the public sector. We consider the case for competitive tendering versus negotiated contracts, and the role of effective actionable benchmarking under both contract regimes and suggest a practical way to undertake benchmarking.

Keywords

Bus contracts; Contract theory; Agency theory; Risk; Competitive tendering; Negotiated contracts; Benchmarking

2.1. Introduction and background

The provision of route bus services in many economies has changed considerably over the years. Following an initial situation that typically involved private sector provision up until the 1970s, as is still common among most developing economies, public sector monopolies became the norm. A substantial swing to private sector service provision then began in the 1980s, largely driven by a desire to reduce the growing call of services on the public purse and to provide scope for private sector innovation, which was thought likely to improve customer services and reduce costs (Hensher and Wallis, 2005).

In the developed world, there has been a growing interest in creating a competitive environment in which to deliver improved passenger transport services that not only grows patronage but also reduces the amount of subsidy payment from government to operators, be they public or private. In most locations where competition was deemed suitable, the rights to provide service have been increasingly achieved through competitive tendering (CT). The enthusiasm for private delivery of route bus services through CT has varied between countries, with negotiated contracts still popular in mainland Europe with a few exceptions such as Norway, Sweden and the Netherlands; however the winds of change have begun to revise the agenda as a result of European Union competition policy. Australia has always had a significant private sector presence in bus service provision, and the role of the private sector was increased through tendering out of services, initially in Adelaide and Perth in the 1990s (Wallis and Hensher, 2007). Sydney moved (in 2013) from negotiated contracts to CT but only for private operators, protecting the less efficient public operator (see Hensher, 2015 for full details), until 2018 when one of the public operator regions was put out to tender with a private operator winning the right to deliver services (including for the first time a component of demand responsive services). Singapore in early 2015 put all of its bus services out to tender, with 11 bidders. In the USA we mainly see management contracts that involve another party running services under contracts that are owned by the State.

Interest in public sector contracts has clearly been growing among those involved with public passenger transport. As governments move towards separation of regulation from operations, explicit contracts are becoming more common. The incentive implications of different contracts (including cost-plus, gross-cost, gross-cost with incentives and net-cost) have been explored in numerous case studies. Classical agency theory describes the way in which principals (i.e., regulatory authorities) and agents (operators) trade-off risk-sharing and effort incentives when forming a contract. Typically, operators are assumed to be risk-averse and authorities risk-neutral. Risk can be efficiently allocated to the regulatory authority, but this gives the operator no incentive for effort. As a result, we would expect to find operators bearing at least some risk, the optimal amount depending on the preferences of both parties as well as other factors such as the cost of monitoring effort.

The current chapter draws on the wider literature in economics that explores the role of contracting in the delivery of efficient and effective services, which is very relevant to the passenger transport sector. There is an increasing interest in the type of contracts that govern transactions between regulators and public transport operators amongst transport researchers. The use of performance-based contracts (PBCs) designed to enhance operator performance via incentives (such as patronage growth and service enhancements). PBCs have been suggested as a contract form more likely to deliver an efficient outcome than the prevalent fixed-fee or cost-plus approaches (Hensher and Stanley, 2003; Carlquist, 2001; Johansen et al.,. 2001). Such contracts therefore are partly designed to replicate the rewards that would be found in a free market. However, the use of PBCs in public transport has been limited to a few countries such as Norway (Fearnley et al., 2005), New Zealand (Wallis, 2003) and Australia (Hensher and Stanley, 2003). Are these the only public transit environments where the use of incentive contracts is efficient, or is there simply a lag in diffusion of this more efficient contracting technology? The transport literature is strangely silent on this issue.

