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Fact-Finding Mission to New Zealand (May 29-31, 2001)

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Chapter 3: 1989 Transport Legislation and its Purpose

3.1 Intent: Setting the Stage for Reform

After passage of the state sector liberalization acts in 1986, the restructuring of public sector enterprises and removal of their monopoly rights moved forward in many sectors of the New Zealand economy. In 1987, the post office was restructured into three parts, two of which were corporatized, then privatized. The third part, New Zealand Post, remained state-owned. However, it recovers all costs, earns a profit and pays taxes.43

Due to initial inability to agree on how to separate out the various functions of the former Transport, Works and Development Departments, the government did not introduce competition to all transport modes until 1989.44 Finally, in 1989, Parliament carried forward the state sector liberalization acts launched in 1986 with three new acts adapting decentralization, competition and commercialization principles to the transport sector.

The transport sector had long suffered from the same ills as other state sector enterprises enjoying monopoly rights. Prior to reforms, "government was using more than 30% of the resources of the nation."45 Inefficiently used resources burdened sectors of the economy, creating, for example, "a poor transport system."46 A common theme expressed during the FTA mission was the gradual but steady decline of transport patronage following WWII, with no consequences for delivering poor service.

Before 1989, the government regulated urban passenger transport by creating several transport districts. A Transport Services Licensing Authority representative in each district granted exclusive area or route licenses to the dominant local government operators as well as to small private bus companies, such as Newlands, which operated in a northern Wellington suburb. In 1962, a Transport Act reconstituted several transport districts into the Auckland Transport District, the Wellington Transport District, the Christchurch Tramway District, and the Dunedin Transport District. It gave the Governor General power to divide up other areas on the North and South Islands as he saw fit. ARC's predecessor, the Auckland Regional Authority, was the only regional council that owned a transport operator. Territorial local authorities, such as city and district councils, or in some cases, special purpose authorities like the Christchurch Transport Board, owned the remaining operators.

The New Zealand transit deregulation model is a hybrid of the two British competition models: deregulation as imposed outside London in October, 1986 and a second model, which allowed for competitive tendering, imposed in London (the former London Transport service area) a year earlier. Since 1986, about 85 percent of services outside London operate commercially.47 In New Zealand, however, where car ownership levels are higher, and urban areas less dense, commercial operations account for approximately 25-30 percent of services. Most commercial services are concentrated in the largest urban area, Auckland, where they provide 55 percent of service48. Since New Zealand has more subsidized services, its local authorities play a much more important regulatory role than do British local authorities. Further, unlike in Great Britain, New Zealand regional councils can deny commercial service license applications if they determine a detrimental effect on a tendered service. As a result, many of the New Zealand systems resemble the London model, which involves competitive tendering of virtually all bus service. In New Zealand, after many years of decline under the old monopoly model, ridership losses slowly and unevenly began to reverse.

Unlike the U.S., the UK and New Zealand did not have a vibrant private bus industry with sufficient resources to compete with the government-owned operators.49 However, both countries created competitors by privatizing government-owned bus divisions and corporatizing local authority-owned bus operators. In New Zealand the government operators, which by law had become corporatized, won a large percentage of the subsidized service. Both the corporatized companies and small local private operators operated commercial services.50

Passed in 1989, the legislation to deregulate and restructure New Zealand land transport took effect on July 1, 1991. The design of this restructuring differed from that of the UK outside of London. For bus service, the New Zealand model included regulation, separation of regulatory from non-regulatory responsibilities locally, and competition for commercial and non-commercial service. The UK outside of London model includes less leeway for local authorities to competitively tender services not deemed commercially viable.51

Competitive tendering methods for commuter rail, for which new legislation is pending, will be similar to those of the Strategic Rail Authority UK rail-franchising model.52

While legislation removed public operator monopoly rights, it gave the Minister of Transport responsibility, through vehicle registration and safety regulations, to establish comprehensive licensing requirements for passenger transport operators and other potential new applicants.

The 1989 legislation assigned regional councils planning and funding responsibilities, but not the transport supplier function. It required regional councils or other territorial authorities either to divest their transport assets to the private sector, or to establish a transport-related Local Authority Trading Enterprise (LATE).53

The Local Government Amendment Act of 1989 was the logical extension of corporatization of commercial undertakings of state sector agencies. The State-Owned Enterprise Act of 1986 subjected these corporatized entities to the competitive marketplace.

The 1989 acts gave both roads and passenger transport in the urban areas -- usually newly formed LATEs -- the mandate to operate commercially. As in the London model, which required competitive sourcing of bus routes by bundling them into separate tenders, non-commercially viable services would be competitively tendered.

LATEs, however, would have to compete on a level playing field with the private sector and many of them were ultimately privatized.

