Liberalisation and competition in the European regional rail market - June 2013 - Arriva
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Liberalisation and competition in
the European regional rail market
June 2013
Liberalisation and competition in the European regional rail market. Page 1
Executive Summary ............................................................................................................................. 3
1 Introduction.................................................................................................................................... 4
2 Arriva .............................................................................................................................................. 7
2.1 Arriva’s experience in European rail passenger markets............................................... 8
2.1.1 Denmark ........................................................................................................................ 8
2.1.2 Netherlands ................................................................................................................... 9
2.1.3 Portugal ........................................................................................................................ 10
2.1.4 Poland .......................................................................................................................... 11
3 Stakeholder needs ..................................................................................................................... 13
3.1 Challenges that Transport Authorities face .................................................................... 13
3.2 Why tender rail services? .................................................................................................. 14
3.3 Gross cost or Net cost contracts ...................................................................................... 16
3.4 Output based specifications.............................................................................................. 17
3.5 Bidding Arrangements ....................................................................................................... 17
3.6 Key Features of Best Practice Concession Contracts .................................................. 20
4 Preconditions for a successful competition ............................................................................ 21
4.1 Geographical perimeter (Size, Scope and Length of Concession) ............................ 21
4.2 Rolling Stock ....................................................................................................................... 22
4.3 Stations ................................................................................................................................ 23
4.4 Maintenance Workshops................................................................................................... 23
4.5 Staff ...................................................................................................................................... 24
4.6 Performance Regimes ....................................................................................................... 25
5 Conclusion ................................................................................................................................... 26
Appendices...................................................................................................................................... 27
Case studies of market liberalisation in Europe (UK, Germany, Sweden) ............................ 27
a) The UK experience (fully franchised since 1997).............................................................. 27
b) The German Experience (since 1996) ................................................................................ 29
c) The Swedish Experience (since 2000) ............................................................................... 30
Annexe ............................................................................................................................................. 33
A possible route-map for a liberalised rail market in France by 2019 .................................... 33
Liberalisation and competition in the European regional rail market. Page 2
Executive Summary
Arriva is one of the largest and most successful transport services organisations in Europe
operating in 15 countries.
With rail passenger operations in 7 European countries Arriva has unrivalled experience of
the various passenger rail tendering models both in mature and emerging markets.
Effective rail passenger services are vitally important to socio-economic development and
growth and have a low environmental impact compared with other forms of transport.
Rail generates 403 billion passenger kilometres per annum but in overall terms its market of
passenger transport has stagnated and declined.
A European Commission Staff Working Document concluded that the fully liberalised rail
passenger markets of Sweden and the UK had improved more than other less liberalised
markets when considering a range of 10 key indicators.
European institutions are currently proposing the further liberalisation of rail markets.
Competitive tendering has delivered cost savings of typically 20% to 30%, increased
investment and improved service quality resulting in increased market share through better
customer orientation, better quality and performance and controlled costs through improved
efficiency.
Tendering Authorities retain control of key aspects of policy objectives through the tender
design.
Governments and Transport Authorities face a number of challenges with direct award
and tendering can allocate risks to the party best capable to manage them.
There are 3 types of contract each reflecting differing risk/reward characteristics.
It is absolutely necessary for processes and conditions to be totally transparent and equitable.
Effective design of the contract/concession is key to a successful outcome and there are a
significant number of relatively complex and interrelated aspects to be taken into account.
Adequate time needs to be provided for design, bidding and commissioning phases.
Evidence from throughout Europe shows that carefully conceived and implemented route
tendering can generate investment, significantly reduce subsidy requirements, improve
service quality and attract new passengers.
Arriva has successfully contributed to the opening of a number of Europe’s rail passenger
markets.
Arriva would be delighted to utilise this experience and to explore how a tendering model
could be developed to optimise delivery of Authorities’ financial and other objectives in new
markets.
Arriva is willing to consider working in partnership to establish pilot projects.
Liberalisation and competition in the European regional rail market. Page 3
1 Introduction Effective rail passenger services are vitally important to socio-economic development and growth. They provide a sustainable, eco-friendly and inclusive means of mobility giving access to business, commerce, employment, social and welfare needs. They impact our lives at a local, regional, national and international level. From an environmental perspective, rail (both freight and passenger) has a relatively low environmental impact compared with other forms of transport. Indeed within the EU it is the most efficient producing only 0.6% of both Green House Gas and CO2 emissions when compared with other modes (source: Eurostat). Modal shift to rail can further increase these advantages, and produce major benefits for society and the environment. Yet within the EU, whilst rail generates a staggering 403 billion passenger kilometres per annum, this represents only some 7.0% of all land passenger transport kilometres and in overall terms its market share in comparison with all other modes of passenger transport has stagnated and marginally declined since the mid 1990’s (source Eurostat). Economic cycles, growth of private transport, historical lack of investment and poor productivity have certainly contributed to this situation and stakeholders need to address these issues in order to make rail more competitive and the “first choice” of the consumer- the passenger. A recent publication by the European Commission, Staff working Document (2013), Part 3, Impact Assessment (which supported proposals for the opening of the market for domestic passenger transport services by rail) concluded that the fully liberalised markets of Sweden and the UK had improved more than less liberalised markets when considering a full range of 10 key indicators. Furthermore, when benchmarked on a range of satisfaction/quality and efficiency indicators, the liberalised and mainly liberalised markets (which include Germany) scored significantly higher than the other classifications of markets in all main respects. Liberalisation and competition in the European regional rail market. Page 4
However, the rail passenger sector is confronted with substantial challenges over the next decade
and to address these, the European Commission is proposing further widespread liberalisation of rail
markets.