When looking for answers outside the transport literature, it is immediately apparent that an extraordinary amount of theoretical and empirical research has been undertaken relating to the use of different contract forms. Thousands of studies have been conducted which seek to explain and optimise contract use (for an overview of the literature see Boerner and Macher, 2002; Shelanski and Klein, 1995; Lyons, 1996; and Masten and Saussier, 2000). For example, empirical research has been applied to defence (e.g., Crocker and Reynolds, 1993; Adler et al., 1999), agriculture, health (Gaynor and Gertler, 1995), mineral exploration, information technology (Banerjee and Dufflo, 2000), education, construction (Bajari and Tadelis, 2001), fund management, and much more. In their survey of the literature of transaction cost economics, much of which is directly relevant to contract choice, Boerner and Macher (2002) incorporated over 600 studies. Inclusion of relevant studies using principal-agent theory would be expected to add to this number exponentially. Contracts are everywhere and ongoing questions about the foundations of contract theory make this an open and fertile area of research. This chapter draws on this broader literature as a way of revealing the potential strengths and weaknesses of alternative ways to garner greater performance from the delivery of bus services that are primarily under the control of the public sector but which are increasingly delivered by the private sector on behalf of the public sector.

2.2. Contract theory and risk

The cost of contracting is central to the ‘make or buy’ question introduced in Coase's famous 1937 article that founded the modern theory of the firm. Informed by both transaction cost economics and the neoclassical paradigm, a branch of enquiry emerged relating to incentive systems (Holmstrom and Milgrom, 1991, 1994). This line of research focuses on the incentive problem between a principal and an agent. Gibbons (2005) shows the relationship between incentive theory and other branches of the theory of the firm: rent seeking theory (e.g., Williamson, 1979, 1985; Klein et al. 1978); property-rights theory (e.g., Grossman and Hart 1986; Hart and Moore, 1990) and adaptation theory (e.g., Simon, 1951; Williamson, 1991). Cheung (1969) and Stiglitz (1974) were among the first to apply what we now recognise as the classical principal–agent framework with risk aversion attitude, in an attempt to explain the existence of sharecropping. Interest in the moral hazard induced by sharecropping can be traced to Adam Smith's The Wealth of Nations.

Using the sharecropping example, we briefly describe the model in general form, as presented by Gibbons (1998), to illustrate the central role of risk allocation and incentives on contract choice. Consider an agent who takes an unobservable action a to produce output y. For example, the production function might be linear y = a + ε, where ε is a random variable with mean 0 and variance σ ². The principal owns the output but contracts to share it with the agent by paying a wage w contingent on output. For example, the wage contract might be linear, w = s   +   by, where the intercept s is the salary and the slope b is the bonus rate. The agent's payoff is w – c(a), the realised wage minus the disutility of action, c(a). The principal's payoff is y∗ – w, the realised output net of wages where y∗ is the dollar value of the output.

The farmer's objective is to maximise their expected utility by choosing their optimum effort level given the terms of the land contract. Because effort is unobservable and because there is uncertainty in farm production, there is moral hazard for any contract where the farmer does not receive 100% of y. The principal maximises expected profits by choosing the optimal contract parameters, usually some combination of salary s and bonus b (a share of y).

The key idea in this model is that the agent is risk-averse (the principal may be too). The equilibrium contract that solves this model trades off the incentive effects of paying a greater bonus to the agent against the agent's risk aversion. The extreme case b   =   0 offers the agent complete insurance against uncertainty in the weather, σ ², but no incentives to increase output y. The other extreme, b   =   1, gives the agent 100% of the output risk y, removing moral hazard, but offers no insurance. The efficient bonus rate is between 0 and 1, and it depends on σ ² and the risk preferences of the two parties. For a risk-neutral farmer, b   =   1 is a first-best solution, but a risk-averse farmer prefers a contract where income is insured to some extent. For a risk-averse farmer, the size of σ ² will determine both the likelihood of observing a bonus contract and the size of the bonus.

While sharecropping is the traditional application, it is easy to apply the agency model to the public transport context. From this perspective the cost of offering a PBC to a (risk-averse) operator is that it imposes risk on their compensation, which causes higher contract costs. The risk imposed on contractors is increasing in the uncertainty of the environment so that the standard test of the trade-off is to show that incentive pay is lower in more certain environments.

Agent risk-aversion is a necessary condition in the principle−agent model because the farmer's margin relates only to the farmer's (unobservable) effort. In this classical paradigm, which dominates the literature relating to optimum contract form, the need to share risk efficiently is traded-off against the need to provide efficient incentives. Surprisingly, of the few studies that have examined risk sharing and contract choice, most have failed to find evidence to support the view that risk preferences are important (see Prendergast, 2002).