Privatization of the corporatized local operators did not take place logically or in planned fashion. A year before the Wellington system was sold, policymakers did not envision privatization of the transport LATEs. This attitude was consistent with the original concept of corporatized government trading enterprises in the early reform years. The regional authorities seemed poised to either own these assets or have them remain under local control as LATEs over the long run.

Was it inevitable to proceed from corporatization of municipal entities to the eventual sale of locally owned assets in Wellington and Auckland? Not necessarily. Of the big three urban bus operations in New Zealand, the locally corporatized entity in Christchurch, still operates nearly all bus service as the successful low bidder. All bus service in Christchurch is competitively sourced; dating back to the implementation of transport restructuring legislation, there has been almost no commercial service. At present three bus routes or 3% of bus service is operated commercially.54 Christchurch fare box recovery rates have been historically low by New Zealand standards.

However, significant ridership growth occurred in Auckland after 1998, when Stagecoach purchased the shares of Yellow Bus Company. In addition to the Christchurch LATE, known as RedBus, a LATE in Dunedin, Citibus-Newton, continues to operate.

3.2 Acts Directly Relating to Land Transport

  1. Local Government Amendment Act of 1989: covers LATEs, full-cost bidding, and separation of policy, regulations and operations

  2. Transport Services Licensing Act of 1989: effective date of July 1, 1991 for applicants which have notified a regional council of passenger services to be operated.

  3. Transit New Zealand Act of 1989: expenditure for subsidized service subject to "competitive pricing procedure."

Hallmarks of 1989 Transport Reforms:
  • Local authorities received the option of divesting passenger transport assets to private firms or creating a transport-related Local Agency Trading Enterprise or LATE. (Local Gov. Amendment Act No. 4).

  • Forming a LATE allowed the former public entity to apply for a license to operate commercial routes, i.e., those that would not require a subsidy under conditions set forth by a regional council. (Similar to the 1986 State-Owned Enterprise Act, LATEs were corporatized entities that were to behave commercially, competing in the private sector market.) The liberalized Transport Services Licensing Act of 1989, opened up a new market for commercially-supplied transport service.

  • As in previous legislation, LATE's would compete with the private sector by fully allocating costs to compete on a level playing field.55

  • A new authority was created: Transit New Zealand. It took over the functions of the National Roads Board and the Urban Transport Council, which were abolished. The reforms established a Land Transport Fund and derived transport revenues from four sources: excise duties on fuel; road user fees; fees and charges; and the consolidated fund.56

  • Regional Councils retained regulatory and funding functions, but were no longer the supplier of services.

  • Competitive Pricing Procedures were established for all services requiring government subsidies.

3.2.1 Local Government Reform Act of 1989

The Local Government Amendment Act of 1989,57 which amended the Local Government Act of 1974, was as comprehensive locally as the more widely publicized central government reform acts. It triggered massive consolidation of local government. Local governments shrunk from 22 regional councils to 14, thirteen of them elected. The number of territorial authorities contracted from 205 to 74. Special purpose authorities were reduced from 400 to seven.58

New Zealanders had long debated local government financial responsibility and its "unresponsive and inefficient" behavior, but the post-1984 reforms changed local authorities definitively.59 In addition to abolishing hundreds of local authorities, the central government "decoupled" the elected councils from day-to-day management of local enterprises. While Councils set policy and monitor performance, they appoint for each enterprise a chief executive, who has a performance-based contract.

By U.S. standards, this division of labor is not revolutionary. However, the power given by the central government to local governments to create Local Authority Trading Enterprises (LATEs), which transferred local government-operated undertakings to stand-alone trading companies, was innovative.

Local authorities were forbidden to conduct passenger transport operations. In addition, the Competitive Pricing Procedure, required councils to competitively tender "non-commercial" services funded by Transit New Zealand and its successor entity, Transfund New Zealand.

LATEs were a downsized version of the central government's State-Owned Enterprises (SOEs), which were created for essentially commercial activities such as public works projects. LATEs' financial statements are virtually the same as the SOEs'. They must disclose a set of audited financial statements following generally accepted accounting practices, and adopt the "accrual accounting" method.60

The power and scope of LATEs go beyond what would generally be considered strictly commercial activities. Their latitude to enter into a variety of activities has significantly impacted delivery of local services. Service delivery choices, ranging from significant service changes to entering or exiting from significant functions, are key local government decisions. Local governments also consider "the effectiveness of accountability," and monitor arrangements with service suppliers. Councils may also form stand-alone entities for both commercial and non-commercial activities. These can include, for example, special-purpose non-profit entities such as trusts, which exist "at arms-length from, but in close association with, a local authority."61

According to a May 3, 2002 report62 by D. J. D. Macdonald, New Zealand Controller and Auditor-General, "a trend towards outsourcing or arm's length delivery of services" has emerged in local government since 1985. This report, which addressed the radical changes in all service delivery functions, found that in the transport sector "mandatory competitive processes emanating from the Transit New Zealand Act 1989 …reinforced the funder/provider split that has become the norm in central government."

