the impact of governance development models on urban rail efficiency

Transportation Research Part A 42 (2008) 1238–1250

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Transportation Research Part A

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The impact of governance development models on urban rail efficiency

Priyanka Jain a,1, Sharon Cullinane b,2, Kevin Cullinane c,*

a Department of Public and Social Administration, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kongb Logistics Research Centre, Heriot-Watt University, Edinburgh, Scotland, United Kingdomc Transport Research Institute, Napier University, Edinburgh, Scotland, United Kingdom

a r t i c l e i n f o

Article history:Received 8 June 2006Received in revised form 31 January 2008Accepted 24 March 2008

Keywords:Urban railwaysEfficiencyOwnership modelsGovernanceDEA

0965-8564/$ - see front matter � 2008 Elsevier Ltddoi:10.1016/j.tra.2008.03.012

* Corresponding author. Tel.: +44 131 455 2951.E-mail addresses: [email protected] (P.

1 Tel.: +852 2788 8958; fax: +852 2788 8926.2 Tel.: +44 131 451 3527.

a b s t r a c t

Influenced by the twin forces of globalization and urbanization, many cities are developingurban rail transit systems (URTS). The policies and ownership structures within which theyare developed have a profound impact upon their efficiency. This paper analyzes the rela-tionship between ownership structure and technical efficiency through the application ofdata envelopment analysis (DEA). A comparative analysis of 15 URTS reveals that, amongthe different available governance development models, privatization has a direct andpositive bearing upon enhancing efficiency.

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1. Introduction

Urban rail transit systems (URTS) are regarded as the backbone of sustainable urban development. They have evolvedconsiderably since their inception in the late 19th century when the first underground opened in London in 1863. Since then,owing to the rapid rate of growth in motorization and changes in political structures, changes have occurred in the devel-opment, operations and ownership of URTS. Many of the older railways, including URTS that were originally privately owned,have been nationalized. Since the mid-20th century, however, attempts have been made, and are increasingly being pursued,to induce private sector participation in the rail transport sector generally and in URTS in particular. As well as this policyshift from a process of nationalization (where assets such as infrastructure and facilities are taken into government owner-ship) to commercialization (where the government ownership is maintained, but there is private or quasi-private operationand maintenance) to one of privatization (where ownership, operation and maintenance are all in private hands) has beensupplemented with measures of deregulation and decentralization. These changes have given rise to several governancedevelopment models for URTS, each with its own strengths and weaknesses. The formulation of these models is largelydetermined and influenced by government policies. However, not all governance development models have been successfulin the sense that there exist variations in the performance of URTS.

An exploration of previous studies shows that the literature has concentrated extensively on the performance of inter-city(inter-urban) railways. The influence of exogenous factors like regulatory policies (Caves et al., 1981; Cantos and Maudos,2001), public policies (Oum and Yu, 1994), administrative autonomy (Gathon and Pestieau, 1995) and technical efficiency

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Jain), [email protected] (S. Cullinane), [email protected] (K. Cullinane).

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P. Jain et al. / Transportation Research Part A 42 (2008) 1238–1250 1239

(Cowie and Riddington, 1996; Parisio, 1999; Coelli and Perelman, 2000; Yu, this issue) pertaining to inter-city railroads havebeen discussed and analyzed.

In relation specifically to previous studies of the technical efficiency of railways, the majority have applied a range ofalternative, but standard, methods and efficiency estimation techniques to sample data on inter-city (inter-urban) railways.In contrast, the main focus of the paper by Yu (this issue)3 is to propose a methodological advance to the standard frontierestimation technique of Data Envelopment Analysis (DEA) that is described as Network DEA (NDEA). This revolves aroundthe premise that overall operational performance is best measured by combining individual measures of technical efficiency,service effectiveness and technical effectiveness within a single integrated model or framework. It is suggested that by encom-passing both production and consumption technologies within a single framework, all three of the individual component mea-sures that comprise overall operational performance can be estimated simultaneously. The proposed approach is illustratedthrough its application to a cross-sectional sample of 40 of the world’s inter-city (inter-urban) railways.

To date, no attempt has been made to study the performance of urban railways. In this paper, however, 15 URTS fromdifferent cities across the globe have, in contrast to Yu (this issue), been empirically investigated using standard DEA tech-niques to determine their relative technical efficiencies. With all empirical analysis, there is a recognized need to apply theappropriate methodology. In the case of inter-city (inter-urban) rail operations, capacity utilization exerts a significant influ-ence on the overall performance of the individual entities that provide those services. It is potentially important, therefore,that any measure of that performance should account for this by encompassing not only the technical efficiency of produc-tion, but also the service effectiveness and technical effectiveness associated with, and reflecting, the take-up (consumption)of service provision. The finding reported in Yu (this issue) that the magnitudes of NDEA efficiency estimates are significantlydifferent from those yielded by the traditional DEA model confirms that this is the case for inter-city (inter-urban) rail.Clearly, this result and the logic which explains it does have implications for the choice of methodology, but it is less likelyto apply when considering the analysis of urban railways.

Another difference in approach between this paper and that of Yu (this issue) is that the transportation of freight can con-stitute a significant element in inter-city (inter-urban) rail operations, whereas for URTS it is largely irrelevant – at least forthe sample analyzed within this paper. The fact that alternative forms of productive output may exist can again have meth-odological implications. Thus, in Yu (this issue) railway freight is treated as a separate productive output from that of railpassenger output; hence the categorical need for a methodology which allows the consideration of multiple outputs. In fact,even the standard DEA methodology can cater for such a situation and, indeed, this feature has been utilized when analyzingthe technical efficiency of URTS within this paper, albeit in relation to different measures of passenger output rather thandistinct passenger and freight outputs.