In addition to agent risk-aversion attitude, agent risk-neutrality attitude has been explored in what is known as a pure incentives framework. There is an extensive literature relating to contracts under conditions that complicate agent incentives. These include double-sided moral hazard (Lafontaine, 1992; Eswaren and Kotwal, 1985; Lafontaine and Bhattacharyya, 1995), multitask agency (Holmstrom and Milgrom, 1991; Baker, 1992, 2002), monitoring costs (Alston et al.,1984; Prendergast, 2002; Lafontaine and Slade, 2001), measurement costs (Allen and Lueck, 1992a, 1993) and delegation (Prendergast, 2002; Foss and Laursen, 2005).

Transaction cost economists have examined incentives in the lens of incomplete contracting and the resulting moral hazard, showing that asset specificity, uncertainty, complexity and transaction frequency influence contract choice (Williamson, 1979; Goldberg, 1990). This empirical work shows that optimal contract choice depends on specific knowledge of production processes to capture accurately complex incentive trade-offs. In general, incentive contracts will be attractive where the costs of measuring performance are low, and the opportunities for moral hazard are large and many.

Before moving on, it is worth noting that the role of risk preferences in determining optimal contract form is an open area of research. Despite the lack of empirical evidence, risk-aversion may be an important driver; and if this were the case, the implications of ignoring the risk-sharing/incentives trade-off are profound. See Kim and Wang (2004) for a discussion of how important risk preferences are in shaping contract choice even if the agent is almost neutral.

2.3. Efficient contracting

Contract theorists have analysed different types of contracts and contract clauses and the factors that lead to their use in a variety of settings. Studies of contract choice typically analyse the choice among various types of contracts, usually cost-plus contracts and fixed-fee contracts (e.g., Eswaren and Kotwal, 1985; Allen and Lueck, 1992a,b), and examine attributes of the current transaction to determine the optimal contract. Results are specific to the situation being investigated; however clues emerge about the type of environments that are conducive to performance-based contracting.

2.3.1. The output that the principal cares about can be easily described

Output is not always easy to measure and validate. In a famous article on the folly of rewarding A, while hoping for B, Kerr (1975) provided numerous examples of the unwelcome consequences of PBCs that distort rather than enhance agent's effort to produce what the principal wants. Incentive payments tend to overemphasise tasks that are highly visible, objective, and easily quantified and measured. Gibbons (1998) provides an overview of the role of subjective assessments in incentive contracts. Holmstrom and Milgrom (1991) formalised this ‘multitask’ problem. In their model, the seller engages in two tasks: effort in cost reduction, e c , and effort in quality enhancement, e q . Their model employed two extreme assumptions: (1) the tasks are perfect substitutes in the seller's private cost function, g(e c   +   e q ), and (2) costs are verifiable but quality is not. The model shows that giving the seller incentives to reduce costs will cause him to ignore quality considerations completely and engage only in cost reductions. If quality is important to the principal, this is not a good outcome. In a different context, Manelli and Vincent (1995) show that if the buyer cares a lot about quality, using an auction mechanism (which is associated with a fixed price) is not efficient.

The case study provided by Stanley and Hensher (2004), describing the use of incentive contracts in train and tram industry in Melbourne, Australia, indicates that it may be relatively easy to describe public transport output in an incentive contract. In the public transport context, the best single measure of the success of a specific contracting regime is the growth in patronage (Hensher and Wallis, 2005, p.312) which, depending on technology, can be relatively easy to measure.

2.3.2. The agent has considerable discretion in their actions

Bajari and Tadelis (2001) show that cost-plus contracts are preferred to a fixed-price contract for complex projects which are expensive to design and associated with a low level of completeness or a high probability that adaptations will be needed. Conversely, more simple projects, with lower uncertainty, greater completeness and low probability of adaptations, will be procured using fixed-price contracts. The intuition for this result stems from the trade-off between providing ex ante incentives and avoiding ex post transaction costs due to costly renegotiation. In fixed price contracts, risk is allocated mainly on the contractor (b   =   1) while in cost-plus contracts the contractor bears very little risk (b   =   0). High incentives of fixed-price contracts reduce costs but also dissipate ex post surplus due to renegotiation. Low incentives of cost-plus contracts do not erode ex post surplus but provide no incentive for cost saving effort. Thus, the introduction of PBCs would be most effective in more complex situations.

