Designing Competitive Tendering Systems for the
Public Good: A Review of the US Experience
Paper Presented by
Wendell Cox & Jean Love
to the
First International Conference on Competition and Ownership in
Public Transport
Thredbo, NSW Australia
May 1989
ABSTRACT
For two decades, most urban public transit services in the United
States (US) have been provided directly by public authorities and
supported by public subsidy programs. A substantial percentage
of the public subsidies has been consumed by costs, which have
escalated well ahead of the inflation rate.
Concurrently, the private bus industry experienced unit cost
decreases (inflation adjusted). In response to the cost
escalation of public transit and the cost control of the
competitive market, public transit authorities have competitively
tendered considerable amounts of public transit services to
private bus companies.
As US competitive tendering has grown, various approaches have
been tried. For example, some public transit authorities have
provided revenue vehicles for the use in tendered services, while
others have required private companies to supply their own
vehicles. Tendering package sizes have varied considerably, from
a single vehicle to more than 200. In some cases, public transit
authorities have participated themselves in tendering, raising
complex cost comparison and other issues. The success of or
difficulties with tendering programs can be traced to such
variations in competitive tendering system design.
There is an emerging consensus that two principles are crucial to
ensuring that public objectives are met by public transit
competitive tendering programs:
1. Public policy control should be retained over
competitively tendered services to ensure that tendered
services are operated consistent with public policy
objectives.
2. A competitive supplier market should be fostered to ensure
the most cost effective service.
A number of guidelines flow from these principles, relating to
the size of tendering packages, advertisement for tenders, public
disclosure, length of contract period, participation of public
transit authorities in competitive tenders (including guidelines
on public-private cost comparisons) and other issues.
These principles and guidelines were used by the author in
drafting two legislative proposals. The Colorado public transit
competitive tendering act was the first mandatory tendering
legislation passed with respect to any public service in the US.
The model Public Transit Consumer Protection Act has been adopted
by the American Legislative Exchange Council (an association of
state legislators).
I. ECONOMICS, COMPETITIVE TENDERING AND THE PUBLIC GOOD
An increasing share of transit service in the US is delivered
through competitive tendering. This paper is a review of
developments in the design of competitively tendered systems for
bus service in the context of public policy objectives.
A. The Non-Competitive Environment
In a non-competitive environment such as a monopoly, a firm can
obtain a higher price for its products than would be possible in
a competitive environment. Non-competitive firm revenues,
exceeding what would be obtained in a competitive environment,
are referred to by economists as "monopoly rents" or the "welfare
cost of monopoly." Generally, the more competitive a market, the
lower is the price to the consumer, and the less competitive a
market, the higher is the price to the consumer. Consequently,
consumers spend more of their income than necessary for products
produced by a non-competitive firm, lowering the standard of
living and making society in general poorer. Through regulation
and anti-trust laws, therefore, US public policy seeks to
prohibit private firms from obtaining sufficient market power to
set prices outside a competitive environment.
The lack of competitive incentives in public transit have
produced the same price escalation (fares plus subsidies) as
would be expected in private monopoly. For 20 years, most US
public transit has been operated in-house by public transit
authorities (non-competitively). During that time, inflation
adjusted (real) costs per mile have escalated at twice the rate
of inflation and double the rate of increase of the private bus
industry.
B. Competition
In response to escalating public transit costs, public
authorities have begun to use competitive strategies, primarily
competitive tendering, to improve the cost effectiveness of
public transit services. The results of incorporating
competition have been substantially lower costs for the same or
better service and improved cost control.
The public purpose of mass transit is to provide the maximum
level of quality service for the minimum amount of money. There
is no innate merit in either public or private provision of
service. The crucial distinction is between competition and lack
of competition rather than between private and public production
or ownership. For example, prior to the public takeover, most US
public transit services were provided through regulated private
regional or local monopolies. While these companies controlled
cost increases substantially better than the subsequent public
authorities, they still experienced real cost increases (Cox,
1987). The private sector can provide service less expensively,
not because its management is superior, but because it operates
in a competitive market.
C. Public Control and Cost Effectiveness
Competitive tendering serves a public, not private, purpose. As
a result, the public authority must retain full control and
oversight of service design, service specifications and fares.
The success of a competitive tendering program, then, relies on
the following principles:
1. Public policy control should be retained over
competitively tendered services to ensure that tendered
services are operated consistent with public policy
objectives.
2. A competitive supplier market should be fostered to ensure
the most cost effective service.