Both this paper and that of Yu (this issue) derive empirical estimates of railway efficiency, albeit of urban and inter-urbansamples respectively and using panel and cross-sectional data respectively. Both papers find that there exists considerableinefficiency in railway operations across the globe – both urban and inter-city – and that there are broad geographical dis-parities in average performance levels. Using Spearman’s rank correlation coefficient, Yu (this issue) finds that even thoughthe magnitudes of efficiency estimates change significantly when applying different estimation techniques, efficiency rank-ings do not. Based on applying the same statistical test, this corresponds with the findings presented in Cullinane et al.(2005) in relation to the application of quite diverse and distinct approaches to efficiency estimation.

The focus of Yu (this issue) has already been identified as being largely methodological, but is also motivated by the desireto provide better guidance to managers on precisely identifying the sources of inefficiency and implementing efficiencyenhancements. The real raison d’être for this paper, however, lies with investigating, or even seeking to explain, differencesin estimated measures of relative technical efficiency in terms of the different governance development models which applyto each of the sample URTS at different observed times. By so doing, the intention is to inform policy on the adoption ofappropriate governance development models in urban rail provision.

This paper is structured as follows. Section 2 identifies different URTS development models under the regimes of publicsector ownership, corporatization and privatization. Section 3 provides a description of DEA as the chosen efficiency estima-tion methodology. Section 4 outlines the historical development and emergent ownership structure for the sample URTS.Section 5 presents the results of the empirical analysis, while Section 6 draws inferences from these results concerningthe relationship between efficiency and governance structure. In Section 7, a summary and conclusions are provided.

2. URTS governance development models

Since their evolution in 1863, URTS have been designed, financed, constructed and operated either by public or privateenterprises. Differences in the degree of autonomy in decision-making and authorized public control in the developmentprocess have led to the emergence of several models of governance structure. Some of these models are more commonlyapplied than others. Various intermediate governance development models have also been experimented with and adaptedto suit individual urban transit requirements. Fig. 1 presents a brief outline of the different models that have emerged as a

3 Both this paper and that of Yu (this issue) were submitted to the journal at about the same time. Given that both concerned the efficiency estimation ofrailway systems, the advice of the editor and an anonymous referee was that each paper should make reference to the common and distinct elements of theother.

URTS Governance Development Strategies

Traditional Public Ownership Model Contemporary Privatization Models

VerticalSegregation

Centralized URTS

Development

Decentralized URTS

Development

Public Private

Partnership

MunicipalityGoverned

URTS Development

Corporatized URTS

Development

Partial Privatization

Private Infrastructure —

Public Operation

Public Infrastructure-

Private Operation

Build- Operate- Transfer

Fig. 1. Governance development models for URTS.

1240 P. Jain et al. / Transportation Research Part A 42 (2008) 1238–1250

consequence of the customization of priorities. In their stages of development, several policy models have been adoptedwhich have offered a practical solution to meeting urban travel needs within the scope of given and available fiscal and tech-nological resources.

The choice of governance model adopted for URTS has been subject to considerable debate. The Traditional Public Owner-ship Models are based on the notion that URTS are developed in the mould of ‘public utility by public authority’. The publicownership of the system is defended on the grounds of ‘equity’ where it is assumed that, as a public mode of transport, URTSshould be accessible to all. Several variations in the traditional model have evolved that involve public participation in oper-ation and development. These include:

� Central or Federal Government regulated transit systems – In which the planning, financing and operations are undertakenby the central authority. Under a centralized system, urban rail services are provided by regional transit authorities thatare governed both by officials from the state (region) and by city government. This model has been widely followed inNorth America through the creation of Regional Transit Authorities in different cities like New York, Chicago, Boston,etc., to oversee urban public transit provision, including urban rail.

� Decentralized development through municipal authorities – A variation on the centralized model has been the introductionof decentralized urban rail development whereby the municipal authorities or the city administrators are authorized tooversee rail development. Decentralization is defined as a systematic distribution of administrative and fiscal authorityand responsibility from central to the local levels of government for an efficient provision of public services (De Guzman,1988). Many URTS have been developed by municipal governments (e.g., subways in Budapest, Bucharest, Tokyo andOsaka among others).

� Corporatization models – Another modified model of public project development was the introduction of corporations. Cor-porations are statutory bodies into which the government transfers its authority to operate and govern specified publicservices, but these corporations adhere to prudent commercial principles (Jain and Cullinane, 2002). Corporatizationcan be deemed as a step beyond simple decentralized administration and a move towards privatization. URTS in HongKong, Seoul, Vancouver, Delhi, Beijing, among others, have been developed under this model.