Another way to look at this is to consider that output-based incentive pay is more likely to be observed in cases where contractors have considerable discretion. There is little need to base pay on output when inputs are monitored. Thus, uncertain environments result in the delegation of responsibilities, which in turn generates incentive pay based on outputs (Prendergast, 2002).

2.3.3. The agent owns assets

Grossman and Hart (1986) and Hart and Moore (1990) formalised a model of incomplete contracting consistent with earlier transaction cost theory – contracts are incomplete (bounded rationality), contracts are not self-enforcing (opportunism), court ordering is limited (non-verifiability) and the parties are bilaterally dependent (transaction specific investments) – but they further assumed that there is no costly ex post renegotiation (they assume common knowledge of payoffs and costless bargaining). Their focus is instead on how different configurations of physical asset ownership, to which residual rights of control accrue, are responsible for efficiency differences at the ex ante stage of the contract.

In the same spirit, Holmstrom and Milgrim's (1991) model shows that the optimal contract is different for an asset owner (called a contractor in the model) and a non-owner (employee). Measured performance p reflects one action a 1 , but another action a 2 changes the value v of an asset used in the production process. These two actions compete for the agent's attention. As before, the employee is paid only on measured performance (w = s   +   bp) but the contractor receives both wages and any change in the asset's value (w   +   v). Thus, the contractor has great incentive to invest in a 2 , and it will require a larger bonus rate, b, to focus the contractor's attention on a 1 than is the case for an employee who is not distracted by v.

2.4. Why are performance-based contracts so rare?

McAfee and McMillan (1986) analyse a model in which risk-averse contractors bid and the buyer is faced with both adverse selection and moral hazard. The model shows that the trade-off between risk sharing, incentives, and information cause incentive contracts (0   <   b   <   1) to be generally desirable and that cost-plus contracts (b   =   0) are never optimal. However, they acknowledge that most government contracts are fixed-fee or cost-plus, and this is confirmed overwhelmingly in the literature. How can we explain this?

Hart and Holmstrom (1987) suggest that optimal contracts (incentive contracts) are often extremely complicated. In the presence of moral hazard, optimality means inclusion of all relevant information and detailed specification of multiple contingencies. That contracts are usually simple in practice is a result of incomplete information, leading to what Bajari and Tadelis (2001) describe as a ‘nonconvex’ procurement problem resulting in extreme contracts. They argue that there is a fundamental difference between a fixed-price contract and an incentive contract, where a fixed-price contract requires no cost measurement. This leads to a clear discontinuity in the cost of measuring and monitoring costs, and implies that fixed-price contracts will dominate contracts that are ‘close’ to fixed-price, and as it becomes costlier to measure costs, fixed-price contracts will dominate a larger set of incentive contracts. Similarly, they suggest a fundamental difference between a cost-plus contract and incentive contracts, as there is a risk of costly distortion where incentives are introduced. Therefore, solutions close to cost-plus will be dominated by cost-plus contracts.

Schwartz and Watson (2004) use a legal framework to help explain the popularity of simple contracts. There is a trade-off between the costs of contract complexity with gains from efficient investment incentives: higher contracting costs result in simpler contracts. Agents have preferences for high or low renegotiation costs depending on contract complexity (a complex contract requires high renegotiation costs to retain the incentive scheme). They argue that contract law (for example, the prohibition of contract renegotiation bans) discourages complex contractual forms by making renegotiation relatively cheap.

So should incentive contracts be used more often? Dye and Sridhar (2005) uses moral hazard severity to help explain that simple contracts can be optimal, despite the potentially vast array of performance measures that are ‘marginally informative’ (see Holmstrom, 1979). Paul and Gutierrez (2005), looking from a practitioner angle, disagree. This is an open research question.

