Session 9

1. Session 9 Public transport service reform

2. The Major Choices • Monopoly or competition • Competition “in the market” or “for the market” • Gross or net cost tendered franchises

3. 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

4. Market Form - Examples

5. 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)

6. Who is responsible for what?

7. Spectrum of supply arrangements • Public monopoly supply • Performance agreement • Management contract • System concession • Route franchising – gross cost • Route franchising – net cost • Free entry

8. Characteristics of Free Entry Systems • high incentive to innovate • high incentive to predate • danger of associations • danger of over-supply (?) • difficult to co-ordinate

9. 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

10. Roles of the Public Sector in Free Transport Markets • Safety and environmental monitoring • Preventing economic predation • Preventing collusive practice • Controlling monopolisation

11. Institutional Requirements for Free Transport Markets • Local level technical inspectorate • Effective mechanism to control anti-competitive practice at local level • Monopolisation and merger control

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Characteristics of route franchises • separation of planning from operations • small supply packages • short term contracts (3-7 years) • fixed payments, based on bid

22. 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

23. Requirements for gross cost franchises • structural preparation • efficient way of securing revenues • performance monitoring • control of collusion

24. Advantages of gross cost tendering • consistent with any fares scheme • consistent with quality control • consistent with modal integration • generates more competition

25. 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

26. Characteristics of net cost franchises • revenues kept by operators • high incentive to generate traffic • potential incentive to predate • less quantity monitoring required

27. Roles of the Public Sector in Franchised Transport Services • Creating a competitive structure • Defining contracts • Procuring services • Monitoring contract performance • Enforcing contracts • Coordination

28. 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

29. 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.

30. 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.

31. 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.

32. 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).

33. Limitations of the managed market approach in developing countries • Inadequate administrative competence/probity • Limited private sector experience • Failure of the rule of law

34. Possible reform packages • The phased approach – performance agreements • Recognising social issues – two tier systems • Mobilising the informal sector • Managing the associations