Article in BCA (NSW) Bulletin Jan/Feb 2007

BCA/MOT WORKSHOP

Working with the Outer and MBSC

The BCA workshop on understanding the incentives in the new Bus Reform Contracts indicated 'mixed bag' sentiments.
In general the incentives are not clear and could be improved.

The following notes have been prepared on the December 2006 Workshop as background and as a basis for the clarification to MoT.

Background

BCA has played a major role in negotiating reforms for the NSW bus industry, including new Metropolitan bus system contracts. These represent a significant change to the way services are contracted, paid for and planned. To assist the industry understand the contracts and to provide a basis for future policy settings the BCA set up the workshop series, under the general theme of Working with MBSC/OMBSC.

In April 2006 the industry undertook a mid-term review of the bus reform agenda, and submitted to Government a 10 point plan indicating what changes needed to occur to refine and improve policy and procedures to provide sustainability. An important part of the 10 point plan was to establish what changes could be reasonably made to existing contracts to make them more practical as well as establish a clear understanding of how performance and incentive arrangements contribute to contract renewal. In response to the industry 10 point plan the Minister agreed on a number of measures, one of which was to hold a workshop to clarify the allocation of risk and hence the balance of incentives under the new contracts. It is also intended that the workshop series continue and key performance indicators, performance benchmarking and competitive obligations are likely to form the basis of the coming workshops in 2007.

The decision to negotiate contracts with existing operators, as opposed to tendering, brought with it a number of challenges both for government and industry, not the least being establishing effective safeguards and transition arrangements to ensure adequate performance and viability. These considerations led to risk mitigation options including the option of electing an annual reset or cumulative patronage risk component of the new contracts. Those operators who were in the initial year of the MBSC raised with the BCA a number of questions that needed clarification relating to how they could best apply their expertise to grow their business. It was not clear if there were adequate incentives to grow patronage and/or reduce costs or achieve productivity efficiencies. A number of issues like the poor policy decisions on school Tcard, and interpretation of the Government's power to claw back efficiencies needed clarification.

The profile of allocating risk based on who was best able to manage that risk led to the current contract settings. This occurred at a time when operator viability was poor and in general patronage was declining, and hence greater focus was on the Government taking more of the risk, in order to underpin viability. This was not comfortable with the private bus industry who wanted adequate reward for their efficiency, although they had little impact on influencing patronage.

The funding model that was developed was more a defensive strategy, rather than placing higher incentive on achieving patronage growth. This was also a time before the impact on fare harmonisation, new networks and fuel prices was reasonably known.

In preparation for the incentives workshop, BCA compiled a list of 12 questions that summarised the components of the 10 point plan.

BCA also has been developing systems for improving contract administration and management and has delivered to the Ministry a list of suggested improvements to the existing contract, which are expected to be considered after the coming elections. The Ministry has also developed a more systematic approach to addressing the various milestones required under the contract.

BCA is also putting significant importance on establishing industry wide standards in reporting processes and development of industry

This is being done in partnership with Pitcher Partners, who have played an important role in contract negotiations.

Both the Ministry's (Saha) and the industry's (Pitcher Partners) key advisers were invited to be part of the incentives workshop.

Following presentations by Saha International, Pitcher Partners, the BCA and its members, the following conclusions are drawn from the workshop:

The inability to measure the actual school student boarding along with the delays in the introduction of T/Card could substantially reduce the incentives under the contracts as the patronage benchmark can not be accurately calculated nor can the cumulative model be effectively initiated. The Ministry view is that the patronage incentive is intended to promote growing adult passengers rather than growing SSTS patronage. However the patronage change payment is based on boardings regardless of whether it's SSTS or adult passengers. Saha explained that the calculation of the shadow fare was approximately 50% of the estimated fare revenue received by operators. The shadow fare is different between SSTS boardings and adult boardings.
The total variable and fixed costs are not met for new services by the SKR and can only be recovered by patronage benchmark changes which for the reset model only allow one year's growth payments. The impact of the disincentive relates to how your costs and patronage are affected by the new services.
The Ministry did indicate that the efficiencies achieved prior to the introduction of an integrated network would be retained by an operator, as the new bid payments after the integrated network introduction would be on an incremental basis. The wording in the contract is not clear on this point, and BCA need to ensure that the stated practice is binding.
The issue that arose with the calculation of the change payments as a result of an integrated network was whether or not the Ministry would apply the threshold to the calculation. The contract is not clear on this point and the Ministry agreed to provide further comment.
When determining whether or not under a transitional phase finance review a change was enough material to invoke a reset of the model the Ministry would take into account the risk profile of the operator. BCA will seek clarification of this issue but the interpretation by the audience was that cost and operational efficiencies gained by operators prior to the financial review and/or a new networks, will remain with the operators. BCA will seek a clarification of this issue.
The Ministry agreed that on cost were part of the labour reconciliation payment and that when calculating the back pay it was appropriate to simply add the percentage increases to the wages of each driver. The Bus reform Allowance although it is expressed as an allowance under the Bus award is treated as part of the base rate for overtime calculations.
When there are legislative changes that impact on the bus industry then the no net loss net gain provisions apply. When there is an industry wide change such as an increase in the 'F' factor for work cover then there would be no net loss net gain provision. BCA will continue to pursue how no net loss no net gain provisions apply.
No decision had been made yet on the duress alarms but that would be factored into new contracts. If the no net loss net gain applied to these payments would the threshold apply?
The Ministry indicated that even though the government has been responsible for delaying the provision of new ticketing equipment this risk and cost has to be met by the operators, and applied to the impact on revenue protection measures.
More work needed to be done on establishing the procedure and triggers for change events, and how these relate to various thresholds.
The O/MBSC defined the calendar year as January to December for the purposes of defining the term of the contract but treated the financial year, July to June, as the period for financial payments and indexation.
MoT agreed to take on notice BCA's question about the impact of indexing patronage payment by CPI, rather than the cost index.