Governance Models: Privatisation, Contracts, Franchises and the Rest

There is of course much more to public transport governance than just the issue of private versus public ownership. Worldwide, we find a great variety of governance models, which can be roughly characterised as follows.

Quick Comparison Table

The Free-Market Model

The simplest of all governance models, since governance as we know it is absent. Instead, private firms operate public transport services for profit and compete for passengers.

Almost all public transport systems in the Western world (including Melbourne’s) started out this way in the 19th century, though many were handed over to public (largely municipal) operation within a few years of being established. By the early to mid 20th century the few services that still remained on the free-market model were driven into bankruptcy, due to their inability to coordinate with one another to take advantage of network effects, and to compete effectively with the rising popularity of motor cars.

From the mid-20th century onward, the wide availability of cars and ‘free’ publicly-funded road systems means it is no longer possible for a public transport operator to return a profit except in very densely populated cities such as London or Tokyo. This makes the free-market model little more than an academic curiosity today. Free-market enthusiasts such as the Institute of Public Affairs (Allsop 2007) tend to favour the ‘franchising’ model described below.

The Nationalised Model

Public transport is owned and operated by government as a public utility, with all planning and operation carried out by public servants within a vertically integrated organisation, typically a government department. Often there will be separate organisational divisions responsible for individual modes.

This is the model of governance that prevailed after the early public transport systems in most Western cities were nationalised (often following bankruptcy in the free market) between the late 19th century and the early 20th century. Victoria’s own examples of the nationalised model were the Victorian Railways Department and the Melbourne and Metropolitan Tramways Board.

A commonly observed drawback of this model is that the public body, lacking external oversight, abandons its mission to serve the public interest in favour of Yes Minister–style self-serving bureaucratic imperatives. This happens often enough that planning textbooks now warn against it. As transport planner Vukan Vuchic writes:

In many transit agencies that have had a long period of operation without many innovations and service re-organisations, a deep inertia develops. With time, organizations have a tendency to develop a pattern of operations that is convenient for personnel, rather than for passengers and long-term operating efficiency….

This pattern of operations is not easy to change, because in an organization a resistance to change develops that may be designated as “self-defense of incompetence”: individuals or units…. resist any improvements and innovations that would require a change in their established ways of performing their jobs. This phenomenon is by no means unique to transit organizations; it reflects some features of human nature in many working positions. The less competent employees are, the more they resist any changes.
(Vuchic 2005, p.317)

In cities like Melbourne, this tendency for the public transport provider to ‘turn inward upon itself’ was exacerbated by the rapid decline in patronage in the three decades after World War II. This decline was deeper and more rapid in Melbourne than in most other cities, owing to prior structural weaknesses in the provision of public transport, in particular the absence of intermodal integration combined with perverse incentives that led providers to compete against each other (Mees 2000). This led to the evolution of a ‘failure-oriented’ culture within the various public transport agencies. This culture persisted through the attempts at reform in the 1980s, which saw the creation of the multimodal Public Transport Corporation (‘The Met’), but otherwise left the fundamental nationalised model unchanged.

The nationalised model and its close cousin the quasi-nationalised model (see below) are very widespread, particularly in the USA where they form the dominant model for urban transit, and in some European countries. Provided there is a strong organisational culture promoting innovation and a focus on passenger service it functions relatively well. However, in recent years it has become common to evolve toward a new model of public governance that helps protect the organisational culture against the tendency to decay noted by Vuchic; this is the Transport Community model, described below.

The Quasi-Nationalised Model

This is similar to the nationalised model in all respects except that the actual services are owned and operated by private firms, which act as contractors to the public utility. The public utility retains all planning responsibilities and collects the fare revenue. Contractors receive a fee for service calculated using a relatively simple formula that is adjusted regularly to account for changes in input costs. (In the industry this is often called a ‘gross cost contract’.)

This model is vulnerable to rent-seeking, in that the subsidy paid to the private operator can become decoupled from the level of service provided. Diligence is required on the part of the public utility to ensure that the public receives value for money. At the same time the quasi-nationalised model suffers the same weakness as the nationalised model in fostering a self-serving bureaucracy. Because historically this model usually evolves from the free-market model it also often gives rise to conflict between operators defending their ‘ownership’ of routes on the one hand, and on the other hand planners who seek to integrate these routes into a well-functioning multimodal network.

This is the model that applies to most of the Victorian bus industry, where private operators were made contractors to the government in the early 1980s after a number of operators went bankrupt. The model in Victoria prior to privatisation in 1999 may be summarised as a nationalised train and tram system alongside a quasi-nationalised bus system.

The Transport Community Model

Transport planning is coordinated centrally by an autonomous public planning agency (PPA). The PPA has a governing board which may comprise representatives of regional and local government, transport operators, business and consumer groups. The PPA is thus not a government department or ‘traditional’ departmental agency, though it is recognisably a public-sector organisation with statutory powers. In the Australian context this institutional type is best approximated by the statutory corporation with independent board and direct reporting line to the Minister, of which the Roads Corporation (trading as Vicroads) is the most relevant example. (The ABC is a prominent example at Federal level.)

Transport services themselves are usually operated by separate agencies, which may be nationalised entities or private firms, acting as fee-for-service (‘gross cost’) subcontractors to the PPA. In some cases operators assist the PPA with some planning functions (timetables for train services being a common example, as this requires detailed rail scheduling expertise) but this occurs as a mutual process, rather than by the PPA delegating its functions. The PPA usually retains complete control over fare accounting and allocation, and has an important role in branding and marketing the network as a single intermodal entity. The bulk of routine contract-administration work is left to the operating agencies. In some rare cases, the PPA and the operator form a single organisation (largely for historical reasons).

