Managing the Performance of Rail Franchisees

Tabled: 7 December 2016

1 Audit context

Efficient and reliable public transport is critical for the state's economic prosperity and liveability. In Victoria, metropolitan trains and trams have been run by private operators since 1999, operating under various franchise agreements with the state government.

Operating train and tram services through franchise agreements introduces risks for the state—private operators may not deliver the best possible performance and value for money.

As the agency responsible for managing the franchise agreements, Public Transport Victoria (PTV) is also responsible for managing this risk. It has a central role in monitoring the performance of franchisees and driving improvements in the way they operate. PTV is also responsible for making sure that franchisees satisfactorily use and maintain the train and tram assets that they lease from the state.

1.1 Train and tram franchise agreements

The current train and tram franchise agreements—known as MR3—were established in 2009 through a competitive tender process. This was the third time that franchise agreements had been put in place for Melbourne's train and train services.

Figure 1A summarises the history of the franchise agreements for Victoria's train and tram services.

Figure 1A

Phases of Victorian metropolitan rail franchising

Phases of Victorian metropolitan rail franchising

Source: VAGO, based on information from PTV.

Under MR3, the former Department of Transport appointed:

  • Metro Trains Melbourne (MTM) as the train franchisee
  • Keolis Downer Rail, trading as Yarra Trams, as the tram franchisee.

Both agreements were for an initial term of eight years, and expire in November 2017. Regional train services (V/Line) are not part of these agreements.

When PTV was established in April 2012, it took responsibility for these franchise agreements. Figure 1B shows the various parties involved in the agreements and Figure 1C explains the contractual arrangements.

Figure 1B

MR3 contractual framework

MR3 contractual framework

Source: VAGO, based on information from PTV.

Figure 1C

Summary of MR3 contractual arrangements

Agreement

Summary

Franchise agreement

The franchise agreement details the obligations for service delivery, network development and service planning, rolling stock, payments and variations, operational incentives, enforcement and how the franchise will be re-tendered.

Infrastructure lease

Victorian Rail Track (VicTrack) owns the state's rail assets and leases them to PTV under an overarching infrastructure lease, known as a headlease. PTV then subleases the assets to the franchisees under individual infrastructure leases. The franchisees are obligated to manage, maintain, repair and replace the assets, which include track, signals, stations, land and information systems.

Rolling stock lease

Rolling Stock Holdings (a subsidiary of VicTrack) owns the majority of Victoria's rolling stock. It leases rolling stock to PTV under an overarching lease. PTV then subleases the rolling stock to the franchisees under individual rolling stock leases.

Projects agreement

The projects agreement establishes a consultative process for the state and franchisees to work together to plan, develop and deliver projects.

Telecommunications service agreement

VicTrack owns the state's transport telecommunications network. VicTrack provides managed telecommunication services to the franchisees through this infrastructure under these agreements.

Inter-operator agreements

Inter-operator agreements specify how franchisees and other operators (such as V/Line) are required to work together.

Source: VAGO, based on information from PTV.

1.2 Train and tram performance under the current franchise agreements

To manage the performance of the train and tram franchisees, PTV uses:

  • publicly reported punctuality and reliability performance
  • an operational performance regime (OPR), with associated incentive and penalty payments
  • a customer experience performance regime (CEPR).

The MR3 agreements specify minimum service standards for punctuality and reliability—known as thresholds—which are not performance targets.

Under the OPR, PTV determines incentive and penalty payments by measuring the impact of an individual service delay or cancellation on passengers. This is a different measure to the publicly reported figures, which reflect whether trains and trams run on time. Appendix C outlines the OPR in more detail.

1.2.1 Train performance

In general, MTM has stabilised and improved train performance under the current agreement. Figure 1D shows that performance has significantly improved—it has exceeded the punctuality threshold—87 per cent—since late 2011 and has met or exceeded the reliability threshold since 2009 (the entire period of the agreement).

Figure 1D

Trains quarterly punctuality and reliability, December 2009 to June 2016

Trains quarterly punctuality and reliability, December 2009 to June 2016

Note: The December 2009 quarter covers only one month of operations.

Source: VAGO, based on information from PTV published in Track Record.

PTV attributes improvements in train punctuality to more state investment in network upgrades, new rolling stock, franchisee performance initiatives and stable patronage growth.

The satisfaction of train customers is measured by a quarterly phone survey. As shown in Figure 1E, customer satisfaction has improved under the current agreement and has met the performance targets that were determined when the agreement was negotiated.

Figure 1E

Train customer satisfaction monitor results (phone survey), March 2010 to June 2016

Train customer satisfaction monitor results (phone survey), March 2010 to June 2016

Note: Under the current agreement, the train franchisee was required to achieve and maintain customer satisfaction index of at least 70 by 1 December 2014 and 80 per cent by 1 December 2018.

Source: VAGO, based on information from PTV.

