Changes to the Transport Agency s Procurement Manual to give effect to the Public Transport Operating Model

Transcription

1 Changes to the Transport Agency s Procurement Manual to give effect to the Public Transport Operating Model Summary and response to submissions received on the document Consultation to support the implementation of PTOM released 21 April 2013 Introduction The government announced a new public transport operating model (PTOM) in April Legislation to give effect to PTOM (amongst other things) came into force on 13 June 2013 and is contained in the Land Transport Management Amendment Act The Transport Agency has been working on the operational policy required to support the implementation of PTOM. On 21 April the Transport Agency released the Consultation to support the implementation of PTOM document that outlined proposals for changes to the Transport Agency s procurement manual. Submissions closed on 21 June 2013, with an extension granted until 28 June submissions were received comprising one individual, four ferry operators, two bus operators, the Bus and Coach Association (BCA) and ten regions. 1 To support the consultation process, the Transport Agency organised a series of workshops to explain the proposed changes and provide an opportunity for stakeholders to clarify their understanding of the proposals. The workshops ran from 30 April to 30 May 2013 and were attended by bus and ferry operators, regional councils and the BCA. Amendments to the procurement manual have been finalised and can be found on the Transport Agency s website in its General Circular section under General Circular 13/08 (Public Transport Operating Model Amendments to the Transport Agency s procurement manual). Purpose of this Document The purpose of this document is to summarise the most common issues raised by submitters (and, where appropriate, discussion at stakeholder workshops), and to provide the Transport Agency s response. Many submissions supported the concept and principles of PTOM but there were a number of matters, mostly of detail where submitters sought review, clarification or elaboration of proposal. This document does not respond to every issue raised in submissions. If regions require additional information related to their submission they should contact their Transport Agency regional representative. Other submitters wanting further information should contact Ian Stuart, Principal Advisor (Planning and Investment Group) ian.stuart@nzta.govt.nz or DDI The term regions include regional councils, Auckland Transport, unitary authorities and those territorial authorities with delegated responsibility for public transport. 1

2 List of Submissions received Submission Number Submitter Abbreviation 01 Private Individual Private Individual 02 East by West Ferries East by West 03 Black Cat Cruises Black Cat 04 Horizons Regional Council HRC 05 Bay of Plenty Regional Council (NOTE submission is in the form of an noting that their views are covered by other Regional Councils) BPRC 06 Greater Wellington Regional Council GW 07 Hawke s Bay Regional Council HBRC 08 Auckland Transport AT 09 Bus and Coach Association BCA 10 Northland Regional Council NRC 11 NZ Bus NZBus 12 Environment Canterbury ECan 13 Belaire Ferries Ltd Belaire 14 Mana Coach Services Mana 15 Waikato Regional Council WRC 16 Fullers Ferries Fullers 17 Otago Regional Council ORC 18 Taranaki Regional Council TRC Executive Summary The consultation exercise indicated that there was general acceptance that the proposed amendments were consistent with the goal and objectives of PTOM. Most questions sought clarification, but a number sought a change, or suggested an alternative, to individual amendments. The Transport Agency has considered suggestions taking into account the high level policy direction provided by the government, the need to ensure value for money outcomes, and the need to balance the interests of stakeholders. In response to submissions, the Transport Agency has adjusted its position on the: role of the negotiation adviser in directly negotiated contracts procurement procedures to be applied to ferry and rail services deposit required to access commercially sensitive fare revenue information associated with a tender. Details of proposed changes are discussed in the body of this document under the appropriate headings. 2

3 Submissions also highlighted where further work is required the: benchmarking methodology that smaller approved organisations can use to undertake gross cost resets for tendered public transport contracts. process to be followed if a negotiation adviser determines that a price for a directly negotiated contract is not considered robust, and whether the negotiation adviser should have a wider role in the negotiation process. challenge process to be followed in the case of a commercial unit The Transport Agency will engage with affected stakeholders on further work. This is expected to begin in early General Submitter Comments The consultation exercise indicated that there was general acceptance that the proposed amendments were consistent with the goal and objectives of PTOM. Submitters acknowledged the significant amount of time spent amongst the large regions, operators and Transport Agency discussing the new relationships and the individual components that make up PTOM. There was a concern amongst some regions that the proposed changes to the Transport Agency s procurement policy as set out in its procurement manual were developed for the large regions with a one size fits all approach. Several submitters commented that the changes would not be right for the small regions whose services typically include smaller urban areas and less frequent services in rural areas. There was also comment that PTOM had been primarily developed for the bus market and some questioned how it would apply to ferry and rail services. In addition to commenting on proposed policy, submitters also indicated where more guidance and detail would be useful to assist with the implementation of PTOM, including resolving inconsistencies in terminology. Submitters highlighted the need for further policy development and guidance from the Transport Agency to enable effective implementation. The Transport Agency has taken into account the responses received, in particular the need to ensure that its policy is clear and concise. We have sought to ensure amendments to the Procurement Manual are clear and understandable. The development of PTOM has occurred over several years and has involved parties from across the sector. Many of the components of PTOM like annual business planning and measuring performance constitute good practice and are applicable to all regions via the partnering delivery model. There is some scope within new procurement procedures for regions with small units that involve infrequent services (that is, runs less than once a day) for contracts to be procured using the staged delivery model. Contracts procured using the staged delivery model are subject to fewer requirements than contracts procured using the partnering delivery model. The expectation though is that the majority of units will be procured using the partnering delivery model. We agreed with submitters who argued that the new procurement procedures for bus services are not completely suitable for the procurement of ferry and rail services. There 3

