The World Bank Session 9 Public transport service reform

The World Bank The Major Choices u Monopoly or competition u Competition “in the market” or “for the market” u Gross or net cost tendered franchises

The World Bank The spectrum of supply arrangements u Public monopoly supply u Performance agreement u Management contract u System concession u Route franchising – gross cost u Route franchising – net cost u Free entry – private supply

The World Bank Market Form - Examples

The World Bank Failure of the traditional supply arrangements The main reasons for the failure of traditional formal sector public transport services in developing countries include: u Reliance on inefficient public sector monopoly suppliers (vide high cost of BMTA in Bangkok) u Unfinanced legally obligated fare concessions destroying financial viability (Russia) u Excessive political intervention on service structures and fares (many African countries) u Competition from informal sector (Argentina, Brazil) u Failure of the fiscal system (Central Asia)

The World Bank Who is responsible for what?

The World Bank Spectrum of supply arrangements u Public monopoly supply u Performance agreement u Management contract u System concession u Route franchising – gross cost u Route franchising – net cost u Free entry

The World Bank Characteristics of Free Entry Systems u high incentive to innovate u high incentive to predate u danger of associations u danger of over-supply (?) u difficult to co-ordinate

The World Bank Role of the informal sector in public transport u Filing in where public sector fails (Russia) u Service differentiation (Bangkok) u Direct service (Brazilian cities) u Employment for the poor (Bangladesh) u Operators associations

The World Bank Roles of the Public Sector in Free Transport Markets u Safety and environmental monitoring u Preventing economic predation u Preventing collusive practice u Controlling monopolisation

The World Bank Institutional Requirements for Free Transport Markets u Local level technical inspectorate u Effective mechanism to control anti- competitive practice at local level u Monopolisation and merger control

The World Bank Competition “In” or “ For” the Market? u London costs have fallen as much, and patronage less than elsewhere u Predation seems to be more difficult in competition for the market u “Integration” is easier with franchising

The World Bank Elements of a Managed Market System u Public control of the right to supply u Separate planning from operation u Depoliticise system planning u Commercialise operational management u Develop competitive market structures

The World Bank Spectrum of supply arrangements u Public monopoly supply u Performance agreement u Management contract u System concession u Service franchising – gross cost u Service franchising – net cost u Free entry – private supply

The World Bank Performance Agreements u Put relationship between government and supplier on a formal basis, but u Tend to be badly enforced u Have only weak incentives to efficiency u Are best seen as either appropriate for a government agency an interim stage to concessioning Main weakness is an absence of competition

The World Bank Spectrum of supply arrangements u Public monopoly supply u Performance agreement u Management contract u System concession u Service franchising – gross cost u Service franchising – net cost u Free entry – private supply

The World Bank Management contracts u Public sector define enterprise objectives u Public sector retain ownership of assets u Private management makes commercial judgements u Private management deploys resources u Payment partly fixed partly by results

The World Bank Spectrum of supply arrangements u Public monopoly supply u Performance agreement u Management contract u System concession u Route franchising – gross cost u Route franchising – net cost u Free entry – private supply

The World Bank System Concessions u Long history in France u Delegation of substantial commercial freedom to operators u Popular for fixed track systems u Very successful in Argentine railways u Less competition than franchising

The World Bank Spectrum of supply arrangments u Public monopoly supply u Performance agreement u Management contract u System concession u Service franchising – gross cost u Service franchising – net cost u Free entry – private supply

The World Bank Characteristics of route franchises u separation of planning from operations u small supply packages u short term contracts (3-7 years) u fixed payments, based on bid

The World Bank Net Cost v Gross Cost Franchising u Net cost franchising assigns both revenue and cost risk to the operator, GC only cost risk. u Net cost gives greater operator incentive to revenue generation u But UK experience suggests that gross cost Generates more bids per tender Generates more bids from new entrants Reduces cost to the franchising authority

The World Bank Requirements for gross cost franchises u structural preparation u efficient way of securing revenues u performance monitoring u control of collusion

The World Bank Advantages of gross cost tendering u consistent with any fares scheme u consistent with quality control u consistent with modal integration u generates more competition

The World Bank Spectrum of supply arrangements u Public monopoly supply u Performance agreement u Management contract u System concession u Route franchising – gross cost u Route franchising – net cost u Free entry – private supply

The World Bank Characteristics of net cost franchises u revenues kept by operators u high incentive to generate traffic u potential incentive to predate u less quantity monitoring required

The World Bank Roles of the Public Sector in Franchised Transport Services u Creating a competitive structure u Defining contracts u Procuring services u Monitoring contract performance u Enforcing contracts u Coordination

The World Bank Institutional Requirements for Service Franchising u Creation of a concessioning agency at arms length from political control u Reconstruction of public sector operations (preferably privatised) u Independent technical quality control agency u Independent audit facility for bid testing

The World Bank The Issue of Monopolisation u Initial efforts to prevent control on privatisation process u Application of monopoly legislation to the bus industry u Predation is difficult to define and control u Concentration is occurring in U.K.

The World Bank Failures in reform Lack of informed commitment u Reserving provision of “social” services for the public sector; u Restriction of eligibility for subsidies to public enterprises; u Arbitrariness and inconsistency in regulation u Failure to create a secure contractual or legal basis for private sector operations; u Limiting competition to the provision of services by the private sector with small vehicles only.

The World Bank Failures of reform Protection of interests vested  Over specification of regulation u Continuation of preferential treatment to public sector operators in competitive regimes; u Unwillingness to offer any form of subsidy to private sector operators; u Maintenance of a public sector franchise holder, using private operators as sub-franchisees u Exemption of state owned enterprises from regulation; u Reservation of favored, scarce, depot and terminal locations for public sector operators.

The World Bank Failures of reform Unrealistic expectations u Fares can be controlled without subsidy ( Kingston, Jamaica). u Operators will be self-monitoring (Santiago, Chile). u Franchising reduces the need for detailed supervisioin (Almaty, Kazakhstan). u Service standards can be set at whatever level you desire (Dhaka, Bangladesh). u Market pressures will generate the right industry structure (Sri Lanka; Santiago); u Privatization can solve the problem without regulatory reform (Sri Lanka, Kuwait).

The World Bank Limitations of the managed market approach in developing countries u Inadequate administrative competence/probity u Limited private sector experience u Failure of the rule of law

The World Bank Possible reform packages u The phased approach – performance agreements u Recognising social issues – two tier systems u Mobilising the informal sector u Managing the associations