Historically the Transport Community model evolved from the nationalised model, in response to pressure on transport agencies to be more publicly accountable and avoid the ‘self-defence of incompetence’ that Vuchic warns against. ‘Transport Community’ is one translation of the German word ‘Verkehrsverbund’ which is the name given to the autonomous PPAs in the German-speaking world. (Vuchic (2005) translates this as ‘transit federation’.) The first of these was established in the 1960s in the city of Hamburg (the Hamburger Verkehrsverbund), but the example most frequently cited in contemporary debates is the Zurcher Verkehrsverbund (ZVV) which manages public transport throughout the Canton of Zurich, a region similar to Melbourne in size and population (ZVV 2007).

Similar organisations are found in cities around the world, notably Vancouver’s Translink, Gothenburg’s Västtraffik, Transport for London, Madrid’s Regional Transport Consortium, and Perth’s Transperth. Some older nationalised agencies such as the Toronto Transit Commission (TTC) are also evolving toward the Transport Community model, with greater public involvement in their processes. In the case of Vancouver, London and some other cities, the PPA is responsible for the arterial road network in addition to public transport; in Zurich, Perth and Toronto the PPA manages public transport alone. Perth’s PPA is actually an autonomous division within the publicly-owned service delivery organisation, the Public Transport Authority (PTA), which acts as the agent providing services according to Transperth plans. The TTC in Toronto operates in a similar manner.

Vuchic (2005) explains the Transport Community model as the one that provides “full functional integration” of public transport services provided by multiple operators, and notes that it “has been considered the most effective form of organization for providing integrated services for the public where complete merger of different operators is not possible.” He sums up the evolution and motivation of the model thus:

Since the 1980s, there has been a trend toward integrated public agencies adopting some forms and practices of private companies for greater operational efficiency. Also, to reduce political pressures and achieve competitive pricing, public agencies contract some sections of transit services to private operators. Yet control by public agencies is retained to ensure that public interest is not subjugated to short-term economic efficiency. Public control also eliminates the need for unrestrained competition, which tends to disintegrate transit network and lower the quality of services. (Vuchic 2005, p.299)

Vuchic also stresses the importance of ensuring the PPA has a strong mandate to increase patronage, and a culture of innovation to defend against inertia.

In planning operations and services, management of the transit agency must follow a strategy that considers the role transit should have in the city, adopt increase of ridership as one of the basic goals, and continuously work on introducing innovations in technology and services. Maintenance of the status quo is not sufficient in dynamic urban transportation conditions. The need for shifting more trips in urban areas from cars to transit is great, and opportunities for achieving that goal must be actively pursued. (Vuchic 2005, p.317)

The Franchising Model

Public transport services are planned and operated by private firms, who either own their infrastructure outright (‘below-rail’ franchising) or lease it from public holding companies (‘above-rail’ franchising). The private firms operate under ‘franchise’ or ‘concession’ agreements with governments, which grant them qualified planning and operational jurisdiction over a specified territory. A government body sets minimum service standards and acts in the role of a regulator, delegating much more of its planning functions to the private operator than in a quasi-nationalised model.

The relationship between regulator and franchisee is governed by a presumption that the franchisee take the initiative as a commercial player and that the regulator act as a safety valve protecting the public interest from egregious lapses by the franchisee. In this way the franchising model differs radically from both the quasi-nationalised and Transport Community models, which are based on fee-for-service contracts with the contractor in the explicit role of a service provider. In exchange for demonstrating compliance with their franchise agreements, operators receive a subsidy and a share of fare revenue, which together provide them with a commercial return. (In industry parlance, this is known as a ‘net cost’ contract.) Unlike in a fee-for-service contract, the subsidy is not explicitly tied to a formula for input costs but is a more or less arbitrary figure established through confidential negotiations.

Vuchic (2005) describes a three-layer model of transport service provision that can help illustrate the difference in responsibilities under franchising compared with other models. The highest layer is strategic planning, which includes such policy questions as setting mode share targets, determining fares, and allocating budgets. Tactical planning sets out the routes and networks required, determines service frequency, prepares timetables, reviews infrastructure needs, and applies new technology to service provision where appropriate. Operational planning deals with the day-to-day running of services, rostering of staff, vehicle maintenance and similar matters.

In a quasi-nationalised or Transport Community model, both strategic and tactical planning are carried out by the public agency, with the operator responsible for operational planning. The franchising model makes the operator responsible for both tactical and operational planning (subject to regulatory oversight), with only strategic planning remaining exclusively under public control. Thus in the franchising model the operator is held responsible for growing patronage, which is largely a matter of tactical planning.

The two places in the world most associated with the franchising model are Britain (excluding London buses and Underground), where the model originated under Margaret Thatcher, and Victoria. Hong Kong, Singapore and Tokyo operate variations of the franchising model, which approximate more closely the free-market model (as transport can be operated on a full commercial basis in these very high-density cities), and some others cities have experimented with franchising on a smaller scale. However, outside Victoria the franchising model is rarely advocated today, largely due to the poor performance of deregulated bus systems in regional British cities (Mackie et al 1995; White 1997; Vuchic 2005).

When ordinary citizens colloquially refer to ‘privatisation’ of public transport, it is generally the franchising model they have in mind, owing to the rarity of true free-market public transport systems in developed countries. This is certainly the way the term has been used in Britain since the 1980s, and in Melbourne more recently.

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