II. PUBLIC TRANSIT IN THE UNITED STATES
Before considering the issues of competitive tendering design, it
is useful to outline the unique context of public transit in the
US and the experience of competitive tendering.
A. Public Transit Use
The public transit environment in the US differs from that of
other nations. Generally, US urban areas have far lower
ridership per capita than in urban areas of similar size in
Australia, New Zealand, Canada and the United Kingdom (Chart:
"Annual Transit Journeys per Capita by Nation"). Per capita
ridership in all Australian state capitals, Canberra, Auckland
and Wellington is more that of all US urban areas except New
York, Chicago and Honolulu
US public transit has largely lost its discretionary market
segment (customers who have automobiles, but choose instead to
travel by public transit). Discretionary patronage primarily is
limited to work trips to the largest central business districts,
and even that is declining. From 1970 to 1980, the public
transit's work trip market share declined by 30 percent. What
remains is the small "captive" market, composed of people who
have limited access to automobiles because of low income. Public
transit has become a poverty program in many US urban areas, and
it is dependent on public subsidies and public policy control for
its continued existence.
B. Escalating Public Transit Costs
For two decades, most urban public transit services in the US
have been provided directly by public authorities and supported
by public subsidy programs. A substantial percentage of those
public subsidies has been consumed by costs which have escalated
well ahead of the inflation rate.
From 1970 to 1985, public transit operating costs per kilometer
increased an inflation adjusted (real) 64 percent, an annual real
rate of 3.34 percent annually (Chart: "Inflation and Excess
Costs"). This cost escalation outpaced every element of the
Consumer Price (inflation) Index --- even that of medical care, a
field in which the US has obtained an international reputation
for lack of cost control. If public transit costs had been
contained within inflation, the same service levels could have
been provided in 1985 for $A7.5 thousand million1, instead of the
actual $A12.2 thousand million. While inflation accounted for
$0.38 of each new public transit dollar, $0.49 was consumed by
cost increases in excess of inflation, leaving only $0.13 for
expanded services and lower fares
C. Competitive Cost Control
Concurrently, the competitive private bus industry experienced
unit cost decreases (inflation adjusted). From 1970 to 1985 real
costs per kilometer declined 8.3 percent, compared to the 64
percent real increase in public transit (Chart: "Public and
Competitive Cost Increases"). The private bus industry operates
more than 120,000 vehicles (four times the daily public transit
requirement) and includes more than 3,000 firms, ranging from
small local operations to large national companies (Cox, 1987).
III. COMPETITIVE TENDERING IN THE UNITED STATES
In response to the cost escalation of public transit and the cost
control of the competitive market, US public transit authorities
have competitively tendered considerable amounts of public
transit services to private bus companies. The incorporation of
competitive tendering has become a national trend, and has
received attention from the national media, such as The Wall
Street Journal (Carroll, 1988).
A. Extent of Competitive Tendering
More than half of the paratransit service (dial-a-ride or demand
responsive service, largely for the disabled and elderly) is
competitively tendered (UMTA, 1985), while less than 10 percent
of total bus service is competitively tendered (Teal, Giuliano
and Morlok, 1986). (It is ironic that competitive tendering is
used for a substantially larger percentage of the specialized
service than for less specialized bus services. Specialized
services represent a small percentage of all transit expenditures
and is perceived by public transit managers or unions as a
secondary activity.) While an increasing share of transit
service is competitively tendered, the overall percentage remains
small probably because of the reluctance of large public transit
authorities to incorporate competitive tendering and the strong
opposition of public transit unions.
B. The Basic Approach
Under competitive tendering in the US, the public authority
retains the service franchise (ownership) and controls the
service. The public authority specifies route alignments,
service frequencies, fares schedules and any other requirements
deemed to be in the public interest. Private transportation
companies respond to requests for proposals from public
authorities to provide specific services for a limited period of
time (no more than five years). The public authority awards a
contract to the lowest responsive and responsible proposer. The
jobs of present public transit employees are protected by
restricting the competitive tendering conversion to the natural
employee attrition rate. (This can be substantial. AC Transit in
the San Francisco Bay Area was able to reduce its driving staff
by nearly 10 percent in a seven month period, without a single
layoff or redundancy.) In some cases, the public authority
leases the vehicles (buses, etc.) to the successful contractor,
while in other cases the contractors supply their own vehicles.
