Helsinki

Introduction

Helsinki represents the competition case in Finland. During the 1990s, the city decided to implement competitive tendering because it thought the previous concession model was too expensive. The city implemented the change in a synchronized manner, together with Espoo, Vantaa, and Kauniainen. Helsinki created the Helsinki city transport authority HKL, and for the other municipalities in the region, the transport authority was named YTV. In a further restructuring, HKL and YTV have been merged into Helsingin Seutuliikenne (HSL: Sinisalo, 2007).

HKL still exists, although it is responsible only for tram and metro services. HSL is today the public transport authority that represents the city as a purchaser. It is responsible for organising the competition, contracting, and ensuring service quality.

It provides the timetables, plans the routes, and supervises. Finally, it is responsible for communication with customers and managing complaints. The operators are mere carriers that only influence quality and internal planning (Lahdenranta, 2000).

In the previous concession model, various public and private operators all enjoyed a quasi-monopoly environment. All operators were given several years for restructuring before they had to face the competition. Restructuring resulted in the privatization of Vantaa’s public operator, while Helsinki decided to give its public operator more autonomy. Nowadays, the market is operated by seven companies whose market share is constantly changing. There are three main operators: the public Helsingin Bussiliikkenne (HELB) and two private international companies Veolia and Nobina. Additionally, there are four mid- and small-sized firms. The city decided to split the network into small entities, bundling just a few lines together.

The result is a rather fragmented net (see Chapter 4.3).

Differences between public and private enterprises have disappeared so that their ways of managing and operating are very similar. The organisation structure within the city is clear-cut, and the public operator has exactly the same standing as the

private ones from the point-of-view of the HSL public transportation authority, with no internal special-power relation (HEL2, HEL3).

Market dynamics have been remarkable in Helsinki. Since the market opened, the companies have heavily competed for the services, resulting in frequent changes of operators. Two reasons produced this phenomenon: the changing winners of a tendering process and the numerous takeovers by private companies entering the market. When the competition started, prices went down significantly by 25% to 30% (Sinisalo, 2007). Then, when one company lost its market share, it tried to re- enter the market with even lower prices because it still had to cover indirect costs like owning a depot and buses. Thus, prices dropped even more in the following 10 years and, as a result, most companies have been losing money, leading to even more mergers and takeovers (HEL2). The overall economic situation of all operators is quite tense (Valkama & Kankanpää, 2008).

The Actors

The HSL (Helsingin Seutuliikkenne) Public Transport Authority

As of 2012, the restructuring process resulted in a unified transportation authority, HSL, which organises both the local and the regional bus transport in Helsinki. HSL evolved in 2010 from the merger of the regional unit YTV and the local HKL because competence would overlap, and the same work would be done twice. While YTV controlled the areas of Helsinki, Espoo, and Vantaa, now other relevant municipalities like Porvoo are going to be integrated as well. Before the founding of HSL, the traffic had been planned twice by different units and was therefore inefficient. There were some examples of redundant services because of the uncoordinated double planning. As the structure is new, it takes time to observe the effects. The hope is an efficiency gain by getting all responsibilities under one roof.

This way, the structure should also be ready for future planning and administrative extensions like the projected integration of the larger Helsinki region. Helsinki strives to offer a holistic traffic-planning approach to the metropolitan region, including all modes of transportation (HEL2).

In its effort to control the competition, HSL is very conscious about not giving the city-owned operator any advantage and treating everyone equally instead.

According to HSL Manager Sinisalo, from the city's perspective, it is an advantage

to keep HELB so that there will be a secured entry for each tendering. Furthermore, keeping HELB is a way to control the prices and the market, as the price calculation is open to the city. This helps the city to compare the prices and ensure the price level is not too high (HEL2).

Operators

Public Operator Helsinki Bussiliikkenne (HELB)

Helsinki decided to keep its operator and make it a player in the competition.

However, it produces deficits permanently and would be bankrupt if it had not had the financial backup of the city. For example, in 2011 it has been subsidized by an average of one million euros per month. Reasons for this deficit are a result of certain disadvantages that come with being public. As HELB Manager Hakavuori states, disadvantages include when the company buys services it must offer by tendering; since these tenderings are binding, management cannot influence the results anymore. In a private company, it would be normal to start negotiating the details after receiving, for example, multiple offers when buying 20 buses. He continues that being public puts Helsinki into the focus of negative public opinion like the newspapers, even if private companies share the same problems. As a public company, it takes more time to apply changes because of administrative structures and the need to obey special laws. Although the management feels as though it is treated no differently by HSL than its competitors, it regards being public as a strategic operational disadvantage (HEL3).

When discussing the position of HELB in relation to other providers, HSL emphasizes not recognising any difference between public HELB and private operators. According to Sinisalo’s experience, their behaviour and treatment are the same. The city is influencing the market by supporting its own company. HELB proves its value through its impact on price regulation and monitoring; therefore, its existence is guaranteed for the moment (HEL2, HEL3). Opposing this view, Veolia’s manager Vihavainen regards the existence of the public operator “not very satisfying” because it wins competitions with unrealistic offers (HEL4). The fact that Helsinki does not publish the results does create speculations, discussions, and a bad atmosphere.