Transport reforms replicated the initial successes in central government reform, such as the SOE's and purchaser/provider split, even more extensively than did other local government changes. The Local Government Act of 1989 mandated the separation of policy and funding from passenger transport operations, but did not mandate the same separation for other local government services.63

Transport-related LATEs have other unique mandates. For example, councils cannot lend money or provide financial assistance to these enterprises at more favorable rates than the councils themselves would receive when borrowing or obtaining financial assistance. Members or employees of local authorities can constitute only a minority of a board of directors, and regional councils may hold equity or debt securities only in passenger transport companies formed by that council.

For other significant non-transport activities, if the local authority decides not to tender a contracting out function "the local authority must record its reasons for the decision."64 The MacDonald report also confirms that "many local authorities passed functions to Local Authority Trading Enterprises (LATEs)… [but] …some local authorities have fully contracted out functions." As was the case with LATEs formed to compete in the passenger transport sector in 1991, "quite a number of Councils have sold their LATEs - perhaps partly to avoid the ownership/purchase conflict."65

Local authorities have been praised overall for all these efforts; the 2002 report states that they "have made giant strides over the past decade in demonstrating their stewardship of public resources." The central government not only continues to place great importance on outcomes such as efficient use of resources, but the competitive tendering method has also consistently performed satisfactorily after over a decade of subjecting local service to the competitive market.

Other earlier reports showed a precipitous drop in directly operated council services. Between 1989 and 1994, in-house delivery dropped from 70% to 26%, while service by business units increased from 2% to 18%.66 Delivery by "external providers" increased from 22% to 48%. According to separate studies reported in the University of Canterbury report on New Zealand, cost savings from contracting out range from 15% to 60%.67

3.2.2 Transport Services Licensing Act

Prior to the 1989 transport reform acts, several passenger transport districts, including ARC and other cities, held monopoly rights over vast and dense urban areas. There was no distinction between services capable of profitable operation - including recovery of replacement costs -- from fare box revenues, and those requiring subsidies to meet local public policy goals.

Part VII, Constitution of Transport Districts, of the Transport Act of 1962 reconstituted four restricted-district boundaries - the Auckland, Wellington, Christchurch, and Dunedin transport districts. It empowered the Governor-General to divide additional districts and name the rest of the North and South Islands. Except for granting competitive licenses for passenger service defined as "for hire or reward by means of a motor vehicle," transport districts were to provide exclusive urban bus service in New Zealand.

In 1989, the regularly scheduled transport service environment was a microcosm of the nationwide situation that had faced the central government four years earlier. New Zealand's public sector included departments with commercial and noncommercial functions, as well as commercial public corporations. Similar to the State-Owned Enterprise Act of 1986, which corporatized state-run commercial activities to compete in the open market, the 1989 Transport Services Licensing Act of 1989 created a competitive market for commercial "scheduled passenger" services, to begin July 1, 1991. [The third act required subsidized or "non-commercial" service to be subjected to market competition.]

A passenger transport company, defined in the Local Government Act of 1989 as a transport-related LATE, was the mandated successor to the local authority-operated transport operator. As the corporatized successor, it would also have to compete to operate commercial service.

Before the July 1991 "big bang" date, the LATEs had to apply for a license, then propose to operate passenger service not requiring a government subsidy. (The competitive licensing act requires that "every transport service shall be licensed.") The proposal had to include details of the service, including routes or areas of operation; timetables or operating hours; fares; and other specifications required by the Ministry or council. The final step required a regional council to accept or decline to register a passenger service.

One justification for rejecting a proposal was an adverse effect on a council's contracted service. The licensing act specifically requires a regional council or a territorial authority to prepare a "regional passenger transport plan…specifying the passenger services the regional council or territorial authority proposes to be provided in its region or district, both generally and in respect of the transport disadvantaged…and…[the plan] may specify the conditions of the service the regional council or territorial authority concerned proposes to be provided in its region."68

Services identified in the regional council or territorial authority plan not to be provided by commercial operators would be tendered. The mandated Regional Passenger Transport Plan also gives regional councils a tool to shape various system specifications, including routes, capacity, frequency of service and fare structure, all of which help maintain the proper balance between commercial and non-commercial passenger transport service.69

3.2.3 Transit New Zealand Act

The central government wisely understood that a large proportion of scheduled passenger transport service would require continued matching funds from a new national agency that would receive revenues designated for all classes of transport. These would include local roading, construction/maintenance, safety, passenger transport, and state highways. Any expenditure of these dedicated for capital, maintenance or operating purpose would be subject to a competitive pricing procedure.70

The new agency created by this act, Transit New Zealand, was responsible to the Minister of Transport. Transit New Zealand had been broken up into modal agencies in 1996. Its main responsibility was to allocate resources in a way that maximizes national economic and social benefits. Funding for all outputs was consolidated into the Land Transport Fund, renamed later in 1996 and then again in 2000.