The private company has incentives to perform effectively aside
from the ultimate incentive, profits: the contract may be
cancelled for unsatisfactory performance; many contracts provide
for penalties for unsatisfactory performance; and the private
company will be interested in being favorably considered when the
contract is re-tendered at its expiration.
Administered properly, competitive tendering, by definition,
results in the lowest costs. Where private costs are less than
public costs, the service is operated privately. Where public
costs are less than private costs, the service is operated by a
public authority under the same terms and conditions as would
have been imposed upon a private company. In either case, the
service is operated the least expensively. Competitive tendering
is analogous in the public sector to "make or buy" analysis
in the private sector.
C. The Record of Competitive Tendering
Competitive tendering has consistently resulted in lower costs
through direct savings and moderation of in-house public transit
costs.
1. Direct Savings
Competitively tendered public transit services have exhibited
average cost savings of 30 percent. Cost savings have ranged
from 10 to 60 percent (Teal, Giuliano and Morlok, 1986; Cox,
1987). For example:
-In Denver, the first competitively tendered services mandated
by a new state law have resulted in cost savings of more than
50 percent.
-In Fort Wayne, Indiana, competitive tendering of public
transit service has resulted in a 25 percent reduction in
overall costs over the last two years, permitting a 60 percent
increase in service level and a 33 percent fare reduction.
-In Los Angeles, two large contracts resulted in average cost
savings of 42 percent.
-In Houston, park and ride service is operated for 33 percent
less than public costs.
-In Seattle, express service is operated for 37 percent less
than the public costs.
Moderated In-House Cost Increases
A competitive environment improves public cost performance.
(This is referred to as the "ripple" effect.) For example:
-Lower cost increases have occurred in San Diego and Norfolk.
In San Diego, the public authority cost savings have been more
than $A115 million over the past 8 years, compared to cost
performance at similar public transit authorities operating
without competitive incentives.
-The competitive environment has considerably improved labor
settlements in San Diego, Los Angeles, San Antonio, Phoenix,
and other cities as it has become clear that there are
alternatives to public monopoly service provision.
D. Service Quality
The data on comparative service quality is very sparse and
largely unquantified. Generally, administrators of competitively
tendered services have rated such services as equal to or better
than in-house public service provision.
E. Is Competitive Tendering Successful?
Competitive tendering is a fluid public policy initiative.
Unlike most public policy initiatives, competitive tendering is
routinely reconsidered every three to five years through the
procurement process. It would be simple enough for public
authorities to abandon competitive tendering of public transit
service as contracts expire. The ultimate indicator of whether
competitive tendering is a public policy success is the degree to
which authorities choosing to competitively contract continue the
practice. No US public authority that has used competitive
tendering for bus service has discontinued the practice.
And the extent of competitive tendering is increasing. New
public transit systems routinely competitively tender for
services. Many public authorities not currently competitively
tendering for service are considering the practice. Many other
public authorities that competitively tender for service are
planning to increase the amount of competitively tendered
service. It has been estimated that a national competitive
tendering program limited to approximately one-half the driver
attrition rate could save between $A32 thousand million and $A51
thousand million over the next 15 years (Cox and Love, 1989
(#2)).
IV. METHODOLOGY
What follows is a distillation of research and experience in the
design of competitive tendering systems in the US. The authors
have had direct design experience in Detroit, Los Angeles, San
Francisco, New Orleans, St. Louis, Minneapolis-St. Paul and
Denver. Additionally, the authors have been involved in research
of competitive tendering system design with respect to services
in San Diego, Milwaukee, Chicago, Detroit, Kansas City,
Sacramento, Los Angeles, Miami, Chicago Fort Wayne (Indiana) and
other locations (Cox and Love, 1989 (#1)). Through this
experience and research, the authors have developed a set of
principles of competitive tendering design. These principles
were used in drafting two legislative proposals.
Senate Bill 164 (Colorado), which was enacted in 1988, requires
that 20 percent of Denver public transit service be competitively
tendered over the next two years (Senate Bill 164, 1988). This
is the first state law in the US requiring competitive tendering
of any public service.
Model state legislation has been published by the American
Legislative Exchange Council (ALEC) to provide guidance to
legislators interested in competitive tendering (American
Legislative Exchange Council, 1989), and is included as the
Appendix. ALEC is a national organization of state legislators
that publishes "model" state legislation.
V. DESIGNING COMPETITIVE TENDERING SYSTEMS
Issues with respect to the design of competitive tendering
systems are discussed below.
