Summary of Experiences in the Introduction of Contracting with the Private Sector ◼ ◼ ◼ Rail Restructuring in Buenos Aires Design-Build-Operate-Maintain Procurement of Tren Urbanoin San Juan, Puerto Rico Massachusetts Bay Transit Authority (MBTA) Rail Restructuring in Buenos Aires ◼ Context ◼ ◼ ◼ ◼ ◼ ◼ ◼ Massive commuter rail system including broad, narrow, and normal gauge, electric and diesel commuter rail lines, managed badly by the Federal government, and a modest rapid transit system managed reasonably by the city. Massive fare evasion Excess labor and extensive "no-show" jobs inadequate maintenance, disinvestment No investment occurring Strong labor unions System close to collapse Rail Restructuring in Buenos Aires ◼ Approach ◼ ◼ ◼ ◼ ◼ ◼ Break the system into 7 lines to be bid out as separate packages Recognize requirement to keep track, vehicle maintenance, and operation in one unified contract. Public sector owns facilities, sets fares, schedules, reinvestment required. Contractor keeps fare revenue to provide incentive Ten-year concession duration (except subway = 20 years) Recognize need to continue subsidy at least at constant level, on-time payment essential Rail Restructuring in Buenos Aires ◼ Approach (cont’d) ◼ ◼ ◼ ◼ ◼ ◼ basis of award: lowest subsidy request No one company allowed to win all contracts, to retain competitive environment Recognize the need to aggressively market the contract opportunity, to develop international field of bidders Public sector needs to integrate the system physically, organize a unified fare system, plan for the future World Bank funded "buy-out" of excess labor Labor union support courted and secured Rail Restructuring in Buenos Aires ◼ Results, very short-term ◼ ◼ Process of marketing the opportunity, preparing bidding documents, issuing request for proposals, evaluations, rejecting unqualified bidders, fighting legal challenges by unhappy bidders, to the point of award of contracts and mobilization took over two years, during which time the old organization became totally demoralized and service and maintenance degraded further. Successful bidders then claimed that condition of assets had deteriorated from the time of initial inspection and bid, so they sought financial relief. Service quality degraded further and ridership fell. Rail Restructuring in Buenos Aires ◼ Results, one year after transition: ◼ ◼ ◼ ◼ Dramatic success. Quality improved, fare evasion ended, ridership up 30%. Reinvestment led to visible improvement in quality. Government, to the surprise of all, paid its bills on time. Tremendously talented and committed management and control staff. Some adversarial nature to monitoring of contracts. Rail Restructuring in Buenos Aires ◼ Results, five years after transition ◼ ◼ ◼ ◼ ◼ ◼ ◼ At least one of the four concessionaires performing substantially poorly. Persistent non-cooperation with government on unified fare system, in spite of contractual requirements to cooperate. Substantial political lobbying by concessionaires to change terms of contract. Quantity and quality of regulatory control staff eroded Government begins to not pay monthly subsidy. Non-competitive "re-negotiation" of concessions to extend duration in exchange for added investment. Cost minimization strategies driving out quality improvements Lessons Learned ◼ ◼ ◼ ◼ ◼ Transition problems are substantial Support or at least acceptance by labor unions very important Extremely competent, honest public sector management and oversight capacity essential Requirements for reliable public subsidy essential to attract competitive private sector interest Substantial improvement achieved, but from a bad, crisis situation. Lessons Learned (Cont’d) ◼ ◼ ◼ ◼ ◼ Political advocacy of private companies makes management and regulation difficult. Illusion and excessive rhetoric about privatization makes it difficult to attract and retain competent public sector management and maintain political support for regulatory functions and public subsidy Fare retention by concessionaires deprives public sector of important flow of management information Interfaces between private companies extremely difficult to manage and integrate, despite explicit contract language. The private concessions succeeded in rescuing a system that (bad) public management was about to destroy, and which had not been possible to turn around. Design-Build-Operate-Maintain Procurement of Tren Urbanoin San Juan, Puerto Rico: Context ◼ ◼ ◼ ◼ ◼ ◼ Long-standing frustration with total absence of quality public transportation or rail service Growing automobile congestion, degrading quality and increasing cost of bus services Highly-talented political leadership committed to creating a rail system Absence of local technical expertise Tradition of bad, non-consumer-oriented public management of public enterprises Availability