Regional passenger services across Germany have increasingly been put out to competitive tender in recent years. The approach to market liberalisation varies from region to region, as case studies in Hesse and Schleswig-Holstein illustrate. Nevertheless, the process appears to be benefiting both the regional authorities and the passenger alike

Arne Beck is an economist and expert on market organisation and competitive tendering in public transport. Ingo Kühl is a spatial planning engineer and an expert in rail operations and infrastructure. Both are Project Managers for KCW GmbH in Berlin

UNDER THE federal government's regionalisation reform of 1996, powers to specify local transport services were devolved to the Länder, who were then allowed to outsource the management of the competitive tenders to tendering authorities of their choice.

Most authorities have, since then, opened at least part of their public transport networks to competitive tender. However, the intensity of competition varies strongly.

The Land of Schleswig-Holstein created Landesweite Verkehrsservicegesellschaft to act as its tendering authority (RG 12.02 p773), while in Hesse, two regional transport authorities, RMV and NVV, have introduced competitive tendering across parts of their networks. Both Länder opened their services up to competition significantly faster than other states across Germany.

Since 1996, LVS and RMV have arguably acquired the greatest experience in the field of competitive tendering. Both have developed competitive concepts with a 'tendering timetable' that foresees a staggered competitive tendering of all regional rail services.

The opportunities offered by competitive tendering and some of the problems that can be encountered are illustrated by the example of the Marschbahn in Schleswig-Holstein and the Odenwaldbahn in Hesse.

The 273 route-km Marschbahn network connects Hamburg with Westerland and sees 4·2 million train-km per year; competitive operations began in 2005.Meanwhile, the Odenwaldbahn network links Frankfurt-am-Main and Darmstadt to Eberbach. Running over 210 route-km and operating 1·84 million train-km per year, tendered operations also began on this network in December 2005. On the infrastructure side, DB Netz launched a comprehensive renewals programme this year (RG 7.07 p453).

Cost to the public purse

From the local authorities' point of view, the results of the open tendering have proved generally favourable, in that subsidy levels have declined. LVS used a net cost contract for the Marschbahn, under which the operator is obliged to provide a specified service for a given period, retaining all passenger revenue plus a contractually-defined subsidy. The revenue risk is carried by the operator.

Competitive tendering reduced the annual subsidy by around 44% compared to that paid to the former operator DB AG. Assuming the same volume of train-km per year, the Land is expecting to save approximately €140m over the 10-year contract period.

The subsidy to be paid to the new train operating company, Veolia subsidiary Nord-Ostsee-Bahn GmbH, is around €4·37 per train-km compared to €7·48 per train-km for DB (Fig 1).

According to LVS, the savings are slightly counterbalanced by the transaction costs: around €100 000 for the tendering process and contract management costs of around €50 000/year. It is important to note, however, that the operating companies can normally only influence around 50% of their total costs. The other half consists of charges paid to the infrastructure manager (which is DB Netz AG in both cases) or energy-related costs.

Analysis of the Marschbahn case shows that Veolia won through more optimistic revenue projections rather than lower costs. Increased ticket revenues can either be achieved by generating additional demand or by more effectively exploiting the consumers' willingness to pay. While ticket prices in Schleswig-Holstein can only be increased with the approval of LVS, operators can influence prices on those routes that they serve more or less exclusively by altering fare zone boundaries.

However, Veolia has not yet made use of this option, and apparently expects to grow revenue primarily through increased demand. As an incentive, it receives a contractual bonus payment from the tendering authority for increasing the number of passengers above a certain level. This incentive scheme, and the winning bidder's belief in demand and revenue growth, have helped to drive down the level of public subsidy.

However, the Marschbahn experience has not been entirely without its problems. After a year of operation, Veolia made a claim for increased subsidy. According to the operator, several conditions of the PSO contract were not being fulfilled. It cited unexpected speed and capacity restrictions applied by the infrastructure manager, and LVS providing subsidy for parallel DB passenger services on the route. Under the terms of the tender agreement Veolia believed it had a guarantee of exclusivity for non-commercial services, and it felt that the cost risk of such changes should be borne by LVS.

After several months of negotiations, no agreement had been reached by the end of October 2007. It is expected that an increase in subsidy payments will ultimately be agreed, but this is unlikely to dent the overall benefit to the Land.

In Hesse, the fees to be paid to the operator of the Odenwaldbahn, VIAS GmbH, remained stable after competitive tendering compared to those paid to DB, although the standard of service has improved (Table I).

A gross cost contract was adopted, paying the operator a specific sum to provide an agreed service for a defined period. In this case the revenue risk is carried by the authority, which benefits from any revenue growth resulting from an improved service, while the operator is left to focus on improving productivity. Transaction costs for awarding and managing the contract are somewhat smaller than those for the Marschbahn.