Qualification: The degree of competition for a given contract is
directly related to both the quality of service provided and to
the cost savings realized through competitive tendering.
Competition is increased when the tendering process is open to
public scrutiny.
An open process allows for maximum participation by all parties
and reinforces the learning process for both the authority and
the competitors. Service delivery is enhanced from the
progression along the learning curve as firms compete on quality
and service refinements as well as costs. Administrative and
monitoring costs decrease as a function of the same learning
process.
Within the US, most states and the federal government require
open records for all entities that receive state or federal
funds. These public information laws require the dissemination
of final contracts, proposals and prices to all requesting
interested parties. Initially passed to protect the taxpayers by
ensuring public review of government, these laws increase the
speed with which potential contractors and authorities improve
the competitive process and help to ensure the integrity of the
procurement system.
The following presupposes that competitive tendering occurs in an
open environment.
A. Preparation
Public authorities have generally consulted with private
transportation providers before designing and issuing requests
for proposals. This consultation may be through informal
meetings, hearing or through formal committees of private
providers under the sponsorship of public authorities. Advance
consultation permits the public authority to consider
alternatives for service and contract design that take full
advantage of private sector capabilities, consistent with public
requirements. As time goes on, the consultive process is
becoming more routine as public authorities gain experience and
increase their communication with private transportation
providers.
B. Request for Proposal Information
Requests for proposal should contain a complete description of
the service to be purchased, including schedules, service
kilometers, service hours and any applicable service or safety
standards. Further, requests for proposal should contain a clear
description of the required proposal format. In some more recent
cases (New Orleans and Denver), public transit authorities have
provided detailed questionnaires and cost forms, which once
completed are the private company's proposal. This approach has
considerable advantages. It reduces uncertainty about what is
required in the private company's proposal and greatly simplifies
the preparation of proposals. This simplification increases the
likelihood that companies that have not previously proposed on
public transit service will submit proposals. Requests for
proposals should, at a minimum, contain detailed cost proposal
forms to be completed and submitted as a part of the proposal.
C. Length Of Procurement Process
The time span between issue of the request for proposal to
submittal of proposals may be the single greatest deterrent to
the number of competitors. There should be sufficient time
between issuance of the request for proposals and the submittal
date for all potential proposers to solicit and receive copies of
the request for proposal, to attend any pre-proposal conferences
and to prepare their proposal. In general, the amount of time
allotted should increase with the size of the service to be
proposed and to the extent that the contractor would have to
provide facilities, capital equipment, and vehicles.
Public authorities should allow adequate time for a thorough
evaluation of the proposals received. The amount of time allowed
between the award of the contract and service provision is
usually specified in the request for proposal and the ensuing
contract. Insufficient lead time will deter competent service
providers from proposing.
D. Proposal Evaluation
Most public authorities divide the evaluation process into two
parts: evaluation of service qualifications and specifications;
and determination of the most cost effective proposal. For a
company's price proposal to be considered, it must meet the
service qualifications and specifications. Some public
authorities require separate sealed envelopes --- one with the
service proposal and qualifications and the other with the
price. The price envelope is opened only for companies that have
qualified in the first step. This approach is useful in building
the confidence of private providers in the procurement process
and minimizes the potential for challenges by unqualified
companies.
E. Fair Cost Comparison
Public transit authorities often compare in-house operating costs
with proposed competitive costs before determining whether to
award a contract to a private proposer. Private providers have
alleged that public transit authorities have not fairly evaluated
private proposals relative to in-house costs. Some public
transit authorities have determined their in-house costs only
after having reviewed the competitive proposals. In other cases,
public authorities have understated in-house costs. As a result,
a general mistrust has arisen in cases where public authorities
administer competitive tendering processes in which they are also
competitors. Because of these concerns, the authors of Senate
Bill 164 did not provide for operation of competitively tendered
services by the public transit authority.
Two public transit authorities took special steps in 1988 to
assure objectivity:
-In Cincinnati, the Southwest Ohio Regional Transit Authority
(SORTA) hired an accounting firm to prepare its internal
proposal and submitted its sealed proposal by the deadline
required of the private providers. Personnel assisting in the
development of the internal proposal were not permitted to
participate in the evaluation of proposals.
-In St. Louis, the Bi-State Development Authority separated
the internal preparation of a proposal from the evaluation
process. Bi-State did not permit personnel who prepared the
internal proposal to participate in the evaluation of
proposals.
