COSTS AND TECHNOLOGY OF PUBLIC TRANSIT SYSTEMS IN ITALY: SOME INSIGHTS TO FACE INEFFICIENCY

Transcription

1 XIII CONFERENZA STATO O MERCATO? Intervento pubblco e archtettura de mercat Pava, Unverstà, 5-6 ottobre 2001 GIOVANNI FRAQUELLI - MASSIMILIANO PIACENZA GRAZIANO ABRATE COSTS AND TECHNOLOGY OF PUBLIC TRANSIT SYSTEMS IN ITALY: SOME INSIGHTS TO FACE INEFFICIENCY pubblcazone nternet realzzata con contrbuto della Socetà talana d economa pubblca Dpartmento d economa pubblca e terrtorale Unverstà d Pava

2 Costs and Technology of Publc Transt Systems n Italy: Some Insghts to Face Ineffcency Govann Fraquell (Unverstà del Pemonte Orentale Amedeo Avogadro, Cers-CNR*, HERMES**) Massmlano Pacenza (Unverstà d Roma La Sapenza, Cers-CNR, HERMES) Grazano Abrate (Cers-CNR, HERMES) July 2001 Abstract Ths study provdes fresh evdence about the characterstcs of technology and cost structure of publc transt systems n Italy. The am s to suggest useful gudelnes for facng detected neffcences. The analyss s carred out through the estmaton of a translog varable cost functon. The sample ncludes 45 Italan publc companes. Frms are observed n the years 1996, 1997 and 1998, and operate both n the urban and extra-urban compartments. Results support prevous evdence on the exstence of natural monopoly at local level and stress the mportance of the average speed of vehcles n explanng cost dfferences between companes. We conclude that cost benefts can be acheved by promotng mergers between frms (whenever possble), ntroducng some forms of competton-for-the-market (e.g., compettve tenderng for the sngle lcense) and takng more care of the local traffc regulaton. Key words: local publc transport, cost structure, technology, regulaton JEL: L5, L92, R41 Ths work has been carred out wthn the Cers-CNR/HERMES project I trasport local: dal sussdo all ncentvazone e all effcenza. We would lke to thank Marc Ivald for hs suggestons about techncal aspects of the cost model analyzed n the study and Federtrasport for the help n constructng the database. * Cers-CNR (Isttuto d Rcerca sull Impresa e lo Svluppo), va Avogadro 8, Torno. ** HERMES (Hgher Educaton and Research on Moblty Regulaton and the Economcs of Local Servces), Real Collego Carlo Alberto, va Real Collego 30, Moncaler (TO).

3 1. Introducton In most of contnental Europe, local publc transportaton (LPT) s a regulated actvty. A local authorty (Regon or smaller local body) regulates each network whereas a sngle mult-modal company provdes the transt servce. The servces operated by more than one frm are an excepton. Publc transt systems generally face unversal servce oblgaton and the demand for ths servce s promoted through low user charges and consderable subsdes. At present, the hgh operatng costs of the local frms consttute a great challenge for poltcal authortes, gven the permanent defct characterzng the sector. They have to ensure the economc-fnancal equlbrum of the utltes avodng waste and neffcences. In order to assess operatng costs, a thorough nvestgaton of the knowledge of the frms technology s necessary. An emprcal nvestgaton of the sources of neffcency n ths ndustry s then useful to change the tradtonal state nterventon and desgn new short and long run polces. The am of ths paper s to provde fresh evdence about the features of technology and cost structure of publc transt systems n Italy, useful to mprove local polcy. Ths s partcularly relevant n the current evoluton of the Italan regulatory framework. As n many other countres, t has undergone radcal changes snce the second half of 1990s. A structural reform started followng the law 549/1995 and the Decret Legslatv 422/1997 and 400/1999, turnng the efforts towards a permanent economc recovery of the whole sector. The emprcal nvestgaton s based on a sample of 45 Italan companes provdng both urban and extra-urban transport servce, observed durng the perod The analyss s run through an econometrc estmaton of a translogarthmc varable cost functon. Ths functonal form allows us to verfy the behavor of scale economes wthn the ndustry and to assess the effects on costs of factors consdered relevant n explanng dfferences between operators. The remander of the paper s organzed as follows. After a concse descrpton of the Italan stuaton (Secton 2), n Secton 3 we brefly revew the emprcal lterature on the LPT sector. Secton 4 s devoted to the presentaton of the 2

