bus contracts

Infratil's decision to register four key bus services as commercial - which require no regional council subsidy - is being described by the Green Party as the actions of a "virtual monopoly" trying to undermine a new tender process.

But Infratil says it will save the Greater Wellington Regional Council (GWRC) $2.5 million a year, making it a win-win for passengers, ratepayers-taxpayers and its own operation.

Two of the services (Queensgate to Stokes Valley and Petone to Upper Hutt) are contracted services which means they attract a GWRC subsidy.

A third proposed commercial service replaces contracted weekend and night-time services between Wellington and Eastbourne. The fourth is a new route from Johnsonville via Khandallah to Victoria and Massey Universities.

Until now, GWRC has set contracts on a route-by-route basis. But a change to legislation introduced last year means that it is possible to bundle sets of public transport routes into a contract.

That's likely to cause competition among bidders, thus driving down the overall level of subsidy required.

GWRC is about to release contracts for bus routes in the Hutt Valley on this new basis. The contracts will be for eight years, with an option for renewal for a further four years, the long guaranteed period being another incentive for an operator to sharpen its price.

According to a GWRC report, there had been steady bus patronage growth up until 2006 but since then, user numbers have been static of declining, despite higher costs of using private cars, petrol, etc. Bus customer satisfaction levels have also slipped 5 per cent since 2003.

''Information on the operational performance of Wellington's bus services is generally acknowledged by all parties to be unsatisfactory,'' the report says.

Services are dominated by the ''big two'' Infratril's NZ Bus Ltd (Go Wellington, Valley Flyer) and Mana Coach Services account for 98 per cent of the market with NZ Bus being by far the bigger of the two.

A High Court finding from 2006 was that while there was genuine interest from other operators to bid for services in this region, current contracts were too small in size and too short in duration.

A nationwide benchmarking exercise found that contracts involving more than one bidder are 15-20 per cent lower than with a single bidder (97 per cent of Wellington's contracted services attract a single bid).

''While it would be simplistic to conclude that competition for all contracts would reduce prices to this extent, the information does indicate that competition would generate significant downward pressures on prices in Wellington,'' the GWRC's report says.

A switch from net to gross contracts, as the GWRC is now proposing in the Hutt Valley, could enable the council to make savings of up to $4m-$5m each year.

Greens former co-leader Jeanette Fitzsimons says Infratil's registration of the two Hutt Valley commercial services on the eve of introduction of the new system here is ''cherry picking'' of the plum routes.

''They've busted open the contract and made it much less likely there will be a competitive tender for the rest of it.''

While it might initially appear to be a saving for GWRC, with two services no longer needing any subsidy, she says the subsidy required for remaining services with those two prime, well-patronised routes out of the equation, ''are likely to be higher''.

NZ Bus CEO Bruce Emson says the company is making these registrations now ''because of a very narrow window of opportunity''.

''Uncertainly around the [Public Transport Management Act] and regulatory framework has made it difficult to contemplate registration of these services until now,'' he said.

It's regrettable the Hutt Valley tender process is proceeding before the revised legislation is in place.

''We do not want to disrupt the GWRC's tender process, and have chosen to register the two services in their totality, seven days a week, even though this has meant incorporating the unprofitable 'tail' of each service in the registration.

''This means the GWRC will be able to proceed without delay to call tenders for the remaining services ...

He says NZ Bus will ''vigorously compete'' for contract tenders when they are advertised. The commercial registrations are for three years, and Mr Emson says it will take that long to turn them into profit through investment, innovative marketing and excellent service delivery.

Despite the GWRC's 2008 report warning that registration of commercial services could be used as a tactic to disrupt the bundled route approach, Transport and Access Committee chairman Peter Glensor says the registrations are legal, and there are very limited grounds on which the council can decline them.

There is an ''over tender'' process that could override the commercial registration, ''but I don't think it's 'top of the pops' in terms of the way ahead'', Mr Glensor said.

There will be some subsidy for the two Hutt Valley routes, with GWRC picking up the cost of ticket concessions and the taxpayer picking up the cost of SuperGold travellers.

New tenders for Hutt Valley services are expected to be ready in about six weeks.

TARGET SET

Greater Wellington Regional Council is targeting 50 million public transport trips (trains, buses, harbour ferry) a year by 2016-17. The 2007-08 'actual' number of trips was 34.7 million.

