How to define an expansion strategy
The Italian LPT market is now dotted with foreign operators such as the French Ratp Dev in Tuscany and the German Arriva in Lombardy and Piedmont. In all cases, these are large operators that decide to invest in the Italian territory, often acquiring small LPT operators and participating in public tenders.
Trenitalia and ATM Milan are the only Italian operators to have entered a foreign market.
On the contrary, Italian public road transport operators struggle to enter foreign markets due to their small company size, which constitutes a constraint for expansion into other countries.
On the other hand, devising the right strategy that takes into account the right drivers and company peculiarities can be the key to success when investing in the European market.
Drivers and development horizons
The main drivers for Italian LPT operators to invest abroad are the following.
Degree of population concentration in European countries
The following figure provides an overview of the share and distribution of cities within the European Union. Using Eurostat's definition and methodology (based on population size and density), there are 811 cities in the 28 EU Member States with an urban centre population of at least 50,000.
The graph can give an idea of the importance of urban public transport in these countries in terms of potential passenger numbers.
Presence of international players in the market
In several countries, urban public transport is characterised by a large number of internal operators, in particular in large cities where national operators operate entire integrated public transport networks, including buses, trams and metro.
The use of competitive tendering has become more widespread over the last 10 years, enabling the development of numerous international companies in the urban public transport sector operating throughout Europe and beyond.
This is the case of several French companies, such as Keolis, Transdev and RATP Dev.
Keolis and Transdev operate in about 5 or 6 European countries (excluding France). Other important European operators are Arriva DB, Nobina and Abellio (a subsidiary of the Dutch railway company NS).
The following map aims to visualise the presence of international players in the European bus market.
A high presence of international players within a country also means high competitiveness. On the other hand, entering a closed LPT market as a foreign operator could increase the possibility of staying there much longer.
Regulatory framework and procurement process for LPT services
Pursuant to Regulation 1370/2007. the internal operators who receive a direct award are not allowed to participate in tender procedures outside their network (Article 5(b)). However, exceptions are possible during the transition period and if the competent authority intends to put out to tender a previously directly awarded contract (Article 5(c)). It is a strategic decision on the part of the competent authority to organise a competitive tender and to put its internal operator out to tender.
France, the UK, the Netherlands, Italy, Sweden and Germany were the first to see the growth of international players in their markets.
The figure above provides an indicative overview of the type of procedure used per country for the award of lots in the urban public transport sector:
- In Belgium, Greece, Ireland and Luxembourg all urban public bus services are entrusted directly to an in-house operator.
- In all other countries are both types of award used (procurement and/or direct award).
- In the United Kingdom (England (outside London), Scotland and Wales) direct adjudication is very rare and only possible in very specific cases.
- In Sweden and Finland, direct awarding is regulated to be used for 'exceptions' and there are currently only a few municipal companies.
- In Germany, the most cities award contracts directly to an internal operator. There are a few examples of tenders for predominantly regional bus services and, to a rather limited extent, for smaller urban networks.
- In Italy the use of competitive tendering has increased in recent years, but has not reached as in France or the Netherlands. The use of competitive tendering has increased particularly over the last 10 years in the Netherlands and Finland and now covers more than 80% of bus routes.
An exceptional situation is found in the United Kingdom, where most urban bus services in England (excluding London), Wales and Scotland are provided on a commercial basis with exceptionally contracted bus routes.
In more than 10 Member States, the use of competitive tendering is rather marginal and is mainly used in small and medium-sized urban areas. In the United Kingdom, Sweden, France (except Paris), Finland (only in the Helsinki metropolitan area), the Netherlands, Denmark and Norway the use of competitive tendering was already implemented before the adoption of Regulation 1370/2007.
There is a tendency to directly entrust urban public transport networks (road and rail) in capital cities or very large urban areas to an internal operator.
There are exceptions, such as London or Helsinki, where urban rail services are provided in-house or by an internal operator and bus routes are contracted out. An exception is Stockholm, where all UTP services are contracted out to several operators (including the metro).
Who are the international operators in Europe?
International companies hold a significant share in only seven Member States, i.e. those that have also largely introduced competitive tendering as the main form of awarding contracts. In most Member States, they play only a limited role in the market.
The Italian context differs from that of other European countries with comparable market sizes, including France, the United Kingdom and Germany, where, despite the presence of different awarding systems, the market has given rise to large operators, active even beyond national borders, characterised by levels of efficiency and profitability decidedly higher than the average of Italian operators.
The concentration of operators was produced autonomously by the market, in some cases (notably in France) promoted, but not forced, by the public actor.
The main European LPT groups have adopted a concentrated corporate structure accompanied by a decentralised organisational structure, which maintain business continuity and the autonomy of the companies that are gradually acquired by the group.
The decentralised organisation, characterised by the presence of a large number of autonomous branches in the management of the service, seems to allow the same groups to:
- adapt to differences in the existing legislative and regulatory framework in and within the different national and local markets;
- relate optimally with the territory, the public body and the users;
- provide the service with a lean organisation and more responsive to local market stimuli;
- make local management accountable for objectives.
Contract characteristics and market entry barriers
In general, most contracts covering LPT services (with the exception of France, Belgium and Ireland, where the organising authorities largely own rolling stock, both buses and light rail) also include the provision of vehicles and maintenance according to local or regional needs. The quality and technical specificities of the buses play an important role in the contract award. Also the maintenance and provision of storage (particularly in countries with a high share of tenders) has strategic importance. In some cases, operators rent vehicles, rent bus depots or outsource maintenance. Resource maintenance is capital-intensive.
Rolling stock and infrastructure maintenance are barriers to entry due to the high investment required. On the other hand, the duration of the contract is a prospect of return.
Transfer of staff in case of change of operator: how does it work?
In France, Finland, the Netherlands and the United Kingdom, the transfer of staff takes place on the basis of national legislation or the sectoral collective agreement in the event of a change of operator after the tender.
In Austria, Denmark, the Czech Republic, Hungary, Slovenia, Sweden and Bulgaria, generally no transfer of personnel would take place because in most cases a change of operator cannot be considered a transfer of activity under national legislation implementing the EU Directive 2001 /23/EC on the transfer of undertakings and there are no other national rules for this situation.
In conclusion, the ideal strategy for entering the foreign market is essentially based on the right mix between::
- The concentration of international players in the analysed countries;
- The percentage of competitive tenders in the country;
- The number of inhabitants in urban areas;
- The characteristics of contracts and barriers to entry.
For further information and insights please contact us at info@basco-t.com
Authors:
Managing Partner
Senior Consultant