Transportation Planning Casebook/Melbourne Trams

Introduction

B22026 New Yarra Trams Livery

Tram systems, or more commonly known as streetcars in the United States, are intricately linked to the history of industrialization in the past century. The Melbourne tramway network, as a major form of public transport, is the largest urban tramway network in the world with 250 kilometers of double track. For perspective, this tramway network is 7 times the length of the METRO System in the Twin Cities. Trams are the second most used form of public transportation mode in Melbourne after the commuter railway network, with a total of 182.7 million passenger trips on the trams in 2012 and 2013.

The privatization of Melbourne’s urban rail and tram systems were started in 1999. Privatization was enthusiastically supported by the media and politicians and initially deemed a success, but not more than three years after franchising, both private operators and governmental officials were facing major financial and operational obstacles. This paper will highlight why and how privatization occurred in the Melbourne tramway system, including what went wrong, what went right, and what policy implications there are for privatizations in the transportation industry.

Privatization

Privatization is the transformation of public sector ownership or control of an enterprise or resource into private sector ownership or control. In other words, privatization is putting a public enterprise onto private sector footing as a public corporation. Such a change can take several forms: whole or partial asset sale; asset transfer through leasing; and management through contracts.

Studies widely discussed about the pros and cons of the public transit privatization. Privatization of public transport benefits from some advantages including, higher service quality for passengers (e.g. frequency, comfort and security), increases in the number of passengers using the public transport system, reduced the long term costs of public transport to the taxpayer, reduced financial risks to the public sector, and no real increases in fares. A privatized public transportation system, on the other hand, might produce the following drawbacks. First, pursuant to less rigorous hiring standards of the private companies, the employees of the private sectors are not as qualified as public sectors. Second, given the private companies operate public transit systems to make a profit, and government pays the companies to operate service at unprofitable places, the subsidization dramatically increases consequently. Third, the private companies constantly attempt to obtain government protection from competition and government subsidies which consequently increase the transactions cost. Fourth, the privatization triggers the government loses the transit facility rental profits which are recouped by distortionary taxation. Last but certainly not least, passenger confusion about route and system choosing will escalate, since private companies has no incentive to present details about their competitors' services in databases.

Progression of Tramways in Melbourne

The first tram in the world was located in Swansea, Wales, United Kingdom (1807). The system was firstly inaugurated by Horse-drawn, it was later powered by steam and electricity. Since 1884, trams have continuously operated in Melbourne. The first tram, in Melbourne, was a horse tram which was an animal powered railway, usually using teams of horses. After that, the cable car was employed to diminish the passenger travel time. A fixed track was pulled in this service by a moving steel cable. In Melbourne the first cable tram line was built in 1885. The first electric tram line opened in 1889, but the project was spoiled with operational problems and closed less than seven years later in 1896. It took until 1906 for another electric service to begin.

Followed by the British Rail privatization experience in 1990, the Melbourne's government, in 1999, decided to privatize tram systems and urban rail. The word ‘franchising’ was borrowed from the British privatization. To privatize, Melbourne’s public transport modes were divided into four separate business units: two trams and two trains: Yarra Trams and Swanston Trams, Hillside Trains and Bayside Trains. They commenced operations under separate identities. Three private operators commenced running five franchises for metropolitan rail (two franchises), metropolitan tram (two franchises) and provincial rail (one franchise).

Performance data for the first three weeks of private operation in Melbourne was good enough for the Government to issue an enthusiastic press release in September, 1999. Although there was certainly no evidence that the privatization had any negative impact on the Government in any metropolitan electorates in first years, operators faced some financial issues by mid-2001 which prompted their concern. One problem they cited was the poor performance of the automated ticketing provider (which was still handled through the government and outside the franchised contract of the tramway operators). Indeed, at one stage early in the franchise period, 30 percent of machines on the rail system were out-of-order. The private operators blame these malfunctioning ticketing machines coupled with the fare increases associated with the GST (Goods and Services Tax) for not coming close to meeting either ridership or revenue projections after privatization.

However, many judge Melbourne’s tram privatization as a reasonable success. New services have been introduced, resulting in an 11.4 per cent increase in the overall number of service kilometers. Some improvements in reliability and punctuality happened which significantly decreased the commuters' concerns and inconvenience caused by strikes and stoppages. The city has been hailed as a model by advocates of privatization, and delegations from other cities visited regularly after privatization seeking to learn and follow Melbourne’s experience (e.g. Toronto).

