International Experience in Competitive
Paper Presented by
Wendell Cox & Jean Love
Second International Conference on Competition and
TABLE OF CONTENTS
THE EMERGENCE OF FREE MARKETS
Discarded Conventional Wisdom
Human Nature and Incentives
The Fiscal Challenge
Liberalization of Public Transport
OVERVIEW OF PRIVATE PARTICIPATION
Low Automobile Dependency Nations
High Automobile Dependency Nations
The Economics of Competitive Tendering
How Competitive Tendering Works
Principles of Competitive Tendering
United Kingdom: London
United Kingdom: Outside London
THE STRATEGIC POSITION OF COMPETITIVE TENDERING
The Purpose of Public Transport
Evaluation of the Service Structures
Service Structure Models
Competitive Operation with Tendering
COMPETITIVE TENDERING AND THE PROSPECTS FOR PUBLIC TRANSPORT
INTERNATIONAL EXPERIENCE IN COMPETITIVE TENDERING
THE EMERGENCE OF FREE MARKETS
The world is discovering the value of free markets. Beginning in
the United Kingdom in the 1980s, privatization and deregulation
have spread to other nations. Most astonishingly, communist and
socialist countries have begun to follow, and even the Soviet
Union is poised to convert to a market economy. The democratic
nations are just becoming aware of the full extent of the
devastation that has followed socialism; and political leaders in
post-communist countries often are reluctant to accept socialism
even in its more moderate forms. As Sali Berisha, leader of the
liberal Albanian Democratic Party put it:
"Nothing socialist would be acceptable. I can't even become
a social democrat. Socialism in any form is a failure, a real
failure." (Berisha, 1991).
Why has socialism been rejected? Socialism has laudable goals
such as the elimination of poverty and a more equitable society.
Its failing lies not in its intentions; socialism has failed
because socialist incentives contradict human nature, so that
socialism cannot deliver on its promises. Human beings, whether
employed by private enterprise or the public sector, tend to seek
their own good before the good of society.
And just as socialism and other forms of statism have proven
incapable of producing comparative national affluence, the
incentives of public monopoly have hampered the delivery of
public services, such as public transport, even in free market
Discarded Conventional Wisdom This conference could not have
been held ten years ago. Then, conventional wisdom held that
public transport must be provided by the public sector. It was
presumed that the few remaining private providers around the
world soon would be subsumed by the inevitable conversion to
public operation. Strong arguments were offered for this
reliance on protected public monopoly.
1. Public monopoly would reduce costs, since the public
agency would not have to pay taxes and would not be required to
earn a profit. Lower costs would also be achieved through the
economies of scale available to a larger organization.
2. Public managers and employees would give greater
attention to the service of customers, since they would not be
deterred by the profit motive. Instead, they would be driven by
their commitment to the public welfare.
The conversion of public transport to public monopolies did not
result in lower public transport costs. Despite the relief from
taxes, public transport costs increased at an extraordinary rate,
and consumed public funding that could have produced many of the
promised service improvements. The anticipated savings from
economies of scale did not materialize, and often public
transport is characterized by diseconomies of scale. Ridership
has continued to fall (albeit a large percentage of the reduction
is related to demographic changes that worked against public
transport such as increased affluence, increased automobile
usage, less dense development, inexpensive home ownership
programs, etc.). And, in many areas, public transport riders
complain about service quality.
Human Nature and Incentives Conventional wisdom failed to take
account of human nature. Competition in the marketplace improves
performance and keeps costs down. Alternatively, monopoly is
characterized by higher prices and limited production. As a
result, government routinely has limited the creation or the
effect of monopoly in the private sector.
At one time, some economic theorists believed that the problems
of monopoly were problems of ownership that only private
monopolies were harmful; public monopolies were virtuous, because
they would replace the profit motive with a public service
motive. Experience, however, has demonstrated the emptiness of
As a group, the people who manage and operate public monopolies
are no more virtuous than the people who manage and operate
private businesses. Like private employees, government workers
want higher standards of living. Accordingly, government
employees steer their performance toward incentives and away from
penalties. Human nature operates as surely in government as it
does outside government.
Incentives, however, are different in government than they are
outside government. An individual, family, or company must make
economic choices and live within its income. Efficient spending
produces a better life, because more can be purchased with
available income. In the short-term, the economic situation can
be improved only by efficient allocation of financial resources.
Except in the most protected industries, the losses that result
from wasteful, inefficient spending are not borne by others. The
rewards in the private sector are tied to obtaining the most
value for the amount of available money.
A government manager, however, faces a different set of
incentives. Government management salaries are highly correlated
to the size of the manager's staff and budget. If a public
manager under-spends the budget or utilizes workers more
productively, the manager will be penalized with a smaller budget
and staff (in relative terms) in following years, and the
manager's salary and career progression will be hampered.
Alternatively, the economic losses that result from wasteful,
inefficient spending can be passed on to others the taxpayers
or ratepayers. In the public sector, then, managers are rewarded
for inefficiency with higher funding, increased staffing, and
enhanced career prospects. The rewards in government are tied to
higher spending and the search for higher revenue.
