PERFORMANCE-BASED QUALITY CONTRACTS IN BUS SERVICE PROVISION

This paper proposes performance-based contracting (PBC) as the best way to deliver social and environmental outcomes consistent with government policy, recognizing the need for appropriate incentives for bus operators to deliver value for the subsidy dollar. One distinguishing feature of the PBC is that payments above community service obligation levels are based on social and environmental benefits rather than primarily on commercial considerations. A reward system for bus operators is proposed that combines payment for delivering a minimum level of service (MLS) that meets government community service obligations, plus an incentive regime that rewards operators for patronage increases above MSL patronage levels. The patronage incentive is based on expected user and external benefits deriving from service improvements and patronage increases. To ensure remuneration is based on efficient cost levels, it is essential to benchmark costs at relevant best practice levels. The paper argues that a PBC approach is consistent with maximizing social surplus from public transport provision across a geographic area, for any given budget constraint and regulatory imposed minimum service levels. One alternative to PBC, competitive tendering (CT), is considered and rejected as being less desirable in terms of securing the maximum social surplus to the community, given the total amount of subsidy support available, although CT is an appropriate non-compliance condition. Case studies from Norway and New Zealand provide models on how a performance-based quality contract could be structured