4 functonal form, the explanatory varables and the methodology used. Secton 5 contans a descrpton of the database, payng attenton to the nature of each varable, whle Secton 6 comments on the results of the estmates. Concluson and polcy suggestons (Secton 7) complete the work. 2. Local publc transt n Italy 2.1. Modal composton The Italan LPT sector 1 concerns urban and extra-urban transport systems and s composed of dfferent transt modes. These nclude: - bus-lnes, operatng n both the urban and the extra-urban areas; - tramways, that provde urban servce n fve ctes (Turn, Mlan, Treste, Rome, and Naples) and extra-urban servce only n Mlan; - subways, wth urban servce n Rome, Mlan and Genoa; - ralways n regme of government lcense or management, operatng on an extra-urban scale; - regonal ralways comng from the recent breakup of local ral-lnes from the State Ralways (FS) company. As n the majorty of European countres, the road-mode of transportaton n Italy has been progressvely ncreasng n mportance 2 and at present the supply of bus servces domnates the sector. 3 It s well worth remarkng the recent attempts to develop nter-modal systems by the emanaton of the law 211/92. Ths law, concernng the hghway mass transt, defned a package of nterventons allowed to beneft from government contrbutons. 4 1 For a crtcal dscusson on the regulatory framework n Italy, see Pacenza (2000a). 2 Ths s due to hgher costs of nfrastructure nvestments whch usually have to be supported to develop alternatve means of transport. 3 Bus-lnes system embraces more than 1,100 frms, 18 per cent of whch provde only urban servces, 67 per cent only extra-urban servces, and the remanng 15 per cent supply both types of servce (source: Mnstero de Trasport e della Navgazone, 1997). 4 In partcular, the development of subway and tramway networks and local ralway systems. 44 projects are known to have been approved at the present tme. 3

5 2.2. Ownershp structure of supplyng companes In addton to the local monopoly whch characterzes the servce provson n most of contnental Europe, n Italy one can note the predomnant poston of publc companes. 5 Management condtons for LPT servces adopted n the past were set out n the law n.151/81: 1] on a shoestrng of the local government unts (drect management); 2] through the formaton of specal companes whose full ownershp s under the local body; 3] n regme of concesson, by means of the drect allotment of the transport lnes to publc-owned or prvate-owned frms. In partcular, the ndrect management through the resort to the specal company nsttute has undoubtedly represented the most recurrng model. Traffc data (number of buses, servce workers and passengers) durng the years certanly hghlghts a progressve relevance of the prvate sector. Nevertheless, the weght of the local publc-owned companes contnues to be decsve, especally n terms of the number of passengers (85 percent publc versus 15 percent prvate, durng 1995) Costs and productvty trend The Italan system, when compared to European standards, presents nadequate tarff levels, but manly dffers wth respect to the structure of costs, that are too hgh, gven the poor level of productvty reached by the sector. Table 1 (ISOTOPE Project of the European Commsson, 1998), shows the man effcency ndcators for Italy, Other European Countres and Unted Kngdom. 6 In terms of labour productvty, the Italan sector shows lower performance (14.77 vehcle-kms for each servce worker) aganst the other European realtes (19.38 for the Other European Countres and for the Unted Kngdom). The data concernng the operatng costs per vehcle-km (3.02 ECU aganst 2.16 for the Other European Countres and 1.44 for the Unted Kngdom) ponts to the same drecton. 5 In some European countres, prvate ownershp domnates the publc sector. The French case s emblematc, where publc frms fall short of 35 per cent. 6 Statstcs were obtaned through the expermental data (relatve to urban bus servce) of the nformaton base developed nsde the project. Data refer to a sample of 108 European towns. 4

