Refranchising Melbourne’s metropolitan train and tram networks Deloitte Touche Tohmatsu ABN 74 490 121 060 180 Lonsdale Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia DX 111 Tel: +61 (0) 3 9208 7000 Fax: +61 (0) 3 9208 7001 www.deloitte.com.au Review of the Department of Infrastructure value for money assessment of private involvement in the Melbourne metropolitan train and tram networks Deloitte Touche Tohmatsu were engaged to review the Department of Infrastructure’s (“DOI”) value for money assessment of the private involvement in the Melbourne metropolitan train and tram networks (the “DOI Assessment”), including the accuracy of information and the assumptions and data underlying the conclusions presented. Scope and work performed The work performed by Deloitte was a high-level, exceptions-based review conducted in accordance with Australian Auditing Standard AUS 110, comprising primarily of inquiries of relevant personnel, and inspection, on a sample basis, of evidence and supporting documentation and analysis. Deloitte did not provide comment or opinion on the DOI Assessment or its conclusions, but rather performed certain procedures to identify whether the interviews conducted and sample data that Deloitte reviewed revealed any inconsistencies with the DOI Assessment, its assumptions or conclusions. Conclusion In July 2007, Deloitte stated in our report that “based on the work which we have performed, nothing has come to our attention that would cause us to believe that, in all material respects, the key assumptions and statements underpinning the conclusions reached in the DOI Assessment report are inconsistent with the source data referred to in the report.” Qualifications and limitations Deloitte’s work was performed solely for the benefit of the DOI and may not be relied upon by any other person. The qualifications and limitations of the review performed by Deloitte are explained more fully in our report. Deloitte Touche Tohmatsu Liability limited by a scheme approved under Professional Standards Legislation. Contents Section 1: Introduction 5 Section 2: Cost to the State 7 Section 3: Risk Allocation 11 Section 4: Franchisees’ performance since contract commencement 12 Section 5: Overall Summary 23 This report has been produced by the Department of Infrastructure. 4 Melbourne Public Transport Overview Metropolitan Rail Franchising 2007 Section One: Introduction The train and tram network has now Framework for assessing value Assessment of the success of the been operated by the private sector for money risk transfer in the arrangements for more than seven years. The within the current arrangements • Performance of incumbent Franchise Agreements with Connex The framework for this review will operators – (operating Melbourne’s train system use the same parameters used by Review of the performance of the under contract to the Government) the Auditor General in the 2005 incumbent operators since 2004 and with Yarra Trams (for the tram review of the re-franchising process against Business Plan KPIs. system) expire in November 2008. – cost to the State, risk allocation The Government therefore needs In summary: and performance. to decide whether and in what form • the Auditor-General confirmed to retain private sector involvement The Auditor General reviewed in 2005 that the costs, risk in the operation of train and tram the payments the government allocation and the performance services. In particular, it must decide negotiated with the train and levels negotiated in the franchise whether private sector involvement tram franchisees and assessed agreements in 2003/04 provided in service delivery provides a value the allocation of risks within the ‘reasonable value for money’ for for money outcome to the State. franchise agreements. This the State; review will also focus on the way This document: • the cost of operating the the franchisees have managed metropolitan train and tram • sets out a framework by which to risks through their performance in network remains relatively define value for money; operating the network since 2004. constant when costs are • lays out a definition by which to To determine value for money the normalised to reflect constant quantify value since contract following components have been investment in rolling stock; commencement in 2004; assessed: • the risks transferred to the • assesses performance of • Cost to the State – private sector have held since the incumbent since contract Outline of the approach taken by contract commencement; and commencement against that the State in the re-franchising • the performance of the incumbent framework and definition; and process to establish the operator operators has been sound when subsidy level • draws a conclusion about whether assessed against the 2004 value for money has been tender evaluation criteria and KPIs Review of the Auditor General’s achieved. in each franchise Business Plan. conclusions with regard to the 2003 process • the performance of the incumbent operators has been sound when Assessment of the actual assessed against the 2004 outcome of costs to operate the tender evaluation criteria and KPIs franchises in each franchise Business Plan; • Risk Allocation - and Review of the 2004 re-franchising process and the Auditor General’s conclusions about that process 5 Section Two: Cost to the State Re-franchising process • establishment of a Franchise The risk-adjusted PSBs were 2003/04 Agreement with PTD, to monitor developed in accordance with service delivery and customer Partnerships Victoria Guidelines, Public Sector Benchmarks (PSBs) service to standards specified; with significant risks identified, were developed as part of the and valued and allocated. Risk re-franchising process to predict parameters and values were then • outsourcing of maintenance to the future revenues and costs determined and validated in a specialist providers who have of operating the two franchises, series of risk workshops, involving a greater level of competency thereby: Departmental staff and external to undertake works and bear advisors. • informing the Government about operational risk. what it would cost an efficient Offers submitted by Connex and Within these parameters the project public sector organisation to Yarra Trams during the course of the team developed “raw “ (ie, non-risk- operate the franchises, in the negotiations were assessed against adjusted) PSBs based on forecast event that negotiations with a range of pre-defined evaluation revenues and cash costs for the incumbents was unsuccessful; criteria. Financial aspects of these businesses over a seven year and bids were assessed in the light period to 2010. • allowing the evaluation of the of the PSBs. Comprehensive bid reasonableness of the offers The PSBs comprised: evaluation reports were presented to Cabinet and decisions taken submitted by Connex and • base estimates of the most by Ministers, in the light of these Yarra Trams. important revenue and cost reports, on the value-for-money inputs - including driver costs, The PSBs reflected the provided in the offers submitted infrastructure renewals and Department’s assessment of the by Connex and Yarra Trams. The maintenance costs, rolling stock most efficient possible means of analysis in the bid evaluation reports costs, and fare revenue; public sector operation, based on a confirmed that, on the basis of the publicly owned enterprise providing • competitive neutrality PSBs, a return to public operation the same scope of services as that adjustments - to adjust for would not offer value-for-money to demanded of Connex and Yarra advantages or disadvantages the State when compared to the Trams. accruing to a public operator arrangements negotiated with the The model provided for: because of their state ownership two incumbent franchisees. (such as the absence of any • a Government Business obligation to pay taxes); and Enterprise (GBE) governance structure to oversee the • transferable risks – which were development, monitoring and identified and valued through achievement of objectives a standard “Monte Carlo” risk and provide an accountability analysis. framework; 7 Auditor-General’s Report – To assess this, the Auditor-General The other component of the Franchising Melbourne’s train developed a “good practice” model Auditor-General’s value for money and tram system 2005 based on a review of Partnerships assessment was whether DOI Victoria guidelines and practices effectively used other negotiation The objective of the – Franchising in the UK and other overseas strategies to achieve a desirable Melbourne’s train and tram system jurisdictions. The Auditor-General’s outcome. The Auditor-General audit was to determine if the good practice model required that: identified eight other strategies in renegotiated franchise agreements addition to the PSBs. The review for the metropolitan train and • the PSBs were clear, determined that all were either tram system represented value comprehensive and transparent; effective or partially so, in delivering for money. In particular, the audit • the PSBs main inputs were the overall objective: sought to determine whether: robust, accurately applied, On the whole, DOI had adequate • the responsible agencies validated and endorsed; and strategies (other than the PSBs) effectively managed the process • changes made to the PSBs, once to influence the environment of developing the current the offer and evaluation and within which negotiations were franchise agreements, so as to negotiation