Comparison of competitive tendering

Issue Frankfurt Helsinki

Organisation mode Competitive tendering Competitive tendering Background motivation Legal compliance Economic free will

Background situation Integrated public operator Several concessions: public and private

City influence High High

Operators 3 (1 public) 8 (1 public)

Market dynamics Low High

Profitability Low Very low

Contract duration 5 -> 6+2 years 3 -> 5+2 years / 7+3 Contract flexibility Renegotiations only Yes

Incentives +/- 5% of contract volume 1% of contract volume

Network fragmentation 5 areas >20

Workers’ issues Loss of income, benefits, job safety reputation, social contact

All the same + integration, language

Transaction costs Restructuring, court case, worker search, tenderings

Set up, worker search, tenderings

For the background, Frankfurt had an integrated public unit (VGF) that also was doing the planning and held the infrastructure. Thus, there had to be structural change, which involved transaction costs, so that the economic outcome was questionable. Transaction costs include finding new jobs and re-schooling the drivers, loss of infrastructure, and disbanding of a unit. The stock of drivers had to be rebuilt, and a new transportation authority (TraffiQ) has been invoked.

Correspondingly, Helsinki founded YTV and HSL in order to improve its overall planning and obtain a holistic transportation approach. Both cities had to found the coordinating transportation authority, but whereas the knowledge to do so already existed in Frankfurt, Helsinki had to create its own expertise in the process.

Frankfurt tried to keep its transaction costs low by transferring personnel to the new unit, which worked successfully at the workers' level. However, at the management level, historic structures caused friction in work procedures. It is a trade-off between utilizing existing expertise and clear power relations. Such problems are unknown to Helsinki and clearly point to the creation history of the transportation authorities.

Generally, for both cities, creating the administrative structure to have a competitive tendering included significant one-time transaction costs. However, in Helsinki, the two public operators kept their structures and therefore did not cause transaction costs.

In Frankfurt, two new entries have conquered the market, taking shares from the remaining public operator. Both private companies that have been taken over by large international companies have been local. With only three providers sharing the market and the incumbent winning the new tenders, the market dynamics are low. If one excludes collusion and coincidence, one can conclude that market barriers appear to be high. In comparison, the market in Helsinki is highly competitive, with eight providers altogether. The big players were also previously locals that had been sold to international companies. Ownership changes rather frequently, and the winners are changing, which all indicate high dynamics in the market. Dynamics in the market mean that the market is actually functioning.

It is interesting to further investigate why the Frankfurt market is seemingly more closed than the Helsinki market. Both should be attractive on the same level by size, and Frankfurt even offers better profit margins. Although the German city is actively trying to invite as much competition as possible, the outcome is sometimes as low

as two applications, endangering the functioning of a market. However, the Helsinki market is dysfunctional as well. Extremely tough competition has led to vast deficits for the companies. The competition produced a struggle for survival, creating life- threatening financial situations for all operators. Both markets do not work properly, albeit with different symptoms and for different reasons. Access to infrastructure is essential for market entry. In both cities, providers do share their depots and collaborate via subcontracts, so this cannot be a limiting factor. One difference in both cities was the number of existing operators in the beginning, , so it might be that the companies in Helsinki were initially fighting in a struggle for survival, whereas in Frankfurt, the competition has been less a question of survival. One consequence of the struggle for market shares in Helsinki was heavy losses and nearly bankrupt companies, while the rather-limited competition in Frankfurt allows operators to work within their limits. This raises the question of to what degree competition is “healthy” and when negative effects exceed the positive ones.

In detail, the price paid by the city dropped heavily in the beginning of the competition, so one can argue a benefit for public finances and higher allocative efficiency. Helsinki paid approximately 30% less per kilometre and Frankfurt likewise 25% less after the first tenders. In both cities, the costs began to rise a bit after the initial drop. There are two reasons for this change: an aggressive market-entry situation when a provider offers a below-production price in order to enter the market, and the labour costs for the drivers, which first decreased sharply and then increased again. Efficiency gains have been achieved on all management levels, like reducing overhead, cutting reserves (slack), and work-plan optimization from the employer’s perspective.