6 On the other hand, a recent study carred out by CNR (1999) underlnes that, n the perod from 1992 to 1997, the gap between costs and proceeds grew by a further 13 percentage ponts, n spte of the postve dynamcs of the tarffs level. 3. Lterature revew 3.1. Internatonal fndngs The results of the nternatonal emprcal studes addressed to the analyss of technology n LPT can be subdvded nto two groups: the analyss of cost elastcty 7 and the study of substtuton elastcty between factors. The pcture relatng to scale economes can be summarzed as follows: 8 - almost all the studes confrm the presence of short-run economes of sze. 9 Ths seems to reveal the exstence of unused capacty. Two crcumstances are relevant for the economy of the transportaton companes: the massve publc contrbuton to the captal nvestments and the mportance of the so-called peak-load problem. Indeed, the capacty necessary to satsfy the peak demand unavodably creates unused capacty n the low demand phases. - the evdence of long-run economes of sze s uncertan. It seems that the nature of the sample and the way of computng the captal prce are crucal elements 7 The analyss of the producton and cost structure of a partcular ndustry often concentrates on the degree of returns to scale. It summarzes how fast costs rse wth respect to output(s). If output y s a scalar, returns to scale are smply defned as the nverse of the output cost elastcty: AC C s = = MC y.( C / y) If margnal costs (MC = C/ y) are less than average costs (AC = C/y), so that s > 1 (equvalently, f AC s fallng n y), we have ncreasng returns, also called economes of scale. The opposte case (s < 1) s denoted decreasng returns or dseconomes of scale; and s = 0 defnes constant returns. In the specfc context of the transportaton ndustry t s possble to make a dstncton between expandng the densty of output, for example by addng more vehcles or attractng more passengers on a gven route, and expandng the spatal scale of output, for example by addng new routes wth smlar denstes. The former often allows more ntense use of equpment, thereby lowerng average cost. Ths form of ncreasng returns to scale s usually called ncreasng returns to densty or economes of densty, to dstngush t from the degree of returns to scale that characterzes an expanson of the entre productve dmenson, denoted ncreasng returns to sze or economes of sze. For more detals on these aspects, see Braeutgam (1999). 8 On ths pont, see also Fabbr (1998). 9 See, among the others, Vton (1981), De Borger (1984), Obeng (1984), Thry and Lawarree (1987), Caves and Chrstensen (1988), Gagnepan (1998), Matas and Raymond (1998). As an example of study that found dseconomes n the short-run, refer to Dalen and Gomez-Lobo (1996). 5

7 n orentng the results. In partcular, n the studes on the extra-urban transport systems the presence of remarkable economes of sze s found whch decrease wth ncreasng frm scale; 10 - the exstence of economes of network densty s confrmed by many works. 11 The average costs are decreasng at the growng of the output, gven the network sze; - the sector benefts of sgnfcant economes of use ntensty. 12 Ths fact reveals the exstence of excess capacty regardng the ntermedate output (potental for trps). As regards the analyss of the elastcty of substtuton between productve factors (usually dentfed wth fuel, labor, captal and mantenance), t emerges that: 13 - the producton technology can be substantally defned as a quas-fxed coeffcents technology, gven the small values of the substtuton elastcty; - labor and captal turn out to be complementary nputs; - labor and fuel are nstead substtutes, even f the substtutablty degree appears to be very low; - between captal and mantenance too there s substtutablty, more marked than n the prevous case. Moreover, on the bass of substtuton elastcty, one can drectly estmate the values of the own- and cross- prce elastcty of the nput demands. The evdence ndcate a demand for the productve factors that s substantally nelastc to own prce and very low values for the cross-elastcty. 10 To ths regard, see De Borger (1984), Berechman (1987), Flppn, Magg and Pron (1992). As far as urban transport s concerned, the presence of sgnfcant economes of scale was found n the studes carred out by Thry and Lawarree (1987), Andrkopoulos, Lozds and Prodromds (1992), Gagnepan and Ivald (1999). 11 Among the others, refer to Wndle (1988), Flppn, Magg and Pron (1992), Matas and Raymond (1998), Gagnepan (1998). 12 Ths s another concept of densty economes whch s very recurrent n the transportaton lterature that uses the fnal output (e.g. passenger-klometers) orented specfcaton of the producton functon. Wth t one means the reducton of untary per passenger cost dervng from the ncrease of served users on a gven transt system. Some examples n lterature are found n the works of Berechman (1983), Button and O Donnel (1985), Caves and Chrstensen (1988), Wndle (1988). 13 See the studes mentoned n the prevous notes and Fabbr (1998). 6

