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Getting New South Wales rail back on track | by Dan Stojanovich
Getting New South Wales rail back on track
It is often said that infrastructure is the lifeblood of the economy. In Sydney, the roads and heavy rail networks are undoubtedly the arteries that sustain both the city and the economy – unfortunately, it’s a city and an economy plagued by congestion and inefficiency. Building more roads and laying more tracks are only part of the solution to unclogging those arteries; we also have to look to efficiency and governance to make real progress and reap real economic rewards.
Getting New South Wales rail back on track?
back on track
By Dan Stojanovich
The performance of Sydney’s trains may appear to be a local, parochial problem – but it goes to the very core of economic competitiveness. Every minute lost on late-running trains, every commuter who jumps in their car and enters the congested road network to avoid clogged or uncomfortable trains, and each dollar demanded from the taxpayer to subsidise inefficient practices on the rail network reduces New South Wales’ national and global competitiveness. Viewed through that prism, the operation of the rail system in New South Wales is an issue of acute importance. In each of the last five financial years, the figures have deteriorated, and every year government funding has grown to meet the shortfall. In 2005-06, RailCorp required a taxpayer subsidy of $6.77 for every passenger journey. Worse, by 2009-10, that figure had surged to $8.33 per passenger journey. It doesn’t take an economics scholar to work out that the current arrangements are unsustainable. It would be a brave politician that argued rail in New South Wales doesn’t need greater investment, but repeatedly doing the same thing is unlikely to suddenly yield a different result. Investment without reform won’t fix the problem.
That is not to say that public investment in RailCorp hasn’t yielded results. A mixture of good senior management and significant investment has seen a rapid improvement in performance standards. This improvement in operating performance is commendable, but it does not resolve the ongoing issue of unsustainable cost escalations, or flagging service levels; which raises the question: What is the best way to deliver cost and quality improvements on New South Wales’ railways?
A major new discussion paper into rail reform argues that New South Wales has the opportunity to answer that question. The paper doesn’t claim to have all the answers, but it does demonstrate that genuine alternatives to the current system do exist. And they work.
The discussion paper, Franchising Passenger Rail Services in NSW: Preliminary Assessment and a Way Forward, provides a reform blueprint for the new State Government to begin to answer that question. While the paper focuses on New South Wales passenger rail services, there are lessons for rail and other transport operations across the nation.
The discussion paper by Infrastructure Partnerships Australia (IPA) and Aegis Consulting argues that competition in rail service delivery could offer improved customer service and greater cost certainty for taxpayers. A well-considered and wellcontracted franchising model could allow New South Wales to transform the way the rail system operates and deliver a customer focus and experience that has been missing.
Getting New South Wales rail back on track?
While franchising rail operations in Sydney and the state’s interurban network to the private sector may seem radical to some, it has strong precedents in other Australian and offshore jurisdictions. This means that New South Wales is in the enviable position of being able to learn from the successes and mistakes of those who leapt before them. The paper examines those experiences and establishes a pathway for New South Wales to consider and implement service delivery reform.
The paper argues that ‘in a context of low customer satisfaction, constrained patronage growth on rail, significant inefficiencies and a huge projected growth in population, it is now appropriate to give real consideration to alternative models that will deliver better outcomes for commuters – and for taxpayers’. This assertion is backed by evidence from domestic and international case studies. The paper goes on to say that ‘in broad terms, the Australian and global experience of the private operation of public transport has delivered significant benefits in terms of cost certainty and cost efficiency to government – while delivering much higher customer service levels’.
The key recommendation of the paper is that the New South Wales Government undertake a special commission of inquiry into the opportunities that exist for competitive franchising on the rail system.
In exploring the opportunities for reform in New South Wales, the paper reviews the experiences in a number of jurisdictions, including: • The United Kingdom (open access and tendered concessions) (1993); • Sweden (tendered and network concessions) (1990); and • Victoria (tendered concessions) (1999).
In each of these cases, a full separation of infrastructure management and service delivery was instituted. Both Sweden and Victoria retained infrastructure ownership and management in public hands, while the United Kingdom initially privatised this function but later resumed control because of a range of factors.
The United Kingdom and Victorian approach initially sought to transfer all operational and revenue risk to the private sector and provide incentives for franchisees to invest in rolling stock and infrastructure upgrades. In both cases, this led to early service issues and financial problems with some franchisees, which caused each jurisdiction to revise these arrangements.