The Contemporary Privatization Models involve private sector participation in varying degrees. Privatization exists as amanifestation of an ideological shift away from a centralized, hierarchical decision-making structure towards a more organicapproach where there is greater reliance on the private institutions of society and less on government to satisfy people’sneeds (Keating, 1989; Savas, 1992). The focus on private sector participation rests on the arguments that they not onlyprovide alternative avenues for financing and developing transport infrastructure projects, but also promote efficiency inoperation, construction, management and the utilization of technology, that may be difficult to match in the public sector(Marber, 1997; Estache and Strong, 1999; Scurfield, 1994). Most privatization initiatives in URTS involve a partnershipbetween the public and the private sector differentiated by the degree of equity finance. Consequently, several distinctmodels have emerged that are applied in different cities. These include:

� Vertical separation models – The vertical separation of railway systems involves the separation of infrastructure fromoperations such that the operators of transport services and providers of fixed facilities are distinctly different entities thatwork in close cooperation with each other (Thompson and Stephan, 1988). Traditional practices involved a single


company overseeing the development of both infrastructure and operations. However, the separation of infrastructurefrom operations necessitates the creation of two companies such that one of the services is privately owned and the otherunder public ownership. Such models have been initiated on the basis of the public operation of services with the privateownership of infrastructure, as in the case of London Underground, and also with the public ownership of infrastructureand private operations, as in the case of Singapore and Buenos Aires.

� Partial Privatization Models – The only recorded case of partial privatization is the Mass Transit Railway (MTR) in HongKong. It involved the devolvement of the publicly owned railway company in a manner that the majority of shares areheld by the government, while a part of the ownership has been sold on the stock market through Initial Public Offerings(IPOs). It is a unique case of privatizing merely a part of a railway company.

� The Build Operate Transfer (BOT) Model – As the name implies, this model involves the private construction, finance andoperation of an urban railway for a stipulated period of time, known as the concession period, after which the ownershipand operation of the entire system is bestowed upon the government. During the concession period, the concessionaire isgranted the right to generate revenue from the facility before finally transferring the fully operational facility, at no cost tothe Principal concession grantor (Merna and Smith, 1996; Tam, 1999). Bangkok Metro Rail is the only system that hasbeen developed using this model.

Of the different models discussed above, the Traditional Public Ownership Model has been predominant. However, over thepast two decades, Contemporary Privatization Models have been increasingly deployed, particularly in Asian and South Amer-ican cities. Fig. 2 illustrates the relative proportions of URTS operated by the public, corporatized and private sectors in dif-ferent parts of the world.

From Fig. 2, it can be seen that most URTS are operated by the public sector. Over the past decade, however, there havebeen increasing instances of significant private sector involvement. After half a century of nationalization and public sectormanagement, Tynan (1999) points out that private participation in railways re-emerged during the 1990s with Latin Amer-ican cities leading the way in the privatization of URTS. The positive experience with private contracts in South America hasalso encouraged privatization attempts in Asia, such as the Sky-rail BOT project in Bangkok and STAR and PUTRA light railprojects in Malaysia (Tynan, 1999). Contemporary models that are not only innovative but also focus on tapping into privateresources to meet public needs are replacing the traditional models. It can be seen from Table 1 that within the privatizationinitiative, it is the BOT model that has gained prominence in the Asian context, while only operational concessions are beingoffered to the private sector in Latin American metro projects.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Europe North America South America East & South-EastAsia

Africa Total

Public Corporatized Private

Fig. 2. Ratio of public, corporatized and private sector operated URTS (2001–2002).

Table 1Selected URTS Public–Private Partnership (PPP) Projects in Asia and South America

Country Project Investment(US$ Million)

Features

Philippines EDSA Light Rail Transit 550 25 Year BOT; initiated in 1993, signed in 1993, Development UnderwayIndia Bangalore LRT 1300 30 Year BOT; initiated in 1994, Project Under ConsiderationMalaysia Kuala Lumpur STAR LRT 1400 60 Year BOT; signed in 1992, construction started in 1996;

project renegotiable after 30 yearsMalaysia Kuala Lumpur STAR LRT (Extension) 765 60 Year BOT; signed in 1995, construction started in 1998Malaysia PUTRA 1400 60 Year DBFO; system started in 1998Hong Kong MTRC – Partial Privatization/50 Years Operating Franchise; MTRC was quasi-privatized

through Initial Public Offerings (IPO) in 2000Singapore SMRT – 30 Year LOA; Private operations; LOA concession signed in 1987 for 10 Year,

renewed in 1998 for 30 yearsThailand BTS 1700 30 year BOT; operation began in 1999Brazil Rio De Janeiro – 20 Year Operating Concession Renewable concession signed in 1997Argentina Buneos Aires 432 20 Year Operating Concession Metrovias to rehabilitate and operate for 20 years,

renegotiable

Source: Menckhoff and Zegras (1999).


3. Methodology

The concept of measuring productive efficiency was pioneered in a seminal paper by Farrell (1957) who, drawing largelyon the work of Koopmans (1951) and Debreu (1951), proceeded to quantify and qualify the production process and formu-late a method of measuring the efficiency of productive organizations using multiple inputs. Farrell’s (1957) proposition ofapplying a non-parametric approach for the measurement of technical and allocative efficiencies was further promulgatedand developed as data envelopment analysis (DEA) by Charnes et al. (1978); a technique that, in turn, has gained prominenceand been extensively applied in analyzing efficiency within the transport sector.

According to Oum et al. (1999), a pioneering study on measuring the efficiency of railways using DEA methodology wasundertaken by Bookbinder and Qu (1993). Bookbinder and Qu (1993) who compared the performance of two Canadian andfive US Class I railways for the year 1989 using the DEA. By including different railways in the DEA model, their resultsshowed that Burlington Northern Railway was the most efficient in the sample analyzed, while the Canadian National Rail-way was the least efficient. A sensitivity analysis on inputs and outputs was conducted and it was concluded that the choiceof inputs and outputs affected efficiency scores.