List of Actors

City of Melbourne: Melbourne is the capital and most populous city of the state of Victoria, in Australia. It is the second most populous city in Australia. Melbourne is the heart of business in Australia, it is the financial center of the region. The current population of Melbourne is 4.35 million people.

John Cain: Cain was the Premier of Victoria between 1982 and 1990. Cain carried out many reforms to the Victorian Government.

Jeff Kennett: Kennett was Premier of Victoria between 1992 and 1999. Kennett’s administration was largely responsible for the controversial turnover of the public transport services to private operators. During this handover, many jobs were cut from the transportation sector. Large protests were waged in response to Kennett’s vast cutbacks and transition of the public transport system to private operators.

Steve Bracks: Bracks was the premier of Victoria from 1999 to 2007, coming into office following Jeff Kennett. Bracks represented the Australian Labor Party.

Transit Users in Melbourne: Current ridership for the rail services in Melbourne are estimated at 800,000 people per weekday. This number is estimated to increase greatly in the next decade, with numbers reaching 1.8 million by 2022.

Director of Public Transport (DPT): The DPT was the head of the public transport division in Victoria, Australia. This position was in place from 1999 to 2012, it has since been abolished. The key responsibilities were entering into and managing franchise contracts between the various providers of different sectors of the public transport of Victoria. These responsibilities have since been handed over to Public Transport Victoria, which was created in April 2012.

Public Transport Victoria: PTV is the current statutory authority of public transport in Victoria. The goal of Public Transport Victoria is to coordinate, provide, operate and maintain a safe, punctual, reliable and clean public transport system. Managing franchise contract are a large portion of PT’s responsibility, along with managing ticketing and marketing.

Connex Melbourne: Awarded a franchise to operate Hillside Trains in 1999, a previously publicly run transport group. In 2004, after much negotiation, Connex won the exclusive right to operate all of Melbourne’s metro train services.

Metro Trains Melbourne: Metro Trains Melbourne is the suburban commuter rail franchise that serves the Melbourne region. Average weekday ridership is 415,000 passengers. MTM is a joint venture between MTR Corporation (Hong Kong), John Holland Group, and UGL Rail. Metro Trrains Melbourne won the contract over previous operator Connex Melbourne in 2009.

KDR Melbourne : KDR Melbourne is a joint venture between Keolis and Downer Edi Rail. KDR Melbourne is the operator of the Melbourne tram service and was selected by the Government of Victoria. This company took over for previous provider TransdevTSL, and retains the operating name Yarra Trams that the previous company had used. KDR Melbourne was awarded an 8 year contract with the region in 2009.

Key Roles

1. Public Transport Corporation:: operator of passenger and freight trains, trams and bus services. It established on 1989 and operated in suburban Melbourne as The Met and in regional Victoria as V/Line. After privatization The V/Line divided into Passenger and Freight division and The Met split into Hillside Trains, Bayside Trains, Swanston Tram and Yarra Tram.
   
2. TransdevTSL:: in 1999 Transdev and Transfield Services joint as a 50/50 venture in order to operate trams in Melbourne. In 2010 Transfield Services sold its share to Transdev.
   
