Session 9
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Session 9. Public transport service reform. The Major Choices. Monopoly or competition Competition “in the market” or “for the market” Gross or net cost tendered franchises. The spectrum of supply arrangements. Public monopoly supply Performance agreement Management contract

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Session 9

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Session 9

Session 9

Public transport service reform


The major choices

The Major Choices

  • Monopoly or competition

  • Competition “in the market” or “for the market”

  • Gross or net cost tendered franchises


The spectrum of supply arrangements

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


Market form examples

Market Form - Examples


Failure of the traditional supply arrangements

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)


Who is responsible for what

Who is responsible for what?


Spectrum of supply arrangements

Spectrum of supply arrangements

  • Public monopoly supply

  • Performance agreement

  • Management contract

  • System concession

  • Route franchising – gross cost

  • Route franchising – net cost

  • Free entry


Characteristics of free entry systems

Characteristics of Free Entry Systems

  • high incentive to innovate

  • high incentive to predate

  • danger of associations

  • danger of over-supply (?)

  • difficult to co-ordinate


Role of the informal sector in public transport

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


Roles of the public sector in free transport markets

Roles of the Public Sector in Free Transport Markets

  • Safety and environmental monitoring

  • Preventing economic predation

  • Preventing collusive practice

  • Controlling monopolisation


Institutional requirements for free transport markets

Institutional Requirements for Free Transport Markets

  • Local level technical inspectorate

  • Effective mechanism to control anti-competitive practice at local level

  • Monopolisation and merger control


Competition in or for the market

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


Elements of a managed market system

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


Spectrum of supply arrangements1

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


Performance agreements

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


Spectrum of supply arrangements2

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


Management contracts

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


Spectrum of supply arrangements3

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


System concessions

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


Spectrum of supply arrangments

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


Characteristics of route franchises

Characteristics of route franchises

  • separation of planning from operations

  • small supply packages

  • short term contracts (3-7 years)

  • fixed payments, based on bid


Net cost v gross cost franchising

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


Requirements for gross cost franchises

Requirements for gross cost franchises

  • structural preparation

  • efficient way of securing revenues

  • performance monitoring

  • control of collusion


Advantages of gross cost tendering

Advantages of gross cost tendering

  • consistent with any fares scheme

  • consistent with quality control

  • consistent with modal integration

  • generates more competition


Spectrum of supply arrangements4

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


Characteristics of net cost franchises

Characteristics of net cost franchises

  • revenues kept by operators

  • high incentive to generate traffic

  • potential incentive to predate

  • less quantity monitoring required


Roles of the public sector in franchised transport services

Roles of the Public Sector in Franchised Transport Services

  • Creating a competitive structure

  • Defining contracts

  • Procuring services

  • Monitoring contract performance

  • Enforcing contracts

  • Coordination


Institutional requirements for service franchising

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


The issue of monopolisation

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.


Failures in reform lack of informed commitment

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.


Failures of reform protection of interests vested

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.


Failures of reform unrealistic expectations

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).


Limitations of the managed market approach in developing countries

Limitations of the managed market approach in developing countries

  • Inadequate administrative competence/probity

  • Limited private sector experience

  • Failure of the rule of law


Possible reform packages

Possible reform packages

  • The phased approach – performance agreements

  • Recognising social issues – two tier systems

  • Mobilising the informal sector

  • Managing the associations


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