The train franchisee is eligible for incentive payments and may incur penalties under the OPR and CEPR. Under the OPR, MTM received $28.6 million in total (comprising incentive payments less penalties) between December 2009 and June 2016. Under the CEPR, MTM received $1.3 million in incentive payments and had not incurred any penalties at the time of the audit.

1.2.2 Tram performance

Under the current agreements, tram performance has been steady and above the service thresholds—98 per cent for reliability and 77 per cent for punctuality—as shown in Figure 1F.

Figure 1F

Trams quarterly punctuality and reliability, December 2009 to June 2016

Trams quarterly punctuality and reliability, December 2009 to June 2016

Note: The December 2009 quarter covers only one month of operations.

Source: VAGO, based on information from PTV published in Track Record.

PTV attributes improvements in tram punctuality to state initiatives, such as new timetables, and franchisee initiatives to improve communication and efficiency. Tram reliability and punctuality is affected by hot weather and the special events held from January to March. The introduction of the free tram zone in Melbourne's central business district in January 2015 resulted in a decrease in performance due to increased patronage. Tram performance is also increasingly affected by road traffic congestion.

The satisfaction of tram customers is measured by a quarterly phone survey. As shown in Figure 1G, customer satisfaction has improved under the current agreement and has met the performance targets that were determined when the agreement was negotiated.

Figure 1G

Tram customer satisfaction monitor results (phone survey), March 2010 to June 2016

Tram customer satisfaction monitor results (phone survey), March 2010 to June 2016

Source: VAGO, based on information from Public Transport Victoria.

The tram franchisee is eligible for incentive payments and may incur penalties under the OPR and CEPR. Under the OPR, Yarra Trams was penalised $4.7 million in total for the period December 2009 to 30 June 2016. Under the CEPR, Yarra Trams received $2.2 million in incentive payments and has not incurred any penalties to date.

1.3 Patronage

Increasing numbers of passengers also affects the operational performance of trains and trams. When more passengers are on board a tram or train, it must stop for longer—known as dwell time—to allow passengers to board or exit.

From 2006 to 2008, the number of train passengers grew by 12 per cent annually, which had a negative impact on punctuality. Since 2009, the number of passengers has stabilised, which has helped to improve operational performance under MR3.

PTV forecasts that passenger numbers will grow by 3.3 per cent annually for trains and 3.8 per cent annually for trams, from 2015 to 2021. This increased patronage, and the major construction projects planned during this period, will present operational challenges for the franchisees.

1.4 Payments to the franchisees

Since 2009, the state has paid over $7.6 billion to the franchisees to run Victoria's train and tram networks—$5.4 billion to MTM and $2.2 billion to Yarra Trams, up to 30 June 2016. These payments cover a range of services and activities, summarised in Figure 1H and do not include the payments for rolling stock lease amounts made by the franchisees on behalf of the state.

Figure 1H

Summary of franchise payment types

Summary of franchise payment types

Source: PTV.

The service fee for running the networks (base contract and maintenance, in Figure 1H) and a share of the revenue from metropolitan ticket sales make up the major part of payments to the franchisees. The franchisees carry the risk that their running costs might exceed the combined service fee and share of ticket revenue.

Until 2014, the state guaranteed ticket revenue due to uncertainties with the implementation of the myki ticketing system. From 2014 onwards, franchisees have been exposed to the risk of variable ticket revenue. This risk is mitigated through periodic resetting of franchisee forecasts of ticket revenue to align with actual revenue, and having a risk-sharing regime that sets an upper and lower limit on the amount of risk the franchisee would bear. Figures 1I and 1J include the actual ticket revenue and risk mitigation payments after January 2014. However, PTV does not include actual ticket revenue in its public reporting in Track Record.

Figure 1I

Payments to MTM, December 2009 to June 2016

Payments to MTM, December 2009 to June 2016

Note: 2009–10 only includes the period December 2009 to June 2010.

Note: Excludes rolling stock lease payments.

Source: VAGO, based on information from PTV.

Figure 1J

Payments to Yarra Trams, December 2009 to June 2016

Payments to Yarra Trams, December 2009 to June 2016

Note: 2009–10 only includes the period December 2009 to June 2010.

Note: Excludes rolling stock lease payments.

Source: VAGO, based on information from PTV.

Separate to these payments, franchisees can earn commercial revenue from advertising and renting out surplus land or buildings. Franchisees also receive payments for their involvement in projects beyond their project agreements with PTV—for example, the level crossing removal program. The scope of this audit did not cover these project agreements.

1.5 Managing train and tram assets

Victoria's public transport assets were valued at $29.8 billion at 30 June 2016, according to VicTrack's annual report for 2015–16. This estimate includes tracks, stations, bridges, buildings, structures, plant and equipment, signalling and communications, land and the Melbourne Underground Rail Loop.

Asset management involves managing all of the activities carried out throughout the life of the asset, including maintenance and renewal, to make sure that it delivers its full value and contributes to the service objective.