4 will be no pre-approved procurement procedures for ferry and rail, although there will still be an expectation these contracts will be partnering based. More detail can be found in Section 6) Treatment of ferries and rail. We are developing a series of web based process diagrams with links to other documents like the procurement manual, the new Guidelines for the preparation of Regional Public Transport Plans 2 (RPTP Guidelines) and fact sheets to assist regions give effect to PTOM. These will be living documents that will continue to be developed on an as needed basis where it is clear that further guidance is required. Because PTOM is as much about culture change (partnering relationship) as it is about changes to procurement procedures there is a limit to how much written guidance can be provided. We strongly recommend that regions engage early and regularly with their Transport Agency regional representative. Bus operators are encouraged to work with the Bus and Coach Association if they have queries, but can contact the Transport Agency direct (contact details on page 1 of this document) as should ferry and rail operators. Common Issues The most common issues raised by stakeholders in submissions and at workshops (in no particular order of importance) were: Partnering Transitioning to PTOM Commerciality Ratio Negotiation Process and Negotiations Adviser Contract Length Treatment of Ferry and Rail Annual Business Planning Benchmarking and Cost Resets Financial Incentive Mechanism Information and Monitoring Revenue Protection 1) Partnering PTOM is a shift away from the traditional specify/provide contracting model to a partnering model. The consultation document explained the partnering delivery model and the components of a partnering contract to implement this shift. It listed some core partnering principles that could be included in partnering contracts. Submitters Comments 2 At the time of writing the Transport Agency had released the interim guidelines on its website, with the final guidelines to be released in December The interim guidelines were issued in accordance with section 95(1)(ia) of the Land Transport Management Act 2003 and therefore is a statutory document. 4

5 Partnering in the PTOM environment was raised by most submitters and drew the most comments and questions of all the issues identified above. Submissions from the regions noted the need for further clarification of what is meant by partnering style and partnering contracts, as well as concern about the conflicting roles of councils (as principal to the contract) and operators. The large metro council s, commented that the description of partnering in the consultation document was too alliance-focussed 3 and includes inappropriate concepts. Comments reflected a belief that it is inappropriate to involve incumbent operators in developing contract terms and conditions to avoid unfair market advantage. Partnering was considered to be the relationship between regions and operators once a contract is awarded, rather than about the development of the approach to, or content of, the contract. GW noted that there are opportunities for operators to be involved in the design of the network and unit structure through consultation on the RPTP. The small and medium size councils were also concerned about implementation of partnering contracts, particularly the possibility of conflicting roles and managing risk and performance. WRC and ORC both considered that partnering guidelines should be centred on common areas of interest to achieve the desired outcomes while still recognising the statutory role of councils and the commercial focus of operators. HRC was concerned that operators outside of the big centres may not be fully aware of the implications of the PTOM partnering environment and asked for a upper central area workshop on partnering contracts. BCA and HRC noted a lack of understanding of all parties of what partnering contracts are and suggested that further policy will be needed to assist capacity and understanding in this area. BCA, AT and TRC stated that the emphasis should be on the behavioural requirements of the partnering parties. AT noted that partnering behaviours should be included in contracts and partnering contracts for joint investment might be an outcome. TRC stated that the three delivery models of partnering, staged and supplier panel should all be based on core principles such as: culture of honesty, accountability and outcomes. East by West was concerned that the move to a partnering arrangement may result in them losing the ability to trial new commercial services. They were concerned that councils may be more preoccupied with the bus and rail network, rather than with ferry travel. There was also considerable discussion at the bus and ferry focussed workshops on what partnering means in the PTOM operating environment. Regional councils and bus operators made the comments that there is a need for mutual trust for partnering to work and new opportunities will present themselves. They also noted that operators will need to be involved early on. There were questions about what happens if, and when, things go wrong. Ferry operators noted that partnering is good in principle but needs practice to follow with operators needing to have a greater say in partnering relationships. 3 A recent form of physical works delivery model that establishes a formal collaborative relationship between the principal and contractor. 5