Achieving the target will require patronage to increase at an average rate of 4.7 per cent a year, per annum, significantly higher than the 3.3 per cent it has tracked at in the recent past.

The target splits these trips into 25 million peak journeys and the same number of ''off peak'' journeys.

Don't you love the strange bedfellows MMP throws together? Any day now, all going to plan, Parliament will pass a bill permitting the control of Auckland's highly subsidised public transport network to return to public hands. And joining Labour and its more natural allies such as the Greens and Maori will be that supporter of free enterprise, the Act Party.

Leader Rodney Hide assures me his planned move is very "pro-market". He says Auckland Regional Council (ARC) chairman Mike Lee had lobbied him, arguing that a party representing consumers and taxpayers had to support such a bill, and after consideration "I said, absolutely".

Mr Hide says what the bill allows "is exactly what you'd want to do if you were looking at spending a $94 million subsidy and looking at getting best value for money, so I was on board".

Not on for the ride is the National Party, which, when in power 15 years ago, forcibly privatised the publicly owned Yellow Bus Company, and, strangest of allies, Winston Peters and his New Zealand First Party.

The Public Transport Management Act won't drive private bus operators from Auckland's commuter bus network. It just gives the Auckland Regional Transport Authority (ARTA) the power to design an integrated passenger transport network that serves the needs of the passengers and the subsidisers first, rather than the bus company shareholders.

Merchant bankers Infratil, owners of Auckland's biggest bus operator, New Zealand Bus, have been lobbying around Parliament as though Karl Marx was coming up the hill behind them. But the case for the status quo does not stand up to scrutiny.

When Infratil bought the old Stagecoach Bus company in 2005, patronage in the year to June was 43.1 million passenger trips. A year later, the service had shed 900,000 passenger trips. By the year ended June 2007, a further 200,000 passengers had disappeared.

It took a war in Iraq and rocketing fuel prices to reverse this downward trend. In the year to June 2008, passenger numbers bounced back to 2005 levels. In that time though, subsidy payouts soared. When Infratil entered the scene, public handouts to regional bus operators totalled $45 million. Just five years on, the budgeted annual subsidy has more than doubled to $93.1 million.

As ARC chairman Mike Lee wryly noted in a letter to Transport Minister Annette King this year, "It would appear that the private bus companies in Auckland are much more interested in increasing bus subsidies than increasing passenger numbers."

As the law stands, despite these huge subsidies, ARTA cannot inspect operators' books to check whether they are gouging the system. Their need for a subsidy has to be taken on trust.

ARTA has no powers to design a transport network linking buses and rail and ferry services into a rational, user-friendly web. It can't even insist on integrated ticketing. Operators can cherry-pick the profitable routes, calling them "commercial", then stand aside and wait for the public to come to them, cap in hand, offering subsidies if they will graciously fill in the "non-profitable" gaps left unserved after the plums have been plucked.

ARTA and ARC lobbied strongly for the right to introduce a fully contracted system in which ARTA would design a network of services where, for example, subsidised buses didn't compete with subsidised rail services. Regional councils up and down the country backed Auckland's campaign, even though they were not faced with Auckland's problems.

The bill initially offered a compromise which annoyed both sides. Ms King was sympathetic to ARC's case and has enlisted the Greens to introduce the amendment supporting the full contract model. With luck, and Rodney Hide's support, the amendment will be passed tomorrow or Thursday and the bill itself soon after.

The revolution won't occur overnight, more's the pity. First, a new regional public transport plan will have to be drawn up and go through the normal consultation processes. Seeking changes to existing commercial services requires a 12-month transition and existing contracts don't expire until the end of 2009 and the beginning of 2010.

The only quandary now is what the National Party might do if it wins the election. With such broad support in Parliament and across Auckland for this bill, leader John Key owes it to voters to signal whether he will throw this act in with the recently passed Regional Amenities Funding Act as bad law he will repeal if he becomes Prime Minister.

AUCKLAND BUREAUCRATS are dangling the carrot of incentive payments to bus operators who are angry over plans to shut them out of running fully- commercial bus services.

And they are promoting the success of a new express service running every 10 minutes across Auckland Harbour Bridge between Albany and the CBD as the model for the future.