Another important application of the DEA methodology in railway efficiency measurement was undertaken by Oum andYu (1994) who analyzed a panel of 19 railways from the OECD countries over the 1978–1989 period. They used a two stepprocess, the first step being the measurement of a gross efficiency index using DEA, the second being a Tobit regression anal-ysis to study the effects of variables and policy options that were beyond managerial control. Their study found that highlysubsidized railways were relatively less efficient than the less subsidized railways and that greater managerial autonomy ledto increased efficiency scores. The study recommended that subsidy policies must be applied to encourage normal marketmechanisms in railway operations to improve their cost-recovery and service levels, while the regulatory framework shouldencourage greater managerial autonomy for improved performance.

Cantos et al. (1999) applied DEA to a panel of 17 European rail systems for the period 1970–1995 in order to assess theimpact of technological advancements on their technical efficiency scores. It was found that technological improvementleads to improved performance and this was especially evident during the 1985–1995 phase of the study when organiza-tional restructuring was carried out in most railway companies. They applied Tobit regression analysis to study the impactof the variables on efficiency scores and concluded that passengers per train and tonnes per train were directly correlatedand so were the degree of managerial and financial autonomy and the percentage of electrified tracks.

Cowie (1999) studied the performance of 43 public and 14 private railways in Switzerland for the year 1995 to analyzethe impact of ownership pattern on efficiency using the DEA methodology. He studied the technical, managerial and orga-nizational efficiency among the public and private railways and concluded that private railways had a higher degree of tech-nical efficiency owing to a high level of managerial efficiency that is due to the reduced organizational constraints that theprivate rail operators face, compared to their public sector counterparts.

In all the above studies, technical efficiency was estimated to analyze the performance of railways. In fact, Coelli and Per-elman (2000) agree with the observation of Pestieau and Tulkens (1990) that technical efficiency measurement is probablythe only appropriate approach for comparing the performance of enterprises that exhibit the elements of natural monopolyand operate under a regulated environment because, by definition, technical efficiency objectives are closely associated withthe objectives pursued by the railway firms; namely, either output maximization with fixed inputs or input minimization toobtain similar levels of outputs.

Thus, measuring the performance of railways has attracted considerable attention over time. However, of the 3203 DEArelated studies noted by Tavares (2002), only a handful have actually utilized the DEA methodology to measure railway effi-ciency and no study has been undertaken on specifically evaluating the efficiency of URTS.


3.1. Input and output variables

DEA is now a widely used tool in efficiency analysis, with the seminal works in the field, by Charnes et al. (1978) andBanker et al. (1984), providing detailed technical explanations. The inputs and outputs define the basis to be used for assess-ing the relative efficiency of decision making units (DMUs) (Thanassoulis et al., 1987). Oum et al. (1999) have compiled adetailed list of possible indicators for measuring the performance of railways. No study has dealt with the efficiency of URTSper se. However, URTS operations use similar inputs to heavy railways and produce similar outputs. As such, the inputs andoutputs that have been selected for the study are as justified hereafter, with a summary of their average values provided inTable 2.

The inputs of URTS which have been included in this study are labour, capital and line. Labour is an essential input factorfor URTS operations and is measured either in terms of total number of staff employed in railway services or as total labourhours including overtime. Labour defines the human effort in the production process and in URTS operations the workforceis divided between administrative and frontline staff. Capital is another important factor of production and consists of goodsand material that are used in the production process. In railway related studies for evaluating efficiency capital has beenmeasured as the total rolling stock accounted for by the number of train cars and electric multiple units (EMU) in service.Line is the total length of tracks on which the train cars run and is measured as the total network length in miles or kilometers.

Railways are a multi-output production system whose outputs include the provision of passenger and freight services(Coelli and Perelman, 2000). URTS are dedicated commuter transit modes and the tracks are not shared between freightand passenger trains. Hence, only passenger services can be included as an output variable. The passenger services are iden-tified and measured as passenger trips (the number of passengers who board operational, revenue-earning vehicles annually)and train car kilometers (the total number of kilometers a train or train car is operated annually for revenue generation).

3.2. Data collection

A questionnaire survey was identified as the best data collection technique to facilitate the research. It was posted to 40urban rail operating companies whose contact details were derived from the Railway Directory 2000–2001. The choice of thetarget sample was dependant upon the qualifying criterion that the URTS must be operational for at least 11 years (i.e. from1992 to 2002) to reflect fluctuations and trends in development and performance. With this size target sample and asufficiently large response rate, the final sample could then be expected to be representative of the full range of developed,developing and transitional economies in order to detect any performance differentiation due to exogenous environmentalfactors like ownership (public or private), regulations and autonomy (administrative and fiscal decentralization).

To collect information for historical comparative research, Jane’s Urban Transport Systems 2001–2002 was reviewed as itprovides detailed background information on the inception and development stages of different transit systems. A DataMatrix Sheet was also enclosed with the questionnaire to gather detailed operational information for the period 1992–2002.

