AYou need to read the section in full before making any judgements.
Taking one table out of the report without including all the explanatory
text is meaningless. If you read the report in full you'll see what these
"subsidies" really are.
Some expenses were not included in the original tender (e.g. use of the
V/Line ticketing system, $52,000/year), and some costs were underestimated
by the Department (includes track maintenance which is $1.5 million/year
compared with a PTC estimate of $512,000/year). These two items alone
account for $3.12 million of the $3.5 million "subsidy".
The increased track costs "due to a change in the methodology in
allocating maintenance costs between passenger and freight services" and
the later charge for ticketing sounds like the PTC conveniently shifting
the goal posts.
The way I read it, the Ministry of Transport and WCR are trying to make
the contract work, but the PTC keeps trying to throw a spanner in the
works, or at least cream as much as they can off the contractor.
--- BEGIN REPORT ---
Report on Ministerial Portfolios
May 1997
Part 1 Executive Summary
Substantial delays were experienced in the finalisation of
contractual arrangements between the
Department of Infrastructure and the private sector provider of the
Melbourne to Warrnambool
passenger rail service which commenced in September 1993, with the
support services agreement not
signed until April 1997.
Paras 3.3.137 to 3.3.140
While at the launch of the privately provided Melbourne to
Warrnambool rail service it was indicated that
the arrangement would result in annual savings to the State of $3
million, the Department had not
determined the extent of actual savings, if any, that have been
achieved.
Paras 3.3.167 to 3.3.169
The Department has not performed a post-implementation review of the
contracting-out of the
Melbourne to Warrnambool and Melbourne to Cobram services and
accordingly there is a possibility
that the experiences gained from these arrangements may not be
factored into future privatisation
proposals.
Para. 3.3.170
Part 3.3 Infrastructure
CONTRACTING-OUT OF THE MELBOURNE TO WARRNAMBOOL RAIL PASSENGER SERVICE
3.3.127 The Auditor-General's Report on Ministerial Portfolios, May 1995
commented on the contracting-out of certain country passenger services
previously provided in-house by the Public Transport Corporation, which
represented one of a range of reforms announced by the Government in
January 1993.
3.3.128 In that Report, audit commented on the results of an analysis of
the evaluation undertaken by the Corporation to support the
contracting-out of the Warrnambool and Cobram services. This analysis
concluded that, as all relevant records relating to the decision to
contract-out these services had either not been retained or were not able
to be produced for examination, audit was not in a position to form a
conclusive view on the cost-effectiveness of the decision to privately
operate the 2 train services.
3.3.129 In response to this audit conclusion, the former Department of
Transport indicated that it would evaluate the contracts against original
cost estimates after they had been in operation for a reasonable period of
time.
3.3.130 As mentioned above, one of the 2 services contracted-out was the
Melbourne to Warrnambool passenger rail service, which transferred the
operation of this service to the private sector in September 1993. Audit
conducted a detailed review of the process followed in the contracting-out
of the Melbourne to Warrnambool service and the outcomes achieved from the
newly established arrangements.
Selection of contractor
3.3.131 An invitation to tender for a number of services, including the
Melbourne to Warrnambool service, was advertised by the Corporation in
January 1993, with a closing date of February 1993.
3.3.132 The then Minister for Public Transport in March 1993 released
details of an agreement reached between the Government and transport
unions relating to public transport reforms, a component of which related
to the continued provision of rail passenger services on at least 6
country lines, of which a maximum of 2 could be privately operated.
3.3.133 Following an evaluation undertaken by consultants appointed by the
Corporation of the tenders submitted for the private operation of the rail
services and the Corporation's acceptance of the consultants' evaluation,
in April 1993 the then Minister for Public Transport announced the
government decision regarding the future structure of country passenger
rail services. The decision involved 2 corridors, namely the Warrnambool
and Cobram Services, to be operated by private operators.
3.3.134 Following the above government announcement, contract negotiations
with the preferred tenderer to operate the Melbourne to Warrnambool
service, the Victorian Railway Company Pty Ltd (trading as West Coast
Railway), commenced in May 1993 with a proposed implementation date of
August 1993.
3.3.135 However, as a result of delays in finalising the contract, the
Company and the Corporation entered into an interim agreement to enable
the Company to commence operating the passenger service from September
1993. Under the terms of the interim agreement:
all locomotives, carriages and drivers necessary to operate the
service were to be provided by the
Corporation with the associated expenses reimbursed by the operator;
conductors and signalling staff were to be provided by the operator;
the Winchelsea, Colac, Camperdown, Terang and Warrnambool stations
and an administration office at
the Geelong station were to be leased by the operator from the
Corporation and staffed by the operator;
and
track and signalling infrastructure were to be provided by the
Corporation and the associated expenses
reimbursed by the operator.
