Bus contracts might seem like a fairly boring topic to most people, but they can have a big impact on how our transport system operates – including, obviously, how much we as tax/ratepayers pay. In New Zealand we’re slowly moving towards a new contracting system known as the Public Transport Operating Model (PTOM). I’ll explain a bit more about what PTOM is shortly. According to the most recent Auckland Transport board reports, they are just awaiting approval on the contracts from the NZTA before they can start to tender routes using PTOM. However recent developments suggest a snag in those plans could be forming.

I spoke yesterday about Simon Bridges speech at Infratil’s latest investor day and other presentations suggest the company is no longer happy with PTOM. As they own one of the largest bus companies in NZ – as well as having a strong history of successful lobbying of the government – that could pose a significant risk to the whole process.

So what is PTOM? To understand it, you kind of need to understand the history of bus contracting in New Zealand.

Briefly, regulatory changes saw most of the public bus companies privatised in the early 90’s. The network was split up into commercial and contracted services, and a lot of the responsibility for planning was turned over to the various bus companies. Commercial services existed where the bus companies could provide a run commercially; however, where the local authorities wanted to run services that were not under a commercial agreement, they had to provide subsidies to do so. Because operators were able to cherry pick individual services on a route to be commercial it led to all sorts of issues, not least of which was some operators rorting the system to get extra subsidies. There were lots of other issues too such as explained in this cabinet paper on PTOM from October 2011.

As a comparison, some of the most common contracting methods used overseas are:

  • For the transit agency to own and run the buses themselves – this is something that not allowed in NZ. Christchurch gets around this because the bus company is owned by the city council while the routes are tendered by the regional council.
  • To gross contract out services – On a gross contract the operator charges the transit agency a set fee to run services with all revenue going to the transit agency. That means that the profits from the routes and services which are commercially viable can be used to help support the less viable services meaning less overall subsidies need to be paid. This is how the Northern Express and the rail network currently run.

The previous Labour government passed the PTMA in 2008 which would have allowed regional councils to take over and gross contract out all PT services. As you can imagine the PT companies didn’t like that idea and were successful in lobbying then-Transport Minister Stephen Joyce to scrap the PTMA. Fast forward a few years, and officials were obviously semi-successful in highlighting to the Minister the issues with the old system, and so from that PTOM was born in collaboration with bus industry.

In essence, PTOM is a bit of a hybrid between gross contracting and the current/old system. The Transit agencies divide up their networks into ‘Units’ which contains one or more routes along with a full timetable for them. Operators can still run commercial services but one slight improvement is they can only do so if they run all services on the timetable. There can still be commercial services but for that to happen an operator has to run all services in a unit – even if that’s 3 in the morning. If they don’t want to make a unit commercial then effectively the unit is gross contracted, however another feature of PTOM is that there is meant to be a partnership based approach where additional revenue is shared with the operators based on the councils.

After having been what is likely a key player in the involved in the formation of the PTOM, NZ Bus like other bus companies were very happy when the details of PTOM were formally announced:

Chief Executive of New Zealand Bus, Zane Fulljames says, “The new framework will drive a quantum leap in service provision and growth in public transport usage through an effective partnership model and performance based agreements. Certainty will enable operators to invest with confidence, recognising the requirement for value for money and an appropriate return on investment”.

And Infratil who own NZ Bus have been upbeat about the prospects of PTOM since then and in their most recent Operational report in December saw them singing Auckland Transport’s praises for patronage growth while noting the following about PTOM.

After a decade of gestation, the new Public Transport Operating Model is moving towards implementation. It is intended to define a new contracting arrangement between bus operators and regional transport agencies with the goals of reducing the cost on tax/rate payers and increasing the use of public transport.

The first offer of the new contracts is expected to occur in Auckland in mid-2015 and is widely recognised as an opportunity to develop partnering arrangements to capitalise on the positive development of the last three years.

