ECMT Workshop on Competitive Tendering of Rail Passenger Services: Experience to Date Paris, France, January 12, 2006

COMPETITIVE TENDERING OF REGIONAL AND INTERREGIONAL RAIL SERVICES IN

Gunnar Alexandersson and Staffan Hultén

Stockholm School of Economics The Process of Swedish Railway Reforms

„ Vertical separation of Swedish State Railways’ (SJ) track infrastructure department (forming Banverket in 1988-89) from other parts of the business administration SJ „ Decentralisation of regional services to County Authorities (CPTAs); perform their first tenders in 1989 „ Decision to introduce tendering also in the state’s procurement of interregional passenger services; takes effect in 1992 „ Decision to deregulate all railway services from 1995; reversed after shift in Parliament „ Decision to deregulate railway freight services in 1996 and transfer more functions to Banverket. Extended possibilities for CPTAs to tender interregional services „ Transport Policy Decision in 1998, transferring even more functions to Banverket and aiming at improved conditions for neutral competition „ Separation and corporatisation of SJ from 2001, introducing competition in the vertical chain (rolling stock maintenance, cleaning and other supporting functions and services) „ Establishment of the Swedish Rail Agency and the creation of a new Railway Law in 2004 The Separation of the Business Administration SJ 1988-2001

Business Administration SJ

Jernhusen Banverket SJ Ltd

Royal Viking Hotel Green Cargo

Scandlines EuroMaint ASG

Traffic Restaurants Swebus SweMaint

TraffiCare

1988 19951996 2000 2001 Unigrid The Railway System in 2005: Key Actors

„ Banverket „ Jernhusen „ Swedish Rail Agency „ The CPTAs and Rikstrafiken „ Transitio and ASJ „ Euromaint and TraffiCare „ Passenger Train Operators SJ Ltd: 74% „ Long-distance: 88% „ Short-distance: 54% Others: 26% (Connex, Keolis, Tågkompaniet etc.) „ Freight Train Operators Green Cargo: 74% „ The State The Regulatory Structure of The Swedish Railway Sector in 1988 and 2005

Part of the market 1988 2005 Passenger services Regional (unprofitable) SJ has monopoly Competitive and receives tendering subsidies (competition for the tracks) Interregional (unprofitable) SJ has monopoly Competitive and receives tendering subsidies (competition for the tracks) Interregional (profitable) SJ has monopoly SJ has monopoly Freight services SJ has monopoly Open access on all lines

Competitive Tendering of Swedish Rail Services

„ Now the dominating procedure for all subsidised railway lines „ Competition “for the tracks” „ Two major types of contracts: Gross Cost Contracts (regional lines tendered by the CPTAs) Net Cost Contracts (interregional lines tendered by Rikstrafiken) Regional Services Procured by CPTAs

„ Gross Cost Contracts: Operators bid for lowest amount of subsidy needed to cover costs (+ profit margin) CPTAs do planning and marketing, decide on ticket prices and take all revenues from fares Operators sometimes receive a share of the fares Systems of penalties for delays etc are commonly used Contract periods: 3-5 years (often possible to extend) „ Early procurement did not always involve tendering, rather negotiated contracts with SJ (some long-term contracts remain) „ Early tenders did not follow as strict rules as later tenders (influenced by Sweden joining the European Union) Interregional Services Procured by the State

„ Net Cost Contracts: Rikstrafiken buys a minimum level of supply (number of departures) along the specified lines Operators have to project both costs and revenues, bidding for the minimum amount of subsidy needed to cover the deficit (+ profit margin) Requirements on quality, price levels etc Multiple evaluation criteria with pre-specified weights Contract periods: 5 years (sometimes possible to extend) „ Predecessors to Rikstrafiken more limited as to staff and powers „ Early tenders used to be performed annually (1-year-contracts) and were characterised by post-bid negotiations „ SJ was supposed to provide potential competitors with all kinds of resources, charging its internal prices – a common source of disagreement in the past „ The transfer of functions and resources to Banverket and other organisations gradually improved transparency „ It took several years for Rikstrafiken to become established and capable of performing tenders Market Entry Through Competitive Tenders

Year Passenger services Passenger services procured by CPTAs procured by the state

