Number 15 August 1997
Paper Presented to the
5th International Conference on
Competition and Ownership in
28 May 1997
International Conference on Competition & Ownership:
COMPETITION, MONOPOLY AND PUBLIC POLICY
Public policy favors competition over monopoly. In the United States, and increasingly
throughout the world, public policy relies on the competitive market is to establish the price and
quality of goods and services. In the market, customer preferences drive the prices of competitive
firms lower, while maintaining or improving product quality. At the same time, public policy seeks
to avoid monopoly.
Governments grant private monopolies only where they perceive there to be no alternative. But
because monopoly raises consumers prices and limits production, governments subject private
monopolies to regulation to replicate the lower costs and higher quality that would be produced by
the competitive market if monopoly were avoidable. Further, government seeks to eliminate private
monopolies where technology advances or other factors make it feasible. Thus, governments have
converted monopolistic industries such as long distance telecommunications to competition. And
governments are beginning to convert electric utilities and local telephone service to competition.
Similarly, governments around the world have converted regulated oligopolistic industries to
competition. (Such as airlines, rail transport, and intercity buses).
However, government's approach to monopolies it owns is different: government monopolies are
typically not subjected to regulation. Yet, there is considerable evidence that government
monopolies are subject to the same pitfalls as private monopolies. They tend to produce services
for more than necessary (at above competitive rates), and service quality is often inferior.
Moreover government is prone to use its monopolies to address non-transport purposes, such as
labor or fiscal policies. This interferes with the monopoly's ability to achieve its public purposes.
The trend toward competitive government: Governments have begun to recognize the
drawbacks of government monopoly and are turning to service delivery mechanisms that improve
public performance through the injection of competition (privatization). The principal privatization
strategy has been competitive tendering, through which a public agency obtains a particular public
service through the competitive market, guaranteeing service to the public, while reducing costs.
Competitive tendering has been implemented by socialist, liberal, and conservative governments in
response to intensifying fiscal challenges. European and Australian governments have adopted
competitive tendering to assist in the reduction of their taxation rates as a percentage of gross
domestic product, without reducing service levels. In some applications, competitive tendering has
been adopted to expand services.
Throughout the developed world, the government monopoly approach has driven public transport
costs to well above market rates. As a result, governments are converting public transport systems
to competitive approaches, especially competitive tendering. In a related development, some
governments are imposing or considering imposition of unit cost regulation on portions of public
transport systems not yet subjected to competition. Copenhagen limits unit costs of non-competitive services to the average rate of competitively tendered services. Proposals to impose
RPI-X or CPI-X (Retail Price Index or Consumer Price Index) regulation on non-competitive
public transport unit costs advanced through lower legislative houses in Washington (with respect
to Seattle) and Colorado (with respect to Denver) in 1997.
By reducing unit costs, governments seek to keep fares affordable, maintain or expand services,
and maintain the competitive position of public transport relative to the automobile.
COMPETITION IN PUBLIC TRANSPORT: SUMMARY OF THE SITUATION
North America: Approximately 10 percent of fixed route and more than 70 percent of door-to-door service is competitively tendered in the United States. In addition, 30 percent of US school
bus service and more than 50 percent of Canadian school bus services is tendered. All suburban
bus service is competitively tendered in Montreal, while smaller public transport systems are
competitively tendered in British Columbia, Alberta, Saskatchewan and Ontario. More than 1,000
buses operate commercially into New York city from New Jersey.
Europe: The European Union is encouraging conversion of public transport systems to
... the concession system (competitive tendering) - where services are subject to open
tender but within a defined operational framework - is well suited to providing an
environment which gives incentives to operators to raise standards whilst safeguarding
system integration which is particularly important to urban and regional transport. The
Commission ... will look at ways of promoting the concession (competitive tendering)
Australia: Conversions are underway or completed in Melbourne, Adelaide and Perth. Under a
federal-state agreement, virtually all public transport services could be converted to competitive
tendering by early in the next decade under a federal-state agreement intended to improve public
resource allocation and international competitiveness by subjecting public services to competition.
