Route Contract: Net Cost
When an authority issues a contract for the operation of one specified route or a specified group of routes, it’s described as a route contract.
Normally these contracts are awarded on the basis of competitive tenders. During a transition period, however, negotiated route-contracts may be awarded on the basis of negotiation with an incumbent bus operator.
Under a net-cost contract the operator provides a specified service for a specified period and retains all revenue. The authority pays a subsidy to the operator if the bus services in an area are unprofitable. If the services are profitable, the authority pays the operator a royalty. Under a net-cost contract the operator has to forecast both his costs and his revenues.
A route contract will be appropriate if the authority wishes to:
A net cost contract will be appropriate if:
- Have mandatory retendering after a certain number of years.
- Establish a sustainable procedure to constantly test the market to achieve the lowest costs.
- Determine the routes and daily schedules.
- Be identified as the bus system provider.
- Take full responsibility for service planning.
- To avoid involvement in setting operators profit levels.
- Offer opportunity to smaller operators to participate.
- The authority wishes to give an incentive to the operator to increase ridership and revenue.
- A small percentage of revenue is collected off-bus.
- Sharing of off-bus revenue is not seen as a problem.
- The authority wishes to fix the absolute amount of subsidy.
The major disadvantages of a net-cost route contract are:
- The authority may have to pay more for a net-cost rather than a gross-cost contract since the operator usually makes very conservative estimates of revenue to reduce his financial risk.
- The authority’s ability to make essential changes to the network are restricted if they adversely affect the revenue of pre-existing net cost contracts.
- Fewer operators usually bid for net-cost as opposed to gross-cost tenders.
- There is a possibility of encouraging on-street competition for passengers on streets where more than one company operates
System design for a net-cost route-contract must take into account: