Public Transport Operating Model (PTOM)
Consultation of proposed changes to the NZTA Procurement manual
Questions and answers
What is PTOM?
The Public Transport Operating Model (PTOM) was announced by government in April 2012, in
response to concerns around value for money from public transport investment. PTOM is a
combination of planning, funding, procurement, partnering and incentivising tools which can help
regions and public transport operators build stronger collaborative relationships. ‘Regions’
includes regional councils, Auckland Transport, unitary authorities and territorial authorities with
responsibility for planning and managing public transport services.
PTOM has a range of key components which, if used as intended, will give operators and regions
confidence to grow investment in their businesses, and allow joint business and unit planning.
This should enable patronage and revenue growth, with less reliance on subsidy.
How was PTOM developed?
PTOM was developed by a collaborative working group of operators, regional councils, the Ministry
of Transport and the NZTA. Since April 2012 the NZTA, in consultation with an implementation
advisory group also made up from representatives from regions and operators, has been
developing operational policies to implement PTOM.
Why was PTOM developed?
PTOM was developed in response to concerns about increases in public spending on public
transport not being matched by patronage increases, very low numbers of tender responses in
Auckland and Wellington, and a deterioration in relationships between some bus and ferry
operators and regions.
These trends undermined the government’s confidence that it was receiving value for money from
its investment in public transport. For more information see the Cabinet papers on the Ministry of
Transport website – www.transport.govt.nz/ourwork/land/ptom/.
What is the NZTA consulting on?
The NZTA is seeking comment on operational policies and changes to the NZTA Procurement
manual to support the implementation of PTOM. Please note that comments about PTOM itself are
outside of the scope of this consultation as PTOM is government policy and will be defined in the
legislation through the enactment of the Land Transport Management Amendment Bill.
What are the main changes proposed to the Procurement manual?
The NZTA would like feedback on the most significant proposed changes to the Procurement
manual, which are as follows:

A new procurement strategy checklist, to assist regions to take into account the changes in the
strategic procurement environment and those features that need to be included for NZTA
consideration (eg transition plan, financial incentive mechanism, negotiation strategy).

A new partnering delivery model, which will be the delivery model for the majority of public
transport services. Under this model suppliers will be selected by:
–
the price quality evaluation method for tendered units
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–
direct appointment for negotiated and commercial units
–
quality based selection for new commercial units.

Inclusion of joint annual business planning and other requirements in unit contracts, to ensure
both parties to the contract plan and invest in public transport units to grow patronage and
commerciality.

Adoption of a financial incentive mechanism in unit contracts to incentivise both parties to
grow patronage and revenue.

Changes to some procurement rules and the introduction of new procurement rules to
–
require like-for-like transitions where there are existing commercial service registrations
under the Public Transport Management Act 2008.
–
enable negotiation for high-performing units in regions with large bus markets where
enough tender information is available for benchmarking
–
set out the conditions under which patronage and revenue data will be provided to
registered tenderers.
What are the key questions in the consultation document?
1. Are the changes to the Procurement manual consistent with the aim and objectives of PTOM? If
not, why not?
Aim – to grow patronage with reduced reliance on subsidy
Objectives:

Grow the commerciality of public transport services and create incentives for services to
become fully commercial.

