Case Studies: Central Public Transport depot of the city of Pilsen

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Project Overview
Pilzen1.jpg
Figure 1: Design of the Central Public Transport Depot of the City of Pilsen
The Central Public Transport Depot of the City of Pilsen Project Profile, Czech Republic
Project Type: Brownfield
Contract duration: 29 Years
Budget: EUR 472M (12bn Czech Crowns)(The amount includes the cost of building the new depot (about 1,6 bn crowns/ EUR 63M) and service costs (the rest).)
Project Time Line
Conception: 2011;
Tender: 2011;
Financial Close: 2012

Introduction

The Pilsen public transport depot is the largest PPP project in the Czech Republic to date and together with multi-storey-car parks in three Czech cities it is one of only a few examples of PPP in the country. It involves construction of a new facility, its maintenance and the provision of services (maintenance and repair of public transport vehicles) for 29 years.

The old facilities spread around the city were found to be obsolete back in 1985. (Hospodářské noviny, 2012) Since then there has been a clear demand for some kind of solution for the aging public transport service infrastructure, but the city of Pilsen did not launch the procurement process until 2011.

As a result of the contract a former part of the Pilsen City Transport Company was purchased by the contractor and about 240 of staff transferred to the private provider. (Kincl, 2012)

Skoda Transportation – the main constituent of the SPV - provided the site for the new depot, which was considered one of the main advantages of the successful bidder. Nevertheless, the project has had to face major opposition from various actors including the Ministry of Finance, trade unions and the leading opposition party in Pilsen City Council. The Ministry scrutinized the project and identified several potentially serious risks for the city resulting from the deal. The Ministry warned the City Council in its report. The minister himself described the deal as a ‘robbery’ that puts the future solvency of the city in serious risk (Miroslav, 2012). Nevertheless, the unusual coalition of the two main rivals on the Czech political scene (ODS civic democrats and CSSD social democrats) saw the project through the council vote that lead to the signing of the contract in May 2012.

As of 1 January 2013 the maintenance and repair services for trams, trolley buses and buses in Pilsen were handed over to the winning consortium. Until the new depot, now under construction, is finished, the SPV will use the current facilities, which it leases from the city.

Efficiency and effectiveness of the PPP solution remains contested as Transparency International asked the Office for the Protection of Competition to launch a full investigation of the whole procurement process and contract (Transparency International, 2012). The project creates a natural monopoly as it will be the only depot for the city of Pilsen. It is not bundled with other activities and the old facilities are still to be considered for redevelopment. With respect to innovation, this is rather limited, as the objective of the project is to deliver better services due to economies of scale.

The Contracting Authority (Public Party)

Pilsen City Transport Company (backed by the City of Pilsen – the exclusive owner) is the contracting authority. Central government was involved only through the Ministry of Finance to assess the contract.

The project was procured in a so called “above the limit” regime according to the public procurement law 137/2006. As demanded by §156 of the aforementioned law (this article is no longer in force) the project documentation was submitted to the Ministry of Finance for assessment. Nevertheless, the results of this assessment were not binding for the city of Pilsen and its transport company – the contracting authority. In the absence of a central PPP unit, which was effectively dissolved in the previous period, the contracting authority had to rely heavily on private consultants (GrantThornton). (Interview I, 2013)

The Concessionaire (Private Party)

The concession for the “Central Public Transport Depot” was awarded to MHD Servis Plzeň. This consortium is composed of the following members: Skoda City Service Ltd., the service provider for buses and trolley buses at the depot; CIAS Holding, the depot constructor; Bammer Trade, provider of cleaning services for all vehicles as well as light and heavy weight maintenance and repairs of buses and trolley buses; Skoda Transportation, provider of light and heavy weight maintenance and repairs of trams; Skoda Electric, provider of spare parts for trolley buses (Contract, 2012).

Users

The concession for the “Central Public Transport Depot” has a unique industrial public user: Pilsen City Transport Company, which is owned by the City Council of Pilsen. The depot is to serve the Pilsen City Transport Company in the first place. However, spare capacity will be available for other transport providers in the region if they decide to use it.

Key Purpose for PPP Model Selection

Value for money and substantial savings claimed to be almost 2 bn Czech Crowns (about EUR 790M) in total over the contract duration were the main reasons according to proponents of the PPP solution. The contractor promised to provide the services 10 per cent more cheaply than the public sector alternative. (Bernard, 2012) However, critics object saying the full range of options was not considered, and that previous costs under public sector provision had never been properly established. (Zikl, 2012) (Interview I, 2013). At the same time, the calculation on which the expected savings are based has been contested with respect to the discounting index used and the fact that no adequate benchmark was provided. (Zikl, 2012)

Project Timing

The existing facilities have been in need of repair and re-construction since the 1980s. The situation was an obstacle to the viable and efficient maintenance and stabling of the Pilsen City Transport Company vehicles.