Where competitive tendering for the procurement of Regional and Urban passenger rail
networks is established in such countries as Germany, the UK and Sweden it has delivered
better value for money, investment and improved service quality leading to:
Increase public transport market share through better customer orientation, better quality and
performance
Controlled costs through increased efficiency and reactivity.
Specific examples show that:
In Germany, Europe’s largest competitive rail transport market in terms of train kilometres,
approximately 32% of the annual volume of 629 million train kilometres per year was put out
to public tender by the end of 2008. The previously high subsidies were thereby reduced
by an average of 26 per cent enabling authorities to increase the amount of train kilometres
offered to passengers;
In the UK, successive reviews of franchising in have concluded that the franchising system
has helped deliver better services, more passengers and lower subsidies than would
have been possible under British Rail, and;
In Sweden passenger transport authorities systematically use competitive tendering for rail
PSCs, although they are not required to do so. This demonstrates that there are clear
benefits from the competitive process.
Liberalisation of markets together with competitive tendering has
demonstrably led to:
•the development of services, in terms of both quality (passenger
comfort, on board services, punctuality, reliability) and volume;
•High levels of safety and security;
•A stimulus to innovation and thereby organic growth of services;
•Customer-orientated strategy leading to rail market share increase (e.g. improved information,
service frequency, intra-modal and inter-modal integration); and,
•Transparency of contractual relations between rail undertakings and authorities.
Liberalisation and competition in the European regional rail market. Page 5
With rail passenger operations in 7 European countries Arriva has unrivalled experience of the various passenger rail tendering models that have been adopted in Europe and operate both in mature and emerging markets. Additionally, as part of the Deutsche Bahn Group we have access to their extensive knowledge, experience and resources. In this paper we share some of our experiences and set out what we consider are the key elements of a successful rail passenger tender model. Liberalisation and competition in the European regional rail market. Page 6
2 Arriva
Arriva is one of the largest and most successful transport
services organisations in Europe with almost 56,000 employees
operating almost 19,900 buses and more than 750 trains (as well
as metros, trams, funiculars, waterbuses and paramedic
transport) in 15 European countries to carry more than 1.5Bn
passengers each year. Our scale and expertise mean that we
can operate a range of transport modes across our business, in
a variety of markets.
We are currently active in the following countries:
Croatia- 260 employees, 120 buses
Czech Republic- 3,000 employees, 1,860 buses, 4
trains
Denmark- 4,095 employees, 1,220 buses, 43 trains,
3 waterbuses
Italy- 3,340 employees, 2,320 buses, 6 trams,
2 waterbuses
Hungary- 945 employees, 405 buses
Malta- 1,120 employees, 285 buses
Netherlands- 2,955 employees, 880 buses, 99 trains, 10 waterbuses
Poland- 1,965 employees, 845 buses, 27 trains
Portugal- 7,015 employees, 3,400 buses, 18 trains, 126 trams
Serbia- 580 employees, 250 buses
Slovakia- 1,560 employees, 840 buses
Slovenia- 520 employees, 275 buses
Spain- 900 employees, 480 buses
Sweden- 3,095 employees, 920 buses, 165 trains, 37 trams
UK- 24,550 employees, 5,800 buses, 403 trains, 375 ambulances/cars
Liberalisation and competition in the European regional rail market. Page 7
2.1 Arriva’s experience in European rail passenger markets
Arriva operates rail passenger services in 7 European countries; these are:
Czech Republic
Denmark
The Netherlands
Portugal
Poland
Sweden
United Kingdom.
We also operated rail passenger services in Germany (until 2010).
Four of our rail passenger operations are described below and more detailed case studies can be
found within the Appendices.
2.1.1 Denmark
2.1.1.1 Rail market
The Danish rail market is regulated, having opened to public tendering in 2000. The Danish
parliament is responsible for the regulatory framework for transport provision and setting fares.
Contracts are typically net cost, with bonus and/or penalty regimes for punctuality and customer
satisfaction.
The market is dominated by the public sector, with Danish State Railways operating approximately 75
per cent of train kilometres in Denmark, under direct award from the Ministry for Transport.
2.1.1.2 Arriva in Denmark
In 2001 Arriva won the first competitive tender in Denmark for approximately 7.5m train km per annum
covering diesel operations in mid Jutland. This was a net
cost contract for 7 years (from 2003) including commercial
activities at stations. The specification was framed to give
bidders the opportunity to develop timetables that would
both grow the market and reduce costs. The state
incumbent was required to lease the existing fleet to other
bidders on non-discriminatory terms and key staff would
transfer to the new concession. The Arriva solution was
extremely resource efficient, included replacement of two-thirds of the fleet (29 trains) with new
Alstom Lints, and targeted investment in station improvements and other quality initiatives despite
saving the client body €11m a year. Increased frequency, shorter journey-times, better connections
and better quality (Arriva Tog services were repeatedly top of the national performance league with
very high levels of customer satisfaction) reversed the long-term decline in patronage on these routes
and generated a 15% growth in passengers during the contract period.