Of the 40 companies contacted, 21 URTS responded. This corresponds to a response rate of 52.5%, which is significantgiven that, on an average, most surveys achieve a rather more modest response rate of only about 20%. However, afteranalyzing the information supplied two issues emerged:

� The inability to separate information. In particular, most North American urban rail systems are operated by a single publicauthority which also operates other public transit modes like buses and ferries and they report their annual performanceand operations jointly. Hence, separating bus operations data from URTS operations data was very difficult. For instance,Washington Metro and Toronto Metro Company have comprehensive operating and budgetary information for the past

Table 2Averages of annual input and output variable values (1992–2002)

URTS Network length (km) Number of staff Train cars Passenger trips (million) Car-kilometers (million)

Barcelona (TMB) 78.10 2539 519 279.35 55.71Beijing (BM) 47.85 9294 452 475.45 38.03Berlin (BVG) 141.99 4312 1502 418.96 126.76Bucharest (METROREX) 59.51 6059 344 144.18 17.56Budapest (BVK) 34.62 2955 294 299 31.77Glasgow (SPT) 10.5 354 36 14.13 3.7Hamburg (HHAG) 99.91 1998 705 174.51 60.55Hong Kong (KCR) 34 4118 357 253.09 71.05Hong Kong (MTR) 61.45 7245 825 786.45 87.80London (LUL) 396.91 17354 3919 825.64 380.49Montreal (STM) 61 7741 759 203.29 60.70Santiago (METROSA) 33.65 1430 324 184.27 29.52Sao Paulo (METROSP) 46.91 7526 616 483.59 75.25Tokyo (TOEI) 81.74 3855 784 598.19 78.72Tokyo (TEITO/TRTA) 168.75 10332 2386 2096.22 232.73


decade, but their data are not mode specific. Rather, combined information is provided for the costs and revenues, totalstaff employed, etc., which makes the comparison fallacious when evaluated against the systems that operate only urbanrail.

� Incomplete data in the data matrix sheet. Some of the fields, especially those relating to cost and revenue data, were leftblank by some respondents (probably due to the confidentiality and/or sensitivity of the data). This affected not onlywhich URTS were actually subsequently included in the study, but also the final selection of inputs and outputs for theDEA as already earlier outlined.

4. Ownership structure and description of sample URTS

Ultimately, 15 URTS were identified for inclusion within the sample for analysis. Table 3 outlines the ownership struc-tures for the sample URTS.

London Underground opened in 1863 and was initially operated by a private concern, the Metropolitan Railway Com-pany. Until 1933, six independent operators together ran the underground railway in London, resulting in stiff competition,high operating costs, and poor service quality. In 1933, all of these independent operations were unified under the LondonPassenger Transport Board, a public corporation. In 1948, The London Passenger Transport Board was nationalized and wasrenamed as the London Transport Executive (LTE). In 1963, the LTE became the London Transport Board (LTB), and in 1969the Greater London Council (GLC) took over the administrative and policy planning of urban transport within the city of Lon-don. In 1984, London Regional Transport (LRT) was created and the London Underground became a subsidiary of LRT throughthe London Regional Transport Act of 1984. The Greater London Authority (GLA) was established in July 2000 and a new trans-port policy was adopted which integrated and transferred the operation and administration of the public transit system(including the London Bus and The Underground) to Transport for London (TFL) (Green, 1987; Glover, 1996).

Glasgow metro, the third oldest metro system in the world, became operational on 14th December 1896. Built as a privatesystem, it was under public ownership as part of Glasgow Corporation Transport in 1923, and was reorganized in 1975 underthe Stratclyde Regional Council (SRC). However, the metro system was closed for massive modernization from 1977 to 1980. Adecentralization initiative was introduced within the regional tier of government through the Local Government etc. (Scot-land) Act 1994 which became effective in 1996 and this led to the decentralized administration of metro services underthe Strathclyde Passenger Transport Authority (SPTA) and the Strathclyde Passenger Transport Executive (SPTE), jointly knownas Strathclyde Passenger Transport (SPT). SPT is the operational wing, while SPTA is responsible for policy formulation andSPTE is entrusted with policy execution (SPTA & E Annual Reports and Accounts, 1998/1999).

Similar to London Underground and Glasgow metro, the U-Bahn or Berlin Subway was initially developed as a privateconcession leased to Gesellschaft fur elektrische Hoch-und Untergrundbahnen, which was established in 1887. When the firstU-Bahn line became operational in Berlin in 1902, the company was granted fare autonomy for 7 years. However, World WarII brought the stagnation and decline of the U-Bahn, and until the 1980s, German railways suffered due to political unrestand network division with the construction of the Berlin wall. Finally in the late 1980s the operation of a unified BerlinU-Bahn was undertaken by BVG, a statutory municipal body (Fabian, 2000; Martínez-Vilanova and Zamorano, 2000).

