Tendering of Metropolitan Bus Contracts

Tabled: 6 May 2015

Audit Summary

Buses are a significant form of public transport, providing cross-town transport, local services and links to the rail network. They are often the only readily accessible form of public transport available for people living in Melbourne's middle and outer suburbs.

Public Transport Victoria (PTV) oversees public transport operators. It is responsible for managing all bus service contracts, which currently cost the state around $1 billion per year.

Melbourne's bus network is extensive—it consists of more than 300 routes covering over 5 500 kilometres, and is serviced by approximately 1 700 buses. These services are delivered by 12 private operators comprising of:

  • 27 contracts with 11 operators, renegotiated in 2008 with longstanding incumbent providers. These contracts, which expire in 2018, cover around 70 per cent of metropolitan bus services, are largely fee-for-service, and contain minimal performance incentives and penalties.
  • A new contract established in 2013 through an open competitive tender with a single operator covering around 30 per cent of services. This contract, known as the Melbourne Metropolitan Bus Franchise (MMBF) agreement, differs from the other arrangements as it contains a suite of performance incentives designed to improve bus services, patronage growth and customer satisfaction. The contract, worth around $1.7 billion, expires in 2023.

PTV leveraged competitive tension in the market when establishing MMBF, expecting this would result in a better service for customers at a reduced cost to the state. A related aim of this approach was to eventually extend this reform to all metropolitan bus services by using MMBF to assess the savings possible through increased competition, and to demonstrate the benefits of a performance-based contract.

The previous government approved the use of an open tender for establishing the MMBF agreement in September 2011. In so doing, it determined that the MMBF agreement would be considered as having achieved value if it:

  • reduced costs for the state
  • delivered improved services for more customers
  • progressed reform of the wider bus industry.
Objectives of this audit

This audit examined whether the state has effectively secured value for money from the MMBF. It assessed the planning and conduct of the MMBF tender, and PTV's management of the resulting contract. The audit also examined the state's progress in preparing to reform future metropolitan bus contracts.

Conclusions

The state has not yet secured full value for money from the MMBF despite achieving almost $33 million in cost savings.

While the project to establish the MMBF contract was based on sound planning and was run in accordance with Victorian Government Purchasing Board (VGPB) requirements, the contract's potential is not currently being realised due to PTV's failure to resolve longstanding issues impacting the implementation of the related performance regime.

PTV needs to urgently address the lack of reliable performance data, as it compromises its capacity to effectively manage the contract, and achieve the state's broader reform objectives.

The Department of Economic Development, Jobs, Transport and Resources (DEDJTR) and PTV's slow progress in preparing to reform the 27 private metropolitan bus contracts which are expiring in 2018 is of particular concern. Despite the scale and complexity of this exercise, and the significant opportunity cost to the state from failure, substantive planning to address these issues has only recently commenced.

Urgent and sustained action is required, to avoid limiting the state's procurement options in 2018, and compromising any opportunity to leverage better value from these services through increased competition.

Findings

Performance of the MMBF

Although the MMBF has been operating for over 18 months, it cannot yet be determined whether it is achieving all of its objectives and full value for money for the state.

MMBF expenditure for 2013–14 was almost $33 million, or 18 per cent, less than the amount PTV estimated it would have spent if the previous contracts had continued.

However, MMBF cost savings alone are not sufficient to demonstrate that value for money has been achieved as this relies on the contract also delivering improved services to more customers.

The MMBF contract establishes an incentive and penalty regime to drive achievement of the operator's service improvement obligations. Effective performance monitoring by PTV is therefore critical to ensure these obligations are met, and to realise the contract's full potential.

While the MMBF performance regime is conceptually sound, PTV has yet to effectively implement it. In particular, PTV has failed to:

  • reach a timely agreement with the operator on the standard for determining incentive payments for improvements in bus patronage
  • resolve longstanding data reliability issues impacting the operation of the performance regime by April 2015 when it was due to be fully implemented
  • withhold payments for instances of non-performance to encourage timely corrective action.

These circumstances are compromising achievement of the state's reform agenda, including PTV's capacity to reliably assess and manage the contractor's performance.

PTV recently advised that full implementation of the performance regime has been delayed.

PTV recognises that overcoming this issue is critical because it will otherwise not be able to implement the financial incentives and penalties that are due to begin after a total rebuild of the current bus timetable—known as the Greenfields timetable.

It has therefore proposed an alternative method for calculating service reliability and punctuality to the contractor, but this had not yet been implemented at the time of audit. However, we found that PTV's proposal is deficient as it relies heavily on self-reporting by the operator to determine the reliability of bus services. PTV did not have a plan or procedures in place to audit and verify the accuracy of this information.

Urgent action is required by PTV to address this issue as it risks compromising the integrity of the performance regime and of related incentive payments.

Reforming remaining bus contracts

Progressing broader reform of the remaining 27 bus service contracts will be a complex and challenging exercise for the state. These contracts do not contain any clear end-of-term rights for the state to run a competitive tender process for these services. The state's right to do so is a longstanding issue that is contested by some members of the industry. Any change in the delivery arrangements for these services will require extensive planning and lead time to assure the availability and transition of any critical assets and infrastructure.