Liberalisation and competition in the European regional rail market. Page 8
The tender process for franchise replacement started in 2008. The tender was for 8 years (with an optional 2-year extension) and the process was broadly similar to the previous one but with the service specification and bid evaluation criteria (50% price, 30% quality and 20% deliverability) more clearly expressed and detail alterations to the draft contract. Five expressions of interest were received and three of these were shortlisted to prepare full bids. The result was that the service was again awarded to Arriva with an offer that included renewing the remainder of the fleet, further timetable enhancements and significant investment. The Trafikstyrelsen (client body) announcement stated that the contract would further reduce the subsidy requirement by 10% (€20m) annually and the independent panel assembled to confirm the award recorded that the successful offer was some 15% cheaper than that submitted by the incumbent (in association with First Group) and had the best quality rating. The service continues to operate with excellent standards of reliability and customer satisfaction. 2.1.2 Netherlands 2.1.2.1 Rail market Very little of the rail market has been competitively tendered to date and only around six per cent of the market is operated by the private sector. Regional authorities have responsibility for regional rail services. Contract conditions differ widely between the regions, and by contract. Contracts are typically net cost and up to 15 years in length. 2.1.2.2 Arriva in Netherlands The process of passenger rail liberalisation started in 1998 when responsibility for procurement of local rail services was devolved to 19 Regional Authorities and started to accelerate around 5 years later encouraged by institutional reform and the success of initial trial tenders. Arriva was an early mover in the market winning (through a joint venture with the state owned incumbent) one of the trial net cost contracts to operate 5.3m train km on rural lines in the Friesland and Groningen Regions from 1995-2005. This was a low investment concession (the existing fleet was retained) but the Arriva offer included some timetable enhancements and a key focus was improving customer service and integration with other public transport modes. It also delivered a modest cost saving to the client body. When the service was re-tendered in 2004-5 for a longer 15-year period, Arriva (acting alone) won with a bid that included significant timetable enhancements (to 7m train km), major investment Liberalisation and competition in the European regional rail market. Page 9
(procurement of 43 new Stadler DMUs and construction of a train maintenance depot) while reducing
the subsidy requirement by almost 50%.
In 2006 Arriva won another small concession providing electric services between Dordrecht and
Geldermaisen. This is a 12-year net cost contract of 1.4m train km for which a fleet of 10 new trains
were procured.
Three further contracts (5 lines) have now been won some of these commenced operations in
December 2012 and the remainder will start in December 2013. A total of 38 new diesel and electric
multiple units have been purchased for these services.
So far only around 15% of the Dutch network has been tendered but the results have been impressive
in terms of new investment, service enhancements and reduced subsidy (typically by around 25%).
Most concessions are net cost (providing a real incentive to grow the patronage) and of sufficient
duration (10-15 years) that depot investment can be justified and rolling-stock residual value does not
add too significantly to costs. On the negative side though, some tenders are for just a single route –
often less than a million train km and requiring just a handful of trains. The mobilisation and start-up
costs can therefore be disproportionately significant. Furthermore some regions lay down very tightly
defined specifications which can stifle timetable and resource efficiency improvements.
2.1.3 Portugal
2.1.3.1 Rail market
There has been only one instance of a concession awarded to a private operating company to date
(Fertagus), but there are now signs of moves towards more widespread competitive tendering.
Urban and regional rail services are operated under concessions allocated by the state, to state-
owned Comboios de Portugal (CP). State funding provides for loss-making regional and urban
services
2.1.3.2 Arriva in Portugal
Through a substantial shareholding in Barraquiero
Group, Arriva has an interest in Fertagus, the only
heavy rail network to have been tendered in
Portugal. This very busy route linking suburbs south
of Lisbon with the city centre is 54km in length and
2.2m train km per annum are operated using a fleet
of 18 4-car double-deck trains that are leased
(heavy maintenance included) from the client body.
It is a net cost contract with some freedom to vary
service levels and fares and, under a contract extension agreement covering the period December
2010 to 2019, now operates without public subsidy.
