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Delegated Management in Public Transport

Overview and Applicability to Asia

CONTENTS

What is Delegated Management and where was it adopted


Risk Sharing

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Situation in Asia

What is Delegated Management and where was it adopted


Risk Sharing

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Situation in Asia

Delegated Management:
O&M franchises or Public Service contracts

O&M services are tendered out through


competitive bidding, for a limited duration, with
very clear Quality of Service requirements

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This model is widely used in Europe for all


public utilities water, waste management,
energy, public transport
European rail regulation - EU Regulation 1370/2007 - Public Service
Contracts
In principle, all regional / urban rail operations have to be tendered out from 2010
If local governments decide to retain their local public operator without a tender, this
operator cannot compete on other markets
ALL rail operations have to be contract based, even with State or Municipality Owned
monopolies

The principle of delegated management

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Definition of
the public
service mission

Managing the
public service

Public
Management

Delegated
Management

Deregulation

Public
authority

Public
authority

Market
forces

Public
corporation

Contract

State
company

Private
company (ies)

Private
company (ies)
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Typical Arrangement

Each actor should deliver what it does the best

Transport
Authority

Draft the Urban Mobility Plans


Decides fares
Defines services
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Chooses the operator


Supervises services
Capital expenditure

Contract

Operator

Operate and maintain the system


Brings private management skills
Advisor to the PTA

Demand vs offer optimization


Ridership maximization
Capital expenditure?

Guarantees financial viability of


the system
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The rationale for Delegated Management

Competition creates incentives to perform


To encourage long-term decision-making: long term view on the
evolution of costs and visibility on the required subsidies
To improve transparency and accountability
To improve delivery time and reduce costs
Private model efficiency : cost and delivery
Right set of incentives (penalties etc)

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To improve the image and quality of service and to increase


patronage

To benefit from the scale and network effect / Best practices sharing
/ Talent and expert pools from being part of an international group
To reform the public sector
Focus on core mission of public authorities
Provide expertise and experience not readily found in public agencies

What a professional operator is bringing

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Do not reinvent the wheel (new projects)


Connection to an international network of operations
Access to innovations, new ideas, and operational solutions
A culture of localization and partnership
Training and empowerment of local personnel
Management of Relationships with Public Authorities
Credibility with a successful operation track record
Comfort for lenders and government,
Optimization of life cycle costs
Identify risks and likely long term issues
Demonstrated ability to implement compact and cost-effective organizations in
challenging environments
Innovations compared to local practice set a benchmark for local operators and
stimulate reform
Specialized training facilities and procedures, industrial tools & software for operations
and maintenance
Knowledge of all major suppliers and solutions (RS manufacturers, ticketing etc)
Choose the best solution and negotiate the best terms

An international solution
Europe the main model
France: road transport (urban and regional)
Germany: rail transport (regional)
UK: London bus and rail franchises
Italy, Spain: road transport, regional rail services
The Netherlands: road (urban and regional) and rail (regional)
Scandinavia: road and rail transport
Eastern Europe (Poland, Czech Rep etc)
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Spreading to other continents:


USA Transit and Rail Boston, LA, San Diego, Miami, Austin
South America urban rail- Buenos Aires, Rio de Janeiro; bus Transmilenio,
Transantiago etc

Africa ME: Algeria metro/tram, Morocco bus/tram, Dubai metro-tram etc


Asia-Pacific: Singapore, most of Australia / NZ etc

Large costs savings for local authorities

In France (still closed), regional train-km cost: 19 on average; in


Germany(open), the average cost of train-km is now about 10
Better quality of service in Germany

Ridership increased: +30% since opening in 1996


Punctuality dramatically improved
Many new services developed: On-board food services, newspapers, music, TV
programs, information and tour commentaries delivered over headsets, bicycles,
Wi-Fi access.

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Deutsche Bahn is now globally competitive, commercially operated


and planning IPO

What is Delegated Management and where was it adopted

Risk Sharing

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Situation in Asia

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Contracting: allocating risks

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Commercial risk:
related to the revenue and the patronage (this includes fare
evasion)
Industrial risk
related to operating expenses (evolution of risk) and
operation (accidents, security, safety)

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Sharing the contract risks

INDUSTRIAL RISK
(on operating costs)

COMMERCIAL RISK
(on revenues)

Public authority

Public authority

Gross cost

Operator

Public authority

Net cost

Operator

Owners risk

Operator

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Pure Management
contract/SEM

Operator / Public authority


(with public subsidy)

Operator
(Without public subsidy)

B.O.T.

