Public Monopoly with Management Contract / Legal Aspects / Legal Instruments / Management Contract / Monitoring and Enforcement

Monitoring and Enforcement
The need for monitoring
A management contract should contain realistic and effective provisions for the monitoring and enforcement of its terms. Like many other provisions contained in the contract, the contents of the monitoring and enforcement clauses must balance various conflicting needs and interests.

The interest of the management company is to be able to manage and operate the bus transport enterprise without undue interference from the public monopoly and without having to justify to it every decision it makes. The public monopoly however needs to retain the ability to ascertain in a timely manner whether the management company is properly fulfilling its obligations under the management contract, and to intervene, also in a timely manner, if these obligations are not properly performed.

The manner in which the public monopoly can intervene is generally set out in each of the relevant provisions of the management contract. The options available to it can range from doing nothing, if it believes a specific event of below-standard performance by the management company is merely an isolated event not likely to reoccur, to terminating the contract if the management company is guilty of repeated poor performance and refuses to, or cannot, correct the situation.

Proper monitoring of the management contract is likely to consist of two main sets of activities.

Disclosure of all relevant information by the management company to the public monopoly.
Periodic inspections and audits by the public monopoly of the management company and of the bus transport enterprise that is being managed.

Disclosure of all relevant information
The management contract should provide for a series of different reports from the management company to the public monopoly. These might include financial, operational, technical, procurement, legal and marketing reports, which are either informational or designed to elicit a decision from the public monopoly on a specific issue.

Proper financial and operational information is especially important. Reports on such matters should be comprehensive and submitted at fairly frequent intervals.

Specific financial and operational information
Financial: monitoring of costs
Whether the management company is compensated by way of a fixed fee, without costs or plus costs, or is compensated by way of a fee based on a percentage of the gross fare revenue collected by the bus transport enterprise, the potential for exaggerated levels of spending on the part of the management company is always there.

One way to curb such spending is to couple either type of basic compensation formula with incentive payments based on profits. At least two other ways exist for the public monopoly to curb what it might perceive as exaggerated levels of spending on the part of the management company — the annual budget and proper accounting methods.

Financial: annual budget
The management contract will set forth broad categories of allowable investments and other expenditures by the management company (and of reimbursable costs, if compensation is based on a fixed fee plus costs formula).

The annual budget, on the other hand, sets forth estimates of this type of allowable spending on an itemized basis. The public monopoly’s involvement in the annual budgeting process will allow it to monitor the management company’s overall performance and spending habits with a clearer understanding of what is really going on.

Several issues arise with regard to the public monopoly’s involvement in the preparation of the budget. The first concerns its exact role in the budgeting process: observer, adviser, or participant (if the latter, the further question arises as to which party has the final say in the matter).

Second, and closely related to the question of ultimate decision-making over the budget, is whether the budget as approved is binding on the management company. If the answer is yes, what sanctions against the management company are provided with regard to important deviations from it and, if not, whether written notification or other formalities are required before the management company can deviate from the budget as authorized by the public monopoly.

Financial: accounting methods
Control over the budget and provisions for the calculation of compensation have little useful meaning if no method is provided for interpreting the data submitted by the management company. The definition of items, such as gross profit, net profit, net income and cost of sales, along with other factors such as inventory valuation, depreciation and accrual versus cash-basis accounting, affects the profitability of the bus transport enterprise.

All of these terms are based on accounting principles. These principles are not uniform throughout the world and even within a single country a variety of accounting principles may be in use. A public monopoly must assess the different accounting principles available to it and negotiate for those principles that are most useful with regard to its own bus transport enterprise, subject, of course, to any applicable law on the subject.

At a minimum, all accounts and financial information that are to be submitted by the management company should be prepared by a reputable accounting firm. The information should be prepared in accordance with internationally accepted and consistently applied accounting principles (or, if not consistently applied, accompanied by details of the inconsistencies), the purpose being to accurately represent, at all times, the financial status of the bus transport enterprise that is being managed.

Operational
The management company should provide the public monopoly, on a regular basis as determined in the management contract, with some or all of the following operational information concerning the bus transport enterprise.

Operational: passengers

Total for the period
Passengers/km during that period
Classified by day: Monday to Friday, Saturday and Sunday
Classified by class: e.g., adult, child, pensioner

Operational: scheduled route trips

Operated: total for the period
Classified by day: Monday to Friday, Saturday and Sunday
Not operated: total for the period
Classified by reason of failure: staff shortage, failure of staff to report for work, mechanical or vehicle failure, traffic incidents or congestion, other Classified by day: Monday to Friday, Saturday and Sunday

Operational: revenue from bus services on the route

Total revenue received for the period
Total revenue received from fares
Additional breakdown by day: Monday to Friday, Saturday and Sunday Additional breakdown by volume and value of each ticket type sold, by day Other sources of revenue

Not all of the above information will necessarily be of use to the owners of the public monopoly, but it does represent the kind of operational information that owners might reasonably need and ask for.

All further additional information reasonably required
In addition to specific financial, operational, technical, procurement, legal and marketing reports required from the management company under the terms of the management contract, the public monopoly should allow itself some leeway, through appropriate provisions to that effect in the contract, to request from the management company any additional information that it may reasonably require from time to time. When asking for such additional information the public monopoly should bear all legitimate costs, if any, associated with its production.

Inspections and audits by the public monopoly
Under the management contract, the public monopoly should also reserve to itself, whether through its own employees or through third parties hired by it, the right to carry out at its own cost:

Inspections — in the form of scheduled or random monitoring and review of the quality of the urban bus transport services provided by the management company, including adherence to schedule, safety, driving standards, quality of the personnel assigned to the operation of the vehicles, staff attitude to customers, and scheduled or random monitoring and review of all activities associated with revenue collection by the management company.
Audits — of any information provided by the management company under the contract, including the right to have reasonable access to all relevant equipment and facilities, records and accounts.