Liberalisation and competition in the European regional rail market. Page 10Barraquiero Group are also part of the consortium that won the Design, Build, Operate and Maintain contract for the Metro sul do Tejo (also south of Lisbon). It is a 30-year concession that commenced in 2002. Both Arriva and Barraquiero Group are also in the consortium that holds the Metro do Porto concession. It is a 5-year gross cost contract from 2010 that covers both maintenance (infrastructure and trains) and operation of this 54km network of light rail (underground in the city centre) and tram services. There are 5 lines with 70 stations and the fleet comprises 102 Light Rapid Transit units. Contract evaluation criteria were 80% price and 20% technical quality and it is understood that the client saved around €10m pa (over 20%) through the tender. 2.1.4 Poland 2.1.4.1 Rail market The rail market in Poland is dominated by state and region-owned operators, however it is opening slowly to competitive tendering. Regional rail provision has been devolved to the regions, while state-owned PKP remains responsible for Inter-City and long-distance rail operations. Przewozy Regionalne (PR) is owned by the 16 Voivodships (provinces), which decide whether to direct award rail services to PR or put services out to tender in their regions. Contracts are typically net cost contracts. Where previously they were between one and three years, there has been a recent move, in some regions, towards longer 10-year contracts. 2.1.4.2 Arriva in Poland In 2007 Arriva (through a joint venture with a freight operator) became the first private passenger rail operator in Poland by winning a tender in Kujawsko Pomorskie Region for 1.75m train km per annum around Bydgoszcz and Torun. It was a short net cost concession and while the client provided 13 modern diesel units, the rest of the fleet had to be provided by the bidder. There was considerable flexibility to design a new resource efficient timetable with improved connections but no staff would transfer to the new operator and new train maintenance facilities had to be provided – all during a six- month mobilisation. Tender evaluation criteria were price (70%) and committed reliability (30%). The client body published the results of the tender and the Arriva offer was PLN 12.93 per train km with 90.5% punctuality while the incumbent offered PLN 18.36 per train km with 95% performance. In actual fact the real saving to the Marshall was greater than the 30% suggested by these figures since, according to press reports the lowest figure that had been quoted in negotiations for direct award had been over PLN 20. Although not evaluated by the client, our bid also included timetable improvements, the introduction of two new and 6 second-hand but refurbished trains from Denmark and customer service benefits. Liberalisation and competition in the European regional rail market. Page 11
After some initial problems the concession
delivered better reliability than contracted, not
least because we were able to improve the
reliability and daily availability of the Marshall’s
owned fleet by over 30% compared with that
which had been achieved by the incumbent. We
were also able to win some small add-on routes
bringing the annual train km to 2.5m
When the network was re-tendered in 2010
under broadly similar conditions but with the concession period extended to 10 years the Arriva offer
was PLN 17.99 per train km with 91.17% punctuality and the incumbent’s offer was PLN 35.48 with
nd
90% performance guarantee. The Arriva winning bid also included replacing the 2 -hand trains with
new ones (to provide a 100% modern low-floor fleet) and further customer service benefits.
Other concessions have been offered in Poland but generally these have been too short – often just
1-2 years (the current legal framework only allows contracts with a maximum duration of 3-years in
most cases) and with inadequate bidding and mobilisation time so Arriva has been unable to bid and
other private operators have not yet entered the market.
Liberalisation and competition in the European regional rail market. Page 123 Stakeholder needs
The main driver of tender design will always be the policy objectives of the client body.
Within the EU regulatory framework client bodies remain free (if they so wish) to:
establish social and qualitative criteria;
determine fares policy and tariffs;
define the public service obligations and the geographical areas
concerned;
establish the parameters on the basis of which the compensation
payment, if any, is to be calculated, and the nature and extent of any
exclusive rights granted;
determine the arrangements for the allocation of costs connected with
the provision of services;
define levels of information, coordination and ticketing integration with
other transport modes and operators.
However, it should be remembered that the more prescriptive a tender is, the less flexibility
there will be to capture the operator’s innovative and entrepreneurial skills.
Whereas a national client body will generally wish to adopt a single model across the whole country
and be keen to attract private investment for new trains and other facilities, a Regional Authority will
more often want a bespoke structure that delivers on local objectives – be these releasing funds for
other essential projects, visibly improved quality, or delivering on challenging modal-change and
environmental targets. Again though access to “off the Public Accounts” investment is likely to be
attractive.
3.1 Challenges that Transport Authorities face
Increasingly, Governments and Transport Authorities face a number of challenges with direct
award for the procurement of public transport, these include:
Pressure on scarce financial resources;
Capital tied up in fleet, property and other assets;
Significant future capital investment requirements;
Historic conditions may make operational efficiencies difficult to achieve;
Significant liabilities may apply;
Employee guarantees;
Historic concessions may not represent value for money or allow improved quality;
Revenue risk may lay with the client body;
Transport is always a political and social issue;
Tough budgets may force difficult choice;
Achievement of multi-modal solutions; and,
Growing customer expectations.
Liberalisation and competition in the European regional rail market. Page 133.2 Why tender rail services?
The driving-force behind the move to competitive tendering of services has generally been the wish of
client bodies (whether National or Regional) to achieve some or all of:
Reduction in the (perceived to be un-justifiably high) subsidy requirement for Regional and
Suburban rail services and delivery of better value-for-money;
Through competition to force the incumbent operator to improve efficiency to the levels achieved
by “best in class” operators elsewhere in Europe;
An end to annual (and possibly difficult…)
renegotiation of service levels and subsidy
requirements;
Transfer of cost (and, more often than not, revenue)
forecasting, management and delivery risks from the
client to a third-party;
Innovation and the development of new cost-effective
services/products;
Improved service delivery (punctuality and other quality attributes) and more effective marketing
to deliver growth in patronage; and finally,
Unlocking timely and effective private-sector investment (e.g. new trains and maintenance
facilities, station car parks and passenger service facilities, ease of bus/metro/bike/pedestrian
interchange, marketing and employee development, environmental protection etc.).
The extent to which each of these is delivered will depend critically on the detailed design of the
tendering process and the nature of the client specification. Nevertheless there is overwhelming
evidence that where the tender structure is well thought through and appropriate, and where risks and
rewards are sensibly allocated to the contracting parties, competition through tendering does deliver
substantial benefits.
The exhaustive research, previously referred to, which was undertaken on behalf of the European
Commission shows clearly that route and network tendering really does deliver these benefits and
more. Specific findings included:
Higher absolute and evolving levels of productivity and efficiency in liberalised markets with
tendering typically delivering a 20-30% cost reduction along with higher levels of passenger
growth;
Significantly higher satisfaction and quality of service
(e.g. punctuality) indicators in liberalised markets. Also
higher growth in the level of services offered (measured
by train km) and patronage (normalised passenger km);
Higher service frequency;
Greater growth in the number of staff employed and
some evidence that employment conditions (principally salaries) are better;
Liberalisation and competition in the European regional rail market. Page 14 Liberalised markets typically have the highest safety standards (but, quite rightly, no causal link
is claimed).
