The operation of Melbourne’s trains and trams has been privatised since 1999. This was a Kennett era transformation that was intended to leverage on the success of similar arrangements in the UK.
There have been 4 iterations of the franchise arrangements – colloquially known as MR1 to MR4 (Melbourne Rail Franchising iterations 1 to 4). The Andrew’s government is now about to embark on the 5th round of franchising, or MR5.
Each iteration of franchising has had an emphasis on a certain set of objectives or themes that have guided, or played-out, as part of these major transactions. Here we try to summarize what each MR round stood for, and what MR5 might be seeking to achieve.
MR1 – 1999 – Risk Transfer and Subsidy Reduction
MR1 was run from a dedicated division of Treasury called the Transport Reform Unit. This specialised team sought to implement franchise style arrangements whereby the private operators would operate and maintain the train and tram networks, in exchange for a fixed government subsidy and retention of fare revenues. The arrangements transferred cost and revenue risk almost completely. The structure of the industry was demarked into 2 train systems and 2 tram systems. A worldwide tender was called, and the party that bid the lowest subsidy, subject to meeting certain quality criteria would have the right to an operating contract of up to 15 years.
Initially the process was considered a success. The private operators took control of Melbourne’s public transport and began to deliver more and more punctual services at significantly reduced subsidy levels to public operation. However, the extent of subsidy reductions proved unsustainable. Bid lines for revenue growth were overly optimistic, as were the extent of cost savings that could be achieved.
One of the operators walked away from its contracts, and others were put on life support until a solution could be worked through.
MR2 – 2004 – Sustainability
Melbourne’s transport network was in crisis. Although services continued to be delivered, the private operators were losing so much money that the government had to step in.
Faced with the prospect of the remaining operators leaving their contracts behind, and with little chance of developing a new market in time, the decision was made to recast the franchise agreements with a focus on sustainability.
The remaining operators entered an open book negotiation with the government to merge the modal networks into single train and single tram franchises, with amended risk arrangements, changes to material mechanisms for revenue and infrastructure maintenance, a new performance framework and an increase in subsidy to bring them to a sustainable level. Risk was also dialled back to more sustainable levels on some cost items (e.g. insurance and electricity) and revenue. Significant emphasis in the new contacts was also put in place to ensure that issues of sustainability or financial distress were able to be identified early.
Given the nature of this negotiation, the franchises were let for a limited period of 5 years.
MR3 – 2009 – Partnership and Projects
MR3 saw a return to the market for Melbourne’s train and tram networks. A world-wide tender was conducted, the result being the unseating of both incumbents and the establishment of the current operators into the Melbourne, and Australian, markets.
The approach undertaken in MR3 was to establish better partnerships with the private sector operators. Government wanted more of a say on how the operations were delivered and how the infrastructure was maintained. Greater transparency was also sought with the franchises remaining open book and with stronger governance and contract management arrangements put in place through the new contracts. Risk was once again revisited and adjustments were made in areas such as revenue risk, the operational performance regime and timetable development.
MR3 also coincided with the start of new investment in the transport network: with new trains, line extensions and electrifications of some parts of the V/Line network. To facilitate this onset of projects, new project specific arrangements were developed that allowed for projects to be delivered in partnership with the operator’s assistance and expertise.
MR4 – 2017 – Accountability and Efficiency
Under the MR3 arrangements, the operators were entitled to a contract extension of 7 years if they met certain KPIs over the course of the initial franchise period. The contract extension was subject to negotiation and an acceptable price being agreed.
MR4 saw material changes being made to hold the operators to account in the areas including KPIs and standards. New penalties were developed for failure to meet benchmarks in areas such as cleaning and graffiti removal. An enhanced customer experience performance regime was also introduced alongside an enhanced operational performance regime. Additional changes to the infrastructure maintenance regimes sought to better align spend with government priorities through new governance committees and cost management regimes.
During the course of MR3 the service levels of tram, and especially train, had grown significantly. The ‘Big Build’ was also underway. These changes had led to some structural opportunities to improve the efficiency of the franchises by recasting the required overhead, taking advantage of scale economies and reconsidering how the operator was paid for its assistance on projects. This efficiency push was counterbalanced with new investments in infrastructure maintenance and lifts in customer standards.
MR5 – 2024 – Switching On
The government recently announced that although the tram network would be retendered in 2023, the contract for the train network would be extended for 18 months. The key reason for the extension was to ensure stability during the critical commissioning phases of the Metro Tunnel Project. Although the tram network will undergo significant change with the introduction of new G Class trams, this has not been seen as a reason to similarly extend the tram franchise.
The Big Build has seen an unprecedented program of projects implemented across the train and tram networks and there is more to come.
Across both modes we will soon have new track, new stations, new trains, new trams, new signalling and a new ticketing system. This is in addition to the successful removal of over 65 level crossings across Melbourne, the impending introduction of the Airport Rail Link and potential future electrifications. The tram network is also due for upgrades across power, track and stop infrastructure.
It can be expected then, that MR5 may be the franchise period of “Switching On”.
This investment in our transport network is also now starting to look at not just building, but also commissioning and taking advantage of these projects to deliver better, more frequent and more reliable services. The investments in hard assets mean nothing unless they translate into better services.
Operators that are able to bring their expertise and highlight their credentials in project commissioning for infrastructure and rolling stock will be better placed to win one of these coveted contracts. In a new world of decarbonisation and social procurement, we should also expect operators to be evaluated against not just what they do, but how they do it.
Whoever wins either the tram or train operating contract under MR5 will be transitioning into an extremely complex environment of contracts, projects, politics and customer expectations. It’s not going to be an easy job, but we should expect the best in the world to be bidding here in Melbourne to take on the challenges.
About the Authors
The Commercial Advisory Partnership (TCAP) is led by four partners who have worked in detail across all iterations of Melbourne’s train and tram franchise contracts. They have led franchise procurement activity, contract design and evaluation for government as senior project members as well as advisors. They have also held senior commercial roles within the transport operators and advised on the development of successful franchise bids. They are experts in Melbourne’s transport arrangements and its stakeholder environment.