All partners in the project share


the risks

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French Mixed Equity Companies - Montpellier Case Study

- Developped since the 80s for development of tram systems


- Nantes, Strasbourg, Grenoble, Orlans, Valenciennes and Montpellier
- Sort of hybrid system, compromise between
Keeping political oversight on transport
Tapping on international / professional expertise
Preventing creation of inefficient SOEs
Ex: Montpellier

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Operator Shareholding
- Local Government:

55%

- Veolia Transdev:

20%

- State Owned Bank :

11%

- Local Banks :

14%

Chinese Model ex Shenyang Tram

- Similar model introduced in China for development of countrys first


modern tram

Operator Shareholding

Local Government: 51%

Veolia RATP:

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3 years contract

49%

Role of Private Partner in Pure Management Contract

Ex: Montpellier
Provides top management and experts, subject to Board approval
Proper talent pool
Allows mobility / attractiveness for these executives

As a Minority Shareholder, influence company strategy and raises


financial awareness

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Act as the Engineering / Technical support for the Company, in


particular for network extensions, new services development etc
Share Know-How and Best practices / Networking effect (Transcites)

Find the balance between initiative and risks


Deregulated
Chile market
UK Bus (Regions)

Initiative for O&M company to


design services and fares
Authorisation
Canada IC
Spain IC

Commercial
services
Hong Kong

PT in France
PT in Spain
Gross costs
+ Quality
incentive
London Bus

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Scandinavia
Bogota
US Transit
French SEM
Shenyang Tram

British rail
Franchises
German
Regional Rail
Netherlands,
Eastern Europe

Public
Management
Risks / costs
Management
contracts

Delegated Management

Risks/ costs & revenues


Gross Cost

Net Cost

Risks covered by
operating company
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Net cost contract: the trend


+

Incentives for the operator


Increase revenues and patronage
Influence on modal shift
Customer orientation
Quality: key factor
Operator in charge of commercial development
Reducing operating costs through more internal
efficiency

Dependence on external factors: traffic and


parking policy, congestion, etc.
Fare policy decided by the authority
Risk of miscalculation

SUBSIDY
REVENUE
R/D

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COSTS

PASSENGER
REVENUES

Operator keeps the revenue


PTA covers the forecasted
difference between costs
and revenues by fixed subsidy
Updating formula to cover inflation

Conditions for success


Market to be monitored by strong & independent
regulator
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In-house companies not to be allowed to compete

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But: Fare revenue rarely enough

Nova Group Asian Metros

Delhi, Bangkok, Shanghai, Singa


Guangzhou, HK, Taipei, Beijin

Offer the operators visibility

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The public authority should cover the risk it can better


manage
Define the operating rights duration (vs investment)
Protection against competition
Define subsidies schemes (if needed) from the beginning
Cover the risk on inflation
At the end of the day, every uncovered risk will translate into
extra cost

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Give the operators incentives to perform

A good contract shall include a performance related mechanism


(bonus-penalty system)
Overall satisfaction
Punctuality
Journey times
Cleanliness
Safety record
Staff courtesy
etc
The contract should include provisions for early termination in case of
poor performance
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What is Delegated Management and where was it adopted

Risk Sharing

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Situation in Asia

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Asia the Spectrum


HK Metro
Japan Commuter
Japan Bus
HK Bus
Singapore Bus
India Metro
Korea Metro / Bus
SGP Metro
Japan MetroIndia Bus

Control

Initiative for O&M company to


design services and fares

Thailand Metro
Philippines Metro
Indonesia Metro/Bus
Malaysia Metro

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China Metro
China Bus
China Tram
Vietnam Bus / Metro

Public

Mongolia
Bus

Risk

Risks covered by
operating company

An appetite for capex and risk-heavy PPP


but mixed feedbacks

PPP failures (from the SPC perspective)


Bailed-out: KL LRT and KL monorail, Seoul AREX
Restructured: Bangkok Skytrain, SL9, Yongin, Taiwan High Speed Rail
Struggling: Kaohsiung Metro, Busan-Gimhae, Uijeongbu