8 3.2. Italan fndngs As far as Italan studes are concerned, the few artcles publshed n recent years are summarzed n Table 2, wth ther man characterstcs and results. All lsted contrbutons adopt the flexble translog cost functon and focus on the bus servce. 14 Only one of these studes (Fazol, Flppn and Pron, 1993) chose to analyze the productve structure n terms of total costs, whle the other two (Fabbr, 1998 and Levagg, 1994) consdered a varable cost model more approprate. The strct dependence on the government grants-n-ad program suggested to treat the captal stock 15 as fxed n the short run. 16 Fazol et al. and Levagg focused only on the extra-urban and urban transport respectvely; Fabbr analyzed both compartments. Levagg works on a sample of companes operatng throughout Italy, whle Fabbr and Fazol et al. concentrate only on a regon of North-Italy (Emla Romagna). The three studes dffer also n the measure of the output: vehcle-klometers and seat-klometers (both supplyorented measures) n Fabbr and Fazol et al. respectvely, passenger-klometers ( demand-orented measure) n Levagg. We wll just lst the man fndngs: - both studes usng a varable cost model reveal the exstence of short-run economes of sze; - as regards long-run economes of sze, the evdence s uncertan. The results seem crucally to depend on the ndex employed to represent the output and on the type of sample. In partcular, the studes usng supply-orented measures of output (Fabbr and Fazol et al.) and focusng on LPT frms operatng n Regon Emla Romagna reveal the exstence of sgnfcant economes of sze, decreasng wth ncreasng company sze. The authors deduce that these frms were globally sub-dmensoned wth respect to the long run equlbrum; 14 Indeed, ths transt mode accounts for over 80 per cent of LPT servces n terms of suppled seatklometers. To ths regard, see prevous secton (2.1). 15 Defned as the number of buses n operaton owned by a company n Fazol et al. (1993) and Levagg (1994), and the average number of buses owned by a company weghted by the average age of the buses n Fabbr (1998). 16 Levagg (1994) underlnes (page 71) that the man consequence of the grants-n-ad program provdng funds to purchase captal has been that «the prce of captal the frms face s much lower than ts actual prce. If ths s the case, the frms are no longer mnmzng costs wth respect to all nputs n the short run, rather they mnmze costs wth respect to the varable nputs». 7

9 - the analyss of economes of network densty leads to nconclusve outcomes. Whle n Fazol et al. remarkable ncreasng returns to network densty are observed at all data pont, 17 Levagg found evdence of postve returns only n the short run; - fnally, Levagg gves evdence of a very hgh degree of economes of use ntensty, both n the short and the long run The cost model To analyze the productve structure of the Italan LPT ndustry we chose a varable cost model. The fxed assets nvestments n ths sector are strctly related to government fnancal programs, so t s not convenent to suppose that frms exhbt cost-mnmzng behavor wth respect to captal. As Wndle (1988), Levagg (1994) and Fabbr (1998) suggest, the captal stock should be consdered as a fxed factor n the short-run. Our model ncludes one output and three varable nputs: labor (L), fuel (F), materals and servces (MS). A techncal-envronmental varable, the average commercal speed, s also ncluded to take nto account the nfluence on costs of dfferent traffc condtons and the specfc characterstcs of the servce area. The translog specfcaton of the cost functon s the followng: lnvc= b0 + b y lny + bk lnk + åb lnp + bsp lnsp+ åb + å b k ln P ln K + å b SP ln P ln SP + b yk lny y * ln lnp lny + K b ysp lny * ln SP + b ksp ln K * ln SP + b yy (lny ) + [1] b kk (ln K) + b SPSP (ln SP) 2 + ååbj ln P Pj + y 2 2 2, j Î { L, MS, F } j CV 17 The range between 2.64 for the small companes to 2.47 for the larger companes. 18 The author suggests that bus companes n Italy have been facng nsuffcent levels of demand, as confrmed by CNR (1999). Ths can be due to the concurrence of other vectors (tramways, subways, prvate cars and so on) and stresses the mportance of developng nter-modal publc transt systems. 8

10 where VC s the varable operatng cost, Y s the output measure, K s the quasfxed nput, P s the prce of the productve factor, SP s the average commercal speed, and y VC s a random nose reflectng the stochastc structure of the cost functon. Defntons and measurement procedures of these varables are dscussed n the followng secton. Gven the regularty condtons assurng dualty, the estmaton of a translog cost functon does not mpose any other a pror restrcton on the characterstcs of the below technology. 19 In partcular, the elastcty of substtuton and the returns to scale are varable, regardng both the level of the output and the combnaton of the nputs. Ths fully satsfes the crteron of model generalty, but can gve rse to serous problems of statstcal effcency of the estmaton, n addton to the well-known ssues concernng the multcolnearty of the regressors. A typcal soluton to the effcency problem conssts n ncreasng the freedom degrees by jontly estmatng, wth the SUR method (Zellner, 1962), the cost functon and the related factor-share equatons, obtaned applyng the Shephard lemma to expresson [1] of the cost relatonshp: lnvc ln P = P x VC = S Î { L, MS, F } [2] where x s the amount of factor used n the producton process and S s the related share wth respect to the varable cost. Snce these factor-shares add up to one ( addng-up condton), we would have a system wth an equaton lnearly dependng on the others. To solve the sngularty problem of the varance-covarance matrx of the dsturbance terms, we have to drop an arbtrary equaton (n ths case S MS ) and estmate the remanng 19 In order to be consstent wth cost mnmzaton, [1] must satsfy the symmetry condtons (b j = b j for all, j) and the followng propertes: - VC s non-negatve; - VC s homogeneous of degree 1 n vector P. We mposed ths condton wth a pror restrctons on the parameters estmaton; - VC s non-decreasng n Y; - VC s non-decreasng n P; - VC s concave n P. 9

