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Session 9

Public transport service reform

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The Major Choices

Monopoly or competition Competition “in the market” or “for the

market” Gross or net cost tendered franchises

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The spectrum of supply arrangements

Public monopoly supply Performance agreement Management contract System concession Route franchising – gross cost Route franchising – net cost Free entry – private supply

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Market Form - Examples

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Failure of the traditional supply arrangements

The main reasons for the failure of traditional formal sector public transport services in developing countries include:

Reliance on inefficient public sector monopoly suppliers (vide high cost of BMTA in Bangkok)

Unfinanced legally obligated fare concessions destroying financial viability (Russia)

Excessive political intervention on service structures and fares (many African countries)

Competition from informal sector (Argentina, Brazil) Failure of the fiscal system (Central Asia)

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Who is responsible for what?

Peformanceagreement

Managementcontract

Gross costfranchise

Net costfranchise

Systemconcession

Freeentry

Ownership -infrastucture

P P P P P C

Ownership -vehicles

P P P/C P/C C/P C

Servicecontrol

P P P P/C P/C C

Fares control P P P P/C C/P C

Revenue risk P P P C C C

Cost risk P P C C C C

Labor risk P P C C C C

Managementcost risk

P C C C C C

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Spectrum of supply arrangements

Public monopoly supply Performance agreement Management contract System concession Route franchising – gross cost Route franchising – net cost Free entry

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Characteristics of Free Entry Systems

high incentive to innovate

high incentive to predate

danger of associations

danger of over-supply (?)

difficult to co-ordinate

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Role of the informal sector in public transport

Filing in where public sector fails (Russia)

Service differentiation (Bangkok)

Direct service (Brazilian cities)

Employment for the poor (Bangladesh)

Operators associations

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Roles of the Public Sector in Free Transport Markets

Safety and environmental monitoring

Preventing economic predation

Preventing collusive practice

Controlling monopolisation

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Institutional Requirements for Free Transport Markets

Local level technical inspectorate Effective mechanism to control anti-

competitive practice at local level Monopolisation and merger control

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Competition “In” or “For” the Market?

London costs have fallen as much, and patronage less than elsewhere

Predation seems to be more difficult in competition for the market

“Integration” is easier with franchising

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Elements of a Managed Market System

Public control of the right to supply

Separate planning from operation

Depoliticise system planning

Commercialise operational management

Develop competitive market structures

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Spectrum of supply arrangements

Public monopoly supply Performance agreement Management contract System concession Service franchising – gross cost Service franchising – net cost Free entry – private supply

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Performance Agreements

Put relationship between government and supplier on a formal basis, but

Tend to be badly enforced

Have only weak incentives to efficiency

Are best seen as either

• appropriate for a government agency

• an interim stage to concessioning

Main weakness is an absence of competition

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Spectrum of supply arrangements

Public monopoly supply Performance agreement Management contract System concession Service franchising – gross cost Service franchising – net cost Free entry – private supply

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Management contracts

Public sector define enterprise objectives

Public sector retain ownership of assets

Private management makes commercial judgements

Private management deploys resources

Payment partly fixed partly by results

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Spectrum of supply arrangements

Public monopoly supply Performance agreement Management contract System concession Route franchising – gross cost Route franchising – net cost Free entry – private supply

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System Concessions

Long history in France

Delegation of substantial commercial freedom to operators

Popular for fixed track systems

Very successful in Argentine railways

Less competition than franchising

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Spectrum of supply arrangments

Public monopoly supply Performance agreement Management contract System concession Service franchising – gross cost Service franchising – net cost Free entry – private supply

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Characteristics of route franchises

separation of planning from operations

small supply packages

short term contracts (3-7 years)

fixed payments, based on bid

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Net Cost v Gross Cost Franchising

Net cost franchising assigns both revenue and cost risk to the operator, GC only cost risk.

Net cost gives greater operator incentive to revenue generation

But UK experience suggests that gross cost

• Generates more bids per tender

• Generates more bids from new entrants

• Reduces cost to the franchising authority

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Requirements for gross cost franchises

structural preparation

efficient way of securing revenues

performance monitoring

control of collusion

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Advantages of gross cost tendering

consistent with any fares scheme

consistent with quality control

consistent with modal integration

generates more competition

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Spectrum of supply arrangements

Public monopoly supply Performance agreement Management contract System concession Route franchising – gross cost Route franchising – net cost Free entry – private supply

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Characteristics of net cost franchises

revenues kept by operators

high incentive to generate traffic

potential incentive to predate

less quantity monitoring required

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Roles of the Public Sector in Franchised Transport Services

Creating a competitive structure

Defining contracts

Procuring services

Monitoring contract performance

Enforcing contracts

Coordination

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Institutional Requirements for Service Franchising

Creation of a concessioning agency at arms length from political control

Reconstruction of public sector operations (preferably privatised)

Independent technical quality control agency

Independent audit facility for bid testing

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The Issue of Monopolisation

Initial efforts to prevent control on

privatisation process

Application of monopoly legislation to the bus industry

Predation is difficult to define and control

Concentration is occurring in U.K.

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Failures in reformLack of informed commitment

Reserving provision of “social” services for the public sector;

Restriction of eligibility for subsidies to public enterprises;

Arbitrariness and inconsistency in regulation

Failure to create a secure contractual or legal basis for private sector operations;

Limiting competition to the provision of services by the private sector with small vehicles only.

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Failures of reformProtection of interests vested

Over specification of regulation

Continuation of preferential treatment to public sector operators in competitive regimes;

Unwillingness to offer any form of subsidy to private sector operators;

Maintenance of a public sector franchise holder, using private operators as sub-franchisees

Exemption of state owned enterprises from regulation;

Reservation of favored, scarce, depot and terminal locations for public sector operators.

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Failures of reformUnrealistic expectations

Fares can be controlled without subsidy ( Kingston, Jamaica).

Operators will be self-monitoring (Santiago, Chile).

Franchising reduces the need for detailed supervisioin (Almaty, Kazakhstan).

Service standards can be set at whatever level you desire (Dhaka, Bangladesh).

Market pressures will generate the right industry structure (Sri Lanka; Santiago);

Privatization can solve the problem without regulatory reform (Sri Lanka, Kuwait).

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Limitations of the managed market approach in developing countries

Inadequate administrative competence/probity

Limited private sector experience

Failure of the rule of law

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Possible reform packages

The phased approach – performance agreements

Recognising social issues – two tier systems

Mobilising the informal sector

Managing the associations