New Zealand: New Zealand public transport systems have been converted to a regulatory system
similar to that of the UK outside London, most services are competitively tendered.
Rail Services: Conversion of light rail and metro systems to competitive tendering has begun or is
planned in Sweden and Australia, while British and some European inter-city rail are being
competitively tendered. Commuter rail services are being competitively tendered in Sweden,
Germany, and the United States.
Japan: In the largest urban areas, Tokyo-Yokohama and Osaka-Kobe-Kyoto, most public
transport service (bus and rail) is provided by private companies on a commercial (non-subsidized)
basis. Ridership is very high in Japan. Ridership in Tokyo-Yokohama is three times that of the US
or the UK, and ridership in Osaka-Kobe-Kyoto is equal to that of the US or the UK.
Caracas, Santiago (Chile) and Bamako (Mali) have closed their publicly operated bus systems
and converted to commercial operation. Sao Paulo has similar plans. Santiago uses competitive
tendering to award central city bus routes (operators pay for the right to provide service). Seoul
has closed its public bus system, with all services now provided by private companies.
Istanbul and Calcutta are increasing the percentage of services provided by private operators. In
many urban areas, private operators, especially mini-bus operators, carry the overwhelming
percentage of riders.
In South Africa, more than 40 percent of work trips are carried by private operators using
unsubsidized "kombi-taxis" (minibuses). Ownership of kombi-taxis industry has been a one of the
most important sources of capital formation for Blacks. In the Johannesburg area a bus-taxi lane
has been built from Soweto to downtown Johannesburg.
Formerly communist nations: The most extensive government operations are in formerly
communist nations, but private operation is expanding.
Moscow: An estimated 50 million passengers are carried by private fixed route taxis ---
approximately as many riders as are carried in Adelaide, Cleveland or Antwerp.
Ukraine: Hundreds of private buses are now operating in cities throughout this nation.
Private buses account for 20 percent of public transport service in Odessa.
The balance of the report deals with competitive tendering, which is emerging as a primary public
transport service delivery mechanism in highly automobile dependent nations.
WHAT IS COMPETITIVE TENDERING?
The public authority purchases public transport services from the competitive market, awarding
service contracts to the lowest responsible and responsive proposer. Competitive tendering is also
called "public-private competition" since public agencies may also compete for services. The
public authority retains full control over policy, routes, schedules, fares, and, vehicle livery, and
service standards. Virtually all policy and service decisions are the prerogative of the public
agency. Contractors simply provide the services specified by the public agency at the fares
specified by the public agency. To the customer, the public transport system remains an integrated
whole with no apparent changes. Public agencies may competitively contract public transport
routes, regions, operating facilities, or specialized services (such as door-to-door service for the
COMPETITIVE TENDERING AND COSTS
Competitive tendering lowers costs both directly and indirectly.
Direct Savings: Direct savings are the difference between the non-competitive cost of operating a
service and the market based cost established through competitive tendering. Direct savings may
occur from award of contracts to either private firms or public transport agencies, which then
produce services at market rates. The direct savings from competitive tendering have been from 20
percent to 60 percent compared to the costs of the non-competitive services replaced.
Indirect Savings: Indirect savings occur in remaining non-competitive services in response to
competition or the genuinely perceived threat of competition. There are two broad categories --- the
"run-up" savings and "ripple effect" savings
"Run-Up" Savings: Anticipation of competition produces substantial savings in non-competitive services over a short period of time as public transport agencies improve their
cost effectiveness during the "run-up" period preceding a short term conversion to
competitive tendering. At the end of the "run-up" period, public agency costs must be at
market rates for it to successfully compete for contracts. "Run-up" savings typically occur
in conversions taking five years or less.
"Ripple Effect" Savings: The "ripple effect" produces more moderate savings in more
gradual conversions as public transport agencies reduce the cost of their non-competitive
services in response to competition. The "ripple effect" drives public agency costs toward
market rates, a level that must be achieved by the end of the conversion period for the
agency to compete successfully.
Governments also gain financially from the higher tax revenues that are paid by private
contractors. Public transport operators, unlike private companies, are typically exempt from
considerable amounts of taxation.
COMPETITIVE TENDERING AND EMPLOYEES
Most government purchases are competitive: Reflecting the public policy preference for
competition, public transport agencies are generally required by law to obtain goods and services
through the competitive market, usually through competitive bidding.
Competitive tendering extends competitive purchasing to labor: Competitive tendering for
public transport service extends the discipline of competition to virtually all functions of a public
transport agency. Competitive tendering produces savings from administrative efficiencies, more
productive work rules, and market determined labor compensation (contractor work forces may be
union or non-union, depending upon the preference of contractor employees). By making it possible
to increase service levels, public transport operating jobs are created that would not otherwise be
created, reducing unemployment, unemployment compensation and welfare expenditures. For
example, San Diego has increased its bus service level by 47 percent, while its operating budget
has increased by only three percent as competitive tendering has lowered costs.
COMPETITIVE TENDERING AND SERVICE QUALITY
Competitive tendering has produced quality public transport service. For example:
Audits by big six accounting firms in Los Angeles and Denver found competitively
tendered service to be equal to or better than publicly operated service.
London Transport found that competitively tendered service was generally of higher
quality, and that when the public operator provided service in a competitive environment
(faced with the threat of contract cancellation, like private carriers), service quality
improved on the same services.
Competitively tendered services have been evaluated as equal to or better than non-competitive services in Copenhagen and Stockholm.
Competitive tendering can also assist public agencies in maintaining fleet quality, by requiring
contractors to provide vehicles. This is a particular concern in multi-modal systems, where bus
capital purchases can be deferred by the heavy capital requirements of rail systems.
Contractors have a genuine interest in providing quality service. Operating in a competitive market,
contractors try to establish and maintain a reputation for service quality, which encourages renewal
options by public agencies and award of new contracts. Ultimately, service quality is the
responsibility of the public agency, not the contractor. Effective public administration will quickly
take remedial action to ensure sufficient service quality, through the imposition of contract
penalties for insufficient performance and termination in the most extreme (and rare) cases.
SEPARATION OF POLICY FROM OPERATIONS
Virtually all complete public transport system conversions to competitive tendering have been
associated with governance reform through "separation of policy from operations." With
separation of policy from operations, the public transport agency's role is focused on the mission
of maximizing service and ridership within public resource constraints. It is limited to establishing
and administering the public transport system and forbidden from directly operating service. The
public transport agency purchases all of its services competitively from public and private
operators. Separation of policy from operations removes the potential conflict of interest that
occurs when an agency evaluates its own proposals and proposals from external organizations.
DESIGNING COMPETITIVE TENDERING
Four factors are important to the success of competitive tendering.
1 Administrative commitment: The agency administering the public transport system
should be driven by an ethic that places delivery of the maximum amount of service within
the constraints of the available funding. Separating policy from operations has been
effective in achieving this end.
Full public policy control: The public agency should specify routes, schedules, fares, and
A competitive market: More intense competition lowers costs and improves service
quality. This can be accomplished by various strategies. Contract sizes should be small
enough to encourage competition by smaller, local firms, as well as national and
international firms. Labor and all other rates should be determined by the competitive
market (not specified by the tendering agency). Contracts should be re-bid at least every
five years. And, all rates should be specified in the contract for the entire term (there
should be no post-contract negotiation of rates).
Skilled contract administration: Public agencies should actively manage contracts to
ensure that they receive the value for which they have tendered.
London: London is converting its entire bus system to competitive tendering. London Transport
(LT) has the developed world's largest public transport bus system with more than 5.000 buses
and carrying 1.1 billion annual linked trips. Under a parliamentary mandate, LT has competitively
tendered 57 percent of its bus services. During 1997, competitive tendering will be expanded to
approximately 80 percent; conversion to 100 percent will be completed in 1999. Nearly 40
companies provide service under more than 150 competitive contracts. Policy is separated from
operations. LT usually competitively contracts by public transport route but has competitively
tendered areas as well. Companies may receive a single contract extension if their services have
met quality standards and if they are willing reduce their cost per kilometer by at least 2.5 percent
during the extension period. The quality of bus service has improved substantially. Policy is
separated from operations.
Services have been expanded 28.7 percent over 11 years (1985-1996), while operating
expenses have been reduced 30.0 percent (inflation adjusted).
Costs per vehicle kilometer have dropped 45.7 percent, an annual cost per kilometer
reduction of 5.4 percent.
Ridership is up three percent compared to a nearly 30 percent decline outside London,
where public transport has been deregulated rather than competitively tendered.
The public operator won more than half of the competitive contracts until it was divided
into eleven firms and sold to private investors (including management and employee
buyouts). These companies continue to operate most of the service, but at market rates.
Before competitive tendering, passenger fares covered 60 percent of operating and capital
costs. In 1996, passenger fares covered 94 percent of costs. In contrast, passenger fares
cover barely 50 percent of operating costs in the largest US public transport systems.
In this competitive environment, London Transport has been able to improve Underground
(subway or heavy rail) cost effectiveness to the point that fares now exceed operating costs
(not including capital costs).
Copenhagen: Copenhagen is converting all of its bus service to competitive tendering.
Copenhagen Transport administers a public transport system of 1,100 buses, carrying 190 million
annual linked trips. The Danish parliament has mandated that the Copenhagen public transport bus
system be converted to competitive tendering. Copenhagen now competitively contracts 56 percent
of its system and will convert the balance by 2002. More than 20 operators provide service under
competitive contracts. The rate paid for non-competitive services (provided until conversion by the
former public monopoly) is limited to the average rate paid to contractors. Copenhagen Transport
credits competitive tendering with reversing its falling ridership trend. Policy is separated from
From 1989 to 1996, total operating costs declined by 18.5 percent (inflation adjusted),
while bus services were expanded by five percent.
Bus costs per kilometer have declined by 22.3 percent (inflation adjusted).
Stockholm: Stockholm is converting all of its bus and rail services to competitive tendering.
Stockholm's public transport system consists of 2,000 buses and 900 rail cars. Annual ridership is
570 million linked trips. The Swedish parliament enacted public transport reforms that led to a
national conversion to competitive tendering. As of 1995, Stockholm competitively contracts
approximately 60 percent of both its bus services and its rail services (metro, light rail, and
commuter rail). Remaining non-competitive services will be competitively tendered in the near
future. According to the public transport agency, "Quality has, at a minimum, been retained
unchanged." Policy is separated from operations.
Competitively tendered bus services are 32 percent less costly than non-competitive
Since beginning the conversion, total bus operating costs have declined 18.5 percent
(inflation adjusted), while bus services have been expanded by 2.8 percent (1992-1995).
Bus costs per kilometer have declined 20.3 percent in three years.
British Rail: Britain's intercity and commuter rail system was divided into 25 train operating
companies. The Office of Passenger Rail Franchising has awarded competitive franchises for each
of the companies for periods ranging from five to 15 years. As financial performance improves,
some routes will generate a premium (profit) for government. The infrastructure is owned, renewed
and maintained by "Railtrack," a privatized utility, and funded primally through access charges on
the train operating companies. "Railtrack" also performs the function of traffic control, similar to
that of an air traffic control system. Vehicles are owned by rolling stock leasing companies. The
franchisees will hold exclusive rights to their services and under current contracts will invest £1.6
billion in new rolling stock. Present government policy anticipates opening passenger routes to
competition after expiration of the initial franchises. Under the current franchises, government
expenditure will fall from £1.8 billion in 1998 to £0.9 billion by 2003 (a reduction of 50 percent).
Minimum service levels are established through the franchising process.
United Kingdom Outside London: All bus services were deregulated in 1986 as required by an act of Parliament. Non-commercial services are competitively tendered by local authorities. More than 75 percent of services are provided commercially (without subsidy). Operating costs per vehicle kilometer have declined by 45 percent (inflation adjusted). However, ridership has dropped by 27.5 percent. Cost savings have been similar to that of competitive tendering in London, while ridership losses have been greater.
Finland: Conversion of all bus services in the Helsinki metropolitan area to competitive tendering
was begun and completed in 1995. The conversion was encouraged by an act of the national
parliament. Policy is separated from operations.
Other Europe: Bus competitive tendering has begun in the Netherlands (South Limburg) and
competitive tendering legislation is being considered by Parliament. Rail services are to be
competitively tendered in the Rhine-Ruhr region of Germany.
Adelaide: The South Australian state government is requiring that all Adelaide bus service be
converted to competitive tendering over a seven year schedule. The first contracts were awarded in
1995 and approximately half of the system is now competitively tendered. Urban rail system will
then be competitively tendered (tram and commuter rail). In preparation for tendering, costs per
kilometer of the government owned bus system have been reduced by 11 percent. The government
owned operating facilities and vehicles will be made available to contractors, at market lease rates,
with the eventual intention to sell unnecessary facilities. Policy is separated from operations.
Brisbane: The Queensland state government is requiring the Brisbane system to improve cost per
kilometer by 30 percent or under threat of conversion to competitive tendering.
Melbourne: The Victoria state government competitively tendered the Melbourne bus system in
1993. Cost savings have been achieved and the government has been able to avoid the expense of
renewing the bus fleet (which is being undertaken under the service contract). The government
intends to offer benchmark based contracts to non-competitive private companies in 1997, under
threat of competitive tendering. Policy is separated from operations.
Perth has competitive tendered 50 percent of its bus system, with the intention of competitively
tendering the entire bus system over a seven year period, required by the Western Australia state
government. The urban rail system will also be competitively tendered. In preparation for
competitive tendering, the government owned bus operator reduced its subsidy per kilometer by 18
percent during the "runup" to competition. The government owned system has also begun selling
over-built or redundant capital facilities such as its central maintenance facility. Policy is separated
Sydney: The New South Wales state government has the threat of competitive tendering to
substantially improve the performance of its central city Sydney public transport system (suburban
services are privately operated), which operates 1,400 buses and carries 200 million linked trips.
From 1986 to 1996, total bus operating costs have declined by 22.4 percent, while service has been
expanded by 10.4 percent. Operating costs per kilometer have dropped by 29.7 percent (inflation
adjusted). Competitive tendering is expected to commence early in the next decade.
Auckland: The impacts of Auckland's conversion were delayed by a national government policy
that allowed the former public monopoly operator a 25 percent preference in first round
competitive tenders (the policy applied only to Auckland). With the second round now complete,
service levels have increased 16.5 percent from 1990, while overall costs have declined by 21.2
percent --- a 33.5 percent reduction in cost per kilometer (calculated from data Auckland Regional
Christchurch: Conversion reduced public subsidies by more than 40 percent from 1990 to 1996.
San Diego: San Diego has converted 37 percent of its bus system to competitive tendering since
1979. San Diego is continuing its conversion at a rate that guarantees the jobs of present public
transport agency employees (there have been no layoffs). More than 100 buses are now
competitively tendered. Policy is separated from operations.
Competitively tendered costs per vehicle kilometer are 50 percent below 1979 costs and 34
percent below the non-competitive costs of the public operator.
In the competitive environment, system-wide bus costs per vehicle hour have dropped 30
percent (inflation adjusted). From 1979 to 1996, bus costs were $475 million less than if
costs had risen at industry rates. This is nearly $100 million more than San Diego spent to
build its first two light rail lines (inflation adjusted).
System-wide bus costs have risen three percent, which has made it possible to increase
service levels by 47 percent since 1979.
"Ripple effect" savings have reduced the costs of non-competitive (former public
monopoly) service by 25 percent per vehicle hour (inflation adjusted).
The former public monopoly has won competitive contracts.
Las Vegas: Fast growing Las Vegas has converted its entire public transport system from private
monopoly operation to competitive tendering --- the first such complete conversion in a major US
urban area. Las Vegas operates 190 buses and carried 32 million unlinked trips in 1996. Ridership
has more than tripled since competitive tendering began, placing Las Vegas among the top 25 US
urban areas in public transport ridership.
The 100 percent conversion of the Las Vegas public transport system was immediate. In
the first year of operation, total operating expenditures rose 135 percent, while service
levels were increased by 243 percent.
Costs per vehicle hour dropped 33.3 percent (inflation adjusted).
Las Vegas has the lowest unit cost of the 50 US largest public transport systems: 40
percent below average.
Indianapolis: Indianapolis competitively contracts 70 percent of its bus system. This was made
possible through state legislation that placed state public transport subsidies under the control of
the city of Indianapolis, rather than the public transport agency. Using its funding leverage, the city
has placed the entire system under a "mobility manager," by which separation of policy from
operations has been established. (The mobility manager is a consulting firm that oversees public
transport service contracts for the city of Indianapolis.) The public operator won a major contract
by an immediate cost per hour reduction of 22 percent. Since beginning competitive tendering,
Indianapolis has increased bus service levels by 38.4 percent, while total operating costs have
increased only 8.5 percent (1994 to 1996, inflation adjusted).
Denver: A 1988 Colorado state law required a partial conversion (20 percent) of Denver's
Regional Transportation District (RTD) bus service. The success of the program has induced RTD
to expand competitive tendering to 25 percent of its system. More than 180 buses are now
competitively tendered. Policy is not separated from operations.
Annual cost savings were 33 percent through 1994 and are increasing. RTD's most recent
procurement yielded a savings of 41 percent and will produce $25 million in savings over
five years (approximately 60 buses).
Since beginning competitive tendering, RTD has increased bus service levels by 25.6
percent, while operating costs have increased only 3.0 percent (1988 to 1995, inflation
adjusted). In contrast, during the six years before competitive tendering, operating costs
rose 18.8 percent, while service levels were increased by 17.5 percent.
"Ripple effect" savings have reduced the costs of non-competitive (former public
monopoly) service by 11 percent per hour (inflation adjusted).
From 1988 to 1995, bus costs were than $120 million less than if costs had continued to
rise at the previous rate.
Houston: Houston's Metropolitan Public transport Authority (MTA) recently competitively
tendered an entire operating division of approximately 140 buses. MTA expects to save 39 percent
compared to non-competitive operating with gross savings over five years of more than $45
million. Policy is not separated from operations.
Los Angeles: Public transport operators in the Los Angeles have recently reached the 20 percent
competitive tendering level, consisting of approximately 550 buses (the largest number of
competitively tendered buses of any US urban area). In the late 1980s, Los Angeles competitively
tendered public transport routes that were threatened with cancellation as a result of financial
constraints. Ridership on the competitively tendered routes increased 150 percent in contrast with
the overall downward tend in Los Angeles. In an independent audit, Price Waterhouse reported:
Cost savings of 60 percent savings per kilometer.
Better service quality: An improvement in service reliability of over 300 percent, a 75
percent reduction in passenger complaints, and virtually the same safety performance
relative to the public operator.
In addition, fares on the competitively tendered services have been kept lower than on the regional
system because of the lower costs. Policy is separated from operations.
COMPETITIVE TENDERING COST REDUCTION PATTERNS
1. Immediate conversion
produces the greatest cost
Immediate conversions of
public transport systems
have produced immediate
and direct system-wide cost
reductions to market rates
(examples: Las Vegas,
New Zealand, and