Private Operators

Notable private operators include Pohjola, Westendin Liikenne, Concordia/Nobina, and Veolia. Out of these private operators, Veolia was willing to participate in this study. Veolia's development is a reflection of the situation in the Helsinki region during the last two decades. Its origin can be found in Vantaa, which sold its city- owned company Vantaa Liikenne in 1994 to the private Swedish company Linjebus and Connex, which finally ended up in Veolia. One interesting aspect is the fact that the manager remained in this case. Former Vantaa Liikenne manager Lahdenranta experienced the shift from public to private within the same company. According to his experience, private organisations are able to make changes more easily and quickly than public units. A public enterprise is much more subject to the influence of its representatives, which limits managerial freedom; private companies are, of course, more business-oriented. The strong side of public enterprise is openness and responsiveness. However, he concludes that the difference between the two ownership options has significantly diminished (HEL1). Apparently, the idea was to keep knowledge within the organisation, and management was not seen as the cause of the inefficiency but rather structural problems. Current Veolia manager Vihavainen thinks that decision-making is easier and quicker in a private company, a fact that still applies in a bigger company. Veolia had losses of 3.7 million euros in 2009 but improved and managed to create a small profit in 2011. Profitability improved through the use of longer contracts and scale economics with the central unit in Paris (HEL4).

Workers

Employees of the public operator experienced a number of changes related to the reforms. Work time calculation has been changed so that breaks are not paid any longer, and often these breaks are not even taken in the depot anymore. This means drivers put in more work per salary and experience a lower chance to build social interaction with their colleagues. As a result, there is less communication and a loss of team spirit. Team spirit is also harmed by the fact that different nationalities form exclusive groups, which is more a question of language skills than culture. Work time models used to be flexible; and employees could choose from one out of three alternatives, but the decision is now made by the company. Also, increased flexibility is demanded by the employer; drivers must be available both on a short-term basis

as well as on holidays, which are now confirmed only three weeks ahead of time.

Increased flexibility also counts for the routes, which causes the loss of personal contact with the customer and makes it more difficult to solve issues. Since the routes change several times per shift, it sometimes leads to mistakes, such as taking a wrong way (HEL5).

The contracts are the same for each employee; only after ten years do they get a bonus. On the positive side, the drivers now can opt for one out of four depots closest to their home and always begin and end their shift there. One difference between working for a public versus a private company is that the public company only charges five days for one week of holiday, whereas the private one would charge six (HEL5).

Users

Customers do not have an organised body where ideas and complaints are collected.

Instead, they can complain either directly to the company or to HSL. Customers' interests are represented solely by the transportation authority HSL, which manages customer feedback. Additionally, the customer’s voice is heard via a satisfaction evaluation, which has generally remained high overall compared with other cities and also internationally. On the positive side, the overall service increased, and prices remained low. However, the quality trend has been declining recently as the operators’ cost cutting has left its mark. Service performance is challenged by the drivers’ limited language ability and primarily by poor fleet maintenance (Sinisalo, 2007). HSL tries to ensure service quality by emphasizing incentives for operators in the contract. More detailed information about the incentive question is provided in the contract section.

Institutional Arrangements

The contract between the public authority HSL and the operators stipulates that the city receives all ticket revenues. The operator states the service costs per unit, upon which the tendering authority then calculates the total costs. Factors influencing the calculation are costs per kilometre, per hour, and per vehicle day. While HSL does all the planning, including the routes, timetables, and fleet schedules, the sole purpose

of the operator is planning the bus service provisions, including working shifts and vehicle use (HEL2).

Contract duration has increased over time. From an initial three years in the first tendering (ibid.), contracts now last seven years plus a two-sided option of three years. Both the local transport authority and the operators favour the adoption of even longer contracts. According to Veolia Manager Vihavainen, better long-term planning and reduced transaction costs are the main arguments for this development.

The optional extension, however, creates some uncertainty for the operator. For example, instead of planning ahead, Veolia would prefer a guarantee for the continuation of the service in case the operator fulfilled all contract requirements thoroughly (HEL4).

The contract volumes are to some extent flexible, and the purchaser HSL may change the amount by up to 20% over the contract period, while the price per-unit remains. However, the amount of service influences efficiency through positive economics of scale. For example, HELB manager Hakavuori believes that reducing the volume increases the costs per unit and therefore influences profitability in a negative way. Above that, uncertainty reduces predictability and therefore challenges planning. So far, the volume of service has usually been rather extended and not reduced, thanks to the increasing number of passengers; as a result, this point has not yet caused a negative effect (HEL3).