The Fiscal Challenge Nations face profound financial
challenges. The governments of many affluent nations are
operating at a deficit and are increasing the national debts
rather than financing their operations through increased
taxation. Taxpayers and ratepayers are increasingly reluctant to
provide additional public revenue.
The cost of government continues to rise, fueled by ever higher
interest charges on national debts, increased public service
needs, and the continuing escalation of costs among existing
Public funding is a scarce resource. Clearly, governments cannot
afford to spend more than necessary on any public service. When
it does, service must be rationed; needed new services are
denied; standards of living are lowered; unemployment is
increased; and economies are made generally weaker.
To maintain a high standard of living, it is necessary that
government become economically efficient. Resources must be
allocated efficiently; and resources are most efficiently
allocated through free markets.
Liberalization of Public Transport The economics of public
transport are no different than the economics of nations. As the
world is learning from the difficult transition from socialism
toward free markets in eastern Europe, those with a stake in the
status quo are resolute in their reluctance to allow reform.
The same is true of public transport. Public transport's
generally declining market share and expanding percentage of
public expenditure have commanded little or no attention within
the public transport community. Comfortable managers and trade
unions often have exhibited little concern about public
transport's exceedingly expensive decline. The resistance to
needed reforms is well summarized by the following:
"...invariably unwelcome is the dogmatic upheaval of public
transport by born again politicians with a newly discovered
solution privatization to the perceived ills of public
transport, which has mysteriously evaded both those before them
and the transport professionals." (Bushel and Stonham, 1986)
Public choice economics explains why the need for change evaded
"...the "owners" of public enterprises (the taxpayers) are
numerous and dispersed no one of them has sufficient wealth at
stake to make it worth taking an interest in the day to day
operations of the firm. The managers and employees of public
enterprises accordingly have a great deal of discretion which
they may use to further their own private interests rather than
or in addition to those of the public at large." (Shughart and
It should be no more surprising that those with a stake in the
public sector monopoly model have not lead the needed reforms in
public transport than that the reform of socialist economies is
not being led by the nomenclatura.
But, often over significant opposition, public transport's fiscal
difficulties impelled political action to change the incentives
of public transport from those of monopoly to those of
competition. The perverse incentives of public transport and the
fiscal challenges faced by government have combined to liberalize
markets in public transport, just as national markets are being
liberalized. In the past decade, there has been a strong trend
toward the incorporation of competitive incentives in public
OVERVIEW OF PRIVATE PARTICIPATION
Low Automobile Dependency Nations Many developing nations
copied the public monopoly model and established public transport
monopolies. The results often were not successful.
In some places such as Caracas and Santiago, Chile, rising
costs and inadequate service has led to the abandonment of public
operations and its replacement by private carriers.
In other locations like Calcutta, Accra, Kampala, Khartoum,
Lagos, Lima, Lusaka, and Maracaibo the percentage of transit
provided by public operation has declined substantially.
Privately operated transit has increased.
Increased private participation is being encouraged in
Turkey and Morocco.
These newer private operations are not subsidized and typically
use smaller vehicles (minibuses and shared ride taxis).
In many developing nations, private carriers historically have
provided all or most of the public transport trips. The private
sector provides the majority of public transport trips in many
cities such as Seoul, Buenos Aires, Sao Paulo, and Manila.
Post-Communist Nations Nations that now are in transition from
Communism previously adopted the public monopoly model for public
transport on ideological grounds. These nations face a
formidable task in market development, because there is no
private supplier market such as tours, charter bus, school bus or
taxicab service. However, post communist nations may be well
positioned to take advantage of the relatively low capital
barriers to entry to develop a private sector for the provision
of public transport services. Automobile ownership in many such
nations is still comparatively low, and public transport
dependency is high. The large demand for public transport
services could create opportunities for the development of
mini-bus and shared ride taxicab services. Substantial
advantages could occur:
The necessity for public subsidy could be reduced, if
not eliminated an important consideration for economically
Private operation of public transport services that use
less expensive smaller vehicles could provide an important
entrepreneurial boost to the economy. Public transport is one of
the most obvious and immediate opportunities for supplier market
development in liberalizing countries.
High Automobile Dependency Nations Private providers operate
substantial levels of services in nations with high automobile
dependency. In Japan, a large number of private providers
operate non-subsidized rail and bus service. Other nations, such
as the United Kingdom and New Zealand, have or will soon
deregulate public transport services. In these cases, all
services requiring public subsidy will be purchased by
governments through competitive tendering. The conversion to
deregulation and competitive tendering is less complex because a
private transportation supplier market exists. The balance of
this paper will outline the experience in competitive tendering
of public transport service.
Competitive tendering is the provision of a public service
through a competitively awarded contract. The government chooses
what services to competitively tender and chooses the private
providers from which it purchases the services. Competitive
tendering involves a synthesis of public and private roles. The
public sector decides what services should be competitively
tendered and what specifications should apply to the service. The
competitive market responds to the invitation of the government,
and one or more producer is selected to provide a specific
service for a period of time. The public sector retains policy
control over the service, while the competitive market produces
the service under public scrutiny. Competitive tendering is
being used around the world for a variety of public services,
including public transport.
The Economics of Competitive Tendering The fundamental
advantage of competitive tendering for governments is that it
saves money. Competitive tendering brings competitive incentives
to the production costs of a public service and reduces public
costs in three ways:
1. Lower costs through provision of service at no more
than the competitive rate (the "going" rate).