3. National Express:: This was operator of Swanston Trams. They decided to withdraw their franchise in 2002.
   
4. KDR:: Keolis and Downler EDI created a joint venture to operate Yarra Trams since 2009.
   

Timeline of Events

• 1997 - Melbourne trams split into two trams system, Swanston Trams and Yarra Trams.
• 1998 - MetroLink Victoria Pt Ltd was formed to bid for one half of the Melbourne Tram network.
• 1999 - 29th Aug :: TransdevTSL (50/50 joint between Transdev and Transfield Services) won the franchise of Yarra Trams.
• Tram system served by 476 vehicles and carried 123 million passengers per year.
• 2000 - M-Tram report financial difficulties
• 2001 - Citadis low floor introduced by Yarra Trams.
• 2002 - Victorian government announced it would pay operators A$110 million.
• National Express franchise(for M-Train) collapsed after its British parent company withdraw financial support and government faced crisis in franchise system
• 2003 - State government introduced single-operator franchise model.
• 2004 - in April TrasdevTSL took over M>TRAM franchise from National Express.
• 2005 - Texts of the last agreements were released publicly.
• 2008 - The Victorian state government has called for expression of interest to operate its urban rail service from 2009.
• Yarra Trams contracts extended by 12 months to November 2009.
• Five Bumblebee trams leased from France till 2011.
• First Wind-Powered trams introduced.
• 2009 - KDR Melbourne, a joint between Keolis and Downer Edi Rail, selected by the Victorian Government as the franchise operator. (An eight years contract that commenced on 30 November 2009). Also Metro Trains Melbourne selected as the preferred bidder for a contract of operation.
• 2013- First E-Class tram delivered to Melbourne.

Maps of Locations

Precedent for Privatization: The United Kingdom Rail Experience

The Melbourne privatization was based on the British Rail experience that took place in the early 1990s . Through this process, the British Government looked to transfer assets, operations, and investments of British Rail to the private sector . This was done through the passage of The Railways Act 1993 which established a complex structure for the rail industry in the UK. The primary objective was to dismantle British Rail in order to create over 100 separate companies. The government then issued contracts for the use of rail facilities such as track and stations .

While privatization was intended to have many positive impacts throughout the UK rail network, there is still much debate over the results of the system’s implementation. By some estimates, there have been several improvements including a slower rate of fare increases than under British Rail and continued improvements in safety .

There have also been some negative results from privatization. Service on many traditional routes was seriously disrupted for many months during the transition. Additionally, it was more profitable for privately operators to continue operating with old rolling stock, resulting in two primary negative impacts. First, passengers were subject to riding in outdated trains. Second, rolling stock manufacturers suffered due to the lack of orders for new trains. Finally, privatization did not improve punctuality and reliability as promised. In fact, one thing is for certain: privatization of rail in the UK created a system that is extremely complex for companies, passengers, and employees. When Melbourne was looking to privatize their tram network, they looked to the UK as an example and worked with many of the officials and consultants that facilitated Britain’s experience. These individuals claimed to have learned valuable lessons from the UK that they would be bringing with them to Melbourne .

Why Privatization for Melbourne?

By harnessing the successes and improving upon the failures of British Rail privatization, the City of Melbourne looked to create a successful plan for rail and tram privatization with the ultimate goal of implementation by the late 1990s. In 1993, the newly elected Liberal government began the Public Transport Reform Program. This program was designed to analyze transit operations and make recommendations for improving the efficiency of the system. The primary recommendation, which was ultimately implemented, was privatization of Melbourne’s publicly operated bus service. The results of bus privatization were very controversial. However, five years after bus privatization, the government of Victoria stated:

“The introduction of innovative new and improved services has seen annual patronage rise steadily, consistently averaging 15 per cent above the levels previously carried by the Public Transport Corporation, with more than 14 million passengers carried…in 1996-97. National Bus has introduced some 80 new services, allowing greater frequencies, extended hours of operation and improved services to railway stations and regional shopping centers.”

Given the success of prior bus privatization in Melbourne, moves were made in the late 1990s to begin implementing privatization of train and tram services. Through this privatization, the government of Victoria had the following series of objectives they aimed to achieve.

Progressively improve the quality of transit service through innovation and competition

Through privatization, the government would cease all central transit planning activities. Their only duties would be to approve changes to timetables and routes. The idea was that private transit operators would now be able to produce efficiency innovations and implement service improvements because they are no longer hindered by the stifling governmental involvement. The open market would force franchises to compete with each other in order to acquire the customer. This would result in an improve experience for all transit users.

Minimize taxpayer cost of transit by transferring risk to the private sector

The amount of transit subsidy provided to franchisees would decline every year, with the ultimate goal of reaching zero subsidy. This directly reduces taxpayer burden and shifts financial risk of transit operations to the private sector. Throughout the 12-15 year contract, taxpayers would save around $1.8 through decreases in subsidies. The declining subsidies were justified by the assumed dramatic increase in ridership over the period following privatization.