2.5. An overview of contract regimes in passenger transport

2.5.1. Competitive tendering

Competition is important to ensure that privatisation improves efficiency. Many cities have introduced competition for the market through competitive tendering of licences to operate public transport services for a specified duration, for example, 15 years to operate a rail line or 5 years to operate a package of bus services. Cherry-picking of profitable routes could be prevented by packaging unprofitable routes with profitable ones or by provision of government subsidies. Licences could be awarded based on a number of criteria, e.g., track record, proposed fares and services, or required amount of government subsidies.

Interested operators would submit competitive bids proposing high levels of service, low fares and low level of government subsidies in order to win the tenders. If there is intense competition for the tender, the winning bid would be close to the outcome with market competition. The transport regulator would enter into a contract with the winning operator based on the proposed terms. The operator has the incentive to be as efficient as possible to maximise profits for the limited duration of the licence. Extension of the licence could be contingent on the incumbent operator's performance. The threat of replacement after expiry of the licence incentivises the incumbent to maintain good performance.

Due to the durable, immobile nature of transport investments, and the essential service nature of public transport, both parties – the operator and the regulator acting on behalf of passengers – are vulnerable to opportunistic behaviour of the other party. A long-term contract could protect both parties from opportunism by establishing clear commitments. The level of commitment depends on the completeness of the contract; a more complete contract is able to cover more contingencies (Hensher, 2010). However it is undesirable and impossible to write a complete contract with a long duration if the environment is changing rapidly. A contract that is overly prescriptive may be inflexible to changing circumstances. Drafting a relatively complete contract may be too difficult and the transactions costs too high (Gomez-Ibanez, 2003).

London's bus system is the oft-cited example of how one of the world's largest urban bus systems has benefited from CT at the route level. London began privatising its government-run bus operator and tendering bus services in 1985 and the conversion was completed by 1999. Cox (2004) compared the situation in London before and after the conversion, and found significant productivity improvement and cost reductions. Prior to privatisation and CT, bus costs per vehicle kilometre had risen 79% between 1970 and 1985. This trend was reversed with costs per vehicle kilometre falling by 48% from 1985 to 2001. Annual capital and operating expenditures dropped 26%, despite service expansion of a similar magnitude in the same period. Unit costs fell 48% and productivity measured by level of service per unit of currency increased 91%. Government subsidies were reduced substantially and reached a low of zero subsidies in 1997/8. Similar benefits were observed for Copenhagen, Stockholm, San Diego, Denver and Las Vegas after CT was introduced (Cox, 2004).

These cost savings, however, were often once-off - a windfall gain. Many of the cities which experienced cost savings after introducing CT saw unit costs rising in subsequent tenders, for example, in London, Copenhagen and Stockholm (Hensher and Wallis, 2005), despite the primary focus of CT being to lower costs, subject to prescribed service levels. This has stimulated discussion on alternatives to CT, such as negotiated performance-based contracts (NPBCs) between regulators and operators, where there is greater emphasis on service improvement.

2.5.2. Negotiated performance-based contracts

The evidence that savings from competitive tendering (CT) diminish beyond first round tenders, together with dissatisfaction with what competitive tendering has delivered for service improvements in some jurisdictions, has encouraged the search for alternative awarding mechanisms that can sustain performance pressure (Wallis and Hensher, 2007). An important development has been the focus on the theory and practice of negotiated performance-based contracts (NPBCs), particularly as an alternative to competitive tendering, as a means to award the right to provide service (see, for example, Hensher and Stanley, 2003; Stanley et al., 2005; Yvrande-Billon, 2007b; Hensher and Stanley, 2010).

A common rationale for NPBCs is to deal with the inevitable uncertainty that creates difficulty for ex ante contract specification and tender bidding, by adopting an awarding mechanism that can be adaptive and sustain performance pressure during the course of the contract. These areas of uncertainty relate, in particular, to questions that relate to service quality, which have proven to be much more difficult to specify in tender requirements than price but are increasingly recognised as the key to desired policy outcomes. By focussing on performance pressure during the contract, NPBCs reflect alliance contracting as used in such areas as building and construction and in infrastructure Public Private Partnerships more broadly. CT remains a fall-back mechanism in the event that service providers operating under NPBCs do not measure up adequately against their key performance indicators.