The Transit New Zealand Act opened up the remaining passenger service that required central and local authority funding, with the exception of passenger rail, to a separate local authority competitive tendering process. Each class of output was subject to separate approvals by Transit New Zealand. The act gave this agency power to set specific terms and conditions for contracts. This particular provision is similar to the FTA Circular on Third Party Contracting, which governs procurements for FTA- subsidized goods and services.

The Transit New Zealand Act treated passenger rail differently. The New Zealand railway system, owned and operated by the central government, became a State-Owned Enterprise (SOE) in 1986. Under New Zealand Rail, the system controlled all rail freight and long distance passenger and commuter rail, as well as ferry service between the North and South Island, and bus subsidiary operations. In 1993, New Zealand Rail Limited was privatized when Tranz Rail Limited bought its assets. A private consortium now owns Tranz Rail. The act did not provide any access rights to freight or passenger rail competitors.

Competitive pricing is mandated by the act, which states, "No payment from any source shall be made by any local authority in respect of any passenger service unless the amount of the payment has been determined by a competitive pricing procedure."

In addition, New Zealand regional councils usually employ a "net cost" tendering system. This means that bidders take a risk on the amount of fare revenues collected, estimating the subsidy required. If successful, a bidder received the subsidy bid amount, and retains all fare revenue.71

The Transit New Zealand Act was amended in 1992 to require regional councils to form a land transport committee of local and central government representatives which would prepare a regional land transport program, including a plan for regional passenger transport.

Funding allocation levels for passenger transport have proven the most controversial feature of land transport reform. The national government is shifting towards more funding of passenger transport as shown by Transfund's announcement of the Patronage Funding Plan. After reform implementation, a provisional petrol tax levied in five urban areas partially reversed the initial drop in central government funding responding to cost savings from the efficiency measures. For the past several years, however, subsidy contributions have remained flat, not even keeping pace with inflation.72


43Fielding and Johnson, Ibid.

44Fielding and Johnson, Ibid.

45Douglas, Ibid.

46Douglas, Ibid.

47White, Peter Professor of Public Transport Systems Univ. of Westminster - May 19, 2002 e-mail response to Jim Seal

48Transfund NZ FTA presentation May 29,2002

49White, Peter Professor of Public Transport Systems Univ. of Westminster: Bus Tendering in London a Critique Sept 2000; Cox, Wendell & Duthion, Brice Competition in Urban Public Transport A World View 7th International Conference on Competition in land Passenger Transport Molde, Norway June 2001

50Mein, Barry - interviews.

51White, Peter Bus Tendering in London…Ibid; Cox, Wendell Competition in Urban Public Transport…Ibid

52NZ Ministry Of Transport - press releases

53OECD 1997 Managing Across levels of Government New Zealand (p. 349 -361)

54RedBus Administration - interview 9-19-02

55Fielding and Johnson, Ibid.

56Ministry of Transport NZ Moving Forward - Land Transport Changes Feb 28, 2002

57Pallot, June. Local Government Reform in New Zealand: Options for Public Management as Governance University of Canterbury, New Zealand

58OECD Managing Across levels of Government…Ibid

59Pallot, Ibid.

60Pallot, Ibid.

61Controller and Auditor-General NZ Contracting for Maintenance Services in Local Government June 1997; Controller and Auditor-General Report for Timaru District Council of New Zealand. Overview of Governance Issues (unknown date)

62Mandated by the Public Audit Act of 2001

63Fielding and Johnson, Ibid.

64Item.

65Item.

66Dept of Internal Affairs 1994 [Local government act review] On Dept of Internal Affairs website

67Pallot, Ibid.

68Knowledge basket web site [for all acts), Ibid

69Environment Bay of Plenty NZ Regional Passenger Transport Plan 2002/03

70Knowledge basket web site; amendments 1992 & 1995.

71Wallis, Ian & Gale, Jayne Economic Incentives To Increase Public Transport Patronage - The Theory And The Practice Thredbo 7 International Conference on Competition and Ownership in Land Passenger Transport, Molde, Norway June 2001

72Mein, Barry interviews & Transfund "Transit New Zealand Approved Passenger Transport Programme 1990/91 through2001/02 (allocations)

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