Auckland’s public transport has massive upside if the contracts can encapsulate a positive and durable partnering relationship

However that seems to have changed. At the Infratil investor day their CEO talked briefly about it noting in particular (26:55):

I don’t see in the new model encouragement for public transport passenger growth, you know, which you would have thought was one of the key criteria for what’s called the PTOM structure, the new operating methodology. And so that might affect how we bid for these contracts. I don’t get that sense of engagement of what’s happening in Auckland, I don’t get it in Wellington. I think it’s probably one of the more disappointing aspects that you’ll probably hear about during the day.

There’s also bit more detail of some of their issues in this article from back in December.

I’ve heard some suggestions that some of the rewards in the contracts greatly favour the operators over AT while the operators are saying the opposite. As it’s all behind closed doors, it’s hard to know exactly what’s going on – however, given that the bus companies’ natural behaviour is to extract as much revenue as possible, I suspect that’s behind a lot of the issues. As an example, one of the complaints in the article above is that they don’t like the length of the contracts, however they’ve already been successful in getting PTOM contracts pushed out to up to 9 years on tendered routes.

Perhaps these companies are in a last ditch bid to delay the implementation of PTOM as they are the ones likely benefiting the most from the massive patronage growth we’ve been seeing.

While AT likely can’t run the buses themselves, perhaps it’s also time for a Christchurch type solution and have the council through one of its other CCO’s buy or set up a bus company that then goes and competes for routes commercially. If the existing operators don’t like the contracts then that might leave space for someone who does.

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  1. It’s ridiculous that Auckland Transport needs permission and takes directives from NZTA/Central government for how it contracts out bus/PT services, which should be a 100% local affair.
    It just shows the point that government in NZ is over centralized and more autonomy needs to be given to the provinces/cities. Auckland would really flourish if it was a State of NZ and had it’s own government, instead of being held back by the central government in Wellington.

    1. The Government contributes a significant amount of funding through NZTA so its reasonable that they have some input. NZTA are required to ensure that Procurement policies meet the funding rules so that all parties ( Councils and Operators) are treated fairly.

  2. Thanks for the update Matt

    Just out of interest do you know which clause of the Act prevents a transit agency from owning and running the buses themselves? Could enabling this option be achieved through a simple private members bill?

    This does seem to be playing out similar to the Snapper fiasco – the politics of delay looked like a factor there too, like when Infratil/Snapper complained to Joyce about the tendering process for the integrated ticketing project- thereby delaying the project by four months.

  3. So sickening that we could have had this 7 years ago if national hadnt won the election and scrapped it. How much would that have saved rate payers?

    Im actually quite surprised it is anything to do with central government. Why isnt it just another commercial contract entered into by the council?

    Central govt law to ensure more taxpayer subsidy of private profit?

    1. This government doesn’t want a competing center of power in NZ’s major cities…. Especially Auckland. Imagine a Labour-lead Auckland with real autonomy contending with a National-lead government in Wellington. We came close with Len Brown, but making the CCO’s beholden to Wellington prevented it… And Brown’s stupidity in having the affair sank him. Well be lucky if Cameron Brewer isn’t the next Mayor. I suspect this will get worse before it gets better.

  4. Watch out for shills and astroturfing on this. Remember “Mike Wilkinson” and “Bob”? Both were vociferous in their defence of snapper and never commented on anything else!

  5. This all sounds completely ridiculous! (well almost as ridiculous as when all these bus services were privatised in the first place!).
    Quite simply there does need to be an incentive to grow public transport however it is all quite messy.
    Surely AT could put routes and times with the minimum size of bus required (along with other requirements eg bus age/condition etc) with a set fee for each route based on those requirements etc (the fee to be perhaps about 50% of the cost of operating the service -depending on usage etc)
    AT would keep 50% of all revenue from fares paid with the bus company getting the other 50% (to stop the operator from giving away free rides whilst also encouraging them to provide good service). Combined this would mean that for a bus that is only half full should make money for a bus operator while a bus that is full provides a good profit. It encourages them to get more punters on a bus to make more money of course. AT itself should be able to either require a bigger bus or increased services if buses are regularly full.
    Alternatively bus companies get a set fee per route (as per requirements and minimum service levels) and AT keeps all revenue.