Private operator Ritchie's runs the buses, but does not keep the fares it collects. They go to the Auckland Regional Transport Authority (ARTA).

Ritchie's is paid a fee to provide the service and gets an annual bonus for every passenger carried above a set threshold.

Ritchie's director Andrew Ritchie said the incentive payments "are not exactly huge to be honest, but anything is better than nothing".

But the service, structured and marketed by ARTA, had worked out well for his company.

"It's been a huge winner with the public."

ARTA chief executive Fergus Gammie is equally enthusiastic about the success of the Northern Express service. A total 39% of passengers were converts from commuting by cars, and the service is credited with taking 400 cars off the northern motorway and harbour bridge at peak times.

As important for Gammie, the service provides him with a model for the future as local authorities push for much greater control over public transport.

That has raised the ire of private bus operators such as Stagecoach NZ (owned by listed investment company Infratil), who want to continue to run fully-commercial services in Auckland and Wellington, and collect their own income through fares. "Fees are totally outside our demand-driven model," said Infratil manager and Stagecoach director Tim Brown.

"We want to be incentivised to build patronage and customer loyalty by being 100% focused on fare income."

Gammie said: "We understand private operators have their own (profit) drivers, but it is a question of being able to meld those with community needs in regard to public transport."

The debate is coming to a head as the government reviews public transport legislation which ARTA contends has put New Zealand out on a limb.

"New Zealand is one of the few places in the industrialised world to provide passenger transport through the market," said Gammie.

The legislation, passed in 1989, allowed private operators to provide the services they wished.

Regional councils would then contract private operators to run additional services for a fee, and with the help of a council subsidy to make it economic.

Gammie said the assumption was that commercial services would predominate, and contracted subsidised services would fill in the gaps.

"But we've got exactly the opposite."

He estimated up to 80% of New Zealand's passenger transport services were contracted and subsidised by councils, and the rest were run commercially.

Most of those commercial services were in Auckland (where 26% of services were commercial) and Wellington.

New Zealand's small and scattered population meant there were not many routes where private operators could make a profit.

"Tiny, over-crowded Hong Kong is the only place in the world with a fully commercial passenger system."

But the mix of commercial and contracted services in Auckland is frustrating regional government's plans to introduce an integrated route, fares and timetable network of public transport.

ARTA is not able to alter a registered commercial service, and cannot decline to register a commercial service because it may conflict with a planned regional network, something also required by the same legislation.

It also says commercial services can be used in an uncompetitive manner and undermine the competitive process for public funding.

Gammie said: "Fact is, there will more competition in a fully contracted system than there is in the mix of commercial and contract we now have."

Infratil has interpreted ARTA's proposals as the first step to regain public ownership of public transport in Auckland. This Gammie denies: "We've no private agenda to take over private bus operators. We want to work in partnership with them."

There are also suspicions that moves to offer larger (150-bus) rather than smaller (22-bus) tenders are being designed to tempt Australian and French bus firms to enter the market at the expense of local operators.

Gammie said such entrants would face additional hurdles of convincing transport authorities they could operate in New Zealand.

"Our agenda is getting an integrated transport system in terms of fares, routes and timetables the public clearly wants," said Gammie.

To do that, they had gone to the model which worked successfully in many big Australian cities as well as in London. He said Australians looked at New Zealand's free-market public transport model in the early 1990s, but decided against it. Instead, they adopted a system where public authorities planned integrated networks, and where private operators were incentivised by bonus payments to run the services.

"Operators paid a bonus for every passenger carried above a target are driven to provide a higher quality service," said Gammie.

Ritchie said his company had met every bonus target in the 20 months the Northern Express had been operating. "The big worry I have with a fully contracted network is whether ARTA has the money to run it," he said.

Private operators running a fully commercial service took most of the risk; under contracted services that risk would transfer to ARTA.

Ritchie said running contracted services involved more work for private firms than a fully commercial services. Some routes were also more suited to commercial than contracted services.

"I'd like to see some commercial services retained, but only in consultation with the public authority running the network," said Ritchie.

That fits ARTA's plans. It wants new laws that allow it to contract for all services if it wishes, but retain or introduce commercial services where they fit with transport network plans.