Secure a substantial and sustained increase in the number of passengers

Other transit systems that privatized services experienced large increases in ridership immediately following the implementation. Building on that precedent, franchises in Melbourne would be awarded generous financial incentives if they met increasing patronage goals. In order to meet these aggressive ridership targets, it was anticipated that private operators would:

• invest highly in marketing (as the government did very little prior to privatization
• implement an improved feeder bus system in order to increase access to rail routes
• make upgrades to rolling stock
• increase express service
• provide improved real time passenger information
• make significant improvements to station areas

Additionally, it was assumed that all private operators will have extensive experience in the transit industry. This expertise will produce a more integrated system and reduce delays for passengers, thus increase the attractiveness of transit and ultimately increasing patronage.

Ensure that the highest standards of safety were maintained

In order to ensure the highest level of safety for all passengers, contract operators would be required to gain safety accreditation from the Government’s Director of Public Transport Safety.

How/Policy Issues

Melbourne has an unusually large train and tram service to service their 3.4 million residents. For many decades, the transportation system in Victoria was run by different entities. The rail and tram services were run by the government, while the bus services were turned over to the private sector much earlier. Patronage declined in the 1970s, and these various providers needed increased government subsidies in order to continue operation . These government actions proved to support a dysfunctional system in which multiple operators saw themselves as competing with each other rather than work towards the common goal of decreasing use of private automobiles .

During the 1980s, attempts were made to mitigate the problems of the current disjointed system. In 1982 the Labor Opposition Party won the State Election. Following significant cuts to night and off-peak and weekend transit services made by the previous Liberal government, the incoming Cain government restructured the existing transportation bureaucracy . At this point, the Metropolitan Transit Authority (the Met) and the State Transit Authority (the V-Line) were established. These government transportation agencies were further merged to form the Public Transport Corporation (PTC). Integrated service did not result from this amalgamation, as incongruous cultures inherent within the different organizations persisted .

The Cain Government was somewhat successful in its attempts to halt the continuous decline of transit patronage during their first two terms. More money was spent in order to employ more staff and increase services, but these techniques proved to be unsustainable. In an attempt to cut costs during their third term, the Cain Government implemented a system of pre-purchasing tickets, which eliminated the need for conductors on trams . These actions sparked much disapproval amongst the powerful transportation unions, which took actions to protest the decisions. Protest actions and strikes on the part of the labor unions continued to be an issue for years to come. With these attempts at reform clearly failing, the Government was left with few alternatives. Fares were raised significantly and losses were again seen in patronage .

In 1993, the Liberal Kennett Government once again took power. Shortly after taking office, the Kennett Government initiated the Public Transport Reform Program. This program was designed to improve the efficiency of the PTC . During this time, the PTC’s workforce and cash subsidy were reduced greatly, each decreased by more than half . It became increasingly apparent that the inefficiencies in the system were vast, and outsourcing as well as privatization became viable options for the Government. In the midst of these reforms, the publicly-operated bus services of Melbourne were privatized. The Victorian Government, along with many other commentators claimed that the move to privatization of the bus services would improve service and increase patronage . It has been concluded that these claims proved to be false, as patronage declined in the years following privatization .

With rail and tram services still under control of the Government, inefficiency an uncertainty persisted. During the 1996 election, the Kennett government promised to corporatize but not privatize the rail and tram services in hopes of improving service. Things did not work out as planned. In 1997, PTC employees took industrial action (strike), and the Victorian Government announced that the organization would be privatized . In order to deploy the privatization strategy, the Government established a Transport Reform Unit (TRU). The TRU consisted of officials from the Department of infrastructure and Treasury, as well as other necessary specialists . Legislation was enacted later that year and on July 1, 1998, the PTC was split into five separate corporations. One corporation was in charge of country services, two were in charge of Melbourne trains, and two were in charge of Melbourne trams. Due to the amount of detail involved in the process, the official handover did not occur until August of 1999.

Splitting the train and tram services into two parts each was intended to inspire competition. It was thought that this competition would ensure improved service and avoid the possibility of handing the service over to an entity that would become a service monopoly. This new structure also sought to facilitate greater innovation in the field and allow the smaller companies to focus on more localized issues . It was assumed that the culmination of these factors would result in improved service for the consumer and thus increase patronage.

