T Has Failed to Hold Keolis to Commuter Rail Operating Contract

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Over two-dozen rail operators initially expressed interest in the MBTA’s commuter rail contract, but only the incumbent, Massachusetts Bay Commuter Railroad Company (MBCR), and a French newcomer, Keolis Commuter Services, submitted final bids. Keolis ended up winning the contract for at least the next 8 years with a $2.68 billion bid, making it the largest transit contract in the history of the Commonwealth and the most expensive rail operating contract in the country.

Many saw this agreement as a turning point for the beleaguered commuter rail system. MBCR had been in charge for more than a decade, and long-standing criticisms of an absence of meaningful performance incentives were purportedly cured in the “no-excuses” contract.

Under the new contract, each late train, dirty passenger coach, or other performance lapse is supposed to result in a distinct fine. The fines are limited to $868,849 per month for the first year (this is assumed to be 75% of the operator’s monthly profit). During Keolis’ first year at the helm, including forgiveness for some winter weather-related fines and an introductory three-month grace period, the French operator racked up $7.53 million in fines.

In each subsequent year of the contract, the monthly fine limit was supposed to increase. For years 2-8 of the agreement, the cap is also raised to 90% of assumed monthly profit. The cap for year two of the agreement is $1,098,040 per month, a 26.4% increase from this year’s limit.

On top of a fee cap escalation, each individual fee was also pegged to increase in proportion to the T’s payments to Keolis. For example, Keolis exacted a net fee of $291,886,672 to operate the commuter rail system in FY15; in FY16, Keolis will receive $307,430,720, a 5.3% increase, meaning that each individual fee will increase by 5.3% as well.

As written, the contract penalizes the operator for poor performance through an agreed upon, incident-based system. In practice, the MBTA forgave fines as a means for Keolis to fund the operational improvements needed to avoid penalties in the first place.

Keolis, like MBCR, was supposed to formulate its bid with these requirements in mind. If Keolis’ low bid doesn’t allow them to adequately perform the duties agreed upon in the contract then that is purely Keolis’ problem to fix. Altering the terms of the contract now rewards Keolis for underbidding in the first place.

Keolis made the $2.68 billion bid knowing the rules – it should live up to it.

Frank DePaola, interim general manager of the T, defended the decision to return the fines by claiming that the T wasn’t “returning to them any profit,” but rather “having them hire additional staff and giving them the funds to cover the cost of these staff who will improve the customer experience.”

Customer service improvements should fall at the feet of Keolis, not the MBTA. Keolis agreed to perform a specific service for a predetermined price. The cost of their inability to meet their promises should come out of their own pockets.

If not, the procurement process was unfair.