Stalled: Uisinseol LRT, Manila MRT7


Cancelled: Jakarta Monorail and many others
PPP successes (from the SPC perspective)

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Manila MRT-3
So far Beijing L4, KL Airport Express
The jury is still out on Indian PPP but some likelihood that Mumbai 1 and
Hyderabad will have to go through restructuring or government bail-out
In first generation PPP, mixed successes from SPC view as very big risk
shouldered by private parties (no MRG, no or low capex subsidies in early
projects) but overall successful delivery and efficient operations

New PPP models are more robust, but still capex heavy

New schemes more balanced, mostly with shift of ridership risk to public
sector, e.g.:
Korea: (slow) shift to Build Transfer Lease after first generation
projects proved unsustainable

Thailand: PPP Gross Cost the norm from Purple Line onwards (no
revenue risk but lease payments indexed on performance)

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Philippines: New PPP model under Aquino administration. Still ridership


risk, but shadow toll (MRT7) or can rely on existing traffic figures (LRT1).
India - biggest PPP consumer in the world recently, and generally
successful for other utilities, while for Rail much will depend on
performance of Mumbai 1 then Hyderabad

Delegated Management" in Asia - Macro view

Transport PPP projects, nb per type (1990-2012)


450
400
350
300
250

Source: World
Bank PPI database

200
150
100
50
0

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Concession

Greenfield PPP
project

Government
Divestiture

East and Southeast Asia (exc Japan, Korea)

O&M / Management
contract
South Asia

Prevailing mindset profit is a remuneration of investment no investment, no profit


But service and investing are 2 very different activities and the best operators are
rarely the best financiers

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Delegated Management" in Asia Rail

Real rail O&M contracts in Asia


Singapore, to the 2 local operators
MTR Beijing Daxing (to some extent)
Shenyang tram
Other: Cancelled plans in Chennai and MTR Shenyang

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Concessionaires delegating O&M Seoul L9, Mumbai, Hyderabad, BusanGimhae, Uijeongbu

Delegated Management" in Asia bus


No pure delegated management case in the bus market in Asia (no assets, service only)

India BRTS with JNNURM financing probably the closest example

A very few cases own buses only limited duration license

Seoul (few tendered bus lines)

Transjakarta

China

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Korea

Private sector
involvement

General service
standard

Assets on operator
BS

Tenders

Mostly SOEs, some


private, few JVs

++

Bus + Depot

No

+++

Bus + Depot

No

Foreign
operators?
HK, SGP,
Alsa,
Kumho
No

Bus + Depot

Some (Bluelines)

No

++
+++

JNNURM support
Bus + Depot

Yes
No

Serco
No

+++

Bus + Depot

No

No

+++

Bus

Yes

No

++

Bus + Depot

Some (BRT, some


new routes)

No

++

Bus + Depot

Some (feeders)

No

Only private
Big operators SOE +
India
many small private
India BRTS
Only private
Japan
Mostly private
Private, but
Singapore
government linked
Singapore,
Only private
City Direct
Thailand
Mixed (dominant
(Bangkok)
SOE)
Indonesia
Only private
Transjakarta
Mixed (Dominant
Malaysia
SOE in KL)
Vietnam
Mostly public

++ (private) / +++
(RapidKL)
+

Bus + Depot
Bus + Depot

Not yet, possibly


for BRT
No

No
Kumho

What is Delegated Management and where was it adopted


Risk Sharing

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Situation in Asia

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Conclusion

Delegated Management has proven outcomes in transparency / cost-reduction /


service improvement / ridership stimulation / project delivery times
Several financial & contractual schemes are available to reflect different
allocation of risks in function of local authorities priorities
Delegation to private sector does not remove Public Sector Responsibilities.

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Institutional responsibilities
Control of service Quality
Tariffs to end-user and competition definition,

Delegated Management need capable PTA and experienced operators


In Asia, Operations and Infra (Capex) are still largely perceived as going in pair
Delegated Management Model has been slow to gain traction with influence from the
Japanese/HK model
Yet these models are very difficult (impossible?) to replicate and very few actors able
There is potentially ample room to deliver tangible benefits with Delegated Management
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Thank you!
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