The study concluded that
“Evidence of competition for PSCs in Germany, Sweden and the Netherlands has shown
that tendering accrues savings for Client Authorities, sometimes up to 20-30%, which can
be re-invested to improve services or be used elsewhere. Experience in other liberalised
markets such as Sweden and the UK has shown improvements in quality and availability
of services with passenger satisfaction rising year on year and passenger growth of over
50% over ten years. Improved services would bring clear benefits to passengers and
savings of some €30-40bn to taxpayers if competitive tendering was extended across the
whole of the EU”.
The finding that staff numbers (and pay) have grown faster in liberalised markets than in closed ones
is, perhaps, at first sight surprising. Private operators win concessions through their constant pursuit
of resource efficiency as demonstrated by the table below, which compares the staff numbers per
million train km of the main operators in Poland:
Carrier Annual Train km Number of Staff per million
(million) employees train km
Arriva RP 2.4 200* 83
Koleje Śląskie** 3.0 320 107
Koleje Mazowieckie 16.5 2,600 158
Przewozy Regionalne 70.0 12,900 184
* includes contractors
** half-year 2012
It is, however, the case that lower unit costs enable client bodies to affordably increase the level of
service leading to greater employment opportunities.
The European Commission report does not fully address the benefits of investment by private
operators but it should be noted that in the UK, for
example, subsidiaries of Arriva are investing to re-open
previously closed routes, to construct completely new lines
and to open new stations as well as spending massive
amounts to regenerate existing stations and improve
customer facilities. It is also worth noting that across the
whole of mainland Europe the average age of the Arriva
train fleet is just 10 years and that over three-quarters of
Liberalisation and competition in the European regional rail market. Page 15the trains that we run have been built since 2000.
The report’s findings align closely with Arriva’s own experiences details of which may be found in the
case studies attached as appendices.
3.3 Gross cost or Net cost contracts
Historically there have been two main types of contracts- these are:
Gross cost contracts, of which the main features are:
Tendering authority pays an operator a specified sum to provide a specified service
Tendering authority keeps passenger revenue and often sets routes and vehicle specifications
Gross cost contracts may be considered easier to manage and, perhaps as a result of this, the
approach is often adopted by client bodies in markets that are in the early stages of liberalisation.
Such contracts can, however, end up being very inflexible (effectively the timetable is frozen) or very
complex with subsidy variations based on changes in vehicle km, vehicle hours and peak vehicle
requirement with separate rates for additional staff hours ordered and complex performance regimes.
Net cost contracts, of which the main features are:
The operator takes on revenue and cost risks
Operator keeps passenger revenue
Tendering authority can provide a contribution where cost of providing service would not be
commercially viable
In reality a net cost approach may be simpler to introduce and to manage and gives the operator a
strong incentive to meet the needs of end customers without recourse to complex performance
regimes. The key requirement for a net cost contract is a transparent revenue allocation system. This
does not necessarily need to be 100% accurate, merely to broadly reflect travel patterns and to
respond to changes in patronage.
Either approach is acceptable from a bidder’s perspective.
Hybrid solutions are also possible. In some Swedish and German gross cost contracts part of the
subsidy is based on the quantum of services provided but the remainder is related directly or indirectly
to passenger usage. Other contracts migrate from gross cost to net cost once a track record of
financial performance has been established after, for example, two years of operation.
Liberalisation and competition in the European regional rail market. Page 163.4 Output based specifications By specifying the outputs required rather than the precise timetable to be operated client bodies can create the freedom for bidders to develop more resource efficient (and, often, more customer friendly) solutions. Such a specification will normally include the following parameters: Time band for first and last trains; Minimum frequency required at each station; Regularity (e.g. strict clock-face, or every hour +/- 3 minutes) Required connections Capacity requirement Permitted variations at weekends and on Public Holidays etc. A fixed timetable leaves the bidder with few opportunities to either reduce costs or respond to changing customer needs. In the UK, Denmark and elsewhere, flexibility in the service specification has enabled operators such as Arriva to provide more capacity by running a more frequent service at lower cost. Similarly, issues of service quality above a minimum level defined in the ITT are better addressed through the tender award criteria (typically 70% price and 30% quality, but this can be varied according to the client body’s objectives) and bonus/malus regimes than through detailed specification (e.g. specified ticket office opening hours, frequency of ticket checks etc.) in the ITT. 3.5 Bidding Arrangements If a number of bidders are expected then a prequalification process is beneficial to shortlist those with the best approach and qualifications. These are major long-term contracts and bidders will need to fully understand the existing performance together with the risks and opportunities before committing to an offer. Liberalisation and competition in the European regional rail market. Page 17
Comprehensive bidding information should therefore be provided including extensive current and
time-trend data for the concession. At the very least this should include:
Passenger counts;
Passenger flow and ticketing sales/income data;
Performance (punctuality and reliability);
Details of known or expected future developments;
Details of any contracts and/or other obligations that will transfer to the new operator;
Copy of the draft concession contract;
If the existing fleet is to transfer and the operator is to be responsible for train maintenance then
maintenance schedules and detailed cost/contract data;
Employment conditions and summary personal record details for any staff that are expected to
transfer to the new concession.