Three of the five franchises (V Line, Bayside Trains, and Swanson Trams) were awarded to National Express, a UK transport operator. Yarra Trams went to a French operator, Transdev, and the Hillside Trains franchise went to Vivendi/Connex, another French operator. An Office of the Director of Public Transport was established to ensure that all of the operators complied with the conditions that were set .

At the time of privatization, little information about the terms of the various agreements were made available to the public. This changed with the election of the Bracks Government in late 1999. It was established that this information was important to the public and that it necessarily be made available for review. Details of the plans were made public, including the objectives of privatization. Quality of service improvements, increases in ridership, minimized costs to the taxpayer, and heightened standards for safety were all outlined in the report . After review, it was concluded that the contracts that had been established were in line with the goals that had been set. To many, this seemed like a promising move in the right direction, though results were yet to be seen.

Outcomes of privatization, as well as their interpretations have been mixed. The competition resulting from the way in which the Melbourne transportation system has been structured since the late 1990s has not had the intended effect. Rather than simply improving service and increasing patronage, as initially intended, privatization has resulted in the advent of rivalries between independent operators . Rather than the system becoming increasingly integrated, it has become more disjointed. Schedules for one operator’s services could not be obtained at the other operator’s stations. Confusion and frustration amongst users of the multiple services grew. Rebranding techniques were employed in an effort to elucidate the system, but only succeeded in further muddling the already confusing situation .

In 2010, the Parliament of the State of Victoria enacted the Transportation Integration Act in hopes of unifying all of the elements of the region’s transport system. The overarching objective of this policy is to further the goals of sustainability that Melbourne has previously set. The act is an effort to bring various agencies together in hopes of achieving a set of collective objectives .

A key group that came out of the Transportation Integration Act was the Public Transport Development Authority (PTDA). The goal of the PTDA is to manage the public transport system in an efficient, reliable, clean, and safe manner . Along with the tasks of maintaining the existing infrastructure and improving service generally, the PTDA was established to manage the public transport service contracts . Establishment of the PTDA is meant to create greater clarity of the roles of the various players in the transport system.

Results from Privatization

The results of this privatization have been very controversial. Just before privatization, the Auditor-General of Victoria concluded that “after 6 years of cost-cutting and rationalisation of operations, there appears to be limited scope for further large savings”. Both before and after this statement, the data used and analysis conducted to determine whether the private sector had better results than this was called into question.

Ridership Results

Similar to many other transit systems in industrialized nations, the Melbourne transit system ridership was consistently declining following World War II. However in 1994, the trend started to reverse, and the system actually saw a 2% annual increase in ridership between then and 1999 (the year of privatization), which is consistent with Melbourne’s population growth.

Privatization contracts were written assuming very large increases in ridership and revenue. Ridership was expected to increase by 40-80 percent in the first 15 years (to approximately 2014), which puts ridership at its highest since the 1950s. Revenue was forecasted even higher than ridership. One contract with Bayside Trains actually forecasted a 112% increase in fare revenue between 2000 and 2014. A more optimistic revenue than ridership forecast was justified by the existing zone-based fare system; as the Metro grew outwards, revenue increases were expected to grow faster than ridership because each individual rider will be paying more to travel farther. Additionally, ridership increases were forecasted at the off-peak times so they would be accommodated at minimal cost.

The Government of Victoria published that the ridership on trains in Melbourne increased by 7% between 1999-2004 and that the ridership on trams increased by 6% in this same period. This was significantly less than the projected revenue growth over that period (48% for trains and 44% for trams). Even outspoken advocates of privatization acknowledge that ridership is well below the aggressive projections. The Department of Infrastructure in 2002 stated that “train and tram operators have experienced less than satisfactory financial performance and are projecting the potential for significant financial losses in coming years”. The Melbourne operator’s fare revenue was $100M short of the projected revenue in 2004.

Operations

The competition resulting from the way in which the Melbourne transportation system has been structured since the late 1990s has not had the intended effect. Rather than simply improving service and increasing patronage, as initially intended, privatization has resulted in the advent of rivalries between independent operators. Instead of seeing increased efficiency due to the expertise of the private operators, the firms actually started competing with each other. Separate timetables, redesigned and dissimilar vehicles on various providers, and unwillingness to display “competitors” schedules (even at adjacent stations) made the transit experience confusing at the onset. Confusion and frustration among users of the multiple services grew. Rebranding techniques were employed in an effort to elucidate the system, but only succeeded in further muddling the already confusing situation. Rather than the system becoming increasingly integrated, it has become more disjointed.