2. Lower costs through the "ripple effect" as public
agencies improve their cost performance in response to the
3. Lower net costs as a result of tax revenues, licenses,
and fees paid by private contractors on the public services they
How Competitive Tendering Works There are five basic steps in
the competitive tendering process:
1. The government seeks competitive tenders for delivery
of a specific quality and quantity of service for a defined
period of time.
2. A contract is awarded to the lowest responsible and
responsive tenderer that demonstrates the ability to provide the
required quality and quantity of service.
3. Contractors that fail to provide the service as
specified are financially penalized or replaced.
4. New competitive tenders are sought in sufficient time
to award a new contract for service commencing at the expiration
of the contract.
Principles of Competitive Tendering There are two fundamental
principles of competitive tendering of public services:
1. The government should retain full policy control,
determining which services are purchased, establishing quality
and safety standards, administering contracts, and monitoring
2. The government should foster a competitive market. The
maintenance of a competitive market is crucial to the success of
competitive tendering. Private monopoly should not be tolerated
any more than public monopoly. Fostering a competitive market
Wide participation and full disclosure of
information, so that all potential interested proposers have
sufficient information to submit a tender if they desire.
Limitation of contract duration (usually no more
than five years including renewal options).
Limitation of tender size, so that smaller
companies have an opportunity to participate.
Cost control through a requirement for fixed-price
tenders, and prohibition of price negotiation after contract
No government specification of labor arrangements
except compliance with applicable law.
Competitive tendering saves money not because the private sector
is superior to the public sector; competitive tendering saves
money because competition induces lower costs than monopoly.
Services provided by private contractors are as fully public
services as the same services provided by governments and public
authorities, because the government remains in complete control.
United Kingdom: London A 1984 act of Parliament required that
competitive tendering of bus services begin in London. Before
that time, virtually all of the bus services of London Transport
were operated under a protected monopoly. The same act set up
the former public bus monopoly as an subsidiary of London
Regional Transport (which later re-assumed the London Transport
name). Tendering began in 1985 and is administered by the
Tendered Bus Unit of London Transport.
Currently, more than 35 percent of LT bus service is
competitively tendered, amounting to more than 200 routes, 1,500
buses, and 90 million annual vehicle kilometers. The tendered
services of London Transport would, if separate, be one of the
world's largest urban bus networks.
Tendering is expanding at about five percent of LT bus services
annually. Sixty percent of tendered services are operated by
twelve subsidiaries of London Bus, which has responded to the
competitive environment by reducing costs. This phenomenon is
known as the "ripple" effect, in which publicly owned enterprises
begin to exhibit the more cost effective performance in response
to the threat or reality of competition. Seventeen private
providers account for the other tendered services. This service
is administered by a staff of 40 in the Tendered Bus Unit. Cost
savings have been estimated at 15 percent, and improved service
quality has been reported.
LT determines the route alignments, timetables, and fare
structure. Service and vehicle specifications are set by LT.
Private providers tender gross rates per service kilometer (the
passenger fares remain the property of London Transport). Tender
packages may involve single routes or extensive networks. This
approach makes it possible for small private providers to compete
for some contracts. Contracts are awarded using a variety of
factors, including price, experience, financial ability, etc.
Contracts are for up to three years with renewals of up to three
years. No contract may be renewed a second time. Contract rates
are periodically adjusted based upon an index of inflation.
The London approach involves a form of separation of policy
(service planning and contract administration) from operations
the organization administering the public transport system and
the competitive tenders does not tender for the services.
However, London Buses, Ltd. is a subsidiary of London Transport,
and, in some early tenders, it was alleged that London Bus cross
subsidized tendered services with subsidies provided for its
non-tendered services. Steps have been taken to ensure fair cost
competition by London Bus.
Despite the extent and success of competitive tendering in
London, there are indications that its scope might be limited in
the future. The Conservative government has announced that, if
it should win the next election, public transport in London will
be deregulated, and a government consultation paper suggests that
the design will be similar to that of outside London.
United Kingdom: Outside London Public transport bus services
were deregulated in the United Kingdom outside London in 1986.
The act of Parliament permitted public transport authorities to
competitively tender for services that were not provided
commercially, and it placed restrictions on the ability of public
transport authorities to intervene in or regulate commercial
operations (such as specifying fares, timetables, etc.). Before
deregulation, most public transport services were provided by
protected public monopolies.
More than 75 percent of public transport bus services are
operated commercially. Remaining services determined to be
"socially necessary" by governments are competitively tendered,
usually in packages covering only a few vehicles, and often only
one. Tendered services are often established to fill low demand
times (evenings, weekends, etc.) or are extensions of commercial
routes. As a result, tender packages tend to be small and a
public transport authority may administer more than one hundred
Requests for tenders may require proposal of either net or gross
rates. Net tenders involve the tendering of a subsidy rate
instead of a total cost rate, and the private provider assumes
the risk for the passenger fares. Timetables and route
alignments are specified by the public transport authority,
though alternative tenders usually are permitted. A variety of
evaluation factors govern the award of contracts.
Contracts may not be awarded for a period of more than five years
under the act. In many instances, contract rates are
periodically adjusted according to an inflation index.