The invitation to tender should also give a clear view of what the client-body is seeking to achieve
through the tender and the methodology that will be used to evaluate the offers received (the award
criteria.)
A simple process for clarification questions and answers should be laid down (normally with the
answers published to all shortlisted bidders) and also, to the extent appropriate, arrangements that
allow some meetings with the client body, site visits and meetings with existing management.
Bearing in mind the complexity of bid preparation and the fact that many bidders will have to obtain
Company Board approval of their offer, at least 3 months should be allowed for bid preparation and
adequate time will also be required for tender evaluation and award and for mobilisation. These
considerations mean that even for a modestly sized “transfer as a going concern” concession
the tender process should start perhaps 2 years before the proposed commencement of
operations. More complex concessions, especially those requiring construction of new trains
will typically require perhaps three years or even longer in extreme cases.
Liberalisation and competition in the European regional rail market. Page 18Months
-25 -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 1 2 3
Simple concession transferred as going concern (no new trains,
etc.)
Apply ForTrack Access
Bid Final Awar Start of
I.T.T. Planning Mobilisation Period
Preparation Nego d Operations
Concession requiring new trains
Final Order Depot etc Start of
I.T.T. Bid Preparation Award Planning Mobilisation Period + Staff recruitment/training + delivery/testing of trains
Negotiation Trains contract Operations
NOTE: It would be even longer for big concessions
The above is indicative only as the timeline is sensitive to a number of issues such as:
Lead times for rolling stock procurement and/or homologation
Process for safety certificate and any other necessary certifications
Driver training requirements
Provisions of maintenance facilities
Allocation of train paths.
Liberalisation and competition in the European regional rail market. Page 193.6 Key Features of Best Practice Concession Contracts
These can be summarised as being:
Financial and other risks allocated to the party best able to manage them;
Adequate indexation to cover inflation;
Focus on defined outputs and processes rather than a prescriptive list of inputs;
Periodic reporting requirements focussed on what is really necessary – avoidance of costly and
innovation stifling micro-management of concession activities;
Proportionate and graduated process to address contract infringements by either party;
Independent dispute resolution process;
Contract variation and client specification change process (usually best-endeavours to agree will
suffice).
It follows that an appropriately structured contract should provide the operator with enough
commercial freedom to apply innovative solutions and focus on the delivery of a quality service.
Liberalisation and competition in the European regional rail market. Page 204 Preconditions for a successful competition
4.1 Geographical perimeter (Size, Scope and Length of Concession)
The minimum size of concession that should be considered is around 15 trains and 1m+ train km. as
bidding and mobilisation costs will have a disproportionate impact on the price per km of anything
smaller than this.
If a significant number of new trains are required and/or existing staff do not transfer from the
incumbent then the maximum practical size is around 8-10m train km but even then only the largest
international players will be able to participate in a tender of this magnitude. A concession of 4-5m
train km is probably more realistic for effective competition.
If the concession transfers to the new operator as a “going concern” with the existing fleet and staff
(even if a new depot is required) then there is no real limit on the size of concession that can be
offered.
Whatever the number of train km it is generally beneficial (and costs will be
lower) if the selected routes form a “natural network” having proximity to a
depot and opportunities to inter-work trains and crews between routes to
optimise resource efficiency.
Ideally the concession holder should also be responsible for all customer-
facing activities including station operation and retailing (ticket sales), and
on-train customer service, revenue protection etc. This is particularly
beneficial in the case of net cost concessions as it enables the operator to
ensure consistent standards of customer service across the whole journey and to focus investment
and management attention on initiatives that have the greatest impact on the customer experience.
Regardless of who runs the stations, there need to be arrangements that ensure non-discriminatory
station access by any operator and provision of seamless, convenient and attractive services and
assistance to all passengers.
Experience has shown that for “transfer as going concerns” concessions requiring little or no
investment, duration as short as 5 years can generate attractive bids but even in these circumstances
better value will be achieved by a period of 7 years or longer. More generally though for concessions
with modest investment and staff recruitment/training requirements 7-10 years will be appropriate
whilst if significant fleet renewal is proposed 12-15 years should be the norm.
It is also common practice to provide for an extension (typically of 3 years) if the concession holder
delivers on franchise service delivery and quality commitments.
Liberalisation and competition in the European regional rail market. Page 21The tendering authority needs to facilitate:
The availability to bidders of transparent, detailed and recent market and operational data
including passenger flows and ticket income, track and facility access charges etc. If existing staff
are expected to transfer to the new operator then employee details (numbers by function,
employment conditions, seniority etc.) also need to be provided.
A Clearly defined requirement specification (minimum level of service, minimum frequency etc.).
A precise time line for the expected bid/start of operation/mobilisation
A good level of flexibility especially on timetabling
Fair, open and transparent prequalification
Availability of all aspects of customer care service and information to passengers
Thus the optimal duration depends on the complexity, the risk/reward structure and the level of
investment.
4.2 Rolling Stock
There are a number of different models for the provision and
ownership of rolling stock. Normally the operator provides the rolling
stock but in some concessions, for example in Sweden, the rolling
stock is a concession asset owned by the client body and then
leased to the operator whilst in other cases the operator may be
required to take over existing fleets at an agreed value.