6 Partnering is a collaborative relationship between a region and operators to provide quality public transport services. It is not restricted to contractual relationships but extends to the development of the network through planning (for example unit design and RPTP development). Partnering places reciprocal obligations on both parties and will be a foundation for improvements to the delivery of public transport services. Tensions will continue to exist in partnering contracts. Partnering does not override region s statutory responsibilities or operator s responsibilities to their owners. Nor does partnering override or interfere with the normal contract management or performance requirements of a contract. Partnering provides a positive framework for handling these tensions and resolving them in a manner that does not undermine relationships and encourages innovation. The components of PTOM are designed to support partnering, and we are looking to regions and operators, through their actions and interactions with each other, to define what good partnering looks like to deliver quality public transport services. Partnering will continue to be a core component of PTOM that needs to be reflected during the planning process (by involving operators in unit design and RPTP development), during procurement (via the partnering delivery model and contract development), and as part of ongoing contract and relationship management. 2) Transitioning to PTOM As part of the transition to PTOM, regions need to work with operators to ensure that public transport networks are meeting the needs of their communities before beginning the process of segmenting the network into units and developing a new RPTP. In addition, the region s procurement strategy needs to be reviewed and the Transport Agency s endorsement of the amendments sought. The Transport Agency will work closely with regions and with operators during the transition process to ensure that those steps are completed efficiently. Submitters Comments There was general concern about the transitional period between the old operating environment and PTOM and the role of the Transport Agency in particular. Submitters concerns broadly related to the resourcing required to transition to PTOM, the role the Transport Agency would play in the transition, and level of clarity round the transition process. Resourcing concerns HRC and TRC noted that the changes proposed require additional internal resource investments and skills that they do not currently have and requested funding for implementation from the Transport Agency. GW wanted assurance that the staff from the Transport Agency will be available to respond to documents in a timely manner, noting, along with TRC, that transition timing will be challenging. 6

7 ECan requested a Transport Agency regional representative to provide support for the development of its procurement procedure and highlighted previous issues that hampered its ability to get its procurement strategy endorsed. ECan also thought there was considerable duplication in what is to be included in the Procurement Strategy and in the RPTP and wanted to include the procurement strategy as an appendix to the Plan. Belaire wanted the Transport Agency to remain part of the process until the changes have bedded down. It saw resourcing as critical, noting that there is an existing resourcing overload and that timing for implementation should be cognisant of this. The Transport Agency s role during the transition A number of regions and operators sought more information about how much the Transport Agency will be inside regions businesses during the transition. Some regions considered that the Transport Agency was taking too large a role in the transition to PTOM in terms of making decisions. For instance, HRC wanted to know why the Transport Agency needed to approve each request for proposal. ECan noted that flexibility is needed and that regions should have the right to make decisions within scope of the endorsed procurement strategy. Conversely some operators were concerned that the Transport Agency might not remain closely involved in decisions. Fullers wanted the Transport Agency to provide tighter governance and have a stronger role in drafting standard contract terms and conditions. The issue of the Transport Agency s role, transitional issues and processes was also the subject of a significant amount of discussion at the bus and ferry focussed workshops. Attendees stated that they need clear implementation processes to make PTOM work. Fullers noted that there is a lot happening at the moment that is not PTOM related but will impact on how it transitions to a PTOM partnering environment. It noted a lack of resources impeding it from getting things done properly and in a timely fashion. Greater clarity round transition process GW, ECan, HRC, NRC and HBRC wanted clarity around the status of all guidelines, and the timing of procurement strategy versus timing of their RPTP s. AT wanted the Transport Agency to produce guidance on the transition period that is separate from guidance on the steady state for clarity. NZBus considered there is still significant uncertainty with the proposed changes and declared a need for greater clarity before the transition period. The Transport Agency s core role during the transition is to ensure that the PTOM policy is implemented as the government intended, and ensure consistent application of PTOM across New Zealand. To this end, we will continue to support all parties during the transition, and also have more involvement in the approval of key documents, such as requests for tender. The extent to which some requirements will continue beyond the transition (for instance, approval of RFPs) is dependent on the extent to which we are confident that value for money is being achieved. Regions should discuss resourcing issues with their Transport Agency regional representative. To reduce the risk of expending unnecessary effort regions are encouraged to engage regional representatives early, and at regular intervals, as they transition to PTOM to make sure they are meeting legislation and operational requirements. We will endeavour 7