To a large extent, the productive efficiency improved at the drivers’ expense because their salary is a crucial component of the overall costs for producing bus- transportation services, especially in cities. When the competition started, salaries were cut as much as 30%, and working conditions were becoming harder as individual productivity was increased. As a consequence, drivers were losing interest in the job to the point that they became a scarce resource. Strikes, labour unions, and a push from the city authority helped the salary to recover parallel to the competition’s prices. When changing employers, drivers in both case cities now retained some of their privileges like retirement bonuses, so the competition therefore had fewer negative effects on the drivers. However, bonuses have been reduced significantly, especially for new drivers.

As a side effect of driver scarcity, money was used in the form of transaction costs in both cities. Educated drivers changed professions, and new, uneducated

people had to be instructed to get a bus driver’s licence. There were search costs, and applicants with less-suitable attributes had to be taken in. Service quality was reduced due to language problems (especially in Helsinki) and variations in individual competence. Education programmes supported by public finances helped to cover the recruitment problems in both countries but added to the transaction costs.

Helsinki operators took in a number of immigrants and tried to integrate them with language lessons. The image and reputation of a bus driver deteriorated in both cities, likely as a consequence of the working conditions and the workforce configuration, which only added to the problem. The public transportation authority is indirectly able to support workers' interest if they demand a certain salary level from the contractors and also through the use of timetable planning. If a break on the bus exceeds a certain time range, it is unpaid. By keeping the turnaround times under this threshold, the transportation authority can ensure a break as part of the paid-labour time for the drivers.

Aside from the competition effect regulating the prices, both markets also have the public operator as a price-regulating instrument. This is important, especially in Frankfurt where competition is limited, as prices might increase to a monopoly level without it. In Helsinki, this special function is not needed at the moment, but its potential is still appreciated by the city. Additionally, the public operator can serve as a backup to ensure a service by obligation in case a tender is not attractive for the providers.

When comparing the interaction and cooperation between the actors, it is noteworthy that in both cases, subcontracting to each other is allowed. These collaborations can have different backgrounds, such as sharing infrastructure when a depot is situated well for another operator. However, this is not always done, as in the HELB case; depots are a market-entry barrier. Secondly, single lines can be subcontracted when the other operator's infrastructure is located in a better area.

This collaboration is a classic win-win situation and can be found in either town.

Finally, in Frankfurt, the private operators managed to get a smooth start when ICB agreed to gradually shift its service to another provider. ICB also took over a large part of a network won by an opponent when it became clear that it would be impossible to get enough drivers in time, producing an optimal result for the city.

This kind of cooperation is not as widespread in Helsinki, where competition is harder.

The relation between the organising body and the operator seems to be unproblematic in Helsinki, independent of the operator. This distinction is apparently different in Frankfurt, where the public operator is managed by the

former head of public transport, and the role is seemingly difficult for the new unit.

As the same manager is also head of the infrastructure and light-rail operating unit, he is rather influential. On top of that, he gained plenty of expertise when he held the leading position in local public transportation. At the same time, he opposes the competition system and is therefore a natural counterpart to TraffiQ. However, the reported difficulties can be explained only from the point of psychology. Whereas TraffiQ seeks to establish itself in a competent and responsible position and therefore to brush up its achievements and market them accordingly, the manager of ICB and VFG needs to cope with a loss of responsibility and is fighting to show his own achievements of the past in a good light. This antagonism, plus a reversed command structure (previous subordinates are now making higher-level decisions), often leads to friction. TraffiQ’s relation with other operators does not face similar problems. The difference is that TraffiQ became known to the public when VGF/ICB was excluded from one tender after having delivered the cheapest offer, resulting in a court case. In fact, one part of the city was pitted against another one, causing extra costs to the system that would have not emerged otherwise.

The contractual arrangements are very similar. In both cases, the duration has been extended over time to give more predictability to the operator. As a side result, search and transaction costs have been reduced. Also, in both cities, an option to extend the contracts has been established if both parties agree. This option can operate as an incentive for the operator to deliver good services and for the authorities to keep up a good relation with the provider. If used, the degree of competition is lowered.