However, a key consideration is what the concession and client’s finances can sustain in terms of
new or second-hand rolling stock. Trains typically have a useful working life of around 30 years or
more so with appropriate refurbishment second-hand vehicles will often be the most customer-friendly
and cost effective solution, particularly in the case of short duration concessions.
If new rolling stock is a requirement the initial investment together with any residual value
considerations (possibly exacerbated by any non-standard features of the train specification) will
necessitate a long concession, typically of 12-15 years. Value for money can be further enhanced if
the client body commits to either “buying-back” the trains at the end of the concession or requiring the
next concession-holder to take-on the assets book value based on a predetermined formula.
Rolling stock procurement is one of the key dynamics determining the timeline for delivering a
concession.
Liberalisation and competition in the European regional rail market. Page 224.3 Stations There is a preference, particularly in respect of regional rail concessions, for the train operator to operate and manage the stations. Otherwise they are unable to manage (and upgrade) the “whole- journey experience” to maximise patronage. There may also be significant cost-reduction benefits from being able to develop station-trading etc. opportunities. Where stations are served by a number of train operators it is normal practice for operator with the largest number of departures to take the management role. If stations are not included then access and other unavoidable facility charges should be determined on a transparent and equitable basis and ideally be regulated. 4.4 Maintenance Workshops It is desirable that train maintenance is included in the tender of the operations but the train operator should have the commercial freedom to decide whether to undertake the work in-house or to subcontract it. For all except the smallest concessions – and even then only if new trains are an absolute requirement - best- value is achieved by transferring the existing staff, depots and trains to the franchise. Start-up costs (particularly construction of a maintenance depot) are significant and will be reflected in the tender prices. It is not sensible use of public money to pay for construction of new buildings etc. when adequate facilities (that were originally subsidised by tax- payers) already exist. This will also reduce the lead-time between concession award and commencement of operation to the minimum possible. Train procurement, recruitment and training of staff and building construction etc. typically take a minimum of 18 months. Where the facilities are provided by the incumbent operator these need to be provided on a transparent and equitable basis. For longer duration contracts Arriva is prepared to invest in building new facilities but the infrastructure manager will have to facilitate connections from the depot site to the mainline. If a new depot is required, an option is for the client body to offer suitable sites to all bidders, on non- discriminatory terms, for them to develop. Liberalisation and competition in the European regional rail market. Page 23
4.5 Staff Staffing a concession is always a key issue and will be determined by whether the incoming operator is required to employ new or existing personnel - or a combination of both. In some countries, such as Germany, the existing employees do not transfer with their work to the new concession and it is necessary to recruit and train new service delivery teams (drivers, conductors etc.). Across Europe driver training typically takes between 6 and 12 months (3 months+ classroom and 3 months+ practical train handling and general/route familiarisation) so even if adequate and accessible training facilities exist (which is not the case everywhere), this has very real cost and timescale consequences for mobilisation and effectively puts a limit on the size of concessions that can be tendered. The largest tenders that have been offered in Germany are for around 8m train km requiring about 100 drivers. In this mature market bidders would generally expect around half of their new employees to be trained staff who resign from the incumbent to “follow their work” to the new entrant while the other 50% have to be recruited “off the street” and receive full training. In most countries where we operate either the staff transfer automatically to the new operator or each individual has the right to transfer if he or she wishes and in these circumstances there is generally significantly less requirement for recruiting and training new staff so concessions can be larger and/or mobilisation periods shorter. Flexibility to negotiate terms and conditions applicable to the concession and local market conditions is to be preferred. However, Arriva also has considerable experience in staff transferring on existing terms and conditions but this may limit innovation in some areas and will be reflected in the bid. Indeed as previously mentioned staff transferring can in certain circumstances see an improvement in terms through achieving increased productivity. Arriva aims to provide a supportive, respectful working environment and works develops meaningful, professional relationships with our employees, trades unions and work councils. This is underpinned by an annual group-wide survey to benchmark employee satisfaction across a range of measures. Surveys and other regular communications such as company newsletters, open forums, road shows and websites help us to listen to our employees. The majority of our workforce is covered by collective arrangements on working conditions. Health & Safety is a key consideration throughout Arriva and particularly within the safety critical environment of rail operation. Liberalisation and competition in the European regional rail market. Page 24
4.6 Performance Regimes Reputation considerations and, for net cost contracts, revenue risk, will generally ensure that private operators maintain high quality standards. Nevertheless contracts invariably include performance (bonus/malus) regimes. Typically these cover punctuality and reliability, station and train condition (repairs) and cleanliness, provision of committed staffing, customer satisfaction and, particularly for gross cost contracts, patronage levels. It is important that all such arrangements are simple/understandable (avoiding perverse incentives), proportionate and based on realistic targets. If bidders regard them as representing extraordinary risks then these will be reflected in a higher price offer. Experience suggests that the most successful service punctuality and reliability regimes are based on arrival time at destination with the benchmark set at the actual level of punctuality (normally 0-5 minutes late) achieved historically by the incumbent. Unless arrangements exist for the regime to be “back-to-back” with the Infrastructure Manager the operator should only be penalised for delays and cancellations that are its own fault. Penalties normally take the form of a percentage reduction of the subsidy for delayed services (full loss for cancelled trains) but these levels are normally reduced if the alterations are pre-advertised and/or alternative road transport is provided. Bonus payment levels should, in order to incentivise and reward investment to achieve high standards of performance, mirror the penalties. Other regimes will be based on customer surveys, spot checks and recorded passenger flows as appropriate. Liberalisation and competition in the European regional rail market. Page 25
5 Conclusion
Evidence from throughout Europe shows that carefully conceived and
implemented route tendering can generate investment, significantly reduce
subsidy requirements, improve service quality and attract new passengers.