11 factor-share equatons by the SUR procedure. 20 So, applyng [2] to [1], we obtan the followng equatons to estmate jontly wth [1]: S = b + b ln Y + b ln K + å b ln P + b ln SP + y [3] y k j j j SP Î { L, F } ; j Î { L, MS, F } where y s a random nose reflectng the stochastc structure of the cost-share. 5. Data Data set relates to 45 muncpal local transt companes assocated to Federtrasport, 21 operatng over the years 1996, 1997 and 1998, for a total of 135 pooled observatons. 22 The sample ncludes operators provdng both urban and extra-urban servces. 23 The data was collected from the annual reports of Federtrasport and was ntegrated wth a detaled questonnare addressed to each frm. In our model, we use a composte measure of the output (Y) to reflect the global productve structure of the frm. It s well-known n transport lterature, as for the network servces, that the defnton of the output s contrvers and can lead to dfferent results, for example n terms of economes of scale. Our measure of output s computed by multplyng the transt frm s fleet sze, measured n terms of total places offered, 24 and the total traveled klometers. We want to pont out 20 It should be mentoned that the parameter estmates are nvarant to the choce of whch equaton s deleted as long as the Iterated SUR (or Maxmum Lkelhood) estmaton method s employed on the M 1 factor-share equatons. 21 Federtrasport assocate the publc frms of LPT Italan ndustry. 22 Snce we were workng on a panel data n whch each frm was observed over a perod of three years, we had to choose whether to do a smple poolng on cross-secton and tme-seres data, or to add to the model a fxed effect for every year or eventually a tme-trend varable. For ths reason, we dd a Wald test on the jont sgnfcance of the tme dummes for the frst and thrd year added to the model. We also dd the Wald test when we ncluded n the model a tme-trend varable. At the usual confdence levels, both the null hypothess of constancy of the ntercept over tme and the null hypothess of not sgnfcant tme-trend effect could not be rejected, so we opted for a smple regresson on the whole sample. 23 Data manly refers to bus transt mode. Only 8 companes provde tramway, trolley-lne or ralways servce. 24 The total places offered were calculated by multplyng the number of bus and ther average capacty. 10

12 some remarks about ths knd of output. If we consder the operatve context of the LPT ndustry, a frm must supply the servce on a certan number of lnes, offerng a certan number of places and trps on ths network. Our defnton of output allows us to take nto account the length of the network, the frequency of the servce and the sze of the fleet. Furthermore, ths measure s partcularly sutable to our specfc frm sample, whch ncludes both urban and extra-urban servces. As t was not possble to separate the urban actvty from the extra-urban one, we defned an aggregate output and amed to weght ther specfc characterstcs. Generally speakng, the extra-urban frms can perform a hgher number of klometers than the urban unts, coverng a larger network, but the operatve context s very dfferent (a lower number of passengers, longer trps, dfferent traffc condtons). On the other hand, a urban frm reasonably offers a hgher number of places (buses are larger and also ther number s hgher, because there s a more ntensve demand to satsfy). The captal stock (K) plays the role of fxed nput n our short-run cost model. It s represented through the number of vehcles used by LPT companes weghted by the average fleet age. 25 The prces of varable factors were calculated payng attenton to the balancesheet statstcs. The labor prce (P L ) was obtaned by dvdng total labor costs by the total number of servce workers (drvers, mantenance workers and admnstratve staff). The average prce of fuel (P F ) was obtaned by dvdng fuel costs by the number of lters consumed. 26 Expenses for materals and servces represent a resdual cost category. It has been dvded by the seat-klometers 27 offered to obtan an average prce for ths nput (P MS ). It s reasonable to assume that ths knd of expense strctly depends on the actual explotaton of the network. In addton to the standard varables of a proper cost functon, we ncluded n the model the average commercal speed (SP), already consdered n some works on the LPT ndustry (Wndle, 1988; Levagg, 1994; Wunsch, 1996; Dalen & 25 æ age ö c We calculated the captal stock as follows: K ç = ( number of vehcles) * ç age where age c s the è ø average fleet age n the whole analyzed sample, whle age s the average fleet age of the -th frm. 26 For a few frms whch utlze tramways, trolley-lnes or ralways and consume electrcty, klowatt-hours were transformed n equvalent lters. 27 Seat-klometers are the multplcaton of traveled klometers by the average capacty of the vehcles used by the frm. 11