Lessons were learned from both examples. Current franchise contracts enable revenue sharing between government and franchisees with incentives for growth in patronage revenue (United Kingdom); or incentives for infrastructure improvements (Victoria). Fares are regulated in Victoria, and in the United Kingdom fares are regulated for commuter routes where customers have limited alternatives to rail. In Victoria, the government has resumed control of regional services.
According to the paper, in both the United Kingdom and Victoria, franchising has led to improvements in service quality, customer satisfaction, punctuality and volume of services, as well as significant investments in new and refurbished rolling stock and infrastructure. In both the United Kingdom and Victorian experience, the operating subsidies did increase beyond what was anticipated, but this was driven by a massive surge in patronage post reform. And in Victoria’s case, cost recovery levels achieved across Melbourne’s train and tram network is now around double what is achieved in New South Wales.
Sweden took an entirely different approach. Concerned with the rising burden of subsidising uncommercial local and regional rail lines, it transferred responsibility for these to local government and permitted them to franchise rail service operations through competitive tendering. Meanwhile, the central government chose to retain ownership of the monopoly rail service provider that only operates on profitable lines. Competition here has reportedly reduced overall network operating costs by between 20 per cent and 40 per cent.
The paper argues that ‘there is now a clear opportunity for New South Wales to undertake major reforms in the way passenger rail services are delivered through the introduction of competition and contestability in the provision of public transport service delivery’.
Of course, privately operated public transport services are not a new phenomenon, with private entities already operating across much of the New South Wales bus network, part (and soon all) of the ferry network and the light rail system. Added to this, the New South Wales Government has recently announced that it will tender the rest of the Sydney Ferries network. The paper argues that the improved outcomes on these privately operated networks only strengthen the call for reform to the state’s passenger rail services.
Getting New South Wales rail back on track?
Although Sydney’s passenger rail network has enjoyed significant improvements in its reliability in recent years, rail services in New South Wales continue to perform poorly in terms of both financial and customer service performance. Beyond the economic measures, customer complaints rose by 23.9 per cent in 2009/10, and cost recovery has decreased markedly since 2007.
It is not that various public sector approaches have not been tried. Over the past 13 years, the New South Wales rail system has undergone significant disaggregation and re-aggregation. Currently, RailCorp owns the state’s rail infrastructure and is the sole provider of passenger rail services. It mirrors the former State Rail Authority (SRA) prior to 1996. Between 1996 and 2004, the natural monopoly infrastructure components of the rail system were separated from the contestable, service delivery functions. However, interface and reliability problems have seen a regression in the structure – a case of ‘back to the future’.
The case for reform is compelling. Patronage demand increased by 5.2 per cent in 2007-08 and is currently growing at about 2.9 per cent – well above the historic annual average increase of 1.9 per cent. Annual growth in passenger demand adds pressure to RailCorp’s infrastructure and services and increasingly risks pushing passenger loading on trains above the acceptable level of 135 per cent.
But patronage growth poses another challenge to taxpayers. More people and greater demands require additional services, in turn increasing operating costs. Government affordable transport policies cap the allowable fare increases to movements in the Consumer Price Index.
This has given rise to a situation where the loss incurred by RailCorp on passenger journeys was 14 per cent higher in 2009 than 2005. Over this time, government has had to increase its recurrent and capital funding for RailCorp to support train operations and the renewal, maintenance and upgrade of infrastructure.
In the context of a stretched government balance sheet, insufficient flexibility within the constraints of the AAA credit rating and a huge demand for new capital investment – including in extensions to the rail network – the paper argues that it is time to give real consideration to modernising passenger rail services.
So could franchising work in New South Wales? The paper argues that ‘given the benefits, when weighed against the costs, franchising the New South Wales passenger rail system to the private sector is a proposition worthy of further consideration’. It goes on to suggest a realistic method of consideration in the form of a series of key recommendations to the New South Wales Government that would test its costs and benefits in practice.
Getting New South Wales rail back on track?
Asserting that the overarching goal of reform to rail services should be the pursuit of greater customer satisfaction at greater value to taxpayers, the key recommendations of the paper are:
1. Undertake a Special Commission of Inquiry on improving rail service quality and efficiency, including a detailed investigation of the potential to franchise part or all of the New South Wales passenger rail system to the private sector.
The guiding objective of the Inquiry should be to identify options to achieve increased rail customer satisfaction, at less cost to government. The Commission of Inquiry should be led by a suitably qualified individual or team of experts and be able to draw on sufficient resources to fully examine the necessary issues. Consultation with and submissions from government agencies, industry, business, unions, the community and regulators should be sought to ensure as broad a range of views as possible are considered.
2. Resolve the features required to support an effective franchising model that represents value for money for the community. These features should inform the terms of reference of the Special Commission of
Inquiry and concern the appropriate roles of government and the franchisee.
Based on our examination of other franchising schemes in Australia and internationally, these features include: • Government should retain public ownership of all rail assets and provide infrastructure and rolling stock for purposes of franchising. • Fares should continue to be regulated by the government. • Government should assume the responsibility for preparing standard operating timetables. • Government should assume the responsibility for network planning. Network planning should be informed by an operating plan, demand analysis, customer requirements, economic analysis, engineering analysis and risk assessment. • Government should bundle below rail maintenance with passenger services and allow franchise operators to bid for funding for project upgrades. This would create incentives for operators to plan for long-term maintenance and invest in the network. The timing of this may be most appropriate after an examination of the potential of the Clearways program in promoting future competition. This examination should consider whether opportunities have been created for open access or tendered concessions on any or all of the sectors in the rail system. • The relationship between the government and franchisee should be governed by a contract of around eight to 10 years with a further option to renew the contract. • Franchise contracts should be clear and simple, with measurable objectives that provide for continuous improvement in the delivery of services. To ensure this, contracts should: - Explicitly identify any government funded Community Service Obligations that the franchisee is expected to deliver. - Include relevant, measurable and achievable performance indicators that: › are linked to customer requirements; › can be benchmarked; › can be independently verified; › support trend analysis; and › form the basis of payments or penalties to the franchisee.
3. Consider whether the New South Wales Government, as the infrastructure owner, should assume risk in the rail network and simplify the network to improve operating efficiency.
While franchising offers opportunities to attract private sector innovation, investment and efficiency into the rail network, government should at an early stage determine its own investment levels.
Government or private investment would need to be linked to network planning to have the optimal impact on operating efficiency.
Getting New South Wales rail back on track?
4. Immediately commence planning for a limited demonstration project for rail franchising in Sydney.
It would be useful for benchmarking and comparison purposes to establish a pilot franchising project in advance of any wider application of a franchising model that might be recommended by the Special
Commission of Inquiry. In our preliminary analysis we have identified the Eastern Suburbs Railway and
Illawarra lines as the most suitable for a demonstration project, because this sector is already operationally separate from the wider CityRail network. The performance of the demonstration project could inform the findings of the Inquiry.
5. Begin an immediate assessment and market sounding for potential franchising of the operation and maintenance of the CountryLink network.
The CountryLink network could provide a discrete system that is an early candidate for franchising. It bears a range of similarities to inter-urban networks in Europe, North America and Asia, which have been subject to successful franchising for many years. Accordingly, the feasibility of franchising CountryLink services should be assessed in conjunction with the Inquiry.
In recognising the many political and public pressures on large-scale reforms, this paper does not seek an instant overhaul. Rather, it calls for a real consideration of the options and selection of the best value for money outcome.
The pathway to reform would include a public inquiry and consultation with key stakeholders. The basic premise of delivering better customer experiences at less expense to the state should guide the inquiry and any final decision thereafter.
Of course, ferry franchising is a vital test case for public transport reform in New South Wales. While there are challenges in franchising Sydney Ferries, they pale in comparison to the sheer scale and complexity of reforming the state’s rail services. Nevertheless, the success of the ferries transaction – and the will of the new government to make real changes – will be the staging ground for a much deeper reform toward better services and more infrastructure in New South Wales.
David Roberts Head of Project Advisory, ANZ
The time is now
Just as the requirements of the resources sector heat up, our public network of transport and social services needs renewing following decades of underinvestment. Historically just three per cent of GDP in Australia has been invested across the infrastructure sector. Between the 1970s and about 2005, the average age of Australia’s infrastructure ballooned to 21.1 years from about 15.7 years. The last significant build of infrastructure was more than 10 years ago when Sydney was preparing for the Olympics. Bringing the age of infrastructure back to its long run average of between 18 and 19 years will take about $600 billion by 2017, or about 7.6 per cent of GDP. The required investment drive in Australia includes road and rail, ports and social infrastructure. Given just how much work needs to be done in the public and private spheres, realistic advice and reliable delivery of finance has never been more important.