Compared to other URTS in developed economies, the URTS in Hamburg is unique in terms of development and opera-tions. Hamburg saw its first U-Bahn line operational on 15th February 1912 as a joint venture of Siemens-Halske and

Table 3Administration and ownership of sample URTS

URTS Year of initialoperation

System operator Current ownership structure

Barcelona 1924 Transport Metropolitans de Barcelona (TMB) CorporatizedBeijing 1969 Beijing Metro Corporation Public OwnershipBerlin 1902 Berlin Verkehrs-Betriebe (BVG) Public OwnershipBucharest 1979 Societatea Commerciala de Transport cu Metroul Bucuresti

(STCMB Metrorex S.A)State–Municipal Partnership as a JointStock Company

Budapest 1896 Budapest Transport Limited (BVK) CorporatizedGlasgow 1896 Strathclyde Passenger Transport Public OwnershipHamburg 1912 Hamburg Hochbahn AG Public–Private PartnershipHong Kong KCR 1910 Kowloon Canton Railway Corporation (KCRC) CorporatizedHong Kong

MTR1975 Mass Transit Railway Corporation Limited Public–Private Partnership

London 1863 London Underground Limited Public–Private PartnershipMontreal 1966 Societe de Transport (STM) CorporatizedSantiago 1975 Metro de Santiago (Metro S.A) Public OwnershipSao Paulo 1974 Companhia do Metropolitano de Sao Paulo (Metro SP) Public OwnershipTokyo TOEI 1960 Transportation Bureau of Tokyo Metropolitan Government Public OwnershipTokyo TRTA/

TEITO1925 Teito Rapid Transit Authority (TRTA) Corporatized


AEG to form Hamburg Hochbahn AG (HHAG). It was the 10th URTS in the world, and the only URTS to date to retain privateparticipation since its inception in 1912. Hamburg Verkehrsverbund (HVV), (a federation of German transit systems and aholding company with the City of Hamburg retaining 83.5% of its shares), was established in 1965 to undertake administra-tive, planning and financing functions of all public transit systems including the metro. HHAG retained the operational rights(Howson, 1971; Hochbahn Annual Report, 2002).

Not all URTS in European cities underwent a similar development pattern. For instance, in Barcelona (Spain), urban railwas built in 1924 and operated by Ferrocarril Metropolità de Barcelona, S.A (a state governed enterprise). It was decentralizedand brought under municipal administration in 1957. Ferrocarril Metropolità de Barcelona, SA (FMB SA) was corporatized andentrusted with the railway operations, while Transports de Barcelona, SA (TB SA), undertook the operation of buses and tram-ways in 1961. Both FMB SA and TB SA were unified in 1979 under Transport Municipals de Barcelona as a major public trans-port provider in the municipality of Barcelona. In 1986, the name was changed to Transport Metropolitans de Barcelona (TMB).While operations remained decentralized, the administration of public transport, including urban rail, was transferred to thelocal government authority as Entitat Metropolitana Del Transport (EMT), established by the ACT 7/1987. In 1997, a consor-tium of representatives from the State, Local and Municipal authorities was established under the name Autoritat del Trans-port Metropolità (ATM) to promote integration and development of urban public transport in Catalonia (Jane’s UrbanTransport Systems, 2001–2002; TMB Annual Report, 2001–2002).

Unlike the American and European railways, the URTS in transitional economies have been planned, financed, constructedand operated by central government, in collaboration with municipal governments. For instance, the URTS in Moscow,Bucharest and Budapest were developed by the municipal authorities under strict socialist planning guidelines. However,since 1996 Budapest has seen a shift from a state controlled public transport authority to a devolved corporatized entityknown as BVK Ltd. which operates as a joint stock company under private sector accountability principles, with its sharesowned by the Budapest Municipality (BVK Annual Report, 2002).

In 1990, a move was made towards the transformation and introduction of democratic principles in Bucharest. Privatiza-tion Legislation was passed in 1991 paving the way for the decentralization and privatization of various state-owned enter-prises. Following the legislation, the operation of public transport was transferred to Regia Autonoma de Transport Bucharesti(RATB) operating buses, trolley buses and tramways, while the Regia Autonoma de Exploatare a Metroului Bucuresti (RAEMBMetrorex R.A) became the official URTS operator. In 1999, Metrorex R.A was further devolved and transformed into SocietateaComerciala de Transport cu Metroul Bucuresti (SCTMB). The Bucharest URTS operator, Metrorex S.A., is an autonomous state-owned joint stock company, under the authority of the Ministry of Transportation, and is subsidized by the state and by thelocal administration (Metrorex S.A, Annual Report, 2002).

While there has been a move towards the devolution of state ownership in URTS, Latin American and Asian urban rail-ways are also being increasingly decentralized and private participation is being encouraged for the development of URTS.The older systems in most developing cities were operated by local government; for instance, the urban railways in Tokyo(the TRTA and TOEI) were developed by the Tokyo Metropolitan Government (TMG) and, in Seoul by the Seoul MetropolitanGovernment (SMG) (Kim and Rim, 2000; Wakuda, 1997). In contrast, Beijing Metro has been developed, governed and reg-ulated by the state government. The municipal government, which functions as the administrative arm of the state, operatesthe URTS, and is directly accountable to the state authorities.

Apart from the introduction of a decentralized administration, various measures of privatization have also been intro-duced in developing the URTS in Asia. For instance, the Mass Transit Railway Corporation (MRTC) in Hong Kong was devel-oped as a corporate venture in 1979 and was under government ownership until 2000. The Legislative Council, in February2000, approved the Mass Transit Railway Ordinance (Cap. 556) that laid down the legal framework for privatization. It stip-ulated that all the properties, liabilities and rights of the MTRC would be vested in MTRCL (a public listed company) with 50years operational franchise, and the Hong Kong government would retain a minimum of 50% of the MTRCL shares for thenext 20 years. Under the current structure, the government owns 77% of the MTRCL shares, while the rest have been soldthrough IPO. Another urban rail in Hong Kong, the Kowloon Canton Railway (KCR), built in 1898, was established as the Brit-ish-section of Canton Railways in 1910 and later corporatized in 1982 under the Kowloon Canton Railway Corporation Ordi-nance (Cap. 372), with existing liabilities and authority vested in the Corporation (Jain and Cullinane, 2002).