8 to provide feedback on formal documentation in a timely manner. The more advance notice we receive about when documentation will become available the more likely our staff will be able to turn round a response quickly, especially if we already have a good understanding of what is likely to be contained in documentation. We have attempted to clarify as much as possible operational policy content in the procurement manual, including the content and endorsement of procurement strategies. The procurement manual and RPTP Guidelines are the definitive source for all PTOM requirements. The web-based process diagrams will link as appropriate to these documents. Regions should discuss the timing of their procurement strategies and RPTP with their Transport Agency regional representative. While a procurement strategy cannot be endorsed until after the region has adopted its RPTP, the two documents can be developed in tandem such that endorsement of the procurement strategy can occur shortly after the RPTP has been adopted. 3) Commerciality Ratio The commerciality ratio shows the portion of the costs to provide public transport services that is met by users. Regions are required to publish the region s overall commerciality ratio (CR) and the commerciality ratio of every unit. It will be used to inform an assessment of progress toward the government s goal of growing patronage with less reliance on subsidy. The unit commerciality ratios will be used to determine a unit s placing on the league table and whether the unit is likely to be negotiated or tendered (in larger regions). Submitters Comments GW and HRC both commented on the relationship between the CR and farebox recovery ratio. GW did not think both are needed. HRC wanted more clarity about the relationship between the two. ECan considered the CR will not be an adequate indicator of cost optimising by operators, and it requested the Transport Agency consider an efficiency measure as well as a CR in the form of gross costs per km. BCA considered the CR guidance to be appropriate with the exception of the transitional implications of the change to the Transport Agency s concessionary fares scheme (CFS) policy. BCA submitted that including CFS payments in the subsidy will lower the regional CR. It thought the Transport Agency needed to reopen dialogue with stakeholders as these changes have not been widely socialised. NZBus also considered that the policy change for CFS as having significant consequences. It considered the incorporation of the CFS into the annual service fee payable to operators in a unit contract to have unexpected negative consequences on CR calculations. It added that the consultation document did not address how the changes to CFS will operate in relation to existing and new exempt services. The Transport Agency is aware of the similarities of the two ratios, one for the farebox recovery and the commerciality ratio. Both ratios reflect the portion of the cost of providing the services that is recovered from the users, but are used for different purposes. 8

9 The current farebox policy is unchanged and regions will need to continue to include a farebox policy in their RPTPs. The Transport Agency will involve stakeholders in any potential review of the farebox recovery policy. With regards to the CFS policy changes, this policy has been in place for a number of years and the top up payment to operators only continues for some legacy net contracts until these are re-tendered. The historic basis for the policy requiring a top up payment was made to protect the operator from financial loss if the region introduced a concession fare for services included in a net contract after the contract had been awarded. Such a policy is no longer relevant in the PTOM environment because net contracts are no longer an approved delivery model. The Transport Agency will work separately with stakeholders who believe they are affected by the Transport Agency s policy on fare top ups. 4) Negotiation Advisor and process In larger bus markets, a proportion of units will be negotiated to provide an incentive for operators to grow commerciality and patronage. Formal benchmarking will be used to derive a market price range, within which the price of a negotiated contract could be expect to lie if the contract was tendered in a competitive market. In some circumstances the parties will jointly appoint a negotiation advisor from an experienced and skilled panel, established by the Transport Agency, to assist with the negotiations. Submitters Comments Negotiation Advisor There was general lack of support for the proposed Transport Agency negotiation advisor role. ECan objected to the negotiation advisor role. It has a probity auditor on each tender panel and had the same during an earlier contract negotiation process. NRC was concerned about the role, stating that if PTOM is about ensuring a fair and competitive market, then the role had no value and it could be used to veto the award of tenders. GW saw the role as adding no value and that having the role suggested the Transport Agency does not trust that the other elements of PTOM will achieve the desired outcome. It objected to the inclusion of such an advisor when the role was not clearly defined and whether that person is there to look after the Transport Agency s interests. GW considered that it is as well-equipped to deal with pricing and affordability issues as is the Transport Agency and that a regionally-appointed probity auditor will provide confidence in the process. ORC and NZBus both asked for further clarity on the role of the negotiation advisor. NZBus asked if the role will actually involve mediation and was of the view that the procurement manual should set out the negotiation process. NZBus asked what happens if dispute are not solved and noted that the negotiation advisor should be excluded from commercial unit negotiations. ORC was concerned that the negotiation advisor could impede the negotiation of cost effective contracts, and that the mix of three roles (observe, reporting on process and advising applicants, particularly in process) would be a conflict of interest. ORC saw the role as being beyond the Transport Agency s scope of power by removing decision making power from council. 9