The deregulated system involves a form of separation of policy
from operations. Governments that administer public transport
have been required to set up separate organizations if they wish
to continue to own a public transport enterprise. In some cases,
the publicly owned enterprises have been sold to private
The deregulated public transport system has received both praise
and criticism. There appears to be agreement on the substantial
savings in public expenditure. Critics, however, contend that
the limitations on public planning prohibit sufficient
coordination of fares and services. The experience of Newcastle
on Tyne, however, may suggest that coordination can be achieved
with sufficient determination.
Dedicated school bus services (inside and outside London) are
provided under contract, but not subject to the competitive
tendering requirements that govern public transport.
Sweden In 1989, parliament passed legislation eliminating
exclusive licenses to provide public transport services. Before
this regulatory revision, public transport bus services were
provided by protected public and private monopolies under
negotiated contracts with county councils. Holders of licenses
had the right to require a public buy-out of their assets;
however any company participating in competitive tendering
forfeited this right. The effect of this legislation was to
encourage competitive tendering of urban public transport
services by the county councils.
Services in at least 16 of the nation's 24 counties have been
competitively tendered, and it is expected that competitive
tendering will be implemented in additional counties. Some
competitive tendering has begun in Stockholm; and Stockholm
Transport, which is owned by the Stockholm County Council, has
been separated into operating divisions in anticipation of
competitive tendering. Three counties have decided not to
competitively tender services, believing that they can obtain
lower costs through negotiated contracts.
The county councils determine the services to be provided and the
passenger fares. Service requirements gradually have become more
prescriptive. Tender packages generally cover geographical
corridors or sectors rather than individual routes. Tenderers
propose a gross rate. Contract award is based upon a variety of
factors, though there is political pressure to give preference to
the lowest priced tender.
Contract lengths are typically three to five years. Contractor
rates are periodically adjusted based upon a fraction of an
inflation index. Early indications are that cost savings are
averaging from five to fifteen percent.
Coincidentally, local rail services may now be competitively
tendered, and a privately operated rail service is due to begin
operation. Policy is separated from operations.
New Zealand A 1990 act of Parliament required that all public
transport services be provided commercially or under a
"competitive pricing procedure." Before this reform, most public
transport services were provided by protected public monopolies.
Services under the new regime begin on 1 July 1991, and the
reforms will be in full operation after a transition period of
five years (this includes a special "incumbent" price preference
adopted for Auckland). Regional councils are permitted (but not
required) to establish regional public transport plans, which
specify services to be operated and fare structures. Public
transport providers (public and private) generally may operate
any commercial service, but the regional councils have broad
latitude to competitively purchase service that meets the
requirements of the regional transport plans, even where
commercial services are provided.
The system seeks modal neutrality. All land transport, including
urban rail services, bus services, and small vehicle services are
included in the regulatory reform. As a result, tendering
authorities may not specify a size or type of vehicle.
Regional councils may determine route alignments and establish
fare structures for tendered services. Tenders may be either net
or gross. A limitation has been placed on the maximum tender
size to permit competition by the smaller private providers.
Tenders will be evaluated using a system designed to eliminate
from consideration sub-standard services after which preference
usually will be for the lowest priced tenderer. Periodically,
rates will be adjusted using a portion of an index of inflation.
The New Zealand approach will involve full separation of policy
from operations. Governmental units that competitively tender
for service will not be permitted to own public transport
Early indications suggest that most services will not be
commercially operated, and that, as a result, competitive
tendering will be the dominant mechanism for service sponsorship.
Competitive tendering of all dedicated school bus service also
began within the last five years. The maximum contract duration
is six years.
Copenhagen In 1989, the Danish parliament enacted mandatory
competitive tendering legislation with regard to Copenhagen
public transport bus services. Under the legislation,
Hovedstadsomradets Trafikselskab (HT) was required to
competitively tender 15 percent of bus services by April 1, 1991,
another 15 percent by April 1, 1993, and the final 15 percent by
April 1, 1994. It is anticipated that approximately 550 buses
will be operated under competitively tendered contracts when the
45 percent mandate is reached.
Before competitive tendering began, approximately 82 percent of
bus services were directly operated by HT with the remainder
operated under subsidy agreements by private providers. Under
the new arrangement, the subsidy agreements have been terminated.
HT will continue to plan and coordinate all services, and
determine routes, timetables, and fares. All buses will operate
with the HT livery. Upon enactment of the legislation, HT began
intensive planning efforts including a consultive process with
potential private providers. The first requests for tenders were
issued well before the initial April 1, 1991 deadline. To give
operators a sufficient period of time to prepare for service, HT
plans to seek tenders in May 1991 for services to be transferred
to competitive operation in April 1992. Operators are to be
selected in August 1991.
HT has taken steps to ensure that there is sufficient competition
and is seeking to design its process to permit the entry of new
private providers. While the legislation allows maximum contract
lengths of eight years, HT has opted for a four year maximum
contract length. Individual tender packages are kept small
enough to attract smaller entrants. Private providers tender a
fixed price for the first year of the contract; prices of
subsequent year prices are adjusted by an inflation index. HT
uses six criteria to select contractors including measures of
financial ability, experience, service quality, and price.