Another issue regarding flexibility is that Helsinki did introduce a flexibility clause so that the amount of services in the contract can be changed to a certain extent even after the deal is closed. This clause helps the city to react to changes on demand, but on the other hand, it also reduces predictability for the operator and also threatens the profitability of the contract. In the end, it is a question of who takes the risk of uncertainty. Also, the nature of change seems to play a role, since adding a service is reportedly less of a problem than reducing services. On the other hand, Frankfurt relies on renegotiations for extra services. Usually, they offer compromises in quality for the extra service to avoid paying higher costs per vehicle kilometre. The Finnish model seems more favourable for the transportation authority and allows easier adjustments without negotiations, while the operators would clearly prefer the German model for its predictability.

Both authorities are very precise regarding specifications in the contracts, like the vehicles used, and are seen as partly inefficient by the operators. Authorities

apparently seek to exercise control over the various providers through detailed regulations. Decisions that were formerly made by the company managers—or even by people at lower levels—have now shifted towards the authority. One extreme example is the placement of the logo on a vehicle regulated by centimetres, which is an annoyance to some operators. There are also more strategic decisions to be made, like how important it is to have a third exit on every bus and what size the vehicles should be. The question to be asked is who is best to decide about the requirements:

the supervising unit or the subordinate? The supervising unit supposedly represents the customers' and taxpayers' voice, but it can only make a general decision to be fair to all. The subordinate operator can optimize the individual turn but has a tendency to choose for his or her own profit rather than fulfil the demands of the users.

The authorities keep the routes and timetable planning in their own hands.

Practical reasons are mostly coordination issues with other lines and modes of transport. Optimisation of one route may cause negative effects for the user, like long waiting times when changing a bus or irregular departure times. The planning unit is supposedly taking care of the sum of users' interests and balancing the effort versus the costs. From there, the authority decides on a policy like a 15-minute frequency. The question here is whether the operator would be in a better position to take care of this trade-off or the authority. Operators have an information advantage, while the interests between user and authorities are again more congruent. Assuming that demand-driven planning is the most efficient, the question then changes as follows: Is it easier to solve an information deficit or a potential conflict of interest in profit versus quality and quantity?

While the whole bonus system plays only a minor role in the volume, it is weighted heavier in Frankfurt at 5%; Helsinki is thinking of increasing it from 1%.

All actors agree that small-sized incentives do not serve their purpose and need to be increased, such as when demands are unrealistically high for getting a bonus. For the service assessment, new technology helps to evaluate the delays and service failures, and both are part of the bonus system of incentives. Other criteria include cleanliness and friendliness. Frankfurt is seen here as overly strict, and Helsinki is not transparent.

As an example to illustrate the effect of specifications in both cities, bus quality is seemingly different. While it is not a problem in Frankfurt, where all criteria are met on a regular basis, the quality offered by the operators in Helsinki is sometimes dissatisfying, despite age specifications in the contracts. This problem occurs because harsh competition causes the operators to seek to compensate for the low income by poor vehicle maintenance, so even newer buses are in poor condition. On top of

that, the bonus system is not strong enough, and the quality problem does not influence the selection of future winners.

Network size plays a role as well. While Frankfurt decided to have just six network groups, Helsinki chose numerous small ones. The Helsinki solution helps to keep the market alive so that there is permanent competition and the chance to win new shares. It also gives small operators realistic chances to win a tender when big network pieces are beyond their reach. On the downside, reportedly big orders beat small ones in terms of economy of scale. The difference emerges when the operator is able to transfer vehicles and personnel from one line to another, thus reducing transfer times. Another advantage is a lower cost per unit when buying a larger number of vehicles. This observation has been confirmed in both cities and also means that large companies have the edge over small ones when operating in several cities. Finally, too-small tenders might be unattractive to bigger companies when these are too large to care. After all, economies of scale can help to explain why small companies survive in Helsinki but not in Frankfurt.

5.4 Institutional comparison of the three organisational