A further important rationale seen by some proponents of NPBCs is the belief that this contract form is most likely to support a trusting partnership between purchaser and provider, particularly for system planning, and that, given scarce skills on both sides, such a relationship is more likely to maximise goal achievement through service provision than an awarding mechanism based on CT (Stanley et al. 2007). Australian bus contracts have been pioneers in the development of negotiated performance-based contracts (NPBCs), founded on trusting partnerships, whereby contracts are re-negotiated with existing operators, subject to meeting certain conditions. Melbourne and more recently Sydney are examples of this approach (Hensher and Stanley, 2010).

Wallis et al. (2010) review the Adelaide experience with three rounds of tendering bus services and conclude that there is little to gain in terms of cost efficiency and quality enhancement by going to a fourth round of tendering. They argue that a move to NPBCs can not only reduce the considerable transactions costs (associated with tendering) but also offers the opportunity to work closely with efficient incumbents to grow trust and build patronage (mindful of the realities of the market for public transport services). It also reduces the uncertainty associated with renewal through tendering, where a very efficient incumbent operator can still lose the right to provide services. Under tendering, there is a real and observed risk of incumbents tending to not commit to longer term investment in the industry (both physical and human resources) where contract continuity is uncertain, even when all the boxes are ticked on performance. Similar experiences have arisen elsewhere such as in the Netherlands. Wallis et al. (2010, pp. 89–98) state:

A key attribute of competitive tendering for the periodic selection of operators of subsidised public transport services is to secure the provision of specified services at efficient cost levels. This has proved particularly effective where services were previously provided by an inefficient monopoly operator. The arguments for the adoption of competitive tendering in preference to negotiation with the incumbent operator may be less clear-cut in other cases.

…

The conclusions drawn from the assessment against relevant South Australian Government objectives are that the [negotiated contract] NC strategy is clearly preferred against the group of ‘quality’ criteria, and also on balance preferred against the group of ‘supplier market and cost’ criteria. These conclusions are essentially supported by the assessment against international differentiating factors, which concludes that the current Adelaide situation has a number of features which indicate that an NC strategy is likely to be more appropriate in this case. These two assessments together lead to the conclusion that, given the Adelaide situation at the time of the assessment, there was a strong case for adopting an NC-based strategy (with CT as the fallback) rather than CT as the primary strategy. (p. 96)

In very general terms, negotiation is the process through which parties perceive one or more incompatibilities between them, and work to find a mutually acceptable solution. In contrast to competitive tendering, which is framed to determine the value of a product or service, negotiation is designed to create the value of the product or service.

Provisions to guard against regulatory capture are critical in a negotiated performance-based contractual process. Australian experience suggests that, under NPBCs, transparency and accountability can be achieved if the following four conditions are in place (Hensher and Stanley, 2010):

1. Performance benchmarking to ensure that operator performance is efficient and effective. This benchmarking needs to be subjected to independent verification. Key performance indicators (KPIs) and the threat of competition (through tendering), in the event of inadequate performance, assists the maintenance of competitive pressure and efficient performance.

2. An open book approach to costs, achieved through an independent auditor. Operators whose costs appear to be high through this analysis must justify their numbers or face a cut in remuneration. Those whose costs appear low have the opportunity to argue for an increase. Under competitive tendering, it is less likely that operators see any obligations to reveal their cost structures, since government has awarded them a contract based on the offered price under competition. Thus the benchmarking and open book auditing under NPBCs provides a much better way to obtain detailed data on operator performance that can be used to benchmark in a very meaningful way, controlling for differences that are not under the control of the operator.

3. The appointment of a probity auditor to oversee the negotiation process.

4. Public disclosure of the contract.

Australian experience across jurisdictions that tender and those that negotiate is that there is a tendency for cost convergence. A number of operators who provide service under each regime have noted this trend. This result underlines the importance of negotiation as an alternative approach.

Under a negotiated approach, benchmarking plays an important role, designed to monitor and ensure efficiency and effectiveness through the life of a contract, and not just at the point of contract completion. We discuss benchmarking in detail in a later section. Incentives built into a negotiated contract conditioned on market-linked benchmarks, and the ultimate sanction of tendering if non-compliant, enable the incumbent operator to at least prove