Policy is not separated from operations.
United States The dominant of service provision for public
transport bus services is the protected public monopoly.
However, a trend has developed toward competitive tendering over
the past decade. In 1980, very little service was competitively
tendered (less than 100 buses). This has grown to more than
3,500 buses in 1990 (8 percent). One state, Colorado,
legislatively mandated a level of competitive tendering (20
A high percentage of new and expanded services has been
competitively tendered over the last decade. Cost savings have
averaged 30 percent. In cases where the protected monopoly
status of the public operator is removed, "ripple" effect cost
savings have been identified. While there have been isolated
exceptions, service quality has been equal to or improved in
comparison to previous public monopoly operation. The few
reports of reduced quality have come from public transport
agencies that have been resistant to competitive tendering. In
the cases where public agencies purchased services from public
monopolies but have converted to competitive tendering, there is
near consensus that service quality and safety have improved.
Most tenders are gross. Tenderers usually are required to
propose a rate per service hour or service mile for each year of
the anticipated contract. The failure to periodically adjust
rates by a measure of inflation increases the risk to the private
providers. Tender sizes may be large, but usually permit
segmentation so that smaller private providers can compete. In
some cases, fuel tax escalators are built into the contracts.
Evaluation of tenders is typically based on a variety of factors,
though there is a trend toward methods that eliminate
sub-standard operators from consideration when lowest cost is the
final evaluation criteria. Public transport agencies sometimes
submit a tender in competition with the private operators. While
this practice may focus attention to the difference in costs
between public and private operation and thus may lead to
"ripple" effect savings, there have been a number of allegations
of unfair tender pricing by public transport operators.
In some urban areas there is separation of administration from
operations, while in most urban areas policy is not separate from
Private providers have been used in dedicated school bus service
for many years. The largest company operates more than one third
as many buses as the entire public transport industry (17,000).
In the early years, contracts were developed through negotiation
rather than competitive tendering. There is a trend toward
competitive tendering in the school bus industry, and, next year,
school bus services in the nation's largest city, New York, will
be competitively tendered. Currently, private operators produce
approximately 30 percent of the school bus service with more than
100,000 buses. Public and private dedicated school buses carry
more than double the number of passengers carried on all public
Private providers also provide most demand responsive services
(dial-a-ride services typically tailored for the elderly and
disabled) in which approximately 70 percent of service is
Australia Some competitive tendering has begun in New South
Wales as bus services are replacing rural rail services and late
night urban rail services.
However, a more comprehensive New South Wales regulatory reform
may lead to competitive tendering and, if its proponents are
right, may achieve the advantages of competitive tendering
without displacing formerly protected private franchised
In 1990, the New South Wales Parliament passed a regulatory
reform aimed at establishing service levels and fare standards
for franchised (non-competitive) privately provided services.
Before that time, most of the suburban services in the Sydney
area were provided by protected private monopolies. Subsidies
were limited to concessionary fare reimbursements. These
companies operate more than 1,500 buses.
The new regulatory environment will require the Department of
Transport to establish five year contracts with the private
providers. Subsidies still will be limited to concessionary fare
reimbursements. The contracts will cover geographical sectors,
and will average 50 buses in size. The private providers will be
required to provide specific levels of service based upon overall
policy objectives and will be limited in their ability to raise
passenger fares. Private providers that are unable to meet the
terms of the contract will have their services competitively
tendered. It is anticipated that private providers meeting the
terms of the contract will receive automatic five year renewals
at the end of each contract period.
The Sydney approach relies on the private providers to determine
route alignments and timetables within the overall confines of
public policy. This approach may be considered competitive
tendering by threat.
Concurrently, publicly operated State Transit (which provides the
inner city bus services) is under pressure to improve its
financial performance. The organization has been divided into
six operating units, and competitive tendering has been
threatened if subsidy reduction goals are not met.
Most school bus service is competitively tendered in Australia.
South Africa Urban public transport services are provided in
South Africa by protected public and private monopolies.
Kombi-taxis (shared ride taxis) also provide a regulated
alternative to many of these services.
The central government has been interested in injecting
competition to reduce the level of public subsidy to the
protected monopolies. The Department of Transport (DOT)
established competitive tendering demonstration projects to
replace some of the private services.
DOT issued the requests for tenders and administers the
contracts. DOT establishes the service levels, sets a fare
structure, and establishes general requirements with respect to
contractor provided buses. Tenderers may propose an alternate
fare structure or alternative service levels.
The private providers tender a subsidy rate per service kilometer
and assume the risk for fare revenues ("net" tenders). The
contract award decision is based on multiple factors, including
low rate, experience, financial condition, facilities, vehicles,
Contracts are awarded for a period of three years. The
contractor's rate is adjusted on a quarterly basis using an
inflation index. According to early indications, cost savings
are being achieved, and the program is considered a success.
Parliament may consider a competitive tendering bill next year.
It has not been decided whether public monopoly services will be
subjected to competitive tendering.
Canada Most public transport in Canada is provided by protected
public monopolies. Some smaller public transport systems are
competitively tendered in British Columbia, Ontario, Saskatchewan
and Quebec. Among the major metropolitan centers, competitive
tendering is limited to suburban communities in Toronto, and
there have been important recent inroads in metropolitan Toronto.
Interest in competitive tendering is increasing among some
political officials and among organizations representing private
bus companies. There is no separation of policy from operations.
The majority of dedicated school bus services are provided under
Elsewhere: Competitive tendering is occurring in other
locations as well. For example:
In Lille, France competitive tendering accounts for 28
bus routes over which more than 60 buses operate. Routes and
fares are determined by the public authority.
Competitive tendering accounts for five bus routes in
Competitive tendering is scheduled to begin soon in
Competitive tendering is occurring in Finland.
Proposed Conversions Parliamentary proposals are anticipated or
being considered in Ireland, Norway, and South Africa. Further,
various national and provincial liberal political parties have
planned to legislate competitive tendering upon forming
Even where competitive tendering has not been adopted, there is
heightened concern about the rise of public transport subsidies.
A number of national and provincial governments have established
programs to reduce public transport subsidies or to control their
growth more effectively. Competitive tendering yet may be
incorporated in nations that find these approaches insufficient.
A recent Organization for Economic Cooperation and Development
(OECD) suggests that the trend toward competitive tendering is
likely to expand in both public transport and other public
"(there is)...a greater recognition that, in a number of
areas, the private sector may be a lower cost producer of
services traditionally produced by the public sector. The
potential for market testing of government activities remains
under utilized." (Oxley, Maher, Martin & Nicoletti, 1990).
THE STRATEGIC POSITION OF COMPETITIVE TENDERING
The advantages of competitive tendering among public transport
service delivery alternatives should be judged in context of the
objectives of public transport. Among the highly automobile
dependent nations, there is public policy consensus that there
should be a government role in public transport the only
disagreement is over the extent of that role.
The Purpose of Public Transport The justification for public
funding for public transport is the benefits that it can provide
to society. These benefits fall into two general categories:
1. Social benefits: Public transport provides the primary
form of mobility for many economically disadvantaged people
these are the public transport dependent (the captive market),
and their mobility is an important social goal.
2. Environmental benefits: Public transport provides
mobility to discretionary riders those who make trips by public
transport that they might otherwise make by automobile. This
reduces road congestion, air pollution and energy consumption.
This can also result in lower public expenditures for road
The customers of public transport, then, include not only the
riders but also the community in general. Public transport
should serve the riders by providing the highest level of safe
and quality service possible at the lowest cost. And public
transport should serve the taxpayers by providing the desirable
level of safe, quality service at the lowest cost. The customers
of public transport are the riders and the taxpayers or
The public purpose of public transport, then is the movement of
greatest number of people in a safe and comfortable manner for a
given level of expenditure over a sustained period of time. No
other objectives should distort or displace this purpose.
Evaluation of the Service Structures The most appropriate
public transport service structure will produce services
(outputs) that attract the greatest number of passengers while
consuming the lowest costs (inputs); and it will address the
public purpose of public transport over time.
Input: Given the difficulty of attracting larger market shares
to public transport services in highly automobile dependent
nations, and in view of the consistent evidence that cost
performance can be influenced by service structures, cost
performance may be considered of prime importance. Generally,
the public transport organization structure that costs the least
is likely to be the least burdensome to society. There are three
primary cost issues.
Labor costs should be determined by the competitive
market rather than being set administratively.
Work rules should be determined by the competitive
market rather than administratively.
Public transport operators should have the maximum
latitude to organize public transport work consistent with
applicable labor laws and regulations.
Output: The public transport service structure should facilitate
the highest levels of public transport use. There are four
primary service issues:
Public transport services should be safe and of
The public transport system should be comprehensive to
permit reasonable access to all parts of the urban area. A
comprehensive system affords effective mobility for the transport
dependent while offering potential for growth in discretionary
The public transport system should be coordinated with
broad information available concerning routes and schedules.
There should be interchangeable fare media between services and a
coordinated fare structure. An appropriate level of coordination
can assist public transport in retaining present ridership and
may facilitate higher ridership. This is particularly important
where automobile usage is high.
To the extent that increasing discretionary ridership
is an objective, public transport services should be designed in
response to markets needs.
Consistency with the Public Purpose Another important issue is
the capacity of the service structure to achieve the public
purpose of public transport. A service structure that addresses
the public purpose should be stable enough to minimize any
tendency to degenerate toward a service structure less able to
satisfy the public purpose. This is a serious concern given the
predilection of various political parties and factions to pursue
policies that place the interest of public employees over those
of the public.
Service Structure Models While there are many potential
combinations of service structures for public transport, five
general models are reviewed. The functional roles under the
models are outlined in the figure "Public Transport Services
Structures and Functions," and are discussed below.
A. Public Monopoly Public monopoly is the form of public
transport organization most typical in Australia, Canada, the US
and some European nations. Usually a unit of government designs
and operates all public transport services without competition
either in or for the market. (Direct competition on routes is
competition "in" the market, while competition for tendered
services is competition "for" the market.)
The overwhelming characteristic of public monopoly is its
tendency toward cost escalation, which negates its advantages.
While public monopoly theoretically is capable of producing a
comprehensive public transport system, the scope of the system is
restricted by inordinately high costs. Public monopoly can
produce coordinated service and fare systems. But public
monopoly tends to be particularly ill equipped to produce market
oriented services that attract larger travel market shares. (For
example, in the US during the 1980s, public transport market
share declined in nearly all urban areas constructing new rail
systems.) There have been exceptions, such as Toronto, where
public monopoly has increased urban travel market. But even
there the increased market share was accompanied by rapidly
escalating unit costs to the financial detriment of the riders
and the taxpayers.
Customers must rely on the good intentions of public monopolies
to produce services of sufficient quality and safety, and the
record predictably is mixed.
Public monopoly tends, then, to serve objectives far different
than those generally postulated for public transport. The
interests best served by public monopoly tend to be those of the
public transport managers and employees. The result is less
service than otherwise would be provided and at a higher cost.
These entrenched interests are quite capable of preventing or
slowing needed reforms.
If it is assumed that public transport ultimately will serve its
public purpose, then public monopoly must be viewed as
transitional. In view of what is known about public
organizational dynamics, public monopoly is not a practicable,
long-term public policy strategy for achieving the social and
environmental goals of public transport.
B. Private Monopoly Protected private monopoly was widespread in
the United Kingdom and the US before the 1970s and still exists
in some nations. Private companies held exclusive franchises to
operate service over particular routes, urban area sectors, or
entire urban areas. They are not subject to competition either
in or for the market. Fares and services are, however, usually
regulated by a governmental unit.
Private monopoly's primary disadvantages relate to its higher
than competitive costs (though cost escalation tends to be lower
than in public monopoly) and the impacts of that escalation.
As unit costs rise relative to the economy, private companies may
be unable to maintain comprehensive service levels and affordable
fares, especially as automobile dependency grows. This may
result in pressure for a conversion to public monopoly, further
retarding the achievement of public objectives.
As in the case of public monopoly, private monopolies do not
depend upon customers for their survival, and incentives for
service quality and safety are weak.
Private monopoly permits the delivery of a comprehensive system
(though less of one, due to the higher costs) and a coordinated
system under the public regulatory umbrella. Market oriented
service designs are more likely to occur than under public
Private monopoly, then, also should be viewed as transitional.
It is likely to survive only where the demand for public
transport service is strong enough to support higher than
competitive fares and cost structures.
Finally, some recent conversions from private monopoly have not
degenerated into public monopoly. Some jurisdictions simply have
converted to competitive systems without compensating the
previously protected private monopolies. Others have taken the
canceled monopoly protection upon acceptance of any subsidy. Or,
as in Sydney, the threat of competition can be used as a means of
transition from private monopoly.
C. Competitive Tendering Competitive tendering of all public
transport service in an urban area is another service structure.
It requires a public tendering body to determine routes and
service packages, to develop requests for tenders, to evaluate
tenders, to monitor service, and to coordinate services and
fares. A competitively tendered system is characterized by
competition for, but not in, the market. There is movement
toward this model in Copenhagen and Sweden and, to a lesser
degree, in the US. London has been advancing toward this model,
and its future direction is likely to be determined in the next
Parliamentary election. Some urban areas in New Zealand may
follow this model with regional authorities being permitted to
competitively tender for specifically designed services at
particular fares if such services are not provided commercially
(using their regional planning authority).
The primary advantages of a competitive tendering model are that
a comprehensive and coordinated public transport system could be
provided at the lowest possible cost. Because the public would
retain full control of system design, a competitive tendering
model would be strongly sustainable.
Competitive tendering has potential for safe service of
sufficient quality. Often, it is simpler for a contract
administrator to take disciplinary action against an offending
service supplier than it is for a public agency to correct
internal service quality and safety problems. Public
administrators have cited improved quality control as an
advantage of competitive tendering.
The primary disadvantage of a competitive tendering model is its
failure to use the competitive market to design services to
attract discretionary riders. The extent of this disadvantage,
however, depends upon the extent to which a particular market is
commercial from the standpoint of demand. Regardless, increased
ridership is likely to occur simply from the higher service
levels that this cost effective approach fosters.
Another disadvantage is that services are likely to be designed
less cost-effectively than under competitive operation with
tendering, since the operators of the service would not design
A competitive tendering system may be the most appropriate public
transport service structure where the market for public transport
is largely non-commercial, and where there appears to be little
latent demand for public transport services. Urban areas with
lower residential and employment densities and which tend to be
commercially decentralized may be most appropriate for the
competitive tendering model.
The competitive tendering model also would be appropriate where
public policy places a high value on coordination of services and
fares, or where automobiles are such an attractive alternative to
passengers that ridership might easily be lost if the public
transport system is not sufficiently coordinated. Competitive
tendering retains the public mechanism to maximize consumer
information about the public transport system and to simplify its
use through coordinated services and fares.
D. Competitive Operation with Tendering This service structure
(called "deregulation" in the United Kingdom) permits the
competitive market to provide services at market fares with
minimal intervention by government in commercial operations.
Government may intervene only to competitively tender services
that are not provided by the competitive market. Competitive
operation with tendering is typified primarily by competition in
the market and secondarily by competition for the market.
Competitive operation with tendering exists in the United Kingdom
outside London and is proposed for London. Some urban areas in
New Zealand may follow this model.
