COMPETITIVE TENDERING FOR PUBLIC BUS SERVICES. Richard G. Scurfield

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1 May 1990 Transport No. UT-1 TRANSPORTATION, WATER AND URBAN DEVELOPMENT DEPARTMENT THE WORLD BANK COMPETITIVE TENDERING FOR PUBLIC BUS SERVICES Richard G. Scurfield Competitive tendering for the provision of bus services offers a possible compromise between full deregulation and the provision of services by a large public or private monopoly. Experience in a variety of countries has demonstrated that cost savings of between 20% and 30% are generally achieved with few of the social costs which may occur with deregulation, such as congestion in popular corridors. There is increasing interest in competitive tendering, or franchising, of bus services in several countries, including the United States, the UK, Australia, Morocco and Hong Kong (minibuses). The Bank has for many years advocated the provision of public bus services by the private sector in an unregulated environment, with free entry and no control over tariffs. Furthermore, it has encouraged governments to transfer existing public operations to the private sector. However, there are situations where full deregulation and privatization may be neither practical nor politically acceptable and where other avenues of change must be considered. These include: where there is a need to avoid excessive traffic congestion in high density corridors; where markets are thin and unlikely to be contested; when it is necessary to provide socially desirable, but unprofitable, bus services; where cartels are likely to form, or have formed; when it is desirable to avoid the political costs associated with radical and sudden change; and where the private sector is underdeveloped and has to be given time, and the incentive, to grow. file:///o /PUBLIC/twu_xweb/transpor/publicat/td-ut1.htm (1 of 5)07/17/ :18:21 AM

2 Competitive tendering can be used to provide all, or some, services within a regulated market, or specific services within a generally unregulated market, e.g., socially desirable but unremunerative services. Also, it may be used to force an established public operator to tender against private operators; most of the benefits are derived from the introduction of competition and not from change of ownership. The advantages and disadvantages of the technique are listed in the Annex. STRUCTURING THE CONTRACT There are two types of contracts in common use in the US and the UK: Bottom-line contracts assume the operator keeps his revenue and, in addition, he may either receive a subsidy from the authority or, for profitable routes, may have to pay a royalty for the right to operate. The operator requiring the least subsidy or paying the highest royalty wins. The operator takes the revenue risk. Cost contracts require the contractor to provide a full cost bid for the supply of the service, with the authority retaining the revenues; the lowest bid wins. Buses are fitted with fare boxes or ticketing equipment provided by the authority, and the regulator's inspectors are allowed to board the buses to verify that fares are collected properly. The regulator accepts the revenue risk. In most developing countries, a bottom line contract is likely to be preferred. Stopping the leak of public revenue from private buses is likely to prove impossible. Only if prepaid fare cards are in use are cost contracts likely to have obvious advantages. There are other types of contracts and methods for selecting the operator. For example, in some circumstances, it may be appropriate to use the fare to be charged as the variable, assuming the regulator specifies in some detail the nature and content of the service. Also, more complex and less transparent selection criteria have been used in some countries. In Morocco, for example, a contract was negotiated after the bidders had been asked to propose the number of vehicles they would use, the fares, the annual concession fee and a fare revision formula. In Hong Kong, selection was made on qualitative criteria such as the experience of the operator, his past record and his ties to the community to be served. The problem with these approaches is that there is no obvious decision criterion to use when selecting the operator. Competitive tendering requires the establishment of a bus regulatory authority with the required legal powers and adequate staffing. It also presupposes that it is possible to establish fair procurement procedures. The authority will require a team of inspectors to ensure that the terms of the contract are observed and, for most contracts, that the correct fares are collected. SOME GUIDELINES file:///o /PUBLIC/twu_xweb/transpor/publicat/td-ut1.htm (2 of 5)07/17/ :18:21 AM

