Melbourne’s Train Contracts – Lead up to Refranchising - Evolution in Asset Management
Early challenges (1999 – 2003) (MR1)
Following the privatisation of the network, the asset management regime required train operators to undertake maintenance and renewal works (M&R) and gave them great flexibility in where and how they undertook this work. It was an output-based regime. The condition of the asset was measured in initial surveys conducted before 1999. Infrastructure was split into classes and types, and every asset was assessed to arrive at an overall condition index number. The survey was repeated every 3 years.
Theory vs practice
In practice, however, the output-based regime didn’t support the State’s requirements as the asset owner. First, the survey methodology was open to subjectivity. This made it difficult to replicate the initial survey with reliability. Secondly, the initial condition survey was found to be inadequate and based on incorrect assumptions. Thirdly, the status of the network between the 3 yearly surveys was unknown which made it impossible for the asset manager to know how it was performing and for the asset owner to monitor performance or degradation. So now what?
A new approach (2003 – 2016) (MR2/MR3)
The output-base regime was replaced with an input-based regime. Under this regime, asset management and M&R activity was based on the franchisee’s asset management plans. As part of its contractual obligations, the franchisee is required to provide an asset management plan covering the franchise term. These plans gave the State confidence that its assets were being protected over the long term. The State became the risk owner of long-term asset condition under the input-based regime. All risk regarding the effectiveness of M&R work on train operations remained with the franchisee.
Current regime (MR4)
The input-based regime remains, and has proven successful in overcoming some of the challenges encountered in earlier franchise contracts. The fundamentals of the previous asset management framework have been kept, with some changes designed to provide the State with an improved degree of certainty in relation to the cost and quantity of M&R over the franchise term by limiting changes to the planned works program, and more prescriptive reporting requirements to better understand asset lifecycle performance and condition.
Input or output? Without a relatively prescriptive approach to asset management, a rail asset owner may increase risk to its assets. That is, a private operator might select to undertake works of a lessor priority, or easier (and cheaper) to perform, select works that have the greatest impact to operational performance and underinvest in assets that don’t.
Under the input-based asset management regime, the franchisee is contractually required to perform the works identified in the plans, bid a fixed price for all asset management activity over the term and based on the plan it has written, report on how it is progressing under its plans, and take the risk on any cost overruns against its plans.
For a franchisee, the regime transfers additional risk to it, and limits its ability to be entirely flexible in relation to M&R activity. Some will argue that this rigidity discourages efficiency over the franchise term. For the State as asset owner, this is the very point of the regime, in that it doesn’t incentivise the franchisee to pursue other M&R activity outside the plan without approval. The rationale for this approach is to ensure the rail assets are appropriately maintained over their life and reduces the risk of future backlog maintenance liabilities accruing.
We conclude next week with a look at what the MR5 arrangements could look like in 2024.