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Franchising Melbourne's Train and Tram System

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Franchising Melbourne's Train and Tram System V I C T O R I A Auditor General Victoria Franchising Melbourne’s train and tram system Ordered to be printed VICTORIAN GOVERNMENT PRINTER September 2005 PP No. 154, Session 2003-05 ISBN 1 921060 13 1 The Hon. Monica Gould MP The Hon. Judy Maddigan MP President Speaker Legislative Council Legislative Assembly Parliament House Parliament House Melbourne Melbourne Dear Presiding Officers Under the provisions of section 16AB of the Audit Act 1994, I transmit my performance audit report on Franchising Melbourne’s train and tram system. Yours faithfully JW CAMERON Auditor-General 14 September 2005 v Foreword The lifeblood of any great city is its public transport system. For over 100 years, Victoria’s train and tram system was provided by the state. In the late 1990s, the Victorian Government took the step of contracting the private sector to operate the train and tram system, in the form of franchises, for periods up to 15 years. In effect, the state paid private sector companies to provide an essential public service. The franchises soon became untenable, forcing the government to quickly find a viable solution. The government had 3 credible options: renegotiate metropolitan train and tram franchises with remaining operators; retender franchises; or restore train and tram services to public sector ownership. The government chose the renegotiation path. Today, metropolitan train and tram services are provided by separate private sector train and tram operators, and regional train services are provided by the state. This audit examined the renegotiation of the franchise arrangements and whether the issues that arose from the original arrangements were addressed. These arrangements were complex, significant to the state, and costly. I have used this audit as an opportunity to test the government’s model for developing and establishing public-private partnerships. I believe that the lessons captured here will be useful for other similar transactions in the future, not the least of which is the importance of good recordkeeping as the platform for accountability. I consider that the franchise renegotiations resulted in a good outcome for the state. There are some refinements in processes to be made, which should be addressed in future public-private ventures. JW CAMERON Auditor-General 14 September 2005 vii Contents FOREWORD.................................................................................................................v 1. EXECUTIVE SUMMARY.....................................................................................1 1.1 Introduction ......................................................................................................3 1.2 Overall conclusion: Do the current franchise agreements provide value-for-money? .............................................................................................4 1.3 Our assessments in more detail .....................................................................6 2. ABOUT THE FRANCHISING OF MELBOURNE’S TRAIN AND TRAM SYSTEM.........................................................................................15 2.1 Recent history.................................................................................................17 2.2 Costs of operating the metropolitan train and tram system ...................24 2.3 Audit objective and scope ............................................................................31 2.4 Audit method and report structure ............................................................32 3. DID THE RESPONSIBLE AGENCIES PROVIDE EFFECTIVE ADVICE TO GOVERNMENT?.........................................................................35 3.1 Background.....................................................................................................37 3.2 Did the responsible agencies provide effective advice to government?37 3.3 Conclusion ......................................................................................................46 4. DID DoI ALLOCATE RISKS EFFECTIVELY?...............................................49 4.1 Background.....................................................................................................51 4.2 Did DoI allocate risks effectively?...............................................................55 4.3 Conclusion and recommendations .............................................................62 5. WERE PUBLIC SECTOR BENCHMARKS DEVELOPED AND USED EFFECTIVELY DURING THE NEGOTIATION PROCESS?......................63 5.1 Background.....................................................................................................65 5.2 Were DoI’s public sector benchmarks robustly developed?...................68 5.3 Were the public sector benchmarks used effectively to evaluate offers and assist in negotiations?.................................................................80 5.4 Overall conclusion and recommendation..................................................87 6. DID DoI EFFECTIVELY USE OTHER NEGOTIATION STRATEGIES? 89 6.1 Background.....................................................................................................91 6.2 Did DoI effectively use its other negotiation strategies? .........................91 6.3 Conclusion ......................................................................................................98 viii 7. DID DoI OBSERVE PROBITY REQUIREMENTS?......................................99 7.1 Background...................................................................................................101 7.2 Was DoI’s probity plan adequate? ............................................................101 7.3 Did DoI effectively implement its probity plan? ....................................103 7.4 Did DoI adequately manage potential conflicts of interest? .................108 7.5 Overall conclusion and recommendation................................................110 8. DID DoI BUILD IN ADEQUATE PERFORMANCE MONITORING ARRANGEMENTS?............................................................113 8.1 Background...................................................................................................115 8.2 Is DoI’s performance monitoring adequate? ...........................................116 8.3 Did DoI allocate performance monitoring responsibilities to ensure effective monitoring?......................................................................121 8.4 Will DoI’s performance monitoring framework enable it to remedy adverse performance?.................................................................................122 8.5 Overall conclusion.......................................................................................124 APPENDIX A. DIFFICULTIES WITH 1999 FRANCHISE AGREEMENTS...................................................................................................125 APPENDIX B. CHANGES MADE TO THE PUBLIC SECTOR BENCHMARKS..................................................................................................129 APPENDIX C. RESULTS OF AUDIT OF DoI’S PERFORMANCE MONITORING AND PAYMENT ARRANGEMENTS .............................133 APPENDIX D. GLOSSARY...................................................................................145 1 1. Executive summary Executive summary 3 1.1 Introduction Any large city depends on its public transport system. It connects people to work, to services, and to each other. For these reasons, many governments are closely involved in public transport policy and operations in their jurisdictions. In 1999, in pursuit of greater efficiency and service quality, the (then) Victorian Government split Melbourne’s train and tram system into 5 franchises. It conducted a competitive tender for each franchise, and awarded them to 3 private sector franchisees for periods of between 12-15 years. However, it soon became clear that some of the franchisees’ revenue and cost targets had been unrealistic and were unsustainable. Several franchisees experienced various degrees of financial difficulty, which jeopardised their viability. By December 2002, the franchisees’ financial difficulties had become acute, and one (the National Express Group Australia) withdrew from its 3 franchises. The government immediately appointed receivers and managers to operate these 3 businesses. It also negotiated interim operating agreements with the 2 other original franchisees, while it considered its options for the whole system. After a detailed process (the subject of this audit), the government restructured the metropolitan train and tram system into one train and one tram franchise, and awarded the 2 current franchises to: Connex Melbourne Pty Ltd (train franchise); and MetroLink Victoria Pty Ltd (tram franchise). Unlike in 1999, the government did not award the current franchises through a competitive tender process. Instead, it chose to negotiate bilaterally with Connex Melbourne Pty Ltd and MetroLink Victoria Pty Ltd. The franchisees are referred to as Connex and Yarra Trams for the remainder of the report. The current franchise agreements commenced in April 2004 and will end in November 2008, with an option to extend the franchises till May 2010. The Department of Infrastructure (DoI) manages these franchise agreements for the government. 4 Executive summary 1.1.1 The audit The objective of this audit was to determine if the 2004 franchising agreements for the metropolitan train and tram system represented value- for-money. In particular, the audit sought to determine
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