It has also been reported that public transit authorities have
made cost proposals below their true costs in procurements
administered by organizations other than themselves (third
parties), such as universities or employers. Third party
administrators have become more concerned about this problem and
have required a more detailed accounting of costs by public
proposers to eliminate cross subsidization of below cost
proposals (which results in higher overall public costs). In
response to this concern, the US Urban Mass Transportation
Administration recently ruled that public transit authorities
must offer no less than fully allocated capital and operating
costs when proposing on third party procurements (Chief Counsel,
1988).
The model state legislation permits public transit authorities to
compete in competitive procurements, but contains provisions to
ensure fair competition and fair proposal evaluation (Section 7).
To obtain the maximum level of competition and, therefore, the
lowest price, it is important for public authorities to encourage
the confidence of the private sector in the fairness of the
procurement process. This is best accomplished by requiring that
proposing public authorities be subject to the same rules as
private companies and that public authorities propose no less
than their true costs.
F. Pre-Proposal Conference
Many public authorities hold one or more pre-proposal conferences
with potential proposers after issuance of the request for
proposals. Pre-proposal conferences often result in changes in
the proposal package as the public authority makes corrections in
the original specifications or, as a result of questions from the
potential contractors, becomes aware of alternative ways to
deliver the service. Pre-proposal conferences can assist both
the public authority and the private providers by improving the
understanding of the service required, and this results in lower
costs and more responsive private proposals.
G. Types Of Contracts
Most US competitive contracts involve the quotation of fixed
prices by private providers, while others have permitted
manipulation of contract prices under certain circumstances.
Generally, to the degree that any negotiation or cost arrangement
between the public authority and the contractor is conducted
without competition, there is the potential for unduly increasing
public authority costs. This is because in a non-competitive
situation the supplier of the service (the contractor) has a
degree of market power over price. For this reason manipulation
of unit prices is becoming more rare.
1. Fixed Price Contracts
The extensive use of fixed price contracts has been instrumental
in maintaining the cost effectiveness of competitive tendering.
The most important characteristic of fixed price contracts is
that contract rates (prices) cannot be non-competitively
manipulated. Fixed price contracts involve the proposal of a
certain price for a given amount of service over a specific
contract length, usually expressed in cost per unit of service,
such as service kilometers or service hours. There are two basic
forms of fixed price contracts, pure fixed price contracts and
indexed fixed price contracts. (Both are permitted under Senate
Bill 164 and the model state legislation.)
Pure Fixed Price Contracts: From the public perspective, the
optimum level of competition and, thus, the lowest costs are
likely to be achieved through "pure" fixed price contracts.
Proposers are required to quote fixed prices for basic contract
terms, for all option periods, and for downward or upward
adjustments in service level. There is no price negotiation
after execution of the contract and, therefore, no provision for
adjustment of unit prices.
Indexed Fixed Price Contracts: Fixed price contracts may include
forms of indexation that permit contract price adjustments based
upon the change in generally accepted indices such as measures of
inflation or fuel cost increases. Indexing can reduce the risk
for private contractors as they attempt to predict future costs.
Potential contractors propose basic unit prices, but the unit
prices are increased or decreased periodically according to
specified indices. The price variation may be a percentage of
the index's change and/or be invoked only when a certain level is
reached, such as a 10 percent increase or decline from a base
level. Indexing can increase public costs since private sector
costs often increase slower than inflation. On the other hand,
indexing can provide a simple tool for dealing with major
variations in cost that are outside the control of the
contractors, especially fuel costs. Another function that would
lend itself well to indexing is insurance, however no reliable
index has been developed. As in fixed price contracts, indexed
fixed price contracts do not provide for price negotiation after
execution of the contract --- reimbursement can be changed only
according to the movement in the appropriate indices.
2. Manipulation of Contract Prices
Unit price manipulation has been permitted in two situations, for
elements of cost that rise extraordinarily and universally and
for periodic price negotiation. (Provisions of Senate Bill 164
and the state model legislation (Section 5.D.) prohibit any
manipulation of unit prices.)
Extraordinary and Universal Cost Increases: Because of fears
that a private contractor might not be able to maintain service
in an environment of general and extraordinary cost escalation in
certain functions, some contracts have provided for reduced
private risk, either through negotiation or "pass through"
treatment of such costs. For example, a contract might provide
for negotiation or pass through to reimburse cost escalation of a
function that is beyond the control of the contractor and has
universally impacted public and private providers (such as the
insurance escalation in 1985-6).
