Because governments insist on low fares, few of the world's major cities have public transport systems that operate without taxpayer support. But Melbourne's "Met" during the Cain/ Kirner years also plumbed the depths of operational inefficiency. It was a business operated for the benefit of its workforce and union reps with little attention paid to the needs of customers.
According to the Auditor-General, poor cost control also meant the Melbourne "Met" operated with a huge $549 million deficit in 1992. The deficit represented a taxpayers' subsidy of 57 per cent. By 1996, the Kennett Government's in-house reforms had halved the labour force, cutting $245 million from the deficit and reducing the subsidy to 37 per cent of costs.
Goaded by a transport workers' strike designed to sabotage the Melbourne Grand Prix, in 1997 Kennett decided to privatise the "Met". Unlike other privatisations, trams and trains were sold off for negative sums -- the "buyers" agreed to specified levels of service in return for on-going but diminishing subsidies. Base subsidies are being progressively reduced from an annual $264 million to zero by 2009. The discounted cash flow value of the privatisation (actually an asset lease rather than a sale), was an estimated $1.8 billion.
As with other Victorian privatisations, the Kennett Government did not allow a single business to buy the full set of services. Instead the assets were separated into five components. Three different owners now manage the three train and two tram services.
The preparation for privatisation involved setting service standards with incentives and penalties designed to bring improvements. Though these incentives/ penalties are considerably smaller than the base subsidies, performance measures to date demonstrate major improvements in reliability.
The following table illustrates this.
Melbourne train & tram: punctuality & reliability performance
Pre- and post-franchising
| Train | ||||
| Tram | ||||
Source: Victorian Department of Infrastructure
A more sophisticated performance monitoring measure has shown a 35 per cent reduction in delays and cancellations in three years -- reaching this target seven years ahead of schedule.
The Kennett Government's tram and rail privatisations, as with some of its other asset sales, appear to have been too successful in the sums they raised. At least one of the buyers has been struck by the same "winner's curse" that has afflicted Macquarie Bank and its purchase of Sydney Airport.
A shortfall in labour productivity gains is one reason for buyer disappointment. Unanticipated revenue deficits from the Melbourne sport of fare evasion is another. Notwithstanding stern ads and vigorous policing, the companies claim fare evasion is $50 million a year in excess of expectations. This is a pivot around which the private owners and the Government are currently negotiating a re-set of the privatisation conditions.
Interestingly, although the Bracks Government rarely misses opportunities to bash the Kennett Government's privatisations, it is hard-headed enough to recognise that ministers and public servants cannot run these enterprises. In fact the Government has moved to ensure the owners are locked-in. Thus, in February of this year, it agreed to pay $110 million in settling some long-standing claims with the companies, and in the process demanded and got a doubling of the new owners' performance bonds to $210 million. This increases the penalty the companies would incur if they walk away from the contracts.
Indeed, irrespective of its ideological preferences, the Bracks Government can hardly be displeased with the privatisation outcome. The marked turnaround in punctuality and reliability is well-documented. Partly because of this, following a half a century of falling market share, the system has seen a remarkable trend reversal.
The reforms from 1993 gradually turned the tide of two decades of declining patronage. Even so, although passenger numbers increased, public transport's share of the travel market continued to fall and was under 8 per cent in 1998. Privatisation has turned this round. The Government now estimates the public transport share of the travel market is back to 9 per cent. This has even prompted public transport aficionados to dust off their Mission Impossible plans for a 20 per cent market share by 2020.
Melbourne public transport's achievements are rarely noticed above the venomous chorus of criticism from user groups and those opposed to private ownership. This is partly due to the private owners' hesitancy in trumpeting their achievements in the light of on-going contractual disputes with the government. It also may be due to the Bracks Government's diffidence in promoting a major success that it inherited. But three years solid performance of Melbourne's privately owned public transport is further evidence of the benefits of transferring assets out of the public sector.
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