Managing Victoria's train and tram assets is complex because of the range of agencies involved—the assets are owned by VicTrack, leased to PTV, and then subleased to the franchisees. Figure 1K describes the roles and responsibilities of these agencies for maintaining and renewing Victoria's train and tram assets under MR3.

Figure 1K

Summary of maintenance and renewal responsibilities in MR3

Agency

Key responsibilities

Franchisees

  • Ensure infrastructure is always in a condition that allows the network to operate safely.
  • Maintain the functionality and capacity of the network.
  • Undertake a predetermined number of renewals specified in the franchise agreement. The train franchisee introduced a renewals prioritisation tool in 2014 that removes this requirement and allows them to determine which renewals will be undertaken based on a range of factors, with the goal of achieving the best outcome for the network.
  • Undertake maintenance and renewal work in accordance with agreed asset management plans and annual works plans.
  • Submit reports on maintenance and renewal key performance indicators and completed work to PTV.

PTV

  • Manage all maintenance and renewal aspects of the franchise agreements and ensure franchisees comply with them. This includes assessing and approving franchisees' asset management plans and annual works plans.
  • Ensure a sound asset management framework is in place to guide franchisees' maintenance and renewal work.
  • Pay franchisees for maintenance and renewal work according to the franchise agreements.
  • Maintain sound knowledge of asset condition by collecting relevant data and information.

Department of Economic Development, Jobs, Transport & Resources

  • Implement the state's policy objectives and frameworks for managing transport assets and infrastructure.

Source: VAGO.

The train and tram network is a significant asset for the state, so it warrants rigorous oversight and management by PTV to make sure that the assets enable the delivery of effective and efficient public transport.

1.6 Extending train and tram franchise agreements

MR3 includes a provision for the current franchisees to negotiate exclusively with the state for a seven-year extension if they meet certain performance benchmarks.

PTV has determined that both MTM and Yarra Trams have met the performance benchmarks specified in the agreements, enabling them to negotiate a new franchise agreement, which will be known as MR4. If these negotiations fail, the state could extend the agreement at a fixed price for up to three years, while it undertakes a tender process for new franchisees.

In preparation for these MR4 negotiations, PTV has undertaken a project to examine the strengths and weaknesses of the current agreements and identify opportunities to improve value for money in future franchise agreements.

1.7 Agency responsibilities

Public Transport Victoria

PTV was established in April 2012. Its primary objective is to plan, coordinate, provide, and maintain a safe, punctual, reliable and clean public transport system. PTV oversees all aspects of the franchisees' day-to-day operation of the train and tram networks, including performance requirements.

Department of Economic Development, Jobs, Transport & Resources

The former Department of Transport, which initiated the MR3 franchise agreements, was disbanded in 2013 and its functions were distributed between the now Transport Division of the now Department of Economic Development, Jobs, Transport & Resources (DEDJTR) and PTV.

DEDJTR is responsible for the state's transport and infrastructure policy and planning. It is overseeing the negotiations of new franchise agreements, and the secretary of DEDJTR is chairing the primary governance body for this project.

In June 2016, the Victorian Government announced the creation of Transport for Victoria (TFV). This new agency will plan, coordinate and operate Victoria's transport systems and associated agencies.

TFV will sit within DEDJTR and have overarching responsibility for the transport portfolio. Under this arrangement, PTV will remain as the agency responsible for managing and administering the train and tram franchise agreements.

VicTrack

Created in 1997, VicTrack is a state-owned business operating under the Transport Integration Act 2010. It owns Victoria's railway land, infrastructure and assets. Through a subsidiary (the Rolling Stock Holdings group of companies), it also owns much of the state's rolling stock. VicTrack also has a role in providing telecommunications services to franchisees.

1.8 Previous VAGO audits

Since the 1990s, we have regularly scrutinised Melbourne's public transport operations. We have conducted audits examining various aspects of the train and tram system, including franchising arrangements, financial performance, asset management and operational performance. A summary of these audits and their findings is provided in Appendix B.

1.9 What this audit examined and how

We examined PTV's effectiveness in managing the performance of Melbourne's metropolitan train and tram franchisees, by assessing whether:

  • PTV's management of the franchise agreements is delivering value for money
  • PTV's strategic planning for the extension of the franchise agreements is rigorous and designed to produce value for money.

Achieving value for money in tram and train services involves consideration of a wide range of factors and is not only a financial question. We focused on contract management, oversight of franchisee operational performance, and asset management and whether they contributed to value for money.

The agencies included in this audit were:

  • PTV
  • DEDJTR
  • VicTrack.

We conducted the audit in accordance with section 15 of the Audit Act 1994 and the Australian Auditing and Assurance Standards.

The total cost of the audit was $555 000.

1.10 Report structure

The report is structured as follows:

  • Part 2 examines contract and performance management
  • Part 3 examines how PTV oversees the management of the state's rail assets
  • Part 4 examines how well PTV is preparing for negotiations with the franchisees for the next franchise agreements.

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