of public funding to finance and subsidize operation of a Metro Design-Build-Operate-Maintain Procurement of Tren Urbanoin San Juan, Puerto Rico: Approach ◼ ◼ ◼ Require one system provider and operator to take responsibility for vehicles, signals, power, track, yards, and shops, and operation and maintenance for ten years. Retain public sector control of schedules and fares, and retention of fare revenue. Allow private operator to receive 50% of fare revenue above initial prediction, to provide incentive but low risk. Design-Build-Operate-Maintain Procurement of Tren Urbanoin San Juan, Puerto Rico: Approach (Cont’d) ◼ ◼ ◼ Demonstrate clear government capacity and willingness to invest in capital and pay operating and maintenance subsidy. Organize aggressive outreach and marketing of the business opportunity to private sector, internationally. Use separate contractors for specialized tunnel construction, and relatively small segments to encourage local participation in construction, with public sector responsible for integration of interfaces, with support of systems and operations contractor Design-Build-Operate-Maintain Procurement of Tren Urbanoin San Juan, Puerto Rico: Short-term Results ◼ ◼ ◼ ◼ ◼ ◼ Substantial success at getting Metro underway in less time than normal. System approximately 80% constructed, with cost overruns and schedule slippage at similar level as traditional procurement. Great success at integrating operations perspective into the process. Great difficulty managing interfaces, with claims-oriented contractor behavior and "extortionate" behavior by at least one major contractor creating delay to gain leverage over government. Requirement for strong public oversight of construction process. Rhetoric of privatization a constant problem with contractors seeking to evade clear requirements of contract. Substantial weakness in private sector capacity to integrate civil and system work. Design-Build-Operate-Maintain Procurement of Tren Urbanoin San Juan, Puerto Rico: Prediction of Long-term Results ◼ ◼ ◼ ◼ High-quality transit service with multi-year management philosophy providing better service than possible with traditional one-year public management model. Reasonable cost, quality, and schedule performance, comparable or superior to traditional method. Need to develop stronger public sector oversight capacity for public transit. Expect re-written history with excessive claims of success by private companies. Lessons Learned ◼ ◼ ◼ ◼ ◼ ◼ ◼ Great strategic advantage over traditional method in ability to get moving more quickly, make course corrections. Great need for competent management in public sector. Interface control, extortionate behavior a constant problem. Multi-year operator and maintenance philosophy within system group very valuable. No free lunch. Stable reliable payment of investment and subsidy by public sector essential. Constant risk that excessive rhetoric of privatization may lead to under funding of public oversight and under funding of subsidy requirements. Transition problems at end of ten-year contract still uncharted territory. Massachusetts Bay Transit Authority (MBTA) Commuter Rail ◼ 1975 context ◼ ◼ ◼ ◼ Long-term worsening of service on private monopoly commuter rail services, operating on one-year subsidy contracts strong policy desire to improve service strong union environment Monopoly Massachusetts Bay Transit Authority (MBTA) Commuter Rail ◼ Approach ◼ ◼ ◼ ◼ ◼ ◼ Purchase of track and vehicles by public authority Residual right-to-operate cargo service remained with private railroad Major public investment in track and new vehicles Contract to operate and maintain rail service back to original private entity with power to re-bid after five years Fare collection by public authority Fare policy and schedule set by public authority MBTA Commuter Rail (Cont’d) ◼ Results: initial ◼ ◼ ◼ Positive: improved service, ridership, stability of cost, multi-year management Crisis with Conrail proposed cost increase, resolution by changing contractor to B&M, showed value of competition in avoiding extortionate costs. Results: Longer term ◼ ◼ ◼ ◼ ◼ 1988-89 change in B&M management philosophy, labor disputes, degradation of service. Re-bid with poor market response Amtrak contract: better than new B&M but less good than original. 