1990 BK Tåg (exit in 2005) 1995 Sydtåg (exit in 1997) 1998 Linjebuss/Connex BSM Järnväg (exit in 2000) 1999 A-Train () 2000 Citypendeln Sydvästen (exit in 2000) Tågkompaniet Tågkompaniet BSM Järnväg (exit in 2000) 2003 Roslagståg Connex BK Tåg (exit in 2005) 2006 Stockholmståg

The Number of Bids in Each Tender (1) Regional Lines

Year of tender Line 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Lines procured by CPTAs Lidingöbanan 4 1 Saltsjöbanan 4 4 5 4 2 T-bana blå 3 T-bana röd 2 T-bana grön 1 Pendeltågen 4 6 Upptåget 1 4 Länstågen Småland 3 2 3 2 Nässjö-Jönköping 2 Nässjö-Tranås 2 Österlenaren 2 1 Malmö-Ystad 2 Bohusbanan 2 Viskadalsbanan 2 Kinnekullebanan 2 2 3 Västerdalsbanan 2 2 4 Ludvika-Fagersta-Avesta 1 X-tåget 3 Number of tenders 3 0 3 3 3 2 3 2 3 3 3 0 1 2 1 0 1 Average number of bids 2,3 1,7 4,0 2,3 2,0 1,7 2,5 2,7 3,3 3,0 2,0 2,5 2,0 6,0

The Number of Bids in Each Tender (2) Interregional Lines

Year of tender Line 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Lines procured by the state Vättertåg 2 2 1 2 2 Västtåg 2 Kust-till-Kust 2 2 1 1 1 1 Mora-Borlänge 3 2 Bergslagen 1 2 1 Tåg i Bergslagen 1 1 Västerås-Eskilstuna-K-holm 1 2 1 Östersund-Storlien 1 2 1 3 2 1 1 2 Norrlandstågen 1 1 2 2 1 1 2 1 2 2 Mittlinjen 3 2 2 2 1 2 Uddevalla-Herrrljunga-Västerås 1 1 1 1 1 Karlstad-Göteborg 2 1 1 Västkustbanan 3 Stångådals- och Tjustbanan 3 Number of tenders 0 0 0 8 6 2 3 0 9 4 10 6 4 3 0 0 1 Average number of bids 1,5 1,7 1,5 2,7 1,6 1,3 1,5 1,2 1,8 2,3 1,0

The Number of Bids in Each Tender (3) All Lines

Year of tender

All lines 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Number of tenders (total) 3 0 3 11 9 4 6 2 12 7 13 6 5 5 1 0 2

Average number of bids (total) 2,3 1,7 2,2 1,9 1,8 2,2 2,5 1,8 2,1 1,9 1,2 1,8 2,4 2,0 3,5

Frequency of different number of bids in passenger rail tenders

100%

80%

60% 4-bids or more 3 bids 40% 2 bids 1 bid Frequency (%) Frequency

20%

0%

4 05 9 00 02 97 003 200 20 2 95 998 200120 2 93 996 1 199 20 90 19 1 19 991 199 19 1994 198919 1 Year Examples of Cost Effects from Tenders

Lines procured by CPTAs Tender Year Cost effect (regional lines) No. Network in county of Jönköping etc 1 1989 -21% 2 1993 -25% 3 1997 Minor increase Ystad-Simrishamn 1 1995 -18% 2 1998 -10% Herrljunga-Hallsberg 1 1994 -10% 2 1999 -3% 3 2002 Minor increase Borlänge-Malung 1 1991 n.a. 2 1994 -20% 3 1996 Minor Uppsala-Tierp 1 1991 n.a. 2 1999 -20% , commuter trains 1 1998 -32% 2 2005 +10% Lines procured by the state Tender Year Cost effect (interregional lines) No. All lines 1-2 1992-93 -21% 3-6 1994-98 No increase 7 1999 -28% Northern trains 7 1999 -20% 10 2002 -42%

Innovations

„ New and/or improved trains: BK Tåg implementing bus technology A-Train (Arlanda Express) introducing high-speed airport link with direct in-step in all train coaches The Öresund train (multiple national standards) Regina (fast regional train with five seats in a row) X40 (fast double-decker) X60 (fast commuter train with direct in-step and coaches without dividing walls or doors) „ Management and organisation BK Tåg introducing new working routines and conditions Tågkompaniet exploring the possibilities of outsourcing SJ/Euromaint: Separation highlighting safety issues „ Other innovations Tågkompaniet: ticket pricing and booking system SJ: ticket price differentiation and yield management Assorted Problems (1)