Periodic Price Negotiation: Another form of unit price
manipulation is periodic price negotiation. Generally, price
negotiation is annual and begins in the second year of the
contract. Periodic price negotiation can be costly, because
price competition is limited to only a part of the contract (such
as the first year) and the winning contractor has a degree of
market power over price in subsequent negotiations, which are
non-competitive. Further, such negotiation consumes additional
administrative time. Periodic price negotiation can lead to
large auditing burdens, as well, to verify contractor cost
changes.
In effect, periodic price negotiation is a "cost-plus" form of
contracting. The net impact of periodic price negotiation can
negate the very purpose of competitive tendering -- to obtain
service for a competitive price. For this reason, there is a
general trend away from this approach in the US.
H. Renewal Options
Contract duration can be defined in two ways by public
authorities. Some public authorities offer contracts that have a
specified term, such as three years, while other public
authorities may award contracts for a basic term plus renewal
"options." For example, a public authority may award a three
year contract with a two year renewal option for a total contract
term of five years. At the end of three years, the public
authority may decide to exercise the two year option and have the
incumbent company continue to provide the service. On the other
hand, the public authority may decide to competitively procure
the service again at the end of three years. The use of options
can increase the incentives to the contractor to provide quality
service and can give the public authority a way to change
contractors without invoking termination. Senate Bill 164 and
the model state legislation permit a maximum contract duration of
five years including options.
I. Contract Duration
Costs are likely to be higher for shorter contract durations
because the risks will be greater, since proposers must recover
fixed costs over a shorter period of time. Further, "start up"
costs are incurred when a new private provider assumes a
service. Costs will also tend to be higher because the number of
proposers will decline as the risk increases. Contract duration
can be shorter in cases where the public authority provides
vehicles for the private contractor. Some contracts have been
for only one year, while most have been at least two years.
Where the contractor supplies the vehicles, contracts should be
at least three years.
Alternatively, contract periods can be too long. Longer
contracts require greater risks for both parties, since it is
extremely difficult to project costs. Generally, contracts,
including options, do not extend to beyond five years. (This is
the maximum duration permitted by Senate Bill 164 and the model
state legislation.) The primary reason is that, as contract
lengths extend beyond five years, it is necessary to rely more on
negotiated price increases and adjustments, which, in the absence
of competition, are likely to result in higher public costs.
Finally, it is important to observe the same contract duration,
regardless of whether the contract is awarded to a public
authority or a private company. Failure to competitively
reprocure a contract represents an abandonment of competitive
incentives and is likely to result in higher public costs.
J. Rotation of Contracts
Where a public authority competitively tenders for multiple
service packages, it is customary for procurements to be rotated
in such a manner that no more than one service package is being
procured at the same time. Limiting the percentage of service
under procurement at any particular time reduces the incentive
for an incumbent company to seek undue political advantage in the
award process.
K. Contract Size
Contract size is an important consideration because of the large
number of small private providers and the important influence
that these companies have on minimizing costs. The smaller the
proposal package, the more likely that smaller companies will be
among the proposers.
Competitive contracts have generally been relatively small with
only a few cases involving more than 50 vehicles. Nonetheless,
there are cases of competitive contracts of from 100 to 200
vehicles. While only a limited number of companies are able to
propose on such large contracts, there is no evidence as yet that
the costs have been significantly higher than in smaller
contracts. However at least two public authorities that have
procured service in large increments are now considering multiple
and smaller future procurements to increase competition. The
advantage of larger contracts for public transit authorities is
that they can be simpler and less expensive to monitor.
Senate Bill 164 requires that "each individual request for
proposals shall reflect the district's determination as to the
appropriate size for each such request in order to maximize the
number of qualified bidders without causing undue operating
inefficiencies." The model state legislation contains a
provision limiting procurement size (Section 6.F.).
A number of public transit authorities have sought a middle
ground in which requests for proposals are structured to permit
large contracts, if they are more cost effective, while
permitting smaller companies to compete. This is accomplished by
the issuance of a single request for proposal while permitting
companies to submit proposals on part or all of the package. A
variation of this approach involves the provision to propose a
discounted price for the entire package. This approach has been
adopted by the Regional Transportation District in Denver and the
University of Minnesota in Minneapolis.
L. Market Share Limitation
Market share limitations have been designed to limit the ability
of a single company to gain market power and thereby limit
competition. Senate Bill 164 limits individual contractors to no
more than 50 percent of competitively procured service, while the
model state legislation imposes a 25 percent limitation where
more than 60 vehicles of service are operated under competitively
under the sponsorship of the public authority (Section 6.I.).
