The Andrews government has chosen to reward the two incumbent public transport operators for their performance running the city's trains and trams during the past eight years, by offering them the right to bid for a seven-year contract extension, to the exclusion of other would-be competitors.

But it has also sought to address widespread public dissatisfaction with the system's unreliability, by proposing more stringent punctuality targets that give greater weight to on-time running during the peak.

Currently, flat monthly targets for compensation do not distinguish between the peak, when most passengers are travelling and it is more challenging to run an on-time service, and the quieter off-peak when it is relatively easy to run a reliable service.

Metro Trains must run 98 per cent of services each month and has a punctuality target of 88 per cent to avoid having to pay customer compensation. A train is considered late if it is five minutes or more behind schedule.

Yarra Trams must run 98 per cent of services each month, and has a punctuality target of 77 per cent to avoid having to pay compensation. A tram is also considered late if it runs five minutes or more behind schedule.

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Yarra Trams will be required to meet tougher performance standards over the next seven years.

But the punctuality targets do not give added weight to peak-hour services when most passengers use the network, meaning the operators can use the quieter off-peak times to get back above the threshold.

The generous targets were set in 2009, as part of the initial eight-year franchise agreement.

Station-skipping by Metro and 'short-shunting' by Yarra Trams, where passengers are forced to disembark prematurely so the tram can be re-routed to go in the reverse direction, will also be targeted. The new performance regime will measure reliability and punctuality at every railway station on the network and at up to 20 tram stops per route.

Currently this is only measured at a handful of major stations and at a few points on each tram route, giving operators latitude to use these strategies to stay on time, despite the inconvenience to passengers.

The government would not reveal what new performance targets it has asked Metro and Yarra Trams to meet, arguing this is part of confidential negotiations it has just begun with the two companies.

But it did say that the condition and cleanliness of trains, trams and stations will be included in the proposed new contracts, as will the ability to provide a good service during periods of extensive disruption caused by the government's many major projects, including Melbourne Metro and the level crossing removal program.

Metro will also be asked to rein in overbearing advertising at stations.

The negotiation process is expected to take six to eight months before new contracts are awarded.

If the parties cannot agree, the government will throw the process open to outside competitors next year.

"We know passengers just want a public transport system that works – trains and trams that are clean, accessible, arrive on time and stop where they should," Public Transport Minister Jacinta Allan said.

"This will lift the bar on the things that matter to passengers – creating a safe, reliable, accessible network that you can rely on to get you to work on time and home safer and sooner at the end of the day."

The new franchise agreement also includes performance targets for Metro's maintenance of the rail network, and Yarra Trams' maintenance of the tram network.

Public Transport Victoria would conduct monthly "spot audits" to ensure infrastructure is in good condition, and would compel the two companies to provide detailed monthly reports on the network's condition.

Again, the government declined to provide specific details about how the health of the network would be measured or how the two operators would be penalised in the event of falling short.

The Age has published a series of reports in recent months, based on leaked internal information, that have revealed Metro's struggles to stay on top of its obligation to keep the network in good condition, due in part to a long-term legacy of neglect.

Metro Trains Melbourne is a consortium jointly owned by the Hong Kong government's rail operations company MTR; construction giant, John Holland; and maintenance company, UGL Rail.

Yarra Trams is a consortium jointly owned by French transport group Keolis and Australia's Downer Rail.