The fundamental advantage of competitive operation with tendering
is its potential for the lowest input costs. Not only are labor
costs and work rules established in the competitive market, but
services are designed and organized through the competitive
market. Competitive operation with tendering also permits the
establishment of a comprehensive public transport system with
gaps being filled by competitive tendering. Customers can
exercise influence over service quality and safety where they
have a choice.
The fundamental criticism of competitive operation with tendering
is that it has failed to produce coordinated services and fare
structures (though fare coordination has been achieved in
Newcastle on Tyne through cooperative efforts of the operators).
If passengers perceive that they are not well served by the
system, they might combine with trade unions to seek
establishment or re-establishment of public monopoly.
Competitive operation with tendering may be most appropriate in
more commercial public transport markets or in markets where
there is substantial latent demand.
E. Threatened Competition This service delivery model is being
implemented in the Sydney area of New South Wales, where it is
being used to convert from the private monopoly model to a
Operators would be required to meet broad service and fare
standards or have their services competitively tendered.
Franchises will be granted for no more than five years. The
threatened competition model will involve neither competition in,
nor competition for, the market but will rely on the threat of
competition for the market.
The threatened competition model is likely to result in
comprehensive and coordinated services at relatively low cost.
An advantage is that services and work organization would be
determined by entrepreneurs rather than public bureaucracies.
Another advantage of the threatened competition model is that it
is more likely to evolve into a competitive tendering model than
a public monopoly model.
Threatened competition may encourage generally safe, quality
service so long as effective consumer compliant mechanisms are in
place and effectively monitored by the regulatory body.
The primary disadvantage of the threatened competition model is
that, especially where it is a transition from a private monopoly
model, costs are likely to be higher than necessary. Only
genuine competition is likely to produce long-term market
determined costs, and certainly the deregulation experience in
various industries around the world demonstrates the propensity
of regulated environments to evolve inordinately high cost
The threatened competition model is likely to be most appropriate
in an entrepreneurial supplier market that tends to be
The figure "Public Transport Service Structures and the Public
Purpose" outlines the strengths and weaknesses of the service
COMPETITIVE TENDERING AND THE PROSPECTS FOR PUBLIC TRANSPORT
The debate about the appropriate role and extent of competitive
tendering in public transport will continue. Some analysts
believe that competitive tendering is a step toward competitive
operation with tendering. Others suggest that competitive
operation with tendering is a step toward competitive tendering.
Still others suggest that competitive operation with tendering is
a step toward threatened competition. Finally, one nation, New
Zealand, has established a public policy framework that permits
elected officials in each urban area to establish systems
characterized by competitive tendering or characterized by
competitive operation with tendering.
One point is beyond dispute: protected monopoly models have been
proven incapable of meeting the social and environmental goals of
public transport. Alternatively, service structures that
incorporate competitive incentives can address the public
Service structures that incorporate competition are
most likely to achieve public cost objectives.
Increased public transport ridership can be achieved
cost effectively only through more market oriented services.
The question is, therefore, which of the service
structures is likely to best meet the public purpose of public
No single service structure is appropriate to all environments.
The proper public transport service structure can be determined
best by a careful evaluation of local public policy goals, the
nature of the market demand, and the nature of the supplier
Where public policy desires to increase public transport
ridership, or where demand markets are more commercial,
structures that permit entrepreneurs to establish services in
response to the market would seem to be most appropriate
(competitive operation with tendering and threatened
competition). The long term success of the competitive operation
with tendering and threatened competition models will depend upon
the existence of strong customer demand, or of strong latent
demand. Besides the locations in which it is already being used,
competition operation with tendering would appear to have a
strong potential for serving the public purpose ion the post
communist nations, which are characterized by particularly strong
customer demand, and in countries with lower levels of automobile
access (where public transport may account for more than 70
percent of the urban travel market). Threatened competition
would appear to be particularly appropriate where there is an
interest in the transition from the private monopoly model, while
also serving the public purpose (and necessarily avoiding public
Where service and fare coordination are the prime public policy
considerations or where the demand market is less commercial, a
service structure that facilitates a comprehensive and
coordinated public transport system is most appropriate
competitive tendering. Competitive tendering may, indeed, be the
only alternative for achieving the public purpose in urban ares
where there is little latent customer demand. For example, many
medium sized and smaller US metropolitan areas (less than three
million population) are characterized by widely dispersed
commercial development, and the public transport share of the
urban travel market is minuscule (often three percent or less).
In such urban areas, it would be difficult to make a credible
case for the existence of material latent customer demand.
Finally, in fashioning service structures, the supplier market
must be considered. Responsive supplier markets are not quickly
developed, especially where there are not ancillary competitive
services such as tour, charter, school bus, or elderly and
disabled services. Public policy should be directed toward
fostering the development and maintenance of truly competitive
supplier markets as soon as feasible. It may be more important
to set in motion the mechanisms to achieve an efficiently
operating market over a period of years than to seek immediate
conversion to a "perfect" structure where the environment is not
ready to accommodate perfection. A balance must be struck
between disruption that might serve reactionary political forces
and action sufficiently resolute that those with a state in the
status quo are unable to impede progress.
For public transport to maximize its benefits to society,
competitive incentives must operate. The extent and nature of
the most appropriate competitive incentives will depend upon the
individual characteristics of each market.
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