M. Service Specifications
Public authorities clearly describe the service on which
proposals are requested. This includes specification of route
alignments, public timetables, estimated annual service miles and
service hours, and vehicle descriptions. The public authorities
also specify what ancillary services are to be provided, such as
marketing, telephone information, etc. Public authorities also
generally specify vehicle appearances (liveries).
N. Vehicle Provision
Vehicles for competitively tendered transit services may be
provided by public authorities or by the private companies.
Under public vehicle provision, the private company is given use
of the vehicles under a contract to provide the specified transit
service. An advantage of private provision is that the private
company has a greater incentive to properly maintain the vehicles
to maximize their value in the used vehicle market. A
disadvantage is that private companies have to finance such
capital acquisitions, which can increase the cost of capital
(interest). Avoidance of interest charges is a particular
advantage of public vehicle provision (US transit vehicles are
generally purchased for cash with public grants). A disadvantage
of public vehicle provision is that the public authority incurs
additional costs to inspect the maintenance records of the
private company operating the vehicles.
Standard transit buses are a special case in the US because they
have little value in the secondary (resale) market. The rapid
decline in market value of these buses is much more steep than
their customary capital depreciation, and, as a result, provision
of such vehicles is more risky for the private sector. In Miami,
New Orleans and Denver, public transit authorities have made or
plan to make public vehicles available for use by private
contractors to reduce costs and to increase competition.
O. Insurance Coverage
Most public authorities require contractors to maintain accident
and liability insurance limits at least as high as the public
authorities carry themselves and similar to those required by the
US Interstate Commerce Commission ($A5.8 million per accident).
Any requirement above this industry practice, even where it may
be justified, adds to the costs of the contract.
P. Performance Bonds
Many public transit authorities require contractors to post
performance bonds. Performance bonds serve two primary
functions: to demonstrate the contractors business soundness and
to compensate the public authority for any losses resulting from
a contractor default.
Performance bonds probably represent the most simple and reliable
indicator of the contractor's ability to perform. Public
authorities are not skilled in judging the fiscal condition of
private businesses and it can be unwise for a public authority to
perform such a task. Bonding companies are skilled in corporate
financial analysis and a private company that is unable to obtain
a performance bond of a reasonable size may not be competent to
provide competitively tendered transit service. Performance
bonds can be an easy, cost effective way for public authorities
to minimize risks.
It is generally held that performance bonds should be limited to
the maximum potential loss to the public authority in the event
of a default by a private transportation provider, and a
consensus is arising that a the maximum performance bond amount
should be no more than three months' of the contract value. Even
this may be excessive, since the nationally lost service days
have been reported at fewer than five in the last decade. Since
public transit service is readily available from the competitive
market, the maximum foreseeable loss from a contractor default is
the incremental cost of purchasing substitute service while a new
procurement process is undertaken. Added to this incremental
cost should be the public cost of the unscheduled procurement
process. San Diego County has developed its performance bond
requirement by making such a calculation.
Nonetheless, the necessity of ensuring the performance of private
contractors must be balanced against the higher costs that are
likely to occur from the requirement of performance bonds---their
value should be no greater than the foreseeable loss.
Q. Performance Standards
Most contracts provide for some standards of performance. These
may include indices for service quality (cleanliness, color,
lettering, and decor of the vehicle, driver attire, and driver
courtesy), on-time performance, trip completion, record keeping,
and safety. Interestingly, the standards set for tendered
services routinely exceeded those of the previously provided
public sector service.
-Safety: Most public transit contracts require that
contractors include safety standards and vehicle maintenance
standards.
-Service Quality: Various service quality standards are
customarily included in contracts, such as on-time
performance, trip completion, vehicle cleanliness, driver
courtesy, passenger complaint rates.
R. Penalties and Incentives
Many public authorities specify financial penalties for
unsatisfactory performance (in addition to the ultimate penalty,
cancellation of the contract). Judiciously administered,
financial penalties can enhance the likelihood that tendered
service maintains high standards of quality and performance.
Excessively high penalties or penalties based upon unreasonable
standards impose additional costs on both the public authority
and the contractor. Potential contractors will calculate the
costs of excessive penalties and increase their proposal prices
to compensate. Public authorities must evaluate the total costs
and benefits of each penalty. Incentives generally have not
been used in competitively tendered bus services because public
authorities have assumed that the profit motive will be incentive
enough for a responsible private provider.
S. Public Supervision
Public transit services require extensive supervision, whether
they are provided by the public authority itself or a by private
contract. The additional costs of supervising competitively
tendered services are small. London Regional Transport has
reported that its incremental contract monitoring cost was 2.5
percent of contract value for a program that involves more than
20 contracts and 800 competitively tendered buses. Ann Arbor
(Michigan) reported incremental supervision costs of less than
2.0 percent. Common sense would indicate that the costs of
supervision would be directly correlated to the extent of the
monitoring effort. This is usually, but not always, the case.
Public transit authorities have been innovative with regard to
supervision. Miami uses temporary help to do random monitoring
of on-time performance and service quality, permitting a higher
degree of monitoring than would otherwise be possible. Carson
(California) performs random monitoring but supplements this with
routine calls to frequent riders for comments on performance
issues.
VI. PRINCIPLES OF COMPETITIVE TENDERING DESIGN
The success of competitive tendering rests on two fundamental
principles: public control and cost effectiveness. First, the
public authority has a responsibility to the riders and taxpayers
to ensure that public services meet quantity and quality
standards that are set by government --- this requires public
control. Second, competitive tendering programs must foster the
development and maintenance of a truly competitive market so that
costs are kept under control. There is an increasing consensus
among US public transit officials on these principles. The
implications of these two principles are described below:
Principle #1. Public policy control should be retained over
competitively tendered services to ensure that tendered
services are operated consistent with public policy
objectives:
a. Public authorities should design the service consistent
with schedules, standards, and performance criteria that it
has established, and at the fares it has established.
b. Public authorities should closely monitor service
contract compliance as a routine activity, whether the
contract has been awarded to a public authority or a
private company. Public authorities should be prepared to
invoke contract provisions such as may be required to
ensure public service of specified quality and quantity.
c. Contracts should be awarded to the lowest responsible
and responsive proposer: the public authority should
ensure that it is obtaining service from a company that is
capable of providing the service, having proven its
financial and management responsibility in similar services
(responsible). Further, the public authority should ensure
that it awards the contract to a company that understands
the service package, having submitted a proposal that is
sufficiently responsive to the public request for proposal
that was issued for the service.
Principles #2. A competitive supplier market should be
fostered, to ensure the most cost effective service:
a. Requests for proposals should be provided to all
potential proposers in sufficient time to permit well
considered responses.
b. Each request for proposal should cover the smallest
increment of service practicable so that the maximum number
of qualified proposers may respond.
c. Requests for proposal should clearly specify all
service requirements and contain clear and concise
information on the required format of proposals.
d. Service contracts should be subject to new requests for
proposal at least every five years, whether the incumbent
operator is a private company or a public authority.
e. Contract expiration dates should be rotated to minimize
the increment of service being competitively tendered at a
particular time.
f. No single private company should be permitted to obtain
contracts covering an excessive percentage of the public
transit service. (This may not be feasible for public
authorities a very small amount of service subject to
competitive tendering.)
g. Contract prices should be subject to negotiation after
contract award only in extreme cases: No payment
adjustment should be permitted except as specified in the
contract according to the provisions of the request for
proposal, or where extremely unusual circumstances have
resulted in cost increases that are both outside the
control of the contractor and have similarly impacted all
potential contractors in the supplier market.
h. Public authorities should participate fairly in the
procurement process
1. Individuals and departments involved in preparing a
public authority proposal should not take part in the
evaluation of proposals.
2. Public authorities should submit sealed proposals
subject to the request for proposals deadline.
3. Public authorities should be subject to the same
proposal and contract terms, conditions, and performance
criteria as would apply to a private company including
termination provisions.
4. Public authority proposals should include the
attributable fully allocated operating and capital costs
for the functions proposed for purchase through the
request for proposal.
5. Public authorities should include cost saving
innovations in their proposals only to the extent that
such innovations are used in other services provided by
the public authority. (To permit otherwise encourages
public authorities to reduce proposal costs for the
purpose of winning contracts without reducing overall
public costs.)
i. Where there are public capital facilities, they should
be made available to the successful public or private
proposer to provide the specified service. This will
minimize capital and financing costs.
j. Public authorities should impose no contractor employee
requirements beyond compliance with applicable labor
laws.
(c) 2001 www.publicpurpose.com --- Wendell Cox Consultancy --- Permission granted to use with attribution.
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