3.3.136 At the time of the commencement of the service, the then Minister
for Public Transport announced that this privatisation would achieve
annual savings to the State of $3 million.
Contractual arrangements
3.3.137 The principal arrangements entered into for the operation of the
rail service are set out in the following documents:
a Service Agreement, between the operator and the Department of
Infrastructure (formerly the
Department of Transport); and
a Support Services Agreement, between the operator and the
Corporation which requires the provision
of services such as infrastructure maintenance by the Corporation.
3.3.138 In addition, the Corporation's V/Line Freight business has entered
into an agreement with the operator in relation to the provision of
certain services by both parties. Further, another division within the
Corporation provides miscellaneous services to the operator under an
informal arrangement.
3.3.139 Although the Company took over the operations of the rail service
in September 1993, it was not until September 1994 that the Service
Agreement was signed between the operator and the former Department of
Transport, which became responsible for administering the contracts for
the provision of country rail passenger services as a result of an
amendment to the Transport Act 1993.
3.3.140 Furthermore, it was not until 24 April 1997 that both the Support
Services Agreement and the agreement between the Corporation's V/Line
Freight business and the operator were signed.
3.3.141 The main features of the 2 key agreements, namely the Service
Agreement and the Support Services Agreement, are as follows:
the operator to provide passenger services between Melbourne and
Warrnambool;
the operator to collect fares based on rates determined by the
Minister for Transport;
all fare revenue collected by the operator to be paid to the
Corporation excluding a commission retained
by the operator on fares collected for travel not on the Melbourne to
Warrnambool line;
passenger statistics to be provided by the operator to the Department
of Infrastructure which form the
basis of reimbursement by the Department for the transportation of
passengers;
the Corporation to provide certain services and facilities to the
operator and the operator to reimburse
the Corporation for related costs incurred; and
the Department to pay the operator a subsidy in relation to the
provision of the service.
3.3.142 However, these arrangements have evolved since the commencement of
the service by the private operator. In particular, as envisaged at the
commencement of the service, the operator has now purchased its own
rolling stock, thus reducing the extent of locomotive and carriage hire
costs from the Corporation. These assets, which were surplus to the
Corporation's requirements, were sold to the operator at negotiated
prices. In addition, the operator now leases the Ballarat East locomotive
depot at an annual market fee of $12 000 and undertakes most of the
maintenance on its own rolling stock.
3.3.143 The key relationships between the respective parties resulting
from the Service Agreement and the Support Services Agreement are outlined
in Chart 3.3J.
CHART 3.3J
KEY RELATIONSHIPS RESULTING FROM CONTRACTUAL ARRANGEMENTS
Service Agreement
3.3.144 As previously indicated, the Service Agreement establishes the
basis for the provision of the rail service by the operator. The audit
review indicated a number of issues relating to the operation of the
Agreement.
Reimbursement of infrastructure costs
3.3.145 Under the Agreement, the operator is required to reimburse the
Corporation for infrastructure maintenance undertaken based on a set rate
per journey, subject to annual indexation.
3.3.146 For the 1995-96 financial year, $7.3 million was expended by the
Corporation in relation to infrastructure maintenance on the Melbourne to
Warrnambool line, of which $1.5 million was attributable to the operator
and the remainder to other users. This amount was reimbursed by the
operator to the Corporation. However, the costs required to be reimbursed
by the operator did not include non-cash items such as corporate overheads
and depreciation associated with the maintenance activities, which were
estimated by the Corporation at $200 000 a year.
3.3.147 As the level of these maintenance related reimbursements by the
operator were higher than the amount originally determined in the
tendering process and advised to tender participants, the Department has
been reimbursing the operator approximately $1 million a year to offset
the additional costs. The tender process only envisaged an amount of $512
000 for infrastructure maintenance costs which were to be borne by the
operator running the service. However, due to a change in the methodology
in allocating maintenance costs between passenger and freight services by
the Corporation, the amount was found to have been underestimated.
Reimbursement of ticketing system costs
3.3.148 The operator is charged for use of the Corporation's ticketing
system. As this cost was not originally included in the tender
documentation provided to the operator, the Department agreed that an
annual amount of $52 000 be reimbursed to the operator to cover costs
charged by the Corporation for the use of the system.
Relief for fuel cost increases
3.3.149 As a result of diesel fuel cost increases imposed by the
Commonwealth Government from 1 July 1995, which increased the cost per
litre of fuel by over 33 per cent, the operator sought financial relief
from the Department. Although the Department was not obligated under the
Service Agreement to reimburse such increases, it nevertheless agreed to
increase the level of the annual subsidy paid to the operator by $122 000
to offset the additional costs associated with fuel price increases.
Further financial assistance to operator
3.3.150 In June 1995, the operator requested that the Department make
available funding assistance of $300 000 to overcome a short-term
liquidity problem caused by the acquisition and upgrading of the
operator's rolling stock, and unexpected costs associated with hiring
rolling stock which was originally expected to cease in October 1995 but
was extended until December 1996. In response, the Department agreed to
prepay revenue and infrastructure reimbursements of $300 000 to the
operator. The debt, which was offset by the reduction of subsequent
revenue reimbursement to the operator, did not attract an interest charge.
3.3.151 In addition, the operator in May 1996 applied to the Department
for compensation of $1.2 million relating to costs incurred to gain safety
accreditation, which had not been identified during the tender process.
At the date of preparation of this Report, the Department was in the
process of evaluating the application.
Support Services Agreement
3.3.152 A review of the Support Services Agreement, which relates to the
provision of defined services by the Corporation to the operator,
identified the following matters in relation to its operation.
Delay in formalising the Agreement
3.3.153 As previously outlined in this Report, the operator commenced the
provision of the rail services to Warrnambool in September 1993. However,
it was not until 24 April 1997, some 31/2 years after the commencement of
the service, that the Corporation and the operator signed the Support
Services Agreement. The delay in signing the agreement was due to the need
to resolve certain issues, including those relating to insurance and
indemnity clauses and penalty interest provisions in connection with the
late remittance of passenger revenue collections to the Corporation.
3.3.154 The delay in formalising the agreement had the potential to
disadvantage the Corporation and ultimately the State in the event that
disputes arose between the relevant parties.
Lease of station facilities
3.3.155 The Agreement requires the operator to enter into leases for the
stations it occupies and to pay rentals for the use of those properties.
However, audit found that the leases had not been signed as agreement had
not been reached as to the assignment of responsibility for the
maintenance of station buildings.
3.3.156 Current negotiations between the parties in relation to these
issues deal with payment of maintenance costs. The operator did not pay
rent for the first 2 years due to the disagreement over the leases, but
has now paid the outstanding rents in full. In relation to the maintenance
of the station buildings, the operator has contended that there was an
expectation when tendering for the service that only nominal rent would be
paid on the leases and that maintenance of these assets would be
undertaken by the Corporation.
Delays in forwarding passenger revenue to the Corporation
3.3.157 Under the Agreement the operator is required to pay all passenger
revenue collected to the Corporation on a monthly basis, but no later than
14 days after the end of each period. However, correspondence from the
Corporation to the operator indicates that the operator is at times not
complying with this requirement.
Delays in other payments by the operator
3.3.158 While invoices raised by the Corporation are required to be paid
by the operator under the Agreement no later than 14 days after receipt,
correspondence from the Corporation to the operator indicates that this
requirement is at times not being met. In addition, on a number of
occasions the operator has deducted certain disputed amounts when paying
invoices, with such deductions totalling $320 000 over the period December
1994 to March 1996. While the Agreement provides that penalty interest may
be charged in such cases, to date the Corporation has not levied penalty
interest.
Monitoring of service delivery
3.3.159 To encourage the provision of timely services under the Service
Agreement, the operator may be penalised for cancellations or late
services. These penalties apply if, for any month:
less than 99 per cent of all scheduled services operate; and
less than 95 per cent of services are delivered within 10 minutes of
the specified time.
3.3.160 If the above events occur, the next payment to the operator is to
be reduced by 5 per cent each month until service levels are restored.
Table 3.3K outlines service delivery and punctuality data relating to the
operator as provided by the Department for the last 3 financial years.
TABLE 3.3K
SERVICE DELIVERY AND PUNCTUALITY
(per cent)
Service Punctuality
delivery
Period Target Actual Target Actual
1994-95 99 100 95 88.5
1995-96 99 100 95 84.4
1996-97 (to Feb. 99 100 95 89.5
1997)
3.3.161 The table indicates that reliability of service delivery has been
excellent, however, punctuality remains below the established target
levels since the contracting-out of the service.