By focusing tender design on the Best Practice outlined above it is possible
to maximise delivery of these benefits.
Arriva has successfully contributed to the opening of a number of Europe’s
rail passenger markets and would be delighted to utilise this experience and
to explore how a tendering model could be developed to optimise delivery of
Authorities’ financial and other objectives in other markets. A possible first step maybe to have a pilot
project in advance of the opening of a market and once again Arriva is willing to consider working in
partnership to achieve this.
Ends.
Arriva plc.
June 2013.
Liberalisation and competition in the European regional rail market. Page 26Appendices
Case studies of market liberalisation in Europe (UK, Germany, Sweden)
Most European countries adopt a tendering model that is based on one of the following:
a) UK
b) Germany
c) Sweden
a) The UK experience (fully franchised since 1997)
An independent Infrastructure Manager (IM) was established in the early 1990s. Originally this
was privatised as Railtrack plc but it was taken back into public ownership following
insolvency. Variable Track Access charges were set at a low level (reflecting the marginal
costs of additional operations) to incentivise timetable enhancements.
Existing train fleets were allocated to three leasing Companies (ROSCOs) which were then
privatised. These have invested heavily in new trains and some 45% of the current fleet has
been built since the year 2000
The former British Railways (state-owned incumbent) passenger Divisions were reorganised
into 25 self-contained regionally or sector-based Train Operating Companies (TOCs), each
with their own trains, stations and maintenance depots etc. (leased from the ROSCOs and the
Infrastructure Manager respectively). To enable the development of a financial track record for
these Companies all trading relationships with other parts of the former British Railways were
made arms-length and fully contractual.
Comprehensive contract and enforcement (Regulatory) arrangements were put in place to
ensure that network benefits were maintained. These included mandatory non-discriminatory
ticket sales and customer service, cross acceptance of tickets, guaranteed non-discriminatory
access to stations and train maintenance depots by third-party operators etc. The
independent Rail Regulator was also given extensive powers to protect public interest,
oversee the value-for-money of the IM and ensure that competition was “fair.”
A minimum service level (PSO) was established for each route along with arrangements that
capped increases in key fares according to an RPI formula. Highly complex Performance
Regimes (Bonus/Malus) were also implemented to ensure that service quality would be
maintained and improved.
The 25 TOCs were then tendered as “going concerns” by Central Government. All bar one
franchise were net-cost (i.e. the franchisee bore the revenue risk) and were for around 7
years except on a small number of networks requiring major investment which were for longer
periods of up to 15 years. Although award was to be based largely on the basis of price
(lowest subsidy or highest premium) bidders were encouraged to commit to service
improvements, new trains and other investments that would grow the market.
Liberalisation and competition in the European regional rail market. Page 27 Since British Railways had, effectively, been abolished, only new-entrant private companies
were permitted to bid for the franchises.
Competition for the franchises was fierce and several bidders had unrealistic expectations
concerning their ability to reduce costs and attract additional patronage. As a result a few
operators got into financial difficulties (particularly during the hiatus following the insolvency of
Railtrack) and required government bail-outs to maintain services until their franchises could
be re-tendered.
In the succeeding years the UK model has been refined to reflect real and perceived
weaknesses. These adjustments have included increasing the importance of quality plans and
incorporation of a deliverability test in the award criteria, some re-mapping of franchises (there
are now 19), inclusion of a revenue “cap and collar” (sharing of risk/reward between the
franchisee and the Government), simplification of the various performance regimes, a move
towards longer franchises and more prescriptive franchise specifications. Responsibility for
some franchises has also been devolved from Central Government to Regional Authorities.
However the overall structure has changed little.
Franchisees have also become more expert and realistic in the way that they compile their
bids but nevertheless (and despite the “cap and collar”) one franchisee has terminated a
contract early as a result of the current economic downturn.
UK rail concessions are very large and complex businesses (several perform in excess of
40m train km pa and have turnovers in excess of €1 Bn) and with service/quality levels fixed
(so few levers are available for franchisees to reduce the cost base), the expected scale of
cost reductions has not been achieved. Indeed, a recent report prepared for the UK
Government found that the real (inflation adjusted) cost per unit of output has barely changed
during the 15-years since franchising started.
In other respects though the UK model has delivered significant benefits. Patronage (annual
passenger km) has increased by almost 65% and there has been a 24% increase in the train
km operated. Service quality and customer satisfaction have improved significantly (with more
staff in customer facing roles and better training) and there has been very significant private
sector investment in new trains and passenger facilities etc.
A further review of the UK rail franchising process and procedures is currently being
undertaken following the discovery of anomalies in the evaluation of bids for the West Coast
Main Line tender during summer 2012.
Arriva operates around 14% of UK rail services - approximately 80m train km each year
through 4 franchises, one open-access Inter-City operation and a city metro network.
Liberalisation and competition in the European regional rail market. Page 28You can also read
