The most important trip you may take in life is meeting people half way.Henry Boyle, Anglo-Irish politician, 1669–1725
If the operating contract is to be tendered, the initial industry engagement process described in the previous section is generally sufficient to draft a successful tendering document and issue a competitive tender. In a tendered contract, the government does not then need to enter into detailed negotiations over all elements of the contract. The government can draft the proposed contracts in advance, closely based on the tender documents, which should stipulate most of the contract provisions, and only modify elements of the contract that are heavily disputed by all the winning bidders.
If the operating contract is to be negotiated with the impacted operators, however, the negotiation process becomes far more complex, as all of the areas that would otherwise have been subject to the bid or part of minimum qualification criteria become the subject of negotiation.
Before negotiations begin it is helpful to determine the following:
Technical support: Both the BRT team inside the BRT agency and the impacted operators may need technical support. Most city governments are unfamiliar with negotiating a bus operating contract with impacted operators, and in many cities the impacted operators will be unsophisticated individual owners with little business savvy. The BRT team may want to be supported by consultants or advisers to engage with the existing affected operators. It may also want to pay for consultants to assist the impacted operators in meeting their legal, financial, and operational requirements under the new BRT operating contract.
A negotiated process may take a long time, and the operator representatives may require that they be remunerated for attending the meetings involved in the negotiation process and meetings with their constituencies for report-backs, mandating, and so on. The city needs to decide if it will accede to this—it may take the view that representatives of vested interests should not be remunerated for taking care of their own interests. Remuneration can also create the wrong incentives—to participate even where there is no commitment to the project, and to prolong the process. If remuneration is deemed acceptable, it needs to be decided how to structure it. One method may be to pay representatives a fixed remuneration amount upon the achievement of certain milestones in the process. Another way is to pay a fixed allowance per meeting, with a limit set to the number of meetings that will be remunerated. Another is to agree to a total “brokerage” fee paid at the end of a successful negotiation process and divided among the operators’ representatives according to the number of meetings attended by each.
In some cities, the relationship between the government and the informal impacted operators is one of mutual suspicion and mistrust. In this case, the process may have more chance of success if the talks are independently chaired and facilitated, rather than run by the city itself. This has the advantage of creating trust in and respect for the negotiation process, even if the parties do not fully trust each other. A person or team that is skilled in facilitation, negotiation, mediation and conflict resolution should be sought. A selection process that is jointly run by the city and operator representatives is ideal in choosing a person/s trusted by both parties.
A negotiation plan should be drawn up at the outset of the talks and endorsed by all parties as the first milestone in the process. This should deal with topics including:
The negotiation objectives will be likely to include reaching agreement on:
The city, through its legal advisers, should prepare a draft VOC contract and present it to the negotiations. The city strategy will determine the content of the draft VOC contract, which is typically a gross-cost contract, where the VOC will be paid a fee per kilometer for each kind of bus.
In the negotiations with the operators, the financial negotiation is a key part of reaching agreement on the contract. The fee per kilometer specified in the contract needs to cover the fixed and variable operating costs of the services, the costs for financing the vehicles (capital and interest repayments), and company profit. There needs to be a fee per kilometer specified for each type of bus that will be used.
In the negotiation, both the city and the operators will ideally have financial advisers with models to simulate the finances of the VOC over the contract period—including preparing a balance sheet and annual financial statements—and able to determine the required fee per kilometer. The three main components for the fee per kilometer are:
Both operators and the city may present their financial proposal simultaneously and agree at once if they are within a narrow range of each other, say 5 percent. However, if they are far apart, a number of approaches can be followed. Each component can be subjected to a negotiation until settlement is reached. The operating costs are factual items—e.g., the price of diesel and the cost of the maintenance contract—and so spreadsheets can be compared and assumptions, e.g., about dead mileage or fuel consumption, compared and agreed.
The profit margin will be more controversial and will also be the subject of negotiation. If existing traditional or informal operators are being persuaded to take the risk of giving up their known livelihoods in return for something less certain, a commercial markup may simply not be enough of an enticement. The level of profitability may need to be sufficiently high to persuade the operators that participation in BRT will leave them better off than remaining with their existing taxi businesses.
The city strategy discussed earlier will have a negotiating position built into it about the upper limit of profit rate that its budget—or system revenues, if the system is designed to be self-funding—are able to handle.
If there is a deadlock, the dispute resolution procedures agreed in the Negotiation Plan will need to kick in. This may comprise several steps, such as nonbinding expert determination by which the city will be advised before making its final offer. If agreement cannot be reached, fallback positions may need to be exercised, such as awarding the whole contract to only those operators who are willing to accept the offer, or such as putting it out to competitive bidding of one form or another.
Other aspects of the VOC contract may also be contentious in negotiations. The city may, for example, want to limit allowable changes in ownership to a noncontrolling percentage, in that it had certain industry transition or transformation objectives in mind in including the affected operators in the first place. For them to then sell the shares to outsiders may not be acceptable in this context. Johannesburg limited this in its VOC contract to no more than 24.9 percent and no sooner than a year after the contract signature date. Bogotá also forbade the selling of shares to outside parties for five years to protect the indigenous operators’ control (Hook, W. 2009).
Contract length will also be debatable and should also be covered in the city strategy. The length should be sufficient enough that the useful life of the vehicles can be used. Operators may want to make it as long as possible, and they also may want to extract guarantees that at the end of the contract it should be renegotiated with them again. The city should decide its approach in this regard and know the legal requirements in this respect.
The contract also needs to provide for requirements on the VOC to replace old vehicles if necessary in the course of the contract, and to require new vehicles to be purchased if the BRT entity deems that customer demand warrants this. The contract needs to specify adjustments to the fee per kilometer if this happens and is necessary, as well as the treatment of vehicles at the end of the contract, which still have useful life (e.g., compulsory buy-back by the city at the end of the contract, cession to the next contract holder, etc.).
Another area that becomes the subject of negotiation in a contract is maintenance. Where a company is to be formed by inexperienced operators, the city may seek a level of comfort in requiring that a maintenance contract is in place with the bus chassis and engine manufacturer, at least for the first three to five years of the contract. Experienced VOCs often prefer to carry out maintenance through in-house workshops and to achieve significant savings in input costs this way. Thus, the maintenance regimes are an important part of the negotiation.