As for the perceived miserly bonus payments to Ritchie's on the Northern Express run, ARTA said there was more work to do devising its incentives plans. PUBLIC OWNERSHIP (buses and service owned and operated by public authority): Canberra, Rome.

FEE FOR SERVICE (private companies paid a fee and incentive to run buses): Sydney, Melbourne, Brisbane, London.

PUBLIC SUBSIDIES (private companies collect and keep fares, but get a subsidy to run uneconomic services): Christchurch (98%), Auckland (74%) and some in Wellington.

COMMERCIAL SERVICES (private companies run fully- commercial services, collecting fares and receiving no subsidies): Auckland (26%) and some in Wellington.

FREE MARKET: Hong Kong, Manila, Nairobi.

Source: ARTA.

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CAPTION: The new service model is a hit with the public. Photo: Michael Bradley

Wealthy Wellington investor Lloyd Morrison is banking on more of us getting on the buses in the next few years. Marta Steeman examines his latest buy.

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New Zealand's biggest bus business seems almost a pedestrian purchase for Lloyd Morrison, 48 -- an astute, elegant investment banker and patron of the arts and music -- and his crack team of analysts at Morrison and Co in Wellington.

Listed New Zealand company Infratil, run by Morrison and Co, bought Stagecoach this week from its Scottish owners for $250.5 million.

The Auckland and Wellington bus and ferry business turned over $165 million in revenue, of which $55 million was local authority subsidies for bus and ferry services, in the April 2005 year. Earnings before interest and tax payments were $23 million.

There were three other overseas contenders, but no formal tender process. The three are believed to be a couple of Australian private equity firms and Singapore company Comfort Delgro.

The deal was negotiated and sealed fairly quickly -- from start to finish in a month. Stagecoach's owners approached a few parties they knew were interested, including Infratil.

Mr Morrison and his team are the brains behind Infratil, a company they set up and floated in 1994 to invest in infrastructure and utilities. They identify and manage the investments Infratil makes. For that they were paid $8.7 million in the March 2005 year.

Institutional investors in Infratil regard three of its investments as highly successful to outstanding earners.

They are Infratil's holding in electricity retailer and power generator TrustPower, its two-thirds ownership of Wellington Airport and its earlier cornerstone shareholding in Port of Tauranga.

With these Morrison and Co has built up a big store of credibility. Other more recent investments such as Glasgow Prestwick Airport in Scotland and two other purchases of "emerging" airports have yet to prove themselves.

Stagecoach is a big acquisition but well behind Infratil's most successful investment, its 36 per cent TrustPower stake worth close to $600 million.

Including Stagecoach, Infratil now has total assets of about $1.4 billion.

Mr Morrison suggests the "buying back the family silver" metaphor for the Stagecoach purchase. It's a good selling point.

There is a strong streak of national interest and pride in Mr Morrison, a father of five. He initiated public debate last year on a new flag and opposed the Australian takeover of the New Zealand Exchange and the Qantas alliance with Air New Zealand.

"I think in the longer term the advantage of local (ownership) and long-term (commitment) will accrue . . . Supporting capex (capital spending) for improved services and quality of vehicles over time is something we see as playing to our strengths."

Wellington Airport is an example of Infratil's success, he says. International ratings agency Standard and Poor's rated the airport as the lowest cost and most efficient airport in Australasia, and people will acknowledge it offers probably the best service for the market it serves, Mr Morrison says.

"That's the sort of aim we would have for Stagecoach which is its current positioning, but that's something we want to enhance."

Infratil is a hands-on investor that has a close interest in its investments through board representation on the companies.

"We will be very supportive. We have a long-term perspective which management always like, no short-term focus," Mr Morrison says.

The key to Infratil's success so far has been picking the right sectors to invest in. It likes sectors where change is happening. This presents risks as well as opportunities and the company backs itself to adapt, Mr Morrison says.

Stagecoach provides 70 per cent of the bus services in Auckland. That's a mix of commercial and subsidised services. In Auckland, it faces more competition from smaller operators than in Wellington where it is also the biggest operator and has a 26 per cent stake in the next biggest, Mana Coach Services, according to documents filed with the Companies Office.

It is Auckland that offers Stagecoach the greatest opportunity for growth. Infratil says the Government and local authorities have targeted substantial increases in funding in future years to support road and rail networks and greater use of public transport.

