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  • Writer's pictureRob Macey

Melbourne’s Train Franchise Contracts – Lead up to Refranchising

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The Lead Up

By 2024 the Victorian Government will be required to announce its intentions to refranchise Melbourne’s tram and train operations. Unlike the last round of negotiations with operators that occurred through direct negotiation, the next selection process for Melbourne’s tram and train operator will be decided by competitive tender.

It will take at least 2 years to run such a process properly and you can add 6 months to that timeframe to allow for a transition period between old and new operators. The preparations for this procurement will also take time. It wouldn’t be unusual for policy decisions and optioneering to occupy the minds of public sector leaders, policy makers and advisors for at least 2 years. The last direct negotiations were analysed by government for some 12 months – and that was a pre-defined process.

What needs to be done?

The first thing, as you’ve guessed, is to treat the next 3 years as an important planning window. It will go quickly. The train franchise contracts represent one of Victoria’s largest government contracts at a value of around $10 billion over the full 10 year term. It’s kind of a big deal. There’s a State election in 2022 and machinery of government changes will follow. The myki ticketing contract needs to be reviewed. Who knows what else might occur over this period at home and globally? In 2019, no one would have guessed what 2020 would bring. Good planning rules in a climate of uncertainty.

What are the questions?

Melbourne has seen significant investment in network infrastructure over the last franchise period. Consideration will need to be given as to how new operators can extract every performance uplift that Victoria’s bold investment program has been built to support. Rail infrastructure is delivered to improve operational performance and ultimately customer experience.

There are likely to be multiple options on the table for government including the threshold question of whether the privatisation model of 1999 will remain or if the system is returned to public sector control. One wonders if this will get traction given the significant strides taken and improvements made to our public transport system since 1999.

Also likely is optioneering around whether the operations ought to remain vertically integrated, that is, should operating trains and trams be done by a private party with the management of assets like track and rolling stock left to the State? This is akin to the UK franchise model where the government is responsible for “below rail” performance. There is always discussion as to the merits of integration over separation – the integrated model has arguably worked well in Melbourne and incentivised the right behaviours, and was recently adopted by the South Australian Government for the Adelaide heavy rail network. The separated model has not been without criticism in the UK.

Other lines of enquiry include: Will the incoming operators have any responsibility for the delivery of capital works and projects like they do today? If Melbourne Airport Rail is in delivery, how is that to be treated? Will that rail infrastructure be part of the operator’s contract? How will the risk allocation around farebox be treated given the impact of the pandemic? Will timetabling, ticketing and fares need to respond differently to a workforce now pre-disposed to working remotely and flexibly? What impact will this have on patronage? Where will the legislation be with respect to DDA and accessibility?

Transport policy and proposition

The above questions are a small sample of the various policy positions the government will need to consider. Taken together, these positions will inform the proposition that is tested with various transport and community stakeholders before being put to a global rail operator market.

Whatever proposition is eventually settled, it will need to be attractive to the market; have a very sensible allocation of risk; encourage bringing the best technologies and innovations to Victoria; demonstrate that it will engage local employment and community and put safety and passenger experience at the forefront. It will also need to enable an incoming operator to transition efficiently into a network very much changed from an infrastructure perspective since the early 2000s.

Market sounding

Melbourne’s network and the city will be showcased. Our economy, sporting life, people and communities will inform that opportunity. Afterall, this is what a good public transport system enlivens.

The opportunity will need to be sold well. Post COVID, bidders will watch carefully as to the uncertainties that lurk - the contracts must be alive to and address those risks.

It’s recommended that a comprehensive market sounding exercise commence before formal tender process kicks off to engage the market and develop a strong field for the tender. Some of the operators will have by then emerged from the UK’s rail reform currently occurring to address the impact of COVID on rail patronage and farebox.

Crucial also will be securing the progress made over the last 20 years and achieving performance and experience uplifts for Victorians relative to the big investments made in rail infrastructure. This investment will no doubt excite the market as to the opportunity in Melbourne.

MACER Advisory Insights Series

Over the coming weeks, MACER Advisory will be providing a summary analysis of how the current privatised train arrangements work, share insights regarding these arrangements, and suggest opportunities and options for the future.

Next time, we look at the structure and governance of the current train contracts.

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