Insights from Australia / NZ Bus franchising masterclass DRAFT 8 - - PowerPoint PPT Presentation

Insights from Australia / NZ

Bus franchising masterclass

8 June 2017

The materials contained in this document are intended to supplement a discussion with L.E.K. Consulting. These perspectives are confidential and will only be meaningful to those in attendance

DRAFT

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Orientation

4.6`m 4.2m 2.2m 1.9m 1.3m 1.2m 0.3m 0.16m

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Agenda

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Agenda

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Agenda

43% 55% 28% 43% 16% 33% 1% 5% 24% 41% 67% 57% 79% 3% 4% 100 200 300 400 500 600 Melbourne Sydney Brisbane Perth Adelaide Canberra Hobart** Darwin* Heavy rail Light rail* Bus Ferry 537m 510m 176m 148m 50m 18m 8m 5m

Millions of journeys p.a

Source: Company and government annual reports and websites

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Public v private buses

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Melbourne Adelaide Perth Brisbane Sydney Private Rail Light Private Rail Private Buses Private Tram Private Ferries Public Rail Public Buses Public Tram Public Ferries Passenger boardings by mode of transport and ownership in major cities (2010)

Source: Company and government annual reports and websites

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Agenda

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Reference materials

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Best practices

Term Scale Scope Depots

Fleet

Tendering Risk allocation Payment mechanism Performance regime Tender evaluation Operator concentration

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Most interesting transitions

Perth Adelaide Melbourne Sydney Brisbane Auckland 2004 2012/13 2007- 2015

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Sydney 2004 - Critical ingredients

 Financial distress  Strong leadership  Public report (ex- Premier)  “Carrot and stick”  Broken funding model  Collaboration / negotiated agreements

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Sydney - 2004

Before After

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Sydney – 2012/13

The good news  11 private contracts tendered

• First time subject to true competition

 4 new contracts awarded  $45m pa saving over 10 years  New customer performance regime The bad news  Only one new entrant

• Three other contracts all went to operators in

adjacent areas  Depots a significant barrier to effective competition

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Exports we are not that proud of

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NZ: From an effectiveness perspective, the model appeared to have several major shortcomings, but some good features

 Positive features appear to be:

• perators that are strongly motivated to grow patronage
• perators have some degree of freedom to implement changes and service innovation without a long /

difficult evaluation process by public authorities  Shortcomings include:

• creation of a poor environment for implementing service changes and collaborative service planning
• significant constraints on the ability of public authorities to implement integrated fares and ticketing
• insufficient transparency of service quality factors (which have a material influence on patronage)
• incidents of abrupt service suspension, through withdrawal of commercial services
• disincentives for authorities to increase fares or service levels, due to revenue risk residing with
• perators

There is a marked lack of consensus between Regional Councils and Operators about these shortcomings

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Analysis revealed a substantial cross-subsidy with low profits on commercial services and higher returns on contracted services

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Revenue OPEX EBIT

Contracted Services

Millions of Dollars

Combined Commercial and Contracted Services

(Example NZ City)

Revenue OPEX* EBIT

Commercial Services

Revenue OPEX EBIT

Millions

• f Dollars

Millions

• f Dollars

Contracted Services EBIT margin: High EBIT margin: Low

Fare- Box

(Contract)

Contract Payments

ILLUS USTRA RATIVE

Concession Top-up (Contracted) Concession Top-up (Commercial) Farebox Revenue (Commercial) Farebox Contracted Payments Concession Top-up Farebox Revenue Concession Top-up

Commercial Services EBIT = Earnings before interest and tax

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NZ: Both legislation and procurement procedures required substantial change

Low number

• f bids

High contract prices Cross-subsidy Impact Low number of “sizable” competitors in market New entrants hesitant Small contracts Short contracts High bid risk

for new entrants

Poor information

• n patronage

Net contracts Lack of performance transparency Relatively high operator margins

The two-tier system appears to be a key enabler of high contract prices

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NZ: PTOM implementation (2006- 2015)

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Chess board

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Your L.E.K. team

Areas of expertise Education

Surface transport Rail and bus franchising BSc (Hons) Melbourne PhD Cambridge

Simon Barrett Simon Barrett Partner, Sydney Areas of expertise Education

Public transport Franchising MA Harvard

Monica Ryu Monica Ryu Partner, Sydney Areas of expertise Education

Public transport Franchising

Jonathan Metcalfe Senior Advisor, Melbourne (Formerly CEO Transdev Aust/NZ) Areas of expertise Education Imperial College Massachusetts Institute

• f Technology

Public transport Franchising

John Goddard John Goddard Partner, London Areas of expertise Education Imperial College University of Oxford

Public transport Franchising

Andrew Allum Andrew Allum Partner, London Areas of expertise Education Queens College, Cambridge Harvard Business School

Public transport Bus operations

Jonathan Simmons Jonathan Simmons Partner, London

Option A

Jonathan Metcalfe