The Auckland Regional Land Transport Strategy supports more frequent services, extended hours of service and high levels of reliability. Public transport users are expected to increase 62 per cent in the next 10 years.

Buses are the transport system workhorse. They carry about 45 million passengers a year in Auckland compared with rail's 3 million passengers a year.

Auckland Regional Transport Authority is aiming for an increase in bus passengers to 90 million in 10 years and rail to 18 million.

The authority's general manager of passenger services, Heather Hazelgrove, says it has to put into practice the regional transport strategy set by Auckland Regional Council. The authority is not pitting bus services in Auckland against rail services. The plan is to have those services connecting and complementary, she says.

"Auckland is growing but we also want to attract more people out of their cars. So it's a mixture of providing more services, getting more people to use the services we currently provide . . ."

The Transport Ministry is reviewing the procurement model for public transport passenger service and Land Transport New Zealand is reviewing its rules for the buying of the services, such as the size and length of contracts.

"One of the thrusts of the review is to have longer contracts . . . and to have bigger contracts," Ms Hazelgrove says.

At the moment the contracts are quite small, about 20 buses in a contract, and for lengths of two to five years.

Stagecoach has 130 contracts with the Auckland authority. "Bigger contracts and longer times are more attractive to the market and we would hope we would get better prices for that," she says.

A longer contract makes it more attractive to buy new buses.

For now, the jury is out on the Stagecoach acquisition, with Infratil's share price initially barely moving on the news, though it had gained six cents to $3.74 yesterday.

Infratil's institutional investors are lukewarm.

Stagecoach is regarded as a solid, but unspectacular investment.

AMP Capital Investors head of equities Guy Elliffe says from the information supplied, the purchase looks rational.

Morrison and Co has a reputation for picking trends, getting into electricity investments and wind power before others in the private sector.

"It doesn't look particularly attractive or unattractive. On the numbers we've seen, it just looks okay," Mr Elliffe says. "You can't expect every investment Infratil undertakes to be as profitable as TrustPower."

He has great respect for Morrison and Co. "I stress if you look at the increase in asset value and the returns to (Infratil) shareholders over the period since listing, they have done a fabulous job and we rate them very highly as a management team.

"We have a lot of confidence in them to make judgments about investments. They are very thorough analysts," Mr Elliffe says.

Tower Asset Management's New Zealand equities manager, Wayne Stechman, says the big picture for public transport seems favourable. Public transport funding from regional authorities looks likely to increase substantially.

"So that's good, and you know the revenue line is going to improve. "But how they can ever make a lot of money out of something that's surviving through government subsidy, I just don't know. I guess I'm okay with it. It doesn't strike me as being a real gangbuster investment though."

At the coal face, Wellington Tramways Employees Union secretary Phil Griffiths says staff are nervous about what the new ownership will bring.

There are questions about how much more profit Infratil will want, how it proposes to achieve it and how quickly.

Having a New Zealand owner, in his view, is not necessarily an advantage. "It sounds good, New Zealand-owned. But I work on the philosophy that a boss is a boss is a boss and I don't trust any of them."

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ON THE BUSES

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Infratil is paying $250.5 million for Stagecoach's bus services as well as Fullers ferries in Auckland.

STAGECOACH AT A GLANCE

* Stagecoach NZ operates about 365 buses in Wellington and 658 buses in Auckland, which have a book value of $116 million.
* Revenue was $165 million in the April 2005 year, one-third of that from local government subsidies.
* Earnings before interest and tax were $23 million.
* About 70 per cent of the business is Auckland bus and ferry services and 30 per cent the Wellington bus services.

Infratil's management company has become a 41 per cent shareholder in Waikato bus company Go Bus.

Infratil's other purchases this year: Kent International Airport in Britain for $47 million, a conditional aquisitiion of 90 per cent of Lubeck Airport in Gemany and an 11 per cent stake in small oil and gas explorer Austral Pacific for $9 million.

Infratil's main investments:
* 66 per cent stake in Wellingtion Airport
* 36 per cent holding in TrustPower
* All of Glasgow Prestwick Airport in Scotland
* 88 per cent stake in Victoria Electricity
* 21 per cent stake in Energy Developments in Australia

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CAPTION: Illustration: PAUL CLARKSON