Grow confidence that services are priced efficiently and there is access to public transport
markets for competitors.
2. Are the changes workable in your area of responsibility? If not, why not?
3. How could the proposed additional guidance in part C of this document be tailored to meet the
needs of your region and operational practices?
What is the time period for consultation?
The consultation period will last for eight weeks and end on 21 June 2013.
How do I give feedback?
Feedback can be provided verbally, at the workshops or in writing to:
Julie Alexander
Public Transport Investment
NZ Transport Agency, Private Bag 6995, Wellington 6141
DDI 64 4 8946754
julie.alexander@nzta.govt.nz
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Where can I find out more?
To find out more contact Julie Alexander or your local NZTA Planning and Investment team.
Information workshops are being held during the consultation period in Auckland, Wellington and
Christchurch.
How does this relate to the Land Transport Management Amendment Bill?
There are three key parts of the PTOM implementation framework shown in the diagram below.
The legislation currently before Parliament sets the legal framework for PTOM, supported by
changes to the NZTA’s Procurement manual and Guidelines for the development of regional public
transport plans. These three parts work together.
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Do regional public transport plans (RPTPs) need to be reviewed?
Regional public transport plans (RPTPs) continue to be key statutory plans required by legislation.
New RPTPs will need to be prepared under the LTMAB before regions go to tender or by July 2015.
An RPTP must be reviewed at least every 3 years and contains unit descriptions and policies
relating to the provision of public transport services. Regions are responsible for adopting the
plans but must engage with operators in developing them, particularly when determining unit
design and fare setting policies. Plans are publicly consulted on.
The NZTA is reviewing its Guidelines for the development of regional public transport plans and
these will be consulted on later this year.
Do procurement strategies need to be reviewed?
Yes, PTOM is a strategic change in the way public transport is planned and procured. Procurement
strategies are required to be reviewed, to incorporate PTOM requirements, before regions request
their next tender(s).
PTOM provides an opportunity for regions to work in partnership with operators to achieve
improved competition and value for money outcomes that may not previously have been possible,
while also improving the effectiveness of services delivered to communities.
What will happen during the transition to PTOM?
Any existing contracts will continue to apply with the terms and conditions set out in those
contracts for their full term and any agreed term extensions.
Regions needing to go out to tender in the next few months are advised to talk to the NZTA about
contract extensions. Until the legislation is enacted there is considerable uncertainty around
tendering, as any new services starting after the enactment will need to be identified as units in a
regional public transport plan adopted under an enacted LTMAB.
As part of transition planning, regions should in collaboration with operators, ensure that their
public transport networks are meeting the needs of their communities in an efficient and effective
way, before beginning the process of segmenting the network into units and developing a new
regional public transport plan. Alongside the regional public transport plan the region’s
procurement strategy will need to be reviewed and NZTA endorsement sought. NZTA officers are
available to help with transition planning – please contact your NZTA regional office for assistance.
PTOM was developed primarily for bus markets in Auckland and Wellington. How will it apply
to my region?
Some core components of PTOM will need to be implemented in all regions, and across all public
transport modes. These components include defining units, partnering contracts, joint business
planning and financial incentive mechanisms.
Other aspects recognise that regions’ public transport networks differ greatly in size and
characteristics. Some tools, such as the ability to negotiate for a proportion of units, are only likely
to apply to the networks with large bus markets, like Auckland and Wellington.
Ferry and rail markets have some different characteristics from bus markets, including ownership
of assets and investment profiles. The core aspects of PTOM such as the need to define services in
units, under partnering contracts will remain but there are some differences in how the model will
be applied. Ferry and rail specific aspects are identified in part C of the consultation document
(www.nzta.govt.nz/consultation/ptom/docs/consultation-to-support-the-implementation-ofptom.docx).
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What is a unit?
Under PTOM all public transport services identified in a regional public transport plan will be
allocated into ‘units’. Units will be defined in legislation and must form a marketable whole and be
no smaller than a full route for all timetabled services but may include multiple routes.
Each unit will be provided under a contract with the region, with exclusive operating rights. Units
can be:

tendered on the open market, receive a subsidy, with a 9-year term (in bus markets)