Cancellations and on-time running were reported in the media as vastly improved. It is worth noting however that these comparisons in the media were based off the system performance directly before privatization, when the system was struggling with separating the tracks for five companies. The private operator’s cancellations and on-time running numbers are actually comparable to the system statistics in the years prior to privatization (normal operations).

Some lines saw increased frequencies under private operations, however many of the lines that were supposed to be increased as a part of privatization were actually increased prior to privatization under the original PTC.

Some tramway lines were extended under private operations. Route 109 was extended 2 kilometers to Box Hill and the St. Albans line was extended 7 kilometers. However, 9 kilometers of extension was not an excessive or particularly impressive increase in coverage, as was intended through privatization.

Support from public and media

While ridership and operations may not have hit the mark completely, the transition from public to private operation was smooth from the public’s point of view. Previous privatizations in Victoria may have helped the public gain acceptance for privatization of governmental affairs. The public did not oppose the transition, and even welcomed the change after the tram strikes of 1997.

Melbourne’s privatization was setting a precedent internationally. TCC, the transit operator of Toronto (touted as one of the best transit operator’s in the Western world), was documented using Melbourne’s privatization as a good example of fiscal responsibility. A news article from 2002 described how TCC is impressed with Melbourne’s firm contracts and wishes that TCC would follow the same pattern Public opinion, even internationally, was favorable of privatization.

Multiple Disputes After Privatization

However, while hidden from public scrutiny, disputes between the government and the newly hired private operators were ongoing during the transition. Revenue allocation, contract terms, who pays for fare evasion, ticketing machine maintenance, and fees from commissioning delays are just a few of the document disputes in the years following privatization. Finally in February 2002 (three years after privatization), the government paid $110M to private operators to cover marketing costs and help with the previously mentioned disputes. Additional payouts were given that year as a part of the ‘train and tram franchise review’ by the Department of Infrastructure, including revising the terms for the ridership incentive package because the previously set ridership goals were not being met (and therefore the operators were not receiving the financial incentives). With these payments, the government took back the financial risk that was intended for the private sector and eliminated the incentives to achieve massive ridership growth which was intended to lower operation costs and subsidies.

More payments were doled out a few years later when a handful of private operators either withdrew support for tram operations or when contracts were re-written in exchange for a 2.3 billion subsidy payment. For the first five years of privatization, the government ended up paying much more than anticipated to private operators. In February 2004, Yarra Trams and Connex made agreements that included an extra $1 billion over five years to each company to maintain operations. While some efficiency improvements were made in the tram system, operational payout to the private companies far exceeded those improvements.

Benefits of Privatization

Despite the ridership and monetary flop (and without much empirical evidence) some authors claim that the privatization of the Melbourne trams was, in the short term, a good financial decision of the government that reduced operating costs and investment risks while providing better services for customers. “Experience from the time of privatisation in 1999 has been mostly positive apart from franchisee financial performance”. Greig noted the following specific improvements due to privatization:

• increased customer satisfaction through reliability and punctuality
• new and renovated trains and trams
• increased frequencies (above the contracted minimum)
• increased coverage
• upgraded stations, park and rides, and customer information displays
• lower off-peak fares

However, as stated earlier, the litter empirical evidence provided for these claims may have methodology errors.

Potential causes of failure

A main cause of the extra financial payments was that bidders bid too aggressively and thus could not meet their bottom line. The government had to step in and save them from failure because the government needs a functioning transit system for economic and social reasons. Additionally, the government would also look bad if the private companies failed; there was little incentive for the private sector to not ask for more money.

Discussion Questions

Answer your favorite three discussion questions. Be prepared to discuss!!!

1. Was privatization a good idea? Why or why not?
2. What steps should the government have taken to ensure that the private operators acted as unified partners instead of competitors?
3. What techniques can be used to increase ridership if privatization does not produce the results alone?
4. What sort of policies would ensure successful implementation of privatization in other municipalities?
5. Are some elements of a transit system better candidates for privatization than others? Which parts? Why?