10 Negotiation process NZBus was of the view that negotiation of units should be required in large regions. It was concerned that the amount of flexibility allowed will result in implementation being inconsistent with LTMA principles. NZBus submitted that smaller markets should be able to negotiate, but with a prescribed percentage of the market not to be negotiated. The proposal for a negotiation advisor was not intended as a reflection on the capability or credibility of regions. In developing PTOM policy central government agencies, including Treasury, expressed concern about the cost transparency risks and ensuring best value for contracts with terms of six and 12 years. The concerns related to the intention to negotiate prices for substantial blocks of units rather than determine prices through open tender. Central government agencies wanted additional assurance that the negotiations would result in the best value for money in the circumstances. The Transport Agency will retain the requirement for a negotiation advisor but has revised its position to clarify that the advisor will be the Transport Agency s representative. The representative will be present and participate in all like for like negotiations and other direct negotiations at the Transport Agency s discretion, for instance, a price offered that is outside the benchmark range. The Transport Agency will pay all costs associated with its representative. The core purpose of the negotiation adviser is to provide the Transport Agency and the Crown with confidence that the price negotiated for a directly appointed contract is efficient in the circumstances. A price agreed for a contract that is within the benchmark range for the contract will be presumed to be efficient. The Agency does not propose that the advisor has any powers of veto nor would it replace the role of a probity auditor in negotiations. Further work is required to clarify: the process to be followed where the negotiation adviser concludes a price is not robust whether the negotiation adviser should have a wider role than simply providing assurance that a contract price is efficient We plan to engage with affected stakeholders 4 on these aspects in early The detail of the negotiation adviser role is not immediately required but will be resolved well in advance of any negotiation. 5) Contract Terms The consultation document proposed contract terms of six years for negotiated units, nine for tendered units and twelve years for the like for like units. Those terms were considered to balance the need to encourage competition and investment by the bus operators with the need to retain a competitive market. The Transport Agency acknowledged that different contract terms may be needed for rail and ferry services due to their different circumstances to bus operations. 4 Auckland Transport, Greater Wellington Regional Council, Environment Canterbury, Otago Regional Councils and public transport operators providing services in those regions. 10

11 Submitters Comments The nine regions that submitted on this point wanted greater flexibility around contract terms. All wanted the ability to let contracts for shorter terms. HBRC suggested between three and six years for contracts with less than four peak buses. HBRC, HRC, TRC and NRC wanted a review period with optional extension, rather than a fixed nine year term, with a reset of the price only at year six. In markets with one or only a small number of units, nine years between tender rounds was seen by some submitters as having the potential to reduce competition. HBRC commissioned a consultant to prepare a report looking at contract tenures. The consultant spoke to four regions and two operators. Both operators favoured the nine year term, as it would allow it greater certainty around vehicle purchase, longer depreciation, and better job security for staff. One operator acknowledged the risks to councils, but thought these could be managed by councils through good contract design and tender evaluation. HRC, HBRC and NRC were concerned that long contract terms will elevate the risk of harm to public transport through relationship breakdown and requested short term contracts or midcontract review points to mitigate this risk. They were also concerned that long contract terms may reduce competition for small contracts. In regions with more than one unit the inability to stagger contracts to allow regular tendering was seen as a risk. East by West and Belaire supported twelve year terms for ferry contracts. East by West was concerned that if units were negotiated, the six year term would be too short and that the substantial investment needed for vessels would be unchanged regardless of the contract term or whether units were tendered or negotiated. Fullers submitted that nine and twelve year contracts will be insufficient to justify investment in new purpose built vessels and will inhibit competition and may limit patronage growth. The expectation is that the majority of bus units will be procured using the partnering delivery model, and that contract terms will either be six, nine or 12 years depending on whether it is for a directly appointed unit, a tendered unit, or a like-for-like unit. The contract term of nine years for tendered partnering contracts is intended to provide bus operators with a greater period of operating certainty to support a more stable basis to build a partnering relationship between a region and operator to grow patronage with less reliance on subsidy. A nine year term is also expected to make it more attractive for bus operators outside a region to enter new markets because the contract term provides them enough time to get established in a new market. As was noted in the general comments section there is scope within new procurement procedures for regions with small units that involve infrequent services (for instance, a once a week shopper service) for contracts to be procured using the staged delivery model. Contracts procured using the staged delivery model are not subject to pre-set contract terms. The alternative proposed by some submitters for tendered contracts of (say) six years with an optional three year extension removes that certainty and may influence tender prices 11