negotiated with incumbent operators, receive a subsidy, with a 6-year term •

commercial, receiving no subsidy with a 9-year term.
During the transition period there will also be some like-for-like units negotiated with a 12-year
term.
Commercial units
Commercial units are operated with exclusive rights under contract but without direct public
subsidy from the region and the NZTA (excluding the SuperGold card payments). Provided services
remain without direct public subsidy they will not be put out to tender. However, they will still
need to meet specific performance measures. The LTMAB proposes that the NZTA will have a new
power to approve procurement approaches for services that do not receive a subsidy. Over time,
the number of commercial units is expected to increase as operators innovate and invest to
improve their commerciality. The contract term is 9 years and there is a process by which other
operators could make a challenge to operate the unit at term end.
What is a tendered unit?
A proportion of all public transport networks must be competitively tendered, and in smaller
markets all units will be tendered. In larger markets the proportion of units to be tendered will be
determined by the region through its procurement strategy, and this will be influenced by the
region’s overall commerciality ratio. Contracts for tendered units will be for 9 years and a reset of
the gross operating cost will occur at 6 years.
What is a negotiated unit
In regions with larger bus markets, units that perform well relative to other units may be directly
negotiated with operators rather than going out to tender. This provides an incentive to improve the
commerciality of a unit. Negotiated units will have a term of 6 years. Benchmarking information
from tendered units will be used to inform direct negotiations and renegotiated contracts.
How are negotiated contracts awarded?
Any negotiation for a unit contract needs to be based on recent and relevant benchmarking
information from tendered units. At this stage the NZTA considers that only Auckland, Wellington
and Canterbury are likely to have sufficient units to provide robust benchmarking data. Direct
negotiation is still a tool for regions to consider and a value for money case should be provided for
NZTA approval.
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What is the commerciality ratio and league table?
The commerciality ratio shows the portion of the costs of providing a service that is recovered
from fare revenue. It is calculated for each unit and for the region as a whole. It is used to
determine a unit’s placing on the league table and, in regions with large bus markets,
consequently whether it will be negotiated or tendered. The commerciality ratio for the region will
also be used to assess the region’s network as a whole.
The league table ranks all units in a region and will be published annually by the region. In larger
bus markets, league tables will be used to determine which units will be negotiated and which
tendered.
What is the relationship between the commerciality ratio and farebox ratio?
The commerciality ratio measures the extent to which the cost of providing the services in a unit is
recovered from fare revenue, including SuperGold revenue. This is a measure of how ’commercial’
a unit is. It is used to rank units within a region by placing them on a league table. For regions
with large bus markets, this league table will be used as a guide to whether units are negotiated or
tendered.
The farebox recovery ratio is similar to the commerciality ratio, but it measures the contribution
that users make to the cost of providing services. All regions are required to have a farebox
recovery policy and an associated farebox recovery target.
The NZTA is currently reviewing the farebox recovery policy and will consider whether the ratios
can be aligned as part of the review.
How will a fair price for negotiated contracts be obtained?
Data envelopment analysis benchmarking of winning tender prices will be used to set a benchmark
range. If an operator bid falls within this range the contract will generally be directly appointed. If
it falls outside the range a negotiation process will start. The NZTA is proposing a negotiation
advisor be a part of this process to represent the NZTA’s investment interest and to ensure a fair
outcome is achieved for all parties (the public transport operator, the region and the NZTA).
What is a like-for-like unit?
In regions where commercial registrations forming part of the public transport network were in
place before 30 June 2011, in exchange for relinquishing those registrations, operators will be
offered negotiated units that contain an equivalent number of in-service kilometres to those held
in existing commercial registrations, with a once-only 12-year fixed term contract. Where possible,
units with higher commerciality ratios should be negotiated as like for like units. These are a oneoff commercial arrangement, as part of the transition to PTOM. Gross cost resets will not apply at
the 6 year term.
What happens if there are commercial registrations as part of the urban network?
The first step is to understand which commercial registrations will become exempt services (see
next question below).
Existing commercially registered services under the Public Transport Management Act 2008 as at
30 June 2011 that form part of the core network identified in the RPTP will need to be transitioned
into units.
Commercial registrations that form a full unit can become commercial units. These units will still
be under a partnering contract, but will not receive any subsidy.
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Commercial registrations that form part of units will need to be transitioned into ‘like-for-like’
units. This will occur through one-off like-for-like negotiations with the operators of these services.
In exchange for relinquishing commercial registrations, operators will need to be offered
negotiated like-for-like units that contain an equivalent number of in-service kilometres to those
held in existing commercial registrations, with a once-only 12-year fixed term contract (see
question above).
What are ‘exempt services’ and how are they regulated?
These are existing commercial services as at 30 June 2011 which will not be identified in the RPTP
under the provisions of the LTMAB and will transition to exempt services. These will still need to
be registered with the region, but will not be units and do not need to have a contract with
council. Exempt services do not have exclusive operating rights and operators of the exempt
service will be able to set fares.
On an ongoing basis if operators identify commercial opportunities to run services that are not
part of the network identified in the RPTP these may be registered with the region as exempt
services through a process defined in the LTMAB.
What does partnering mean within PTOM and how will it be demonstrated?
For PTOM to be successful there is an expectation that regions and public transport operators will
work collaboratively to develop and deliver services. Components of PTOM, such as longer tenures
and the ability to negotiate contracts for units with a higher commerciality (in larger markets) are
intended in part to support stronger partnering between regional councils and operators.
Partnering within PTOM does not constitute a formal legal partnership, which has its own legal
meaning. Parties are expected to work in collaboratively to develop annual business plans and:

devise strategies that will grow patronage without increasing subsidies

collectively market the network

plan for the implementation of new, improved or expanded services

define service standards and innovations to benefit passengers

identify the need for desirable business processes, infrastructure and supporting requirements
for the network, such as passenger terminals, bus exchanges, ticketing systems, etc

share information that will benefit the network as a whole

identify and implement incentives that will attract and grow patronage and revenue.
What is the new partnering delivery model?
The proposed partnering delivery model is part of the NZTA procurement procedure for public
transport services and will recognise the different skills and ability of the purchaser and supplier
to manage risk.
Regions and operators will be incentivised to work collaboratively to grow patronage with less
reliance on subsidy, and to achieve high performance standards. Successful collaboration demands
that the commercial interests of all parties be aligned. Risk will be shared by both parties through
financial incentive mechanisms.
The partnering delivery model will become the main delivery model for the procurement of
scheduled urban public transport services identified in the regional public transport plan,
including partnering for commercial units that do not receive any subsidy.
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How flexible are the new procurement approaches?
The proposed new procurement procedure for public transport services will enable flexibility to
tailor tools to specific market conditions, provided that all contracts reflect the requirements for
collaborative relationships, annual business planning provisions, key performance indicators and a
financial incentive mechanism.
If regions wish to take a different approach to that set out they are able to make a value for money
case to the NZTA for approval as part of the procurement strategy.
What is a partnering contract?
The proposed new partnering contracts are a contract for a unit. These will not be net or gross
cost based, and financial outcomes and risk will be shared. The contract will reflect core principles
of a commitment by the supplier and the region to use resources and leverage off both parties’
investment to achieve shared outcomes through joint business planning, financial incentive
mechanisms, performance measures and other initiatives.
Will all contracts have to be partnering contracts?
It is anticipated that the majority of urban public transport contracts will be partnering contracts.
Short-term, low-value contracts (such as trial services, special event services and emergency
services) will not need to be partnering contracts but will still need to be contracted under an
approved procurement procedure.
What are the principles for collaborative relationships?
The proposed principles for collaborative relationships that will be included in partnering contracts
include:

mutual (but clear) responsibilities, accountabilities and outcomes

mutual values, benefits and risks

leveraging investment from both parties (and third parties as appropriate)

culture of honesty, transparency and mutual respect to produce win-win solutions

excellent joined-up communication, both internally and externally

cooperation in a non-adversarial environment of trust

willingness to listen, to learn, to innovate and to develop capability (sharing and learning)

efficiency in management and support systems that helps reduce costs.
What does annual business planning mean for my region?
All units, not matter how small, will need to have an annual business plan. Annual business
planning ensures operators and regions work collaboratively to improve services, and potentially
increase patronage and revenue through collaboration.
The scale of the annual business plan should be commensurate with the expected benefit and size
of the market.
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What is a financial incentive mechanism and how do I use one?
The financial incentive mechanism is a partnering tool designed to incentivise regions and
operators to maximise unit performance and ensure that both parties have ‘skin in the game’, to
encourage them to collaborate.
A financial incentive mechanism will be required for all subsidised units, but will be optional for
commercial units. The NZTA will not set a default model, but financial incentive mechanisms will
need to be designed to achieve the following key principles:

incentivise both parties to collaborate to grow patronage and revenue

take account of unit and regional market characteristics

contribute to value for money

apply to all subsidised units and may apply to commercial units by agreement

be separate from cost indexation

be simple to apply and administer.
All financial incentive mechanisms will be based on one of two base models, but can be varied to
suit the risk and growth potential of different markets in which each unit operates. The two base
models are below, and the NZTA can provide a couple of examples of how the models could look:

patronage: linking the incentive directly to patronage change, through a per passenger
payment by the region to the operator