The contracts include a compensation system for the services provided, which tries to reflect the change in real production costs through a price index. In this index, gasoline prices have the greatest influence on the variations. The cost index is applied with a three-month delay, causing dispute about its fairness. The delay can accumulate significant sums, and HELB manager Hakavuori claims that in the case of his company, the difference between real-time expenses and the late adjustment resulted in €1 million in 2008. This problem has been acknowledged, and new contracts include a one-month delay only (HEL3). For Veolia manager Vihavainen, this is still not enough. In his opinion, the steep fuel-price increases in the winter cost his company a large amount of money, so he prefers the index to be in real- time (HEL4). The fact that this adjustment is so important to the operators shows how much their profit is limited. The cost-index factor should be levelled out through the year when fuel prices go down in the spring. Assuming a long-term rise in fuel prices, however, there would be a net loss for the operators. Another problem with the index regulation is with the salaries, which are regulated and indexed as well in the contract. Contracts use the national average for salaries, ignoring the fact that

living costs and salaries in the capital are higher in Helsinki. About 60% of the total costs consist of salaries (HEL3).

Specifications for the buses are very precise, going as far as to predefine the layout of windows and the number of doors. As a result, it is difficult to trade buses with other cities. Some bigger international companies like Nobina do have an advantage because they operate similar vehicles in Sweden, which they can transfer. As a side effect, fewer restrictions would also mean more competition on the producer's side and lower vehicle acquisition prices, as HELB manager Hakavuori pointed out (HEL3). Other issues include the inflexibility and strict demand for three-axle buses at certain times, despite the lack of demand. The operator wants to be flexible in order to save unnecessary costs and would provide the opportunity to do maintenance on the heavy-duty, three-axle buses during normal work hours, as pointed out by Veolia's Manager Vihavainen (HEL4).

Quality assessment is done by public authority HSL in the form of a personal check up on the buses and regular passenger evaluations. Results are given in the form of ratings; in case of good results, a bonus is possible (HSL). In regards to the punctuality criteria, HELB manager Hakavuori believes "[our] quality is improving all the time, and we do get the bonuses. The assessment is reasonably fair and done on an individual basis. If a delay is not our fault, there is no punishment, [such as]

last winter when the roads were blocked" (HEL3). A slightly different opinion can be heard by Veolia Manager Vihavainen: “On the other hand, the customer satisfaction survey was done when the conditions were worse, which therefore influenced the opinions. It would be preferable to emphasise the number of service failures, like when a turn is not driven at all” (HEL4). This argument is shared by HSL, which believes that current contract regulations are not good enough to motivate the operators to solve service disruptions to the passengers’ satisfaction (HSL). One rather dissatisfying point in the quality assessment from the perspective of HSL has been the condition of the vehicles. Age limits prove to be of little use here, but maintenance is vital; five-year-old buses can already be in poor shape if proper maintenance is neglected. HSL Manager Sinisalo suggests considering previous performances by the same operator when deciding on competition winners.

Apart from this, monetary incentives could be strengthened (HEL2).

At the moment, HSL as the purchasing authority is considering reforming the contract in order to improve incentives. Presently, only 1% of the contract volume is based on incentives, so operators are willing to compromise quality for profit.

Current incentives do not sufficiently encourage the upkeep of the fleet or ensure good customer service. As HSL Manager Sinisalo puts it, “The carrot is not tasty

enough, and the system is neither fair nor transparent.” In case of a problem, the operator would not react properly in the interest of the customer. So for now, some drivers’ inability to communicate because of language barrier is regarded as a serious issue, including the poor vehicle conditions despite their young age (HEL2).

HSL has identified four ways to create better and more powerful incentives: First, let the previous performance influence the decision about winning a new contract.

Second, improve the acceptance of incentives by tying them more clearly to quality measures. Third, conduct quality assessments using both objective and customer- based criteria. Finally, utilize demand-based monetary incentives so a greater number of passengers would affect the revenue of the operator. However, this last point was attempted unsuccessfully with airport buses in 2002, when a recession and the drop in demand made it impossible to reach the incentive targets. Introducing revenue incentives would work better with the concession-area type of contract, but there would be a danger of ending up with the same problem of local quasi-monopolies like Helsinki had before introducing the competition. Also, it is inefficient if two companies try to obtain the same customer (HEL2).

Competition

The first tender was awarded in June 1994 and began operating on January 1, 1995.

During the following years, all regional transport services managed by YTV were competed. The region has been split into service bundles of different sizes. The contracts for the services awarded under the first tender were for three years with an option to extend them by one or two years. Costs per kilometre are most influential when deciding who is winning the competition, (YTV2001b).

Reasons for the competition were numerous. Apart from the perceived inefficiency of the public operator, there was a need to coordinate the various companies in the Helsinki area, as each one used to have its own fare system. Thus, one target was coordinating and integrating the service into one, which would be more customer-friendly. Furthermore, companies were making excessively high profit margins on their monopoly licences at the expense of the city, which paid the subsidies. For example, Vantaa’s operator Vantaa Liikkenne (VL) was among the 20 most-profitable enterprises in the country. While the money gained from HELB and VL was returned to the city, the private margins were a loss to the public. As a result, the city of Helsinki was very eager to put public bus transportation to competition when it was made possible (HEL1).