  6. Any delay suits NZ Bus down to the ground for sure, so they’ll delay it as long as possible just like Snapper did to HOP.

    Its also that while PTOM itself may not be a sticking point, the actual problem may very well be the revenue sharing arrangements which will happen under Integrated fare structures (which need PTOM in place first).

    And as I said before, I expect each bus operator is guarding their “pie” now – the pie being all the revenue they get now.
    With integrated fares, their pie will be raided and they’ll be made to share it around to the other services (bus and rail) that each PT user used on each trip according to some formula.
    And I reckon that is the sticking point – as while the bus operators will accept parts of others revenue pie, they don’t actually want to hand over any of theirs (as is required) in return.

    So we have this Mexican standoff presently between AT and the bus operators preventing PTOM and integrated fares.

  7. My understanding is for each ‘Unit’ (collection of routes), the bus size, kms and current passenger numbers are known. On that basis, the bus companies can tender a price.

    Over a 9 year period, while the bus size and kms are fixed, the passenger numbers aren’t. If they increase, who gets the benefit. If they decrease, who suffers the cost.

    If AT takes all the benefit, the bus companies have no incentive to increase patronage so would prefer for there to be zero growth as they get no benefit from an increase (a drop would actually be prefered if AT takes all the loss too).

    If bus companies get all the upside, the are incentivised (over and above the penalties regime which is included) to ensure bus a in good shape, run on time and to increase service levels (either larger bus or increased frequency) if buses start to fill up. But that increased demand may actually be due to improved network effects which AT should reap the benefit of.

    1. What does this matter. All we want of the bus companies is for them to run the buses to the allocated timetable, put the right size vehicles on the right service, and comply with a bunch of standards of cleanliness and decency. Patronage loss and growth is largely outside of the control of bus companies if they do this stuff right. For example AT had to pay each company a big lump of money to bring in AT HOP (for revenue loss), and what has been the result, huge patronage growth!

  8. The Transport Ministry tender system seems to get much poorer value for money than that of the Education Ministry, which negotiates fixed rates each year – http://www.minedu.govt.nz/NZEducation/EducationPolicies/Schools/SchoolOperations/SchoolTransport/DirectResourcingFundingRates2014-2015.aspx. If councils received the fares and followed the school bus rates, the system would be simpler, cheaper to set up and readily allow growth in passengers to be met with more buses.

    1. Also impossible to plan capital expenditure when each new bus has a 6m+ lead time and costs $500k.

      Not such a problem when you are running a fleet of crapy 20yo school buses which cost $10k each.

      1. Surely that is just standard business risk, how many businesses have guaranteed revenue? Can just sell then buses onto another company if lose the contracts.

    2. That would require a government not in the pocket of bus operators and the road freight industry [don’t start me on ferries; Fullers have their very own legislation]…. it is curious which sectors they roll over like puppies for and which they actually defend the public purse more vigorously against. Can it really be as simple as: Drivers good; teachers bad?

  9. Amazing we still have these vestages of rogernomics still hanging around 30 years later!

    Why not cut all the crap and simply run all services publically. No more contracts, no more politics, no more theft from ratepayers. And routes and services would be a lot more responsive rather than being locked in for 9 years.

    Cant believe the bus companies aren’t facing fraud charges!

    1. National is very much wedded to Rogernomics. It’s their present tense. This is why they uniformly favour private transport / media / finance / energy / whatever over the public options they are bent to be stewards of.

      Rail is publicly owned. Trucks and buses are privately owned. Therefore… They hate rail.

    2. When the original tenders were introduced, the cost of providing bus services dropped by about 30% and the then ARC substantially increased the number of services. The same big reduction in cost has been observed worldwide wherever competition for bus contracts has been introduced. Unfortunately since then the council has been cosying up to the big operator and encouraging anti-competitive practices. As a result the number of competitive tenders has dropped – and the cost has gone up. PTOM represents a further move from competition to comfortable arrangements. Expect the costs to continue to rise.

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