Project Locality and Market Geography

The new Depot is located in the City of Pilsen. Pilsen has a reputation and long tradition in manufacturing and industrial machinery with a special focus on transport machinery (locomotives, trams etc.). All Skoda subsidiaries are located in the city together with other associated manufacturers.

Procurement & Contractual Structure

Tendering

The contract was assigned following a “restricted call for tender”. This procedure was chosen in accordance with the public procurement law (137/2006). Four (4) consortia responded to the Restricted Call, of which two (2) were dismissed as not complying with the basic qualification requirements. Of the two remaining, one (Metrostav) pulled out later, unable to compete with the consortium lead by Skoda City Services.

The contract was awarded 10 months after the initial Call for an Expression of Interest.

Contract Structure

The concession concerns the design, finance, construction, operation and maintenance and, finally, the transfer of ownership of the “Central Public Transport Depot” for the Pilsen Transport Company on behalf of the City Council of Pilsen.

The concessionaire is immediately assigned the depot operations (maintenance and repair of transport vehicles – buses, trolley buses and trams), which are carried out in the old depots rented from Pilsen Transport Company.

The Concessionaire is reimbursed through a structure of availability fees. More specifically, the total monthly payment consists of an infrastructure purchase advance, an availability fee (fixed part), an availability fee (variable part) and a fee to cover additional expenses (such as repairs after accidents and other costs associated with incidents or emergencies).

According to the contract and the original offer, the infrastructure purchase advance fee amounts to 8,196,079 Crowns (approx. EUR 323,000) pre-tax to be paid every month between the 37th and 49th month. The fixed part of the monthly availability payment is 11,765,000 Crowns (approx. EUR 463,000) pre-tax. The variable part depends on the actual amount and quality of work and is calculated on the basis of the so-called “statistical kilometers” of the individual vehicles. In case of repairs after accidents, a flat rate of 1000 Crowns (approx. EUR 36 ) per hour per employee is charged. (Contract, 2012)

On the whole, the city of Pilsen is expected to pay about 240 M Czech Crowns (approx. EUR 9,27 M ) a year to the contractor. (Miroslav, 2012) At the end of the contract, the new depot will be transferred to the Pilsen Transport Company.

Both parties have the right to terminate the contract. The termination clauses to be activated by the contracting authority involve: voluntary decision to terminate the contract without giving reasons, private contractor’s failure to fulfill responsibilities under the contract, repeated failure to fulfill responsibilities under the contract, corruption and dishonesty. The termination clauses activated by the private contractor involve: contracting authority’s failure to fulfill responsibilities under the contract. There are also clauses for termination caused by force majeure events. In all of the cases mentioned above (with the exception of private partner default, corruption and dishonesty before the transfer of ownership) the private contractor is entitled to compensation, which is calculated using a complex formula to reflect the market value of the contract (Contract, 2012).

Risk Allocation

Risk is allocated as depicted in figure 2.

Performance

The problem with judging the project’s overall success or failure is that it is difficult to compare the PPP with any alternative. PPP in this case has been presented as the only possible solution by the contracting authority. We do not have much data on the previous performance during the period of direct public provision of the services. Nor do we know how much would the depot building would have cost if procured in the traditional way as the structure is quite unique.

Plzen2.png

Figure 3: Risk allocation

There are clear indicators set out in the contract to monitor the quality of service (especially in article No.18). Given this fact, the contract (Annex No. 10) specifies the penalties associated with all kinds of failures by the private contractor in meeting the demands of the contract.

The basic responsibility for the contractor is to keep the vehicles serviceable as defined by the law and respective clauses of the contract. The contractor has to comply with the requirements set by the quality and environmental management system certificates ISO 9001 and ISO 140001. There is also a requirement for a minimum percentage of available operational vehicles Serviceability of various types of vehicles is defined in the contract. There are penalty payments in the contract in case of the contractor’s failure to meet these limits.

Daily reports on the serviceability of vehicles have to be filled in using a template provided in the annex of the contract. Apart from that, the contractor is obliged to keep a so called record of contract fulfillment for each vehicle which should be accessible to the representatives of the city of Pilsen and the public transport company every day.

Contractor’s remuneration (the variable part) depends on the number of kilometers driven by the vehicles in a month. Each kilometer driven by a particular vehicle is priced. Number of kilometers driven is one of the main indicators to be recorded by the contractor and sent to the contracting authority on a daily basis according to article 18.1.8 of the contract (Contract, 2012).

There are several types of penalties associated with contractor’s failure to meet the criteria set by the contract. Perhaps the most important part deals with penalties for not meeting the limits for the percentage of vehicles available for service. Then there are penalties for breaching general contractual arrangements and commitments, for negligence or delays connected with maintenance and cleaning services as well as with submission of records to the public authority, penalties for failure to honour contractor’s responsibilities and commitments related to buildings, facilities and equipment, and many others.

Thus, the main success the project can achieve is if it does not cause serious budgetary problems to the city of Pilsen, as envisaged by the Ministry of Finance.

Acknowledgments

This paper was enabled by and written in the framework of the Specific university research project SVV 2013 267 501.

References