12 (that is, result in higher tender prices). In such contracts, once awarded, the operator has a reasonable expectation for the extension if performing adequately and the contract cannot simply be terminated. If there are concerns about performance this should actively be managed during the term of the contract. Core PTOM components like annual business planning and performance measures are designed to support more active contract management where regions and operators raise concerns and issues early with each other and take a proactive approach to their resolution. Contract terms for ferry and rail services are discussed in more detail in Section 6) Treatment of Ferries (and Rail). 6) Treatment of Ferries (and Rail) The proposals in the consultation document were primarily related to the bus market and made some references to ferry services. It was commented that ferry markets in New Zealand have differences and additional complexities compared with urban bus markets. Submitters Comments There was general lack of support from operators for the implementation of PTOM in its current form in the ferry market. Submitters sought more clarity on how PTOM would apply to ferry (and rail) services. They were concerned that all PTOM requirements set out in the consultation document would apply to ferry and rail services. The Transport Agency agrees with submitter s views that ferry markets (and rail) are different enough to urban bus markets that requiring them to be procured through the partnering delivery model and subject to all the same requirements as bus partnering contracts is not likely to generate value for money. There will be no pre-approved procurement procedures for ferry and rail services. Regions, with input from operators, will develop the procurement approach for ferry and rail services through their procurement strategies and propose customised procurement procedures for the Transport Agency s approval. The process for developing a customised procurement procedure for the Transport Agency s approval is set out in section 2.8 of the Transport Agency s procurement manual. The Transport Agency regional staff will work with regions with the preparation of both the strategy and procurement procedures as required. Contracts for ferry and rail services should still be consistent with the PTOM framework and should include elements of partnering contracts like principles for collaborative relationships, annual business planning, and financial incentive mechanisms. The bulk of ferry services are in Auckland with some small services in other regions. Each region will have its own characteristics related to access to infrastructure, competition potential and likely business model (such as capital investment or potential for growth). Components such as contract term, tendering or direct negotiation and price reset will be considered as part of the procurement procedure. A region can make a case to the Transport Agency for it to consider approving direct appointment of unit contracts where the circumstances warrant this approach. 12

13 Urban rail services are only provided in Auckland and Wellington and, to the greatest extent possible, the regional resources and intellectual property should be shared between the regions concerned to achieve the most cost effective outcome. Rail rolling stock and infrastructure (other than tracks, power reticulation, signalling and train control) are owned by the region. Contracts will incorporate partnering principles but will be substantially management contracts. 7) Annual Business Planning Annual business planning (ABP) is a key element of contracts entered into under PTOM. It is expected that operators and regions will review the performance of units every year and agree a collaborative business plan, including initiatives, to grow patronage and farebox revenue. The consultation document also noted that the scale of the ABP approach should be commensurate with the expected benefit and size of the market. Submitters Comments Submitters wanted more clarity on what was expected from ABP and were concerned at the suggestion that the process would create a legally binding document. There was also concern that it would result in a substantial overhead if an ABP was required for every unit no matter how small. AT wanted the ability to combine business plans where an operator holds multiple units, and specify unit specific initiatives as part of the wider plan. They also wanted initiatives to correct poor performance, separate from KPI s. ECan considered ABP as the most difficult part of PTOM contracts and stated that more information is needed on what was required in these documents. ORC noted that the parties have different imperatives; councils have a much wider focus than just buses. It submitted that the contracts should be the legally binding documents, not the annual business plans. Belaries wanted to have a formal process around ABP to clarify expectations. It noted that the need for commitment and resources from both parties. At the bus operator focussed part of the consultation workshops it was noted that getting the physical infrastructure right will be a critical part of ABP conversations. The bus operators asked how infrastructure investment could be influenced when territorial local authorities will not be part of the partnering relationship. The Transport Agency considers ABP to be good business practice and wants to encourage more consistent use of it. Annual business plans are not new, and formalise what already occurs current in some regions (e.g. some regions currently undertake joint advertising and marketing and jointly trial services). Annual business plans provides a formal framework for discussions and agreements necessary to work together to improve services and grow patronage. The extent of ABP should be commensurate with the size of the contract and the importance of the services within a unit to a region s wider public transport network. That is, annual 13

