The Routledge Handbook of Public Transport

Corinne Mulley, John Nelson, Stephen Ison, Corinne Mulley, John Nelson, Stephen Ison

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000367096
• Edition: 1
• Topic: Tecnología e ingeniería
• Subtopic: Transporte y navegación

The Routledge Handbook of Public Transport is a reference work of chapters providing in-depth examination of the current issues and future developments facing public transport.

Chapters in this book are dedicated to specific key topics, identifying the challenges therein and pointing to emerging areas of research and concern. The content is written by an international group of expert contributors and is enhanced through contributions from practitioners to deliver a broader perspective. The Handbook deals with public transport policy context, modal settings, public transport environment, public transport delivery issues, smart card data for planning and the future of public transport.

This comprehensive reference work will be a vital source for academics, researchers and transport practitioners in public transport management, transport policy and transport planning.

PART A
Policy context

1
Regulatory frameworks in public transport including tendering

David A. Hensher

Introduction

This chapter focuses on economic regulation, which has an overarching role to ensure that prices and quantity, including quality, of services are aligned with objectives such as the public interest in the provision of public transport. Such regulation is exercised on both natural monopolies and market structures with imperfect or excessive competition. Matters of safety and environmental regulation, often referred to as social regulation (see Viscusi et al., 2005), while also important, are lightly covered given the focus on economic regulation. The range of theories that guide regulatory reform are synthesised before looking closely at specific approaches to procuring services in bus contract design.

The chapter complements Hensher (2018), which explores the role of contracting in the delivery of efficient and effective services as a way of revealing the potential strengths and weaknesses of alternative ways to garner greater performance from the delivery of bus services that are primarily under the control of the public sector but which are increasingly delivered by the private sector on behalf of the public sector.

Economic theories of regulation

There is an extensive literature on the regulatory framework within which goods and services are provided in every country. Economists have developed sophisticated interpretations of how regulation can be used to guide, or control, the way in which services are provided. The role that various agents play in the public and private sector is controversial, and there is no absolute agreement on these roles, despite there being a large volume of theory and practice documented in support of one or more ways in which services might or should be provided. Within the public transport sector, the ambiguity and disagreement remain despite efforts over the last 30 years at least to both promote and reform the way in which public transport is provided. The full spectrum has ranged from public monopoly (nationalisation) to economic deregulation, with competition for the market through tendering being used as a compromised way of controlling the market (in lieu of negotiated contracting) while aspiring to a cost-efficient (and desirably network-effective) outcome that befits a competitive setting. Before taking a closer look at the structural change in the provision on public transport, drawing on examples in bus supply in various geographical jurisdictions, some of the theoretical contributions are synthesised as a guide to what might be best described as aspirational or ideological views of the world of service delivery, which is often drawn on to promote a particular position with respect to the role of economic regulation.

Kay and Vickers (1990) make a useful distinction between ‘structural’ and ‘conduct’ economic regulation. Structural economic regulation concerns the regulation of the market structure and includes restrictions on entry or exit (the interpretation associated with competitive tendering); in contrast, conduct economic regulation is used to regulate the behaviour of suppliers and consumers in the market and includes price controls and minimum quality standards, monitored as appropriate through actionable benchmarking. A distinction is often made between public and private interest theories (Den Hertog, 2012). Public interest theories of regulation assume that sufficient information and appropriate enforcement powers exist to ensure that the public interest is enhanced by an essentially benevolent regulator. In contrast, private interest theories promote a position that regulators are not well informed on demand, cost and service quality and tend to be less benevolent, resulting in private self-interest at the cost of the public interest. Intervention by a public sector authority is typically aligned with market failure and the need to support a social welfare outcome through efficient, albeit appropriate, government intervention.