Our 2009 audit, Melbourne's New Bus Contracts, recommended that the former Department of Transport provide early advice to government on the strategic options and constraints for future metropolitan bus contracts. While the department and PTV implemented this recommendation for the MMBF, it has not been addressed for the next tranche of bus contracts.

In July 2014, the former Department of Transport, Planning and Local Infrastructure and PTV established a joint working group that commenced initial planning for the next round of bus contract procurements. The working group commissioned initial research on bus structures in other jurisdictions and potential reform options.

An interdepartmental steering committee comprising PTV, DEDJTR, the Department of Treasury and Finance and the Department of Premier and Cabinet was also established in early 2015 to inform development of a procurement strategy for the government's consideration by August 2015.

However, progress on this initiative has been slow. Consequently, the risk is now high that a project of this significance, scale and complexity may not be effectively planned and delivered in the time remaining.

In turn, this also risks limiting the state's options in 2018. If delays mean insufficient time is left to pursue an open tender, the state may find that renegotiating with incumbent operators is the only option. This will likely compromise any immediate opportunity for the state to achieve improved value from these contracts.

Tendering the MMBF

The MMBF competitive tender process was guided by appropriate procurement principles and probity requirements, and resulted in a contract that is capable of delivering improved services and value to the state.

PTV's strategic planning for the MMBF procurement was clearly focused on producing a value for money outcome, but did not fully comply with required VGPB policies and guidance. In particular, PTV did not develop a business case or final strategic procurement plan for the MMBF. This created a risk that state decisions about the procurement were not soundly based, although our assessment of supporting documentation indicates that key costs, benefits, risks and options were adequately identified.

During tender assessment, PTV introduced the targeted improvement process—an additional assessment step that was not contemplated in the evaluation plan. Despite this, the process was managed in accordance with VGPB requirements, and assisted with optimising value from the bids and producing a value for money outcome for the state.

Managing the MMBF agreement

PTV's contract management policies and practices for the MMBF are inadequate and are further compromised by the above-noted deficiencies in performance monitoring. PTV does not have a complete contract management plan in place for the MMBF agreement. While routine tasks and processes are documented in a Contract Administration Manual and Process Administration Guides, they do not clarify where responsibility lies for specific tasks and key decisions—including for resolving complex or contentious issues, the approach for conducting regular contract reviews, and the related information management requirements.

This situation, combined with PTV's willingness to negotiate extensions to some contract deadlines rather than withhold payments or invoke penalties, risks reducing the value for money delivered by the contract and undermining achievement of the state's related reform objectives.

PTV advised that it has only waived the withholding of payments for some delayed initiatives which were offered by the contractor and formalised in the contract, but which have no impact on core services to customers. However, a key goal of introducing the performance-based MMBF contract was to create incentives to improve performance. While deadlines may need to be extended in some circumstances, the contract enables PTV to reasonably reduce payments in response, but it has never done so. This is inconsistent with the goals of the MMBF contract and the related reform agenda.

Additionally, PTV has not assessed the value for money implications of the contract variations that have so far been approved. This risks undermining MMBF's value, as it means there is little assurance that implemented variations support achievement of MMBF's objectives.

Recommendations

That Public Transport Victoria:

  1. promptly rectifies all barriers to implementing the Melbourne Metropolitan Bus Franchise performance regime, including data reliability issues
  2. documents and assesses the rationale for all decisions to waive the withholding of payments for non-performance
  3. closely monitors the delivery of key offer commitments and proactively addresses any slippage from contractual time lines
  4. systematically audits and verifies the reliability of performance data provided by the operator underpinning incentive payments.

That Public Transport Victoria and the Department of Economic Development, Jobs, Transport and Resources:

  1. advise government on all key risks, options and required actions for reforming the metropolitan bus contracts expiring in 2018
  2. develop a business case assessing the cost and benefits of alternative reform options and related strategies for all future bus service procurements in accordance with Victorian Government Purchasing Board guidance.

That Public Transport Victoria:

  1. separates the role of probity auditor and advisor on future procurements.

That Public Transport Victoria and the Department of Treasury and Finance:

  1. use the lessons from the Melbourne Metropolitan Bus Franchise's targeted improvement process to develop guidance on how it may be applied more broadly in future procurements.

That Public Transport Victoria:

  1. ensures that contract management processes are in place prior to commencement for any new service contracts
  2. establishes a contract management plan for the Melbourne Metropolitan Bus Franchise in accordance with Victorian Government Purchasing Board guidance
  3. establishes knowledge management and document control processes to ensure critical information and reasons for decisions are readily available to the necessary staff
  4. establishes a process for systematically monitoring and verifying the completion of required Melbourne Metropolitan Bus Franchise contract management tasks
  5. consistently enforces the terms of the Melbourne Metropolitan Bus Franchise agreement in accordance with the contract.

Submissions and comments received

We have professionally engaged with Public Transport Victoria, the Department of Economic Development, Jobs, Transport and Resources and the Department of Treasury and Finance throughout the course of the audit. In accordance with section 16(3) of the Audit Act 1994 we provided a copy of this report to those agencies and requested their submissions or comments.

We have considered those views in reaching our audit conclusions and have represented them to the extent relevant and warranted. Their full section 16(3) submissions and comments are included in Appendix A.

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