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Annually, close to 75 million can be saved if all train operations in Denmark are exposed to competitive tendering. The numbers are from a recent analysis collecting data from international experiences. The analysis comes alongside with the fact that Danish authorities are working with more competitive tendering of the railroad. Additionally, more of the common arguments against competitive tendering of the railroad is rejected in the analysis.
The analysis “Liberalization and competitive tendering of train operations” was available this summer. The analysis was conducted by Lauritzen Consulting w/ Finn Lauritzen for CEPOS. CEPES is a bourgeois-liberal Danish think tank. Lauritzen is a former director of the Danish competition and consumer agency. The analysis of railroads is included in a larger analysis of areas of transportations such as railroads, taxi and postal services.
The analysis states that internationally, the experiences with competitive tendering are mostly good. But there are also a few bad experiences, which shows that competitive tendering should be executed with great knowledge.
Limited experiences
Denmark has limited experience with competitive tendering of train operations. In 2001 the regional train traffic in Midt- and Vestjylland was exposed for competitive tendering. The company Arriva won the tender and started the work in early 2003. Several problems were faced in the beginning, but today the work is viewed as a great success. Customer satisfaction is high and the savings after the first year has exceeded the costs associated with the acquisition process.
International experiences indicate that competitive tendering for train operations can reduce cost by 25 %. This can be shown from previous experiences in both UK and Germany.
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Transactions costs
The analysis indicates that the National Audit Offices found that the Ministry of Transport’s actual costs of the acquisition process of train operations in Midt- and VestJylland was accounted to 1,8 million Euro. Furthermore, running costs of contract follow-up and cost of the suppliers were not taken into the calculation of the cost.
For a future breakdown of the total Danish train operation, one example would be 10 “packages” all which are exposed for competitive tendering in 8-10 years, there will be 1 acquisition a year. With the same cost level associated with the actual acquisition as the one in Midt- and Vestjylland, it will provide an annual transaction cost of around 2,1 million Euro.
Saving potentials
If international experiences are added, competitive tendering has a potential of net saving of about 25 % of state aid to the railroad. Costs of the acquisition need to be added, as well as the costs companies wish to add as a network. These are costs for trains, locomotives and other equipment that is not owned. This calculation proves an annual savings of around 75 million Euro of the entire train operations in Denmark.
There are different forms of risk associated with competitive tendering, including the danger of discounting Danish railway competency. However, there is reason to believe that the companies will hire Danish personnel, as Arrive has done. Reduced wage and employment conditions are also used as arguments based on experience, and the analysis warns against the basis of the lowest price. The reason is that providers, both private and state owned, have provided offers that have not covered the costs. In addition, there must be a focus on state-owned companies recognizing all relevant costs in their offerings.
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This article first appeared at Anbud365, Norway’s leading online newspaper for public procurement. Published by Lennart Hovland on 17th of August 2017. The full article can be found in Norwegian here.
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