3.3.162 Notwithstanding the ability of the Department to impose a penalty
on the operator in relation to the failure to achieve the punctuality
targets, the Department has indicated that it has not been in a position
to enforce the penalties for the following reasons:
the Warrnambool line is one of the last unwelded tracks in Victoria and
is subject to ongoing track repair; and
the delays are often due to the actions of the Corporation which owns
and maintains the track.
3.3.163 Audit was advised that, at monthly meetings with the operator,
service quality is discussed and the operator has been advised that
punctuality improvements are required.
Patronage levels
3.3.164 Audit conducted an analysis of patronage levels and related
revenues, based on information supplied by the Department. Table 3.3L
illustrates the relevant details since the 1993-94 financial year.
TABLE 3.3L
PATRONAGE LEVELS AND RELATED REVENUE
Period Patronage Revenue
(boarding ($m)
nos.)
1993-94 (a) 279 418 3.0
1994-95 288 448 3.1
1995-96 287 897 3.1
1996-97 (to Feb. 1997) 203 407 2.2
(a) Includes 3 months of service operations by V/Line Passenger prior to
contracting-out.
3.3.165 The analysis shows a 3 per cent improvement in patronage for the
period 1993-94 to 1995-96. This compares with an increase in V/Line
Passenger patronage of 2.2 per cent in relation to the Melbourne to
Bairnsdale service, a comparable service to the Warrnambool line.
3.3.166 Notwithstanding the small increase in patronage levels outlined
above, the revenue from the service has remained relatively stable. The
Department has advised audit that the reason for the relatively stable
income level is the wide use of concessional travel on the line.
Payments to operator for providing the service
3.3.167 Since the inception of the arrangement, the Department has paid
$20.3 million to the operator in relation to the provision of rail
services as show in Table 3.3M.
TABLE 3.3M
PAYMENTS TO OPERATOR, SEPTEMBER 1993 TO FEBRUARY 1997
($million)
Passenger
Period reimbursements Subsidies Total
Sept. 1993 to June 3.6 0.7 4.3
1994
1994-95 4.8 0.9 5.7
1995-96 4.9 1.1 6.0
1996-97 (to Feb. 3.5 0.8 4.3
1997)
Total 16.8 3.5 20.3
3.3.168 The above table indicates that payments to the operator have
increased by 5 per cent over the 2 complete financial years under the
contracting-out arrangements, i.e. 1994-95 to 1995-96.
3.3.169 As indicated earlier in this Report, at the launch of the new
service it was indicated that the arrangement would result in annual
savings to the State of $3 million. However, the Department had not
determined the extent of actual savings, if any, that have been achieved
from the arrangement.
3.3.170 In my Report on Ministerial Portfolios, May 1995, the Department
indicated that it would evaluate the contracting-out arrangements after a
period of time. However, at the date of preparation of this Report, the
Department has not performed a post-implementation review of this
arrangement or the contracting-out of the Melbourne to Cobram service,
which commenced around the same time. Accordingly, there is a possibility
that the experiences gained from these arrangements may not be factored
into future privatisation proposals.
RESPONSE provided by Secretary, Department of Infrastructure
Reimbursement of infrastructure costs
Similar adjustments to infrastructure maintenance subsidies were
applied on the same basis to all
rail passenger service operators in Victoria including V/Line
Passenger, Australian National, State
Rail Authority of NSW and Hoys. The total cost of subsidies for
infrastructure maintenance did not
change - while costs allocated to rail passenger businesses
increased, costs allocated to the PTC
freight business (V/Line Freight) decreased by the same amount.
Reimbursement of ticketing system costs
The Report again does not make the point that West Coast Railways was
treated in exactly the
same way as other rail passenger operators.
Relief for fuel cost increases
The 33 per cent fuel increase imposed by the Commonwealth Government
from 1 July 1995
applied to locomotive fuel used by all Victorian operators.
The Report fails to indicate that the Victorian Government funded the
PTC and both contracted
rail operators for this cost which could not be anticipated.
Delay in formalising the Agreement
There was no risk of disadvantage to the Corporation or the State and
no disadvantage occurred.
Payments to operator for providing the service
The savings to be achieved from the arrangement were calculated at $3
million a year in 1993.
The contract was let on that basis and there has been no variation
made to the contract which
would change that outcome.
The Department constantly monitors performance and payments made to
and by West Coast
Railways under the Service Agreement. All indications are that the
contract is performing as
originally estimated.
Experience gained through constant monitoring and scrutiny of this
contract and others entered
into with private public transport operators at about the same time
will be invaluable in
determining further privatisation proposals. To suggest that such
experiences may not be factored
into future privatisation proposals is simply not sustainable.
--- END REPORT ---
Cheers
David