14 business plans should be proportionate to the benefit a unit provides to a region s public transport network. Annual business plans should clearly assign the responsibility for each party s role in undertaking the initiatives. Examples of initiatives include driver training (operator), infrastructure improvement or evaluating a trial service (both operator and region). ABPs are not legally binding documents, the contract is. The level of documentation and detail should also be proportionate to the benefit a unit provides to a region s public transport network. The annual business plan can encompass more than one unit contracted with the same operator provided the initiatives specific to each unit are clearly identified. The annual business plan may be reviewed and amended by agreement at any point but there should be a formal reporting on progress and full review of the initiatives at least annually. The region should be just as accountable for its contribution as is the operator. The Transport Agency will not specify how this accountability is to be incorporated into annual business plans but expects the region to approach this aspect in a responsible manner consistent with a partnering environment. An annual business plan may include reference to infrastructure but it is important that the party responsible to pursue any such initiative is clearly defined. Where infrastructure or the provision of it is controlled by the territorial authority it must be the region s responsibility to progress this with the territorial authority with assistance from the operator as appropriate. Refer also to the Transport Agency s RPTP Guidelines (section 7.4 Aligning services and infrastructure planning). 8) Benchmarking and Cost Resets The PTOM model uses cost benchmark data in two key ways; to provide confidence in the costs of negotiated units in larger markets and to enable the resetting of the gross price at year six of tendered units. It is envisaged that data envelopment analysis based on successful tender bids will be used in the larger markets of Auckland, Wellington and Canterbury and other benchmark data can be used in the smaller markets. Submitters Comments Twelve submitters made comments on gross cost resets and benchmarking. Most submitters had some concerns about the workability of benchmarking and gross cost resets and sought either greater clarity or a change in the Transport Agency s position. GW wanted further information on how many data points are required for benchmarking and stated that if it has insufficient data it will need to tender a higher proportion of the market to have confidence in benchmark prices for direct negotiations. GW and TRC suggested that the Transport Agency develop a cost model that regions can populate with local data. HRC suggested that the Transport Agency could undertake national benchmarking. ECan thought that gross cost resets should be optional and that indexation over the life of the contract will be sufficient and requested further work on benchmarking. It thought that regions should have flexibility over how benchmarking is undertaken as long as it fits within the Transport Agency s guidelines. 14

15 HRC, HBRC, NRC and WRC considered the current approach to benchmarking to be inappropriate for smaller regions as it is unclear where the data will come from and how the process will apply. HRC also queried whether the Transport Agency will pay for the benchmarking advisor. ORC requested the Transport Agency to work with councils to find a workable approach to benchmarking and cost resets. BCA, Mana and NZBus wanted group tender data to be specifically excluded from benchmarking data. They were also concerned about whether gross price resets could result in operators having to accept unsustainable prices. NZBus had concerns about the lack of clarity around aspects of the benchmarking process, such as whether operators will have access to the benchmark range before submitting prices and what supplementary information could be used. NZBus was generally supportive of cost rests, but was concerned that the guidance on resets was not clear. It sought clarification that commercial units will not be subject to resets and that alternative cost models will not be used in large markets. East by West and Belaries had concerns about how ferry services could be benchmarked and suggested alternative ways of informing prices for negotiated units including return on asset, open book or benchmarking against previous contract prices and other negotiated units. The Transport Agency has taken into account the submissions, but does not intend to change its proposed approach to cost benchmarking or gross cost reset for the larger bus markets of Auckland, Wellington and Canterbury. Those regions will use data envelopment analysis (DEA) to establish benchmark price ranges for the negotiation of direct appointments and for the gross cost reset of tendered contracts. After extensive work, including a peer review, DEA was considered to be the most appropriate methodology for undertaking benchmarking. The Transport Agency will source and fund the expertise required to undertake DEA analysis for the foreseeable future. In other bus markets, the gross cost reset of tendered contracts can be done using alternative benchmarks such as unit rates, cost model outputs and cost indexation as agreed by the Transport Agency. We recognise that more work may be required to assist regions identify an appropriate benchmarking methodology and we intend to discuss this matter with affected regions early in As a minimum the Transport Agency would expect a gross cost reset to be guided by the application of indexation to the initial contract gross price and any service level adjustments. Rail and ferry contracts are to be procured through customised procurement procedures. If appropriate, a gross cost reset process will be determined as part of the development of these procurement procedures. The benchmark price range for a directly negotiated contract will not be shared with the incumbent operator before they submit their best price offer. This is necessary to support competitive outcomes. The benchmark price range can be shared with the incumbent 15