Quality improves

In both cases, the level of quality delivered to passengers clearly improved, mainly through the introduction of new rolling stock, offering an enhanced travelling environment. Benefits include air-conditioning, level access for disabled passengers and the installation of passenger information systems. In the case of the Odenwaldbahn, the use of vehicles with rapid acceleration has enabled journey time savings of up to 20 min.

In both cases, substantial operational problems arose after the start of the contract, which affected punctuality and reliability. Responsibility for these problems lay not only with the operators but also with the vehicle manufacturers and infrastructure managers, and the usual 'green banana effect' of teething troubles with new vehicles. Additionally in Hesse, the transport authority underestimated the attractive effect of new vehicles and shorter journey times, which led to rapid overcrowding following their introduction. The authority has since ordered additional rolling stock.

In spite of these temporary problems, the overall quality of the services has improved remarkably when compared to the situation before competitive tendering.

Increased productivity

In the net cost contract case of the Marschbahn, the operator has introduced innovations in both operations and customer-facing areas. Despite the absence of a contractual requirement, the operator has, for example, equipped the vehicles with air-conditioning and audio systems. Additional staff were recruited and a catering service was introduced. On the Odenwaldbahn, operator innovation - as is to be expected under a gross cost contract - focuses on internal efficiencies, typified by the creation of a new depot shared with a local business.

On both routes, average wages fell by around 10% after the initial round of tendering, possibly because of the younger age of the employees of the new operators. However, wages have not fallen as far as they could have under the terms of the collective agreement between the operator and the trade unions. Industry commentators have suggested that there have also been productivity improvements. Moreover, the employee structure has changed substantially - in the case of the Marschbahn, fewer staff are employed in administration and more in customer-facing roles.

In both cases, establishing depots created new jobs in otherwise economically-underdeveloped regions.

Securing profitability

A number of commentators have suggested that the operators' profitability fell as a result of competitive tendering. This is not surprising in a formerly non-competitive market in which the incumbent DB obtained the yields typical of a partial monopoly.

The scale of new investment indicates optimistic financial expectations. For example, Veolia spent around €18m on the construction of a company-owned workshop after winning the Marschbahn tender, although the operating contract only lasts for 10 years.

Barriers to market entry for new operators related to the risk of procuring new vehicles were reduced by suitable contractual agreements. In the case of the Odenwaldbahn, vehicles were provided by RMV from its own fleet but crewed by the operator. On the Marschbahn, a specific instrument, the so-called 're-employment warranty', was developed, under which the authority guarantees further use (and loan repayment) for the vehicles after the initial operating contract period has expired. This agreement is binding, even if a different operator wins the tender for the next contractual period.

Outlook

Looking at recent developments in the German regional passenger market, the implementation of tendering as the general tool for awarding public service contracts has continued. All 32 regional transport authorities now have competitively-tendered services in operation or are beginning tender processes.

However, there is still no standard approach to competitive tendering in place. Several authorities have specific preferences for gross cost or net cost contracts. Some require bidders to use authority-owned rolling stock, while others do not specify how the vehicles are procured.

Recent positive examples of tendering include the Passau - München line in Bayern, where the subsidy per train-km fell to €0·75, less than a tenth of the former price of around €8·50.

The fact that the new operator, who is obliged to purchase new rolling stock for the services, is the former operator DB indicates how much more efficient tendering can make the provision of passenger services while still raising quality standards.

The effects seen on the Marschbahn and the Odenwaldbahn suggest that competitive tendering yielded enormous benefits for the public transport authorities. There was not only a significant rise in service quality but also an equally significant fall in financial support. These positive general experiences are broadly consistent with those of other regional rail services in Germany.

Market participants generally expect that the volume of competitive tendering in the German regional market will further grow, particularly against a background of public budget constraints.

Table I. Operator innovation within regional operating contracts

Authority requirements Operator-led investment
Odenwaldbahn
(gross cost contract)
High-acceleration rolling stock
Rolling stock pool created by authority
Accessible vehicles
Air-conditioning
Quiet interior
Minimum service level
Shared depot concept with local business
More efficient operating practices
Marschbahn
(net cost contract)
New rolling stock
Accessible vehicles
Seat reservations
Minimum service level
Strong passenger rights
Air-conditioning
Quiet interior
Audio system
Catering service
Additional customer service staff
Feeder buses
New local depot
More efficient operating practices

  • CAPTION: Veolia's Nord-Ostsee-Bahn operation has introduced new rolling stock onto the line and provided a range of services not previously offered, including on board catering
  • CAPTION: When VIAS was selected to operate the Odenwaldbahn, it worked with a local business to build a new maintenance depot to service local transport authority RMV's fleet of DMUs
  • CAPTION: Fig 1. The subsidy profile for the Marschbahn decreased from €7·48/train-km to €4·37/train-km after the net cost contract was introduced
  • CAPTION: Competitive tendering has been shown to reduce the burden on public finances of regional passenger services in Hesse and Schleswig-Holstein, but there is still no uniform approach to letting contacts across Germany

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