Risk clarity to unlock capital
While Australian Government balance sheets emerged from the GFC in relatively good condition compared with other mature economies, demand to produce surpluses means the public sector can’t make the infrastructure investment on its own. Roberts says “Turning to the private sector will relieve pressure on balance sheets and help ensure projects are completed on time and on budget. Simplifying and clarifying risk associated with these projects will help unlock capital building up in superannuation funds.” Super funds offer significant capital and they typically have a requirement to invest a portion of their money in alternative assets, which usually includes infrastructure. But many super funds have small teams that have to sort a multitude of options. Straightforward risk profiles can help get their attention.
Government has already shown it’s willing to shoulder some of the operational risk that transport projects can face. In Victoria the state government opted to have its 25 kilometre $890 million Peninsula Link motorway built through an availability model which means the project operators avoid full patronage risk. Roberts says, “There’s room for melding the patronage model that was at the centre of the well documented financial failures with the availability model. Measuring risk throughout the life of a project and its impact on investors is a model that may become more commonplace in the future. Capping government’s exposure helps limit potential costs while providing the necessary support to make a project more financially viable for both investors and debt providers.”
Private sector funds and new financing models will be key to driving renewal of the country’s infrastructure amid booming demand for investment. ANZ is ideallyplaced to play a leading role as an advisor, arranger and lender. That’s because it has a proven track record of pulling the pieces of this complex puzzle together. With skin in the game, ANZ is vitally interested in getting these projects to work. In fact, come to think of it, we all are.
ANZ Contacts: David Roberts, Head of Project Advisory T: +61 2 92271908 E: David.Roberts3@anz.com David Byrne, Head of Utilities & Infrastructure, Australia T: +61 2 92734852 E: David.Byrne2@anz.com Peter Davis, Global Head of Utilities & Infrastructure T: +61 2 92271845 E: Peter.Davis@anz.com
Years
22.5
20
17.5
15 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: ANZ Economics & Research, 2010
David Roberts Head of Project Advisory, ANZ
The time is now
Just as the requirements of the resources sector heat up, our public network of transport and social services needs renewing following decades of underinvestment. Historically just three per cent of GDP in Australia has been invested across the infrastructure sector. Between the 1970s and about 2005, the average age of Australia’s infrastructure ballooned to 21.1 years from about 15.7 years. The last significant build of infrastructure was more than 10 years ago when Sydney was preparing for the Olympics. Bringing the age of infrastructure back to its long run average of between 18 and 19 years will take about $600 billion by 2017, or about 7.6 per cent of GDP. The required investment drive in Australia includes road and rail, ports and social infrastructure. Given just how much work needs to be done in the public and private spheres, realistic advice and reliable delivery of finance has never been more important.
Risk clarity to unlock capital
While Australian Government balance sheets emerged from the GFC in relatively good condition compared with other mature economies, demand to produce surpluses means the public sector can’t make the infrastructure investment on its own. Roberts says “Turning to the private sector will relieve pressure on balance sheets and help ensure projects are completed on time and on budget. Simplifying and clarifying risk associated with these projects will help unlock capital building up in superannuation funds.” Super funds offer significant capital and they typically have a requirement to invest a portion of their money in alternative assets, which usually includes infrastructure. But many super funds have small teams that have to sort a multitude of options. Straightforward risk profiles can help get their attention.
Government has already shown it’s willing to shoulder some of the operational risk that transport projects can face. In Victoria the state government opted to have its 25 kilometre $890 million Peninsula Link motorway built through an availability model which means the project operators avoid full patronage risk. Roberts says, “There’s room for melding the patronage model that was at the centre of the well documented financial failures with the availability model. Measuring risk throughout the life of a project and its impact on investors is a model that may become more commonplace in the future. Capping government’s exposure helps limit potential costs while providing the necessary support to make a project more financially viable for both investors and debt providers.”
Private sector funds and new financing models will be key to driving renewal of the country’s infrastructure amid booming demand for investment. ANZ is ideallyplaced to play a leading role as an advisor, arranger and lender. That’s because it has a proven track record of pulling the pieces of this complex puzzle together. With skin in the game, ANZ is vitally interested in getting these projects to work. In fact, come to think of it, we all are.
ANZ Contacts: David Roberts, Head of Project Advisory T: +61 2 92271908 E: David.Roberts3@anz.com David Byrne, Head of Utilities & Infrastructure, Australia T: +61 2 92734852 E: David.Byrne2@anz.com Peter Davis, Global Head of Utilities & Infrastructure T: +61 2 92271845 E: Peter.Davis@anz.com
Years
22.5
20
17.5
15 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: ANZ Economics & Research, 2010
