Australian and British Experiences with Competitive Tendering In Rail Operations

Abstract

Governments typically underwrite public transport, but that funding is significant and growing. Drawing in private-sector expertise, by privatising the services typically does not eliminate the need for public funding; in any case, such support requires probity rules. Periodic competitions can be undertaken to award the right to provide the service, in return for subsidy or premium payment. Competitive tendering (or “franchising”) in transport dates back to principles espoused by Chadwick in the 1850s and later by Demsetz. The conduct of the tendering competition is central to a successful outcome of franchising. Exclusive rights set out the franchisee’s responsibilities and risk transfer, in return for which a premium is paid to government or a subsidy is received. This model has been widely applied in transport in the last two decades, with varying degrees of success. The paper reviews experiences from tendering competitions in Britain and Australia. Contracting is not costless and should be applied only where value-for-money and probity gains can be identified. Attempting to transfer revenue risk makes it difficult to choose the most efficient operator and to enforce the contract, compromises underlying public interest requirements and discredits the model.