revenue: sharing the revenue change on a proportional basis.
How will PTOM be monitored?
The NZTA is required by the Minister of Transport to develop a new monitoring approach to report
on the success of the PTOM implementation, and is reviewing its requirements for monitoring the
ongoing performance of public transport services. The Minister of Transport requires a report on
the effectiveness of PTOM in mid-2015. The new monitoring approach is being consulted on
separately.
How will fares be set?
Regions will describe their policy for fare setting, which will apply to all units and be consistent
across the network, in their RPTP. Operators can have input to and potentially influence fare
setting through RPTP consultation and annual business planning with the region.
What are fare revenue protection mechanisms and why do I need to include these in contracts?
Under partnering contracts the fare revenue risk no longer sits solely with one of the parties but is
shared between operators and regions so there is a need to have transparency between parties
about how they will manage the risk of fare evasion. This is expected to be commensurate with the
risk and size of the market. In more complex markets, such as those with rail networks, especially
as integrating ticketing is adopted, a more comprehensive fare revenue protection strategy is
likely to be required.
Will indexation continue to be applied?
Indexation will continue to be applied to the gross cost of contracts, to reduce the need for public
transport operators to price a risk premium for input cost variations into tender prices.
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How will disputes be managed?
Most disputes will be managed through standard contract clauses. In cases where operators
consider they have been adversely affected by a region’s decision about exempt services or new
services, there will be a right of appeal to the district court.
Will the introduction of PTOM affect the funding for public transport services?
PTOM is not expected to change the funding available. No specific funding has been allocated for
the implementation of PTOM. Government funding will continue to be allocated through the
National Land Transport Fund to give effect to the government’s priorities as set out in the
Government Policy Statement on Land Transport Funding
(www.transport.govt.nz/ourwork/KeyStrategiesandPlans/GPSonLandTransportFunding/ ), and
interpreted in the Investment and Revenue Strategy
(www.nzta.govt.nz/planning/programming/docs/nltp-2012-15-irs.pdf).
What incentives are proposed for regions and operators to invest and innovate?
PTOM provides greater opportunities for operators to invest and innovate through partnering
contracts with:

9-year tenures for tendered bus units

6-year tenures for negotiated units

9-year terms for commercial bus units

financial incentive mechanism to share the benefits of increased patronage and revenue

annual business planning to enable operators to work collaboratively with regions to improve
services.
In larger markets PTOM provides opportunities for bus units that are performing well and have
high commerciality ratios to be renegotiated at the end of the term rather than going out to
tender.
How will PTOM create opportunities for public transport operators to enter new markets?
Open competitive tender rounds will provide an opportunity for operators to enter new public
transport markets. PTOM encourages and enables better access to public transport markets for
competitors. The previous three years of patronage and revenue information will be provided to
registered tenderers who have signed a confidentially agreement and lodged a refundable bond.
What information will be shared with registered tenderers?
Operators of all units will be required to provide patronage and revenue information (among other
information) to the region and the NZTA, to assist with the ongoing monitoring of the performance
of the unit. Recent revenue and patronage information for units going out to tender will be shared
with registered tenderers, who have lodged a bond and signed a confidentiality agreement.
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What opportunities does PTOM provide for public transport operators to start new services?
Public transport operators will still be able to start new exempt services through a registration
process, if these are not part of the network identified in the RPTP. The Land Transport
Management Amendment Bill sets out the registration process.
Operators will also be able to have input into the public transport network and unit design through
the RPTP process, including identifying potential new commercial units.
How will the change in NZTA policy in respect of payments for concessionary fare ‘top ups’
affect PTOM and what should affected parties do?
The concessionary fare scheme (CFS) was introduced in the early 1990s, to protect operators from
any financial loss if the regions introduced a new concessionary fare after the net contract was
awarded (or came into effect). This provided for a ‘top up’ to be made to make up the difference
between the fare charged at the commencement of the contract and the new concession. This was
provided for in the National Land Transport Programme (NLTP) under category, ‘W/C 513, Bus and
ferry concessionary fares’.
In 2011 the NZTA reviewed work categories for the 2012/15 NLTP and removed W/C 513. Any
provision needed to cover legacy cases is to be included as a component of the cost of services
(W/C 511, Bus services or W/C 512, Passenger ferry services).
In some regions the removal of W/C 513 may impact on the calculation of commerciality ratios
(and in particular the regional commerciality ratio), and commercial units. The NZTA will work with
affected stakeholders.
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