„ The scarcity of bidders „ High and low bids and non-fulfilment of contracts: Too optimistic (low) bids and predatory bids Very high bids Several cases of disrupted services Several cases of bankruptcies Swedish tenders of passenger train services 1992-2003: Spread of bids compared to bid average

180

4th lowest bid 160 3rd lowest bid 2nd lowest bid Lowest bid 140 Bid average (=100)

120

100

Bid price (index, average=100) (index, price Bid 80

60 Vättertåg 1 Vättertåg 2 Vättertåg T-bana röd T-bana Länstågen 2 Länstågen 3 Länstågen Pendeltågen Bohusbanan Bergslagen 2 Bergslagen Kust-till-kust 1 Kust-till-kust 2 Kust-till-kust Österlenaren 1 Österlenaren Nässjö-Tranås Lidingöbanan 1 Lidingöbanan Mora-Borlänge 1 Mora-Borlänge 2 Norrlandstågen 7 Norrlandstågen Kinnekullebanan 2 Kinnekullebanan 3 Kinnekullebanan 10 Norrlandstågen Västerdalsbanan 2 Västerdalsbanan 3 Västerdalsbanan Norrlandstågen 4 etc. Norrlandstågen Stångådalsbanan etc. Stångådalsbanan Sundsvall-Östersund 1 Sundsvall-Östersund 3 Sundsvall-Östersund 6 Västerås-Katrineholm 2 Västerås-Katrineholm Assorted Problems (2)

„ SJ’s monopolistic behaviour Strategic bids Unwillingness to coordinate ticket and booking systems Changed timetables, causing inferior connections for competitors Withdrawing lines from competitive tendering „ Rolling stock lock-in: Rikstrafiken forced to use ASJ rolling stock locked by long-term leasing agreements State grants directed to investments in new vehicles may influence willingness to modernise existing stock „ Commercial vs subsidised services Expansion of subsidised networks may hinder commercial lines Should we invest in completely new lines that presuppose subsidised railway services to get any traffic? Some Other Aspects of Swedish Railways Development

„ Increased infrastructure investment 1990: 1 billion SEK/year Mid 1990’s: 3 billion SEK/year The years ahead: 10 billion SEK/year „ Strong growth in passenger train transportation compared to other modes 1995-2004 „ Increased ticket prices 1988-2003 Development of Different Modes of Transportation 1995-2004

Mode of Passenger Change Shares in 2004 Change transportation transportation since 1995 since 1995 in 2004 (billion (%-age passenger km) points) Car 97 +11% 77% +/-0 Train 9 +32% 7% +1 Bus 8.9 -8% 7% -1 Other 10.4 +10% 9% +/-0 All modes 125.3 +10% 100%

Passenger rail transportation 1994-2004

10

9

8

7

6 Long-distance 5 Short-distance

4

Billion passenger km passenger Billion 3

2

1

0 7 00 2003 2004 20 2001 2002 199 1998 1999 1994 1995 1996 Year Development of Rail Ticket Prices 1988-2003

Change 1988-2003 Ticket prices (current prices) +125% Consumer Price Index +57% Ticket prices (adjusted for inflation) +43% Value Added Tax (VAT) +6% Price excluding VAT (operator revenue) +35% Ticket price adj for inflation: X2000 +53% Ticket price adj for inflation: regional trains +59% Ticket price adj for inflation: InterCity/night trains +24%

Conclusions

„ Swedish railway reforms: a step-wise process not following a rational strategic plan „ Early tests of competitive tendering set off a development eventually leading to the dominance of this practice for subsidised passenger services „ The development of competitive tendering over time has been a learning process for both procuring entities and operators. The tenders have become more and more formalised and now include multiple weighted evaluation criteria „ The tenders have resulted in significant reductions in subsidies needed to procure passenger services. We have also observed innovations in rolling stock, management and organisation, ticket systems etc. „ There are several important problems to consider: General lack of bidders Very low and very high bids SJ’s strategic behaviour The expansion of subsidised lines may threaten commercial lines and a future deregulation