16 operator after they submit their best price offer if required to complete negotiations (for example, the operators best price sits outside the benchmark range). 9) Financial Incentive Mechanism The financial incentive mechanism (formally known as risk and reward) is one of the key partnering tools that enable regions and operators to have a mutual financial interest in the performance of a unit. Its purpose is to ensure regions and operators have a mutual financial interest in the positive performance of a public transport service unit and to incentivise them to collaborate to improve performance by growing patronage with less reliance on public subsidy. Submitters Comments Nine submitters commented on the financial incentive mechanism (FIM). HRC and TRC were concerned about how much level of detail was needed in the procurement strategy, and how to design a FIM that would work for all services (including smaller access based services that may have limited growth potential). HRC was also concerned that operators may not fully understand the downside risk. TRC wanted greater clarity, including a timeframe and longer term worked examples from the Transport Agency. It had concerns about a lack of the expertise to develop a FIM and the cost of buying in this expertise and asked if the Transport Agency s funding would be available for this. AT submitted that FIMs could address wider issues such as fare revenue protection through correctly incentivising operators and wanted only real farebox revenue to be shared. It wanted clarity on who must agree to share revenue for commercial units and who judges the appropriateness of a mechanism on what basis. AT proposed an option of a contract with no FIM for the first year to establish baseline data. GW and AT sought clarity on how FIMs could be applied to commercial units by agreement. ECan wanted further work to be undertaken on FIMs, but think that its current approach of gross cost contracts with patronage incentives is compatible with the proposals. ORC wanted the mechanism refined so that operators are not doubly compensated for inflation. TRC commented on the need to clearly distinguish KPI s, FIMs and the relationship with indexation and commerciality ratios. BCA and NZBus wanted there to be one FIM for a region, although they accepted that perhaps there could be different mechanism for the different modes. BCA was willing to accept variable parameters around how much revenue was shared, but NZBus wanted the operator share of revenue to be no lower than 70%. East by West wanted the share available to operators to represent the real risk of the parties and significant investments, such as new vessels, with a sliding scale of between 50 and 100% of revenue going to the operator. Belaire was concerned that partnering contracts with FIMs will not be significantly different from gross plus incentive contracts. Partnering contracts with FIMs will not provide the same incentive for operators as net cost contracts. It noted that as there will not be any negotiated units the FIM will be more critical. 16

17 At the bus focussed workshops discussions focussed on FIMs application in smaller markets. There were questions about what are the financial incentives in smaller regions and how will the FIM work. The Transport Agency was asked if there will be one FIM per region and how this will work when there are units with very different CRs and growth potential. There were also questions about what will be the incentive for smaller regions with no negotiated units. The Transport Agency has developed additional guidance and two simple FIMs (one based on revenue, and one based on patronage) that regions can consider using, subject to the region s FIM meeting the FIM principles. We will continue to provide support as required to develop an appropriate FIM. Selecting appropriate FIM(s) to be included in partnering contracts will be principles-based. The Transport Agency is not prescribing FIMs because we want regions, in consultation with operators, to identify what is most appropriate to their region. The four principles that need to be considered when selecting a FIM are: incentivise both parties to collaborate to grow patronage and revenue take account of unit and regional market characteristics simple to apply and administer contribute to value for money The FIM must also meet two requirements: apply to all subsidised partnering contracts (may apply to commercial contracts by agreement) the calculation and disbursement of FIM payments must be done separately to indexation and key performance (KPI) payments Because the approach to selecting the FIM is principles-based the matter of whether the FIM shares nominal or real revenue growth is something that a region needs to consider. It is important the regions involve operators in the development of a FIM as a FIM should incentivise both parties to collaborate to grow patronage and revenue. The reason that there is an option of applying a FIM, by agreement, to commercial units is that these units receive no subsidy and are also not eligible for indexation. Consequently, the operator carries all the risk for patronage and revenue growth and for changes in input prices. There may be situations where a region and operator agree that an investment by the region (or the operator or both) in an initiative (for example new infrastructure) will increase patronage and revenue, in which case, sharing of the revenue change is appropriate. There are two components to a FIM: The FIM formula - the type of FIM (for example passenger patronage payment or revenue share) and the parameters of the FIM. These will define what is shared and how complex the formula will be. Considerations include the baselines for comparing change (patronage, revenue and costs), and cost sharing (Eg. downside sharing, upside capping, downside collaring, baseline resets etc) The FIM setting the values or percentages that are applied to the formula, which will define how much is shared (for example 50/50 share or 60/40 share) 17