Where there is often a lack of appropriate public sector knowledge of an industry sector, there is a case for a contribution from the industry sector itself provided that this complements the role of government and does not singularly promote a private-sector commercial interest that is not aligned with achieving government objectives. The challenge herein is with how it can be ensured that this alignment provides a mechanism to ensure that the less informed public sector becomes more informed through private-sector participation to deliver a social welfare outcome when public funds are at risk (Den Hertog, 2012). Delegation of powers within each sector, but most notably in the government sector, is often a cause of regulatory failure, where ‘expertise’ is in the hands of those with limited and often inaccurate information on the industry sector they are responsible for through implementation of the regulatory framework. The formation in the United Kingdom of specialised regulatory agencies (e.g., Office of Rail) is one way of ensuring the relevant specialised skills, and the focus in Singapore through the Land Transport Authority of expert knowledge of specific sectors is laudable, building significant trust and respect between the principal and the agent.

Public interest theories are most often applied to explain regulation in terms of achieving economic (cost) efficiency (Joskow & Noll, 1981, p. 36); however, such theories are also often interpreted more broadly to correct inefficient or inequitable market practices (Posner, 1974; Den Hertog, 2012), designed to achieve a broad socially efficient (including equity or distributional implications) use of scarce resources as opposed to an economically efficient allocation of resources.

Although market failure has historically been used to justify government intervention, there has been significant criticism of this position, linked to the failure to recognise transaction costs and the role they play. Transaction and information costs which underlie market failure are assumed to be absent in the case of government regulation (Williamson, 2002). Market failure is a result of a divergence between the price or value of an additional unit of a particular good or service and its marginal resource cost. The theory of second best has demonstrated that the partial aim of efficient allocation does not make the economy as a whole more efficient if unavoidable inefficiencies persist elsewhere in the economy, as is typical in transport with underpriced alternatives (such as the private car) to public transport where there are observed external effects, taxation, imperfect competition and inadequate information. An appealing regulatory theory must explain how and why regulation is comparatively the best transaction cost–minimising institution in the efficient allocation of resources for particular goods, services or societal values (Zerbe, 2001). Competition may replace some elements of regulation but not all.

In general, the market mechanism itself is often able to produce institutions to compensate for any inefficiencies, with private enterprise developing appropriate ways to avoid adverse selection and quality concerns through best practice performance. The assumption of market failure when a dominant firm supplies the market has been criticised by many authors, notably Demsetz (1968), with significant returns a result of superior efficiency as well as the possibility of competition for the market (Baumol et al., 1982) as opposed to competition in the market.

A key concern of the public interest theory is that the normative theory of economic welfare is being used as a positive explanatory theory of economic regulation (Joskow & Noll, 1981; Den Hertog, 2012). Empirical testing of public interest theories relative to private interest theories has concentrated on the effectiveness and not the efficiency of regulations with limited consideration on such matters as are prices lower, is price discrimination absent, is there a reduction in costs, did congestion decline and is the political influence of interest groups identifiable?

An alternative perspective was presented by Stigler (1971) that became known as the Chicago theory of government. Stigler argued that economic regulation is designed to benefit specific industry groups, for example, the suppression of transport by the trucking sector to protect the railways, whereas Posner (1971) argued that it benefited consumer groups, for example subsidised prices for all public transport users, even though the cost of such services varies by location (e.g., regional vs. urban, inner and outer urban). Regulatory practices appear to confirm this prediction, where regulated industries are either monopolistic, such as rail transport in most countries, or highly competitive, such as freight and ride-sharing services such as Uber, Ola and taxis (see also Chapter 19). Importantly, in the context of public transport, the theory of economic regulation also predicts that the benefits will take the form of transfers directly through subsidies (typically provider side) or indirectly through price or quantity regulation or restriction to market entry. In Stigler’s view, competitive industries have much to gain from economic regulation and are in a better position than consumers to bring favourable regulation about. In practice, such regulation of competitive sectors is rarely seen. One explanation is found in Becker (1983), whose theory suggested that the loss of economic welfare is greater where the elasticity of service supply is greater and that in competitive sectors, the elasticity of such supply is large (Den Hertog, 2012); hence, the transfers of personal or business income and the welfare losses associated with regulation are so large that the countervailing pressure invoked eliminates any investment in political influence. In more general te...