EU regulation could rein in discounts for public transport by making municipal authorities more accountable for their demands on fleet operators.
Blue Streak: Zagreb`s new tram fleet will feature 60 Koncar-manufactured carriages, each costing about EUR 2 million (photo: Flickr)

On the eve of Hungary’s parliamentary elections in 1998, things looked grim for incumbent Premier Gyula Horn. His Social-Liberal coalition had instituted a harsh austerity programme and opposition parties were riding high on the public furore it provoked. Horn’s campaign desperately needed some firstaid to patch up his bruised Socialist credentials. So just before the vote he made an announcement: Pensioners over 70 years of age could ride free on trains and public transportation.

The move was a time-honoured gambit of European politics, where state control over public transport makes it a handy electoral tool. In Hungary’s case the 1998 decree failed to rescue the Horn government, but it saddled Budapest’s public transport company, as well as the country’s national rail system, MAV, with a financial burden that still exists today. This kind of political fiddling is likely to become less common under a regulation agreed to in September by the European Parliament and European Commission.

According to the new stricture, cities whose public transport is run by independent companies will no longer be able to award fare discounts by unilateral decree. The regulation will require working relations between city administrations and their transport operators to be spelled out in detailed contracts, with agreedupon funding for social discount compensation going from the city to the operator.

The regulation could have a particularly dramatic effect in new member states of the EU (as well as in candidate and aspiring member countries), where public transport administration is less evolved than in Western Europe. In candidate state Croatia, for example, just three municipalities have formal contracts with their public transport operators; the rest operate at the whim of politicians, and with all the financial insecurity that this situation entails.

Capital ideas

The new regulation, which will be binding for all European public transport systems in two years’ time, was a topic of keen interest at a meeting of public transport professionals earlier this fall in the Croatian capital of Zagreb. The event was a working group meeting of SPUTNIC, a project funded by the European Commission under the Sixth Framework Programme, which is dedicated to addressing challenges faced by local and regional public transport systems in transition economies. Participants included representatives from public transport operators, as well as local authorities from across Europe.

Operators at the Zagreb meeting agreed that unfunded social discounts can be a serious problem. In virtually all cities, passengers with discounted passes make up a large share of ridership. In the city of Warsaw, for example, there are social discounts for 29 categories of people. Along with the usual categories (e.g. pensioners, students, physically handicapped) are: victims of Nazi and Soviet persecution, blood donors, Second World War veterans— and persons who can certify that they were born in public transport vehicles! Due partly to this wide range of discounts, public transport in Warsaw is 66 percent dependent on public subsidies, the highest rate in Europe.

In the Bulgarian capital of Sofia, discount transport passes are given to more than 200,000 users. Metodi Avramov, head of the economic department at Sofia Public Transport Company Ltd., said his city is grappling with the financial burdens of discounts that were decreed by the city council 10 years ago. The problem with such breaks is not that they exist; the difficulty is when the city gives discounts without budgeting for it, according to the department head.

“A city can’t have a social policy of discounted public transport fares without paying for it,” Avramov added, “because in the end, the burden will fall on the operator.”

Contracts and competition

Reduced transport subsidies are just one possible impact of the new regulation, the main purpose of which is to increase accountability and transparency in public transport services. Under the regulation, if public transport service is handled by one or more independent service providers, all terms of service must be spelled out in written contracts that specify obligations, regions covered by the service, parameters of compensation by the local authority to the operator, and duration of the agreement.

Such contracts would have to be awarded through public tendering—the better to encourage competition. Although cities with single, so-called ‘in-house’ providers will at first be allowed to award their contracts to existing vendors without a tender, they will have to make public all the terms of the agreement. After a period of time, competing vendors who have had an opportunity to inspect the contracts will be allowed to bid for the work.

The regulation was intended to encourage greater efficiency and competition, according to Peter Faross of the European Commission’s Directorate General for Energy and Transport. At the time the regulation was first proposed, in 2000, public transport operators in Europe, on the whole, were actually overcompensated for their services, Faross said. Transport companies would fight fiercely for service agreements, and when they lost they would inevitably sue and demand that the city show the basis on which the winner got the contract.

Faross believes greater transparency and stricter tendering regulations should help alleviate this problem, while also fostering better public transport service. He noted that the regulation allows municipal authorities to put quality criteria into contracts and to stipulate penalties and rewards based on how well an operator meets these standards.

However, the representative of one municipality has doubts about whether the regulation will work. Stanislaw Jedlinski represents Warsaw’s Public Transport Authority, which works with a single, independent operator of the type that will be allowed to keep its exclusive working contract under the new regulation. Jedlinski believes this arrangement will hinder improvements to local public transport.

“The European Commission says the essence of the new regulation is that the relationships between authorities and operators are governed by contract, but this has been the case in Poland for years,” Jedlinski said. “Rather, it seems a step back. You may have a contract with an in-house operator, but if he’s the only one supplying service, he’s not really exposed to the market.”

Although common in Poland, contracting is still new to countries like Croatia. Zagreb City Hall and its transport operator, Zagrebacki Elektricni Tramvaj (ZET), signed a formal operating agreement for the first time ever just last year, joining the ranks of Pula and Dubrovnik as cities where public transport is regulated by contract.

In point of fact, the contract hasn’t changed much in Zagreb, according to Branimir Valasek, an advisor at ZET. Even before ZET and Zagreb City Hall sealed their relationship in writing, the city had provided adequate support for public transport, he said. However, a worry came prior to recent elections, when political opponents of the incumbent administration accused City Hall of spending too much on public transport. The sitting city council won the election, but the close race was enough to convince Valasek of the merits of a long-term contract—one that provides some shelter against the vicissitudes of politics.

Get in writing

Along with providing a sense of stability, contracts can also give transport operators a financial advantage. This has already been demonstrated in Dubrovnic, which formalised its public transport agreement in 2004 under pressure from the European Bank for Reconstruction and Development (EBRD). There, the local transport company Libertas Dubrovnik had applied for a EUR 7.5 million loan to buy a fleet of buses, and the bank said it would approve the loan only if Libertas had an operating contract with the mayor’s office. In fact, it was also EBRD that spurred ZET to get a contract. The company had gone to the EBRD for credit to buy a new fleet of low-floor, articulated trams, and during due diligence the bank took note that ZET did not have a contract. “The EBRD looked at everything: our budgets, our assets, our staffing and so on,” said Valasek. “They insisted they wouldn’t make a loan unless we had a proper contract with the city.”