The Nordic public transport market
Efficient and functional public transport solutions
In the Nordic region, efficient and functional public transport solutions are critical to a sustainable development of society. Because PTAs, which are politically controlled and publicly owned, are responsible for the supply of public transport in their respective regions, assignments are competed for in tendering processes. Tendering processes are typically used for all types of traffic and the market and business conditions are similar in all of the Nordic countries.
Sales in the market for public bus transport services are estimated at SEK 45 billion, with regional traffic accounting for almost 90 per cent of this figure. In all of the Nordic markets, an average of half of the cost of the regional public transport authority is financed through the budgets of regional public administrations. The other half is directly from passengers through ticket revenues. Nobina operates in the market for regional bus services in the Nordics and interregional express bus services in Sweden where there is free competition and pricing is without public subsidies.
Regional tendered public transport has shown favourable growth in recent years and is expected to continue to grow moving forward, in line with a political will to increase the use of public transport and as more people choose to travel by bus. There is also a trend in all countries to include more quality criteria as part of the tender process, and towards better compensation models where incentives are based on the number of passengers and the quality experienced by the customers. Models only using compensation to operators for kilometres driven and indexation compensation a few times per year are less common. We have seen this from clients operating in densely populated and rapidly growing areas, where there is a move towards contracts with balanced terms for operators that enable the delivery of high-quality public transport.
Society is increasingly interested in investing in public transport, particularly in areas with a high population density, such as metropolitan areas where well-developed public transport is important for mobility in society. In addition, public transport is high on the agenda for local politicians as it becomes a more important requirement.
On the whole, the trends over the last decade have been posi- tive. The share of public transport subject to tendering has increased in all of the Nordic countries and particularly in Finland and Norway. Over a five-year period, the total Nordic market for tendered regional public transport services has increased by three percent annually. Buses constitute an attrac- tive transportation mode as a result of the low annual capital and maintenance cost per passenger kilometer, which currently is substantially lower compared to metro, train and tram. The profitability trend of major competitors in the industry has varied over recent years simultaneous to gradually increasing demand in the market.
A small number of major competitors dominate
The contract market for regional bus traffic in the Nordic region is led by a handful of major competitors. This has to do with the extensive requirements placed on potential suppliers of the public transport solution in the tendering process. It is difficult for smaller competitors to compete on major assign- ments because they have trouble meeting the stated require- ments on expertise, stability and proven delivery assurance. The main competitors are France’s Keolis and Transdev, along with German-owned Arriva and Norwegian Nettbuss. Unlike Nobina, several of the companies have some form of state- ownership. Arriva is owned by Deutsche Bahn, which is a state-owned German company, Keolis is owned by the French state-owned railway company SNCF, Transdev is partly state- owned by the French government and Nettbuss is owned by NSB, the Norwegian state railway company. With state- ownership there are both different yield requirements and financing options for the business.
Increased focus on quality – sounder pricing
Passengers expect quality and functional public transport solu- tions. In a tender, this puts high demands on PTAs in their role as client, as well as Nobina, in its role as supplier.
In all Nordic markets, more tendering processes are using evaluation criteria where quality is highly prioritized. Quality typically encompasses delivery assurance with minimal opera- tional disturbances, excellent performance that takes climate and environmental impact into consideration and vehicles equipped with modern equipment for high accessibility. The Swedish and Danish markets have made the most progress in widespread use of quality-based evaluations, but the Finnish and Norwegian markets are also moving in the right direction. We can see that the gap between highest and lowest bidders is closing each year, which indicates sounder pricing. Another sign of the sector’s higher focus on quality is the increasing prevalence of incentive contracts that use performance-based compensation models.
Fragmented market at local level – strong local competitors
Besides the major competitors, there are also many smaller ones in the Nordic market. At present, most regional public trans- port by bus is subject to public tendering processes. However, some regions and cities are still using concession contracts, where the traffic assignment is awarded to either a municipal or private business. In their particular area, these smaller competi- tors are firmly established and there is a very low rate of turn- over for contracts. The local competitors sometimes act as part- ners, by becoming subcontractors to Nobina. This can happen when synergies in the prospecting and tender submittal are possible.
The fragmented Nordic market is showing signs of an underlying need for consolidation. However, taking over a smaller public transport service provider’s contract portfolio is a complicated process involving some uncertainties.
Variation in compensation models used in contracts
Many different types of contracts exist in the public transport market in the Nordic region. Depending on the compensation model used, the contract will fall into one of the following two categories: production or incentive. A production contract uses a fixed compensation model for public transport services. Remuneration to the public transport service provider is a fixed fee and it is based on the number of kilometers, hours and vehicles, which are stated in the tender and documented in the traffic contract.
An incentive contract, on the other hand, assumes that the public transport service provider is able to run efficient operations and attract more passengers. The number of passengers matters greatly to the service provider and there is also typically an evaluation of passenger satisfaction and other quality indicators. The share of variable remuneration in incentive contracts can however range from a low percentage up to as high as 100 percent of total remuneration.
With a higher focus on environmental factors and quality, the use of incentive contracts is becoming increasingly common in all markets. The level of performance-based compensation used in incentive contracts is also increasing, since PTAs are realizing that public transport service providers possess the required expertise on how to design public transport solutions. A common denominator for production and incentive con- tracts however is that the length of contract typically ranges from five to ten years.
Taking on more responsibility in each contract
In incentive contracts, where remuneration is increasingly based on performance, Nobina is better able to impact the profitability of each individual contract. Our performance improves when we have greater responsibility for continually developing the services we deliver, along with having control over marketing and sales. At the same time, Nobina’s manage- ment works in close cooperation with operations. Experience and lessons learned from early involvement in these new, incentive based contracts therefore exists at many levels within the organization. In this way, Nobina has accumulated the right expertise such that it is quickly able to identify, prospect and deliver in accordance with the right performance variables in incentive contracts. Furthermore, Swebus’ expertise in sales tactics and marketing has helped to integrate more parts of Nobina’s business.
Nobina's position in the market
Nobina is firmly established in the Nordic public transport infrastructure. We help our clients create a better, more efficient society by increasing mobility. Our leading position is based on a deep understanding of all aspects of the business. Our success is due to our effective business model with an integrated leadership structure, which, in turn, creates economies of scale in ten-der processes, vehicle utilization and business development.
In the active management of our contract portfolio, Nobina strives to improve each individual contract, while making overall progress in the organization. In Sweden, our leading market position is a result of high efficiency and refinement of contracts. In Finland, in our role as market leader in Helsinki, we are well positioned for increasing our market share in a growing market. In the Norwegian and Danish markets, Nobina is a strong competitor and these markets are also growing, in terms of volume and the number of contracts. As the Nordic region’s largest, most experienced public transport ser- vice provider, the conditions are good for profitable growth.
*Annual Report 2016/2017