As in the case of Asia, the URTS in Latin American cities have been developed by the government with finance providedfrom central and state reserves. Figueroa and Henry (1991) observe that the urban rail operators in various Latin Americancities (like Santiago (Chile), Buenos Aires (Argentina) and Sao Paulo (Brazil)) have a technological monopoly and are respon-sible for planning their own development and expansion, thus making necessary a high degree of centralization to assurebasic service conditions relating to quality and supply. In Latin America ‘‘centralization, autonomy and the self-sufficiencyof Metros go naturally hand in hand. . .” (Figueroa and Henry, 1991, p. 235). Although privatization initiatives have beenintroduced for urban rail projects in Buenos Aires and Rio de Janeiro, they are limited to operational concessions for 20 years(Gwilliam, 2002).

5. Empirical results and analysis

The technical efficiency of the sample of URTS under the assumptions of constant and variable returns to scale is obtainedby applying the DEA-CCR and DEA-BCC models respectively. The data set of 15 urban railways observed for 11 years result in


165 observations in a panel. Each annual observation is treated as a separate DMU and each observed data point is comparedagainst 164 other observations. Table 4 shows the descriptive statistics for technical efficiency scores under the assumptionsof constant returns to scale – CRS (Model 1) and variable returns to scale – VRS (Model 2), as well as for the scale efficiencyscores derived under the VRS assumption.

Table 5 shows the coefficient of technical efficiency scores obtained under the two models. The scale efficiency scores ofthe URTS are also shown. This is because the URTS differ in size and if the technical efficiency scores derived from the DEA-CCR model are different to those derived from the DEA-BCC model, then this implies that the systems are not operating atoptimal scale and greater efficiency could be achieved simply by introducing measures to alter the scale of the system.

Table 5 illustrates that under the assumption of VRS, Glasgow (SPT) is the most technically efficient system, while underthe assumption of CRS its efficiency is reduced by almost 50%. This can be attributed to its low scale efficiency indicating thatits operational scale over the period analyzed was only 53.41% of its optimal scale for maximum efficiency. The GlasgowURTS is significantly smaller than the other systems in the sample and the results seem to suggest that there exists scopeto reap economies of scale from further expansion, although it should be emphasized that this inference need not necessarilyprove to be the case. On the other hand, the Tokyo TEITO/TRTA and the Hong Kong KCR are significantly efficient under bothCRS and VRS with technical efficiency scores of over 99% in both cases for both models. This consistency in the estimatesproduced by the two models is commensurate with operating at close to optimal scale. Thus, both these systems may beregarded as both technically and scale efficient, at least during the period covered by the analysis. The technical efficiencyscore for the Bucharest URTS is the lowest under both CRS and VRS assumptions. Again, the proximity of the two estimates oftechnical efficiency is associated with quite a high level of scale efficiency at 90%. The result for Bucharest suggests that oper-ational scale does not make a significant contribution to the inefficiency of the system. Rather, technical inefficiency is themajor source of the problem and something that can be attributed either to technological inadequacy or to resource alloca-tion decisions that ultimately equate to management deficiency. The URTS in Berlin, the two in Hong Kong and the two inTokyo all exhibit the achievement of optimum scale efficiency levels of above 99%.

The efficiency trends among the sample URTS under both constant and variable returns to scale are shown in Figs. 3 and 4.In 2002 a move was made at London Underground Limited (LUL) to induce private sector participation for infrastructure

development and management and in that year the first Public–Private Partnership contract was signed. From 1999

Table 4Descriptive statistics for technical and scale efficiency scores

Model 1: CRS Model 2: VRS Scale efficiency

Mean 0.7835 0.8386 0.9369Standard error 0.0154 0.0144 0.0091Standard deviation 0.19724 0.18545 0.1164Variance 0.039 0.034 0.014Minimum 0.2843 0.3174 0.5141Maximum 1.0000 1.0000 1.0000Range 0.7157 0.6826 0.4859Skewness �0.856 �1.317 �2.804Kurtosis �0.252 0.811 7.076Sum 129.2856 138.3685 154.5817Total observations 165 165 165Total number of efficient URTS 17 28 17% of Efficient URTS 10.30 16.97 10.30

Table 5Technical and scale efficiency scores for sample URTS

URTS Model 1 (CRS) Model 2 (VRS) Scale efficiency

Barcelona (TMB) 0.8640 0.8819 0.9798Beijing (BM) 0.7960 0.8068 0.9854Berlin (BVG) 0.8434 0.8460 0.9971Bucharest (METROREX) 0.3510 0.3853 0.9099Budapest (BVK) 0.8861 0.8977 0.9860Glasgow (SPT) 0.5341 1.0000 0.5341Hamburg (HHAG) 0.8131 0.8343 0.9745Hong Kong (KCR) 0.9931 0.9948 0.9983Hong Kong (MTR) 0.9125 0.9190 0.9921London (LUL) 0.7724 0.9171 0.8412Montreal (STM) 0.4610 0.4822 0.9557Santiago (METROSA) 0.8164 0.8794 0.9273Sao Paulo (METROSP) 0.7891 0.8035 0.9821Tokyo (TOEI) 0.9254 0.9346 0.9900Tokyo (TEITO/TRTA) 0.9957 0.9962 0.9995

0

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0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

TMB BM BVG METROREX BVKSPT HHAG KCRC MTRC LULSTM METROSA METROSP TOEI TRTA

Fig. 3. Efficiency trends for sample URTS with CRS.