1999 re-bid vehicle maintenance attempt failed because of labor, political opposition Operating contract future uncertain MBTA Commuter Rail (Cont’d) Lessons Learned ◼ ◼ ◼ ◼ ◼ ◼ ◼ ◼ Inherent benefits of long-term contract. Value of competition undermined by lack of competitive private providers. Stable labor relations important. Transitions extremely difficult for customers, labor. Political problems in managing contract. Labor relations central to success. Great importance of on-time payment by public sector. Overall: ◼ ◼ ◼ far better than crisis of 1975 Management challenge Cost increases, but quality increases more Competition in Suburban MBTA Bus Services ◼ 1983 context ◼ ◼ ◼ ◼ Approach ◼ ◼ ◼ ◼ ◼ Marginal private operators with franchises Need for subsidy Availability of limited competitive providers in the market de facto sole-source contracting Contract management key Service contract including fare collection Gradual shift to real competition Results --immediate ◼ Positive: --service stabilized and expanded Sole Source (or No Bid) Contract ◼ ◼ ◼ ◼ A sole source contract is one awarded usually, but not always, by a government after soliciting and negotiating with only one firm. They can be negotiated much more quickly than a typical competitive contract but they are often fraught with suspicion that the company used illegal or immoral means to exclude competitors. U.S. law permits the government to award sole source contracts under specified circumstances Illegal under European Union commissioning law. Competition in Suburban MBTA Bus Services ◼ Results --long-term ◼ ◼ ◼ ◼ ◼ ◼ 1992 efforts to contract out publicly operated, high-quality service failed Labor opposition Customer concerns Electoral activities by unions (1994, 1996, 1998) Overall outcome worse than if never attempted Lessons learned ◼ ◼ ◼ ◼ Quality of service key Labor relations central Availability of private capacity key Cost increases, but quality also MBTA: Paratransit Service, 1984-2000 ◼ Context ◼ ◼ ◼ ◼ ◼ Private non-profit contractor Limited service area Inadequate management structure for expanded service rowing service quality problems Approach ◼ ◼ Competitively bid service, open to private providers Fare, service policy set by public subsidy required. Basis of competition combination of management capacity and minimal subsidy requirements. MBTA: Paratransit Service, 1984-2000 ◼ Initial results ◼ ◼ ◼ ◼ Extremely disrupted service during transition Need to further re-bid service Eventual reasonable service quality with second private contractor Long-Term Results ◼ ◼ ◼ ◼ Expanded service area Reasonable quality Growing cost Extreme disinclination to re-bid because transitions painful Lessons Learned Overall ◼ ◼ ◼ ◼ ◼ ◼ Private contracting can be a successful strategy to turn around a bad situation expeditiously. Transition problems are high, and requirements for honest, competent public sector management and oversight are very high. No substitute for reliable public funding of investment and subsidy. Support of labor unions key. Complex interfaces among contractors very difficult to manage. Multi-year management opportunity very useful. Societal Over time, management capability of strategic unit is likely to degrade from honest/competent to bureaucratic or incompetent, and sooner or later, corruption will become a problem with either the agency or government Contracting with Private Providers by the Public Transportation Industry ◼ ◼ ◼ ◼ ◼ ◼ Organizational Schemes Types of Transit Contracts Contract Economics Contracting Issues and Practices Contract Structure and Management Case Studies Primary Organizational Schemes in the U.S. ◼ Standard Public Ownership & Operations ◼ ◼ ◼ ◼ Simplest structure Theoretically has maximum accountability and control Political and labor issues may introduce inefficiencies Innovation often tied to individual skills and future ambitions Primary Organizational Schemes in the U.S. ◼ Contract Management ◼ ◼ ◼ ◼ ◼ Mostly in smaller areas Provides expertise and/or experience via a manager or team who are not available locally 3-5 year contract duration typical—usually fixed fee Employees either public employees or hired by a locally-incorporated private entity Implementation can be flawed; few incentives for private managers; very similar to first model Primary Organizational Schemes in the U.S. ◼ Service Contracting ◼ ◼ ◼ ◼ Various components of service can be contracted out Provision of actual bus or paratransit service most common Vehicles and equipment may or may not be included in contractor-provided services Objectives of public agencies key to determining type of procurement and contract Services Typically Contracted ◼ Ancillary or support services: cleaning, advertising, real estate, etc. ◼ ◼ relatively straightforward and easy to define & administer Maintenance of way and vehicles ◼ ◼ ◼ limited examples in U.S. (Virginia) labor issues can be tricky more examples in the private sector Services Typically Contracted (Cont’d) ◼ Fixed route bus and rail services ◼ ◼ ◼ ◼ limited examples but increasing—Denver, Dallas, Southern California, San Juan, D.C. suburban services generally has been proposed to reduce costs and/or to provide new services since market is relatively small, # of bidders usually low rail market just starting—quality of service seems to be the emphasis here Services Typically Contracted (Cont’d) ◼ Paratransit (i.e., demand-responsive) services ◼ ◼ ◼ ◼ contracting much more prevalent here with a range of outcomes small portion of public agency budget often consumes a disproportionate amount of management attention and public scrutiny transition difficulties are frequent, especially in areas with only one provider technology plays an important role Contract Economics: Basic Principles ◼ Deals with situation of asymmetric information: ◼ ◼ ◼ important information available to only one of parties important information cannot be independently verified Basic question: how can the party (the principal) with limited information: ◼ ◼ create a mechanism (contract) and behave, such that a party (the agent) with desired traits: ◼ ◼ wants to enter into the contract and then wants to behave as desired by the principal Difficulties in Applying Contract Economics ◼ Complexity of agent's task is great, simple incentives are risky ◼ ◼ ◼ ◼ ◼ ◼ The principal may have difficulty utility function A great deal of information is required of both parties Outcomes generally are not under the agent's control Resulting contracts may be unfeasibly complex The more possible actions, possible outcomes, and uncertainty between the action and the outcome, the more difficult the problem. There are limits to contract complexity in practice --they are difficult and costly to design and enforce. Applications to Transit Service Contracting ◼ Traditional approaches to contract design: ◼ ◼ ◼ ◼ identify desirable performance by contractor define measures for performance devise incentives/penalties based on measures Obstacles to applying contract economics: ◼ ◼ ◼ agency has multiple objectives for contracting contractors have a great range of actions to choose from contractors also have multiple objectives Two Types of Service Contracts ◼ “Cost Plus”(~ 20%) ◼ ◼ ◼ ◼ provider is reimbursed for all costs (usually up to a “ceiling”) plus a negotiated profit contractor generally cannot suffer a loss thought to provide little inducement to keep costs low often associated with quality of service objective Two Types of Service Contracts ◼ “Fixed Price”(~ 80%) ◼ ~ 60% based on service provided (vehicle hours or miles) ◼ ◼ ◼ ◼ ◼ ◼ revenue versus non-revenue can result in less emphasis on quality ~ 20% based on service consumed (passenger trips or miles) short trips versus long trips measurement becomes a critical item shifts much more risk to contractor and various mechanisms have been used to reduce this risk ◼ ◼ “floors” on service or passenger units combination of fixed and variable payments Fundamental Contracting Issues ◼ ◼ ◼ ◼ ◼ ◼ ◼ ◼ ◼ Maximize competition Understand the potential contractors Consider risk premiums Consider implications of fixed and variable costs Performance standards, incentives, and penalties Be concerned with misallocation of resources Compensation provisions (startup costs and cash flow) Provision of equipment and facilities Contract length US Transit Agency Contracting Practices ◼ ◼ ◼ ◼ ◼ ◼ Contracting is growing, but still small share of all service (10-15%) Increasing use of competitive selection processes Structuring bids to minimize contractor's risk can increase competition Incentives and penalties are often included in contracts, but enforced much less frequently Contract extension/renewal a common implicit incentive Impact on reputation is a major factor Specific Issues in US Contract Structure ◼ ◼ ◼ ◼ ◼ ◼ Contractor power to change the contract after it is in place Competition (multiple operators) Size and complexity of contract Compensation (minimize risk) Enforcement of incentives and penalties Contract management Contract Management /Contractual Relationships ◼ ◼ ◼ ◼ Key to success is competent management on both sides Mutual respect and fair dealings most important aspects of relationship Regular reporting by contractor, thorough review by agency necessary Hands-on, frequent interaction reduces “games” Contract Management /Contractual Relationships ◼ ◼ ◼ Incentives more important than penalties except in extreme cases Reputation/recommendation more important than minor financial incentives “Cost-plus” form of contract with revenue/cost savings sharing may be cheapest in the long run Cost-plus contract ◼ A contract framed in such a way that when the contractor finishes the agreed-upon work, they receive compensation equal to their expenses plus some bonus (which can be either a fixed amount or proportional to the expenses). Even if the contractor suffers cost overruns, they will still receive full compensation plus their expected profit. There is little or no direct financial incentive to minimize costs, since the contractor will always be fully reimbursed (plus profit) upon contract completion. This is in contrast to a fixed-price contract.
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