3 When formulating a contract, the following guidelines may be of assistance: The contract should be as straightforward as possible but must clearly spell out the responsibilities of both the operator and the authority. There is a need to weigh up the administrative advantages of large contracts against the competitive advantages of small contracts. On balance, small (up to 50 buses) rather than large (50 to 100 buses) contracts are to be preferred. Contracts of greater than 100 buses should be avoided. There must be a clear definition of what is being bought: the standards and frequency of the service which is to be provided, the size and type of vehicle to be used, and, for bottom-line contracts, how fares are to be set and adjusted; for the latter, a permitted range may be specified. If multiple selection criteria are used, consideration should be given to specifying a formula for their combination in a single decision variable. The selection process should remain transparent. The risk to the operator will be reduced if the contract is indexed. The contract must specify how it is to be monitored and enforced. Prequalification may simplify contractor selection, but care is required to avoid corruption. Without prequalification, it will almost certainly be necessary for the authority to introduce qualitative elements into the selection process in order to ensure that standards are maintained. A contract period of three years provides a balance between the operator's need to recover his investment and the need to ensure he does not become entrenched. A shorter contract period may deter interested bidders who fear they will not be able to recover their initial costs. Where an active secondhand bus market does not exist, a five-year term may be preferable, otherwise the bids are likely to be excessively high because bidders will seek to recover their costs fully over the shorter contract period. An alternative, but less satisfactory approach, is for government, or the authority, to retain ownership of the buses and maybe the maintenance facilities, and lease them to the operator as part of the contract (as was found necessary for certain contracts in London). The contract can usefully include an agreed price formula to allow for marginal variations in the service provided by the operator. A simple arbitration mechanism should also be included so as to ensure small disputes do not become big ones. Bidding rules have to be defined to prevent larger companies from using unfair pricing practices when preparing bids. Also, existing operators must not be allowed to retain monopoly rights over the use of bus stations, stops and terminals. CONCLUSIONS Competitive tendering for bus services has enabled urban bus services to be provided at substantial savings in both the US and the UK. While experience in developing countries is limited, it is believed the technique may be of interest in a wide variety of political and institutional environments where full deregulation is either unacceptable or it is thought congestion and other associated social costs may exceed the benefits. However, there is no direct Bank experience in using the technique. TO LEARN MORE file:///o /PUBLIC/twu_xweb/transpor/publicat/td-ut1.htm (3 of 5)07/17/ :18:21 AM

4 Gwilliam, K.M., C.A. Nash and P.J. Mackie, "Deregulating the Bus Industry in Britain," Transport Reviews, 1985, Vol. 5, No. 2. Beesley, M.E., S. Glaister, "Deregulating the Bus Industry in Britain -- A Response," Transport Reviews, 1985, Vol. 5, No. 2. Proceedings of a conference on the "Competition and Ownership of Bus and Coach Services," Thredbo, Australia, May 1989 (to be published shortly). Hensher, David A., "Some Thoughts on Competitive Tendering in Local Bus Operations," Transport Reviews, 1988, Vol. 8, No. 4. World Bank, "Urban Transport Enterprises: Tale of Two Cities," Kingdom of Morocco, Report No NOR. ANNEX WHAT ARE THE ADVANTAGES OF COMPETITIVE TENDERING? The contracting out of bus services provides a compromise between full deregulation and public provision. Below is the comparison with both parastatel operations and full deregulation. Compared to Parastatel Operations Advantages (a) Cost savings: Typically, operating cost savings of between 20% and 30% are achieved, of which about one-fifth is absorbed by the cost of operating the regulatory authority. (b) Improved focus for subsidies: The regulatory authority is required to assess in some detail the need for continuing the operation of any loss-making services. In addition, the exact costs of the subsidies are known. Disadvantage (a) Larger regulatory authority: A larger regulatory body will be required. This is a potential source of corruption, but one which must be off-set against the possibility of a decrease in corruption in any parastatel and the increased efficiency of the sector. file:///o /PUBLIC/twu_xweb/transpor/publicat/td-ut1.htm (4 of 5)07/17/ :18:21 AM

5 Compared to Full Deregulation Advantages (a) Network development: Since fares and routes can be specified by the authority, contract tendering permits the benefits of service and, perhaps, fare integration, to be retained. For example, with competitive tendering, London has retained its popular fare cards. (b) Control of congestion: Full deregulation can lead to the over-concentration of services in popular corridors with resulting congestion both along the route and at stops. This is likely to be of concern in many of the larger cities in which the Bank is involved, e.g., the high level of concentration of jeepneys in Manila. (c) Control of safety: There is often concern that deregulation will lead to on-street competition between drivers, resulting in reckless and selfish driving as is evident in many countries, e.g., Hong Kong. Also, tendering should permit the regulators more effective control over the mechanical condition of buses. (d) Market not contestable: In an unregulated market, either a large existing operator or an association of operators may be in a position to control entry into the market and prices within the market. Disadvantages (a) Less innovation: Proponents of deregulation believe that since the cost of entry is low and the market is contestable, full deregulation is likely to lead to more innovative services. (b) Larger regulatory authority: Contracting out of services requires a bigger authority in a deregulated environment. Back to text. file:///o /PUBLIC/twu_xweb/transpor/publicat/td-ut1.htm (5 of 5)07/17/ :18:21 AM