0

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

TMB BM BVG METROREX BVKSPT HHAG KCRC MTRC LULSTM METROSA METROSP TOEI TRTA

Fig. 4. Efficiency trends for sample URTS with VRS.



onwards, the results of this analysis show that the London URTS has experienced a steady increase in efficiency. However,this trend has not been very significant due to the uncertainties arising from its transition from a corporatized to a privatizedentity. It is also interesting to note that despite being privatized, the Hamburg URTS achieved a rather low technical effi-ciency score of less than 85%. This could be due to several factors such as excessive regulatory control and political changesamong others.

At a relative efficiency level of almost 85% under both constant and varying returns to scale assumptions, the Berlin URTSis relatively more efficient than other publicly owned systems. The efficiency index of the Barcelona URTS exhibits a suddendrop during 1997. However, following the introduction of administrative changes, it has recorded a steady increase inefficiency.

Under both varying and constant returns to scale, the efficiency trends of both the Bucharest and Montreal URTS are lowerthan the efficiency of others in the sample, indicating a high degree of inefficiency in resource allocation and usage. Between1997 and 2000, the Beijing URTS experienced a sudden decline in efficiency under both models. A similar trend can be wit-nessed for the Hong Kong MTR, where efficiency declined during the phase 1998–2001. Overall, the changes and fluctuationsin efficiency trends can be related to a number of external factors. In the next section, we analyze whether ownership andchanges in ownership structure have had an impact on these efficiency trends.

6. The impact of ownership on efficiency

Since the mid-1990s governments in developing and transitional economies have made a move towards introducinggreater decentralization and private sector participation in the development, operation and expansion of urban rail net-works, and this has been especially prominent in Asia and Latin America. In North America, fiscal decentralization is activelybeing promoted, but there has been no evidence of moves towards URTS privatization, while the London PPP has been themost prominent privatization measure in Europe. In contrast, URTS operators in developing and transitional cities haveexperimented with various forms of private sector participation and decentralization.

The efficiency analysis in the above section has been carried out irrespective of the ownership structure of the URTS.However, in order to understand the efficiency trends of URTS that have developed under various ownership models, in thisstudy three ownership models have been compared. They are Private Ownership (P), Corporatized Ownership (CR) and Pub-lic Sector Ownership (PB). Fig. 5 shows a comparison of the relative efficiency levels between the different ownership modelsunder the assumptions of CRS and VRS.

Model 1

0

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0.40.5

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0.80.9

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Effic

ienc

y

PrivateCorporatizedPublic

Model 2

00.10.20.30.40.50.60.70.80.9

1

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Effic

ienc

y

PrivateCorporatizedPublic

Fig. 5. URTS efficiency trends under different ownership models.


Between 1992 and 2002 privately owned URTS show a higher efficiency trend than corporatized and public sector ownedURTS under the assumptions of both models. Their high efficiency could be attributed to, for instance, the alternative sourcesof finance open to the private sector, greater nimbleness in the adoption of new technology, the less bureaucratic manage-ment associated with private organizations, etc. Among the URTS included in the study, only Hamburg, London and the HongKong MTR involved some form of private sector participation. The fluctuations in the efficiency of privatized URTS can beexplained by the fact that at the time of the study both London and the Hong Kong MTR were in transition from corporatizedto private entities. Many new URTS, especially in the developing countries of Asia and Latin America, are being built withsome form of private sector participation under BOT and O & M Contracts. Examples include the Sky-Rail in Thailand, theBangalore LRT and the PUTRA in Malaysia.

Corporatized URTS show higher efficiency levels under both models. The efficiency, although on an upward trend underVRS, is lower than the privately owned URTS. This is because although corporatized entities follow commercial principles inrail operation, being a statutory extension of the Government, its operations are highly regulated in some aspects. Therefore,if maximum efficiency is the major objective, although corporatization has a higher efficiency trend than public sector own-ership, it should be seen as very much an initial step towards privatization.

It is interesting to note that the publicly owned URTS exhibit a lower efficiency trend in both models. There could be sev-eral factors that explain this declining trend in efficiency. For instance, the low level of managerial autonomy in the publicsector, insufficient interaction between decision-makers and end users, lengthy decision making processes and plan imple-mentation phases, a lack of commercial objectives, etc.

7. Conclusion

One of the major reasons for privatization is to reduce public borrowing and increase the liquidity of the enterprise. Thisstudy shows that private sector participation increases the efficiency of URTS and results in an increasing efficiency trendline. Efficiency trends under different administrative structures, as shown for different models in Fig. 5, indicate that corpo-ratization should precede privatization plans as an initial step in improving productive efficiency. Should the corporatizedURTS become a self-sustaining system, privatization should only be introduced as a measure to reduce government respon-sibility for urban rail provision. This would allow the government to focus its resources and energies on more socially desir-able, but less profitable aspects of the URTS. It would also enable governments to negotiate the terms of privatization from astronger negotiating position. A major problem in most developing countries has been ill-conceived and hasty privatizations,which have reduced the bargaining power and authority of the government in public utility projects. Such drawbacks can beavoided by first of all attempting to enhance profitability through a process of corporatization.

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