13 Gomez-Lobo, 1996; Gagnepan, 1998). The terrtoral context n whch the servce s offered makes t dffcult to compare the cost performance between frms. In fact, the traffc condtons and the envronmental characterstcs of ther network are pecular. Addng the average commercal speed to the cost functon, costs are expected to lower wth ncreasng speed. Table 3 contans descrptve statstcs (mean and standard devaton) for all the varables of the model and the cost-shares. We can note that there s great varablty, especally on costs, output and captal stock. 6. Results Table 4 presents the results of the jont estmaton of the translog cost functon and related factor share equatons for labor and fuel. We see that the model fts the data very well percent of the varance n the dependent varable s explaned by the varance n the regressors ncluded n the system of equatons. Moreover, the estmated relatonshp must satsfy the usual neo-classcal condtons requred for a cost functon. Whle lnear homogenety n nput prces was mposed as a constrant on the parameters estmaton, the other condtons (see note 19) must be checked ex-post. The estmated cost functon satsfes each of these condtons at 83 percent of the sample data ponts. 28 The above results support the functonal specfcaton, hghlghtng the goodness of the model n explanng the cost structure of the Italan LPT ndustry. It s also mportant to note that nput cost-shares estmates for the average frm of the sample (parameters b L, b MS and b F ) are very smlar to ther sample average values reported n Table Almost all of the estmated parameters are strongly sgnfcant and consstent wth the expectatons. The only excepton concerns the coeffcent sgn assocated 28 More specfcally, ftted VC s always non-negatve, non-decreasng n nput prces (ftted factor shares are postve at each observaton) and non-decreasng n output (postve margnal costs). The condton of concavty of the cost functon n nput prces (hessan matrx based on the ftted factor share negatve sem-defnte) s satsfed for 112 observatons on The average frm s an hypothetcal frm exhbtng sample average values for each varable of the cost model. As we have normalzed all ndependent varables on ther respectve sample mean before the transformaton n logarthms., parameters related to frst-order prce terms return a drect estmate of correspondng nput cost-shares, computed for the average frm. 12

14 to the fxed nput. 30 The nterpretaton proposed by Caves, Chrstensen, Tretheway and Wndle (1985) and Wndle (1988) s that the postve sgn of K reflects an ndustry that does not mnmze cost n the long term and therefore employs too much captal n the producton process. Ths argument has been later advanced also n a study on the Italan urban transt systems carred out by Levagg (1994). In ths work the author argues that the neffcent use of captal could derve from the generous government programs of subsdng nvestments. Ths way of provdng funds to purchase captal dstorted the nput allocaton. The coeffcent of output ndcates that a 10 percent ncrease n output ncreases short-run varable costs by only about 4.2 percent at the mean producton. The recprocal of output cost elastcty ( e y ) gves the estmate of short-run returns to scale (SRS). For the average frm, the computaton s the followng: SRS 1 = e y = = 2.37 [4] We can evaluate the long-run returns to scale (LRS) by applyng the followng algorthm, frst suggested by Caves et al. (1981): LRS 1- e = e y k = = [5] It s worthwhle to remark that the adopted model does not allow us to separate the dmensonal effects on costs (sze economes) from the densty effects (network densty economes). 31 In fact, as already noted, we used a composte output so the effects on costs due to an ncrease n the number of places offered, the network length or the frequency are not dstngushable. The short-run scale economes ndcate that a proportonal ncrease of all varable nputs (labor, fuel, materals) produce a more than proportonal ncrease n the output. Ths means that Italan companes are not fully explotng ther 30 The evdence that the varable costs ncrease wth ncreasng captal stock s not consstent wth the mcroeconomc theory. Wth regards to ths problem, an ntense debate arose n the lterature. In fact, t seems to be a general problem that characterzes the use of a varable cost model, not only n the transportaton ndustry. For a dscusson on these ssues see Fabbr (1998), pp See Caves et al. (1984). 13

15 captal stock,.e., the fleet owned by the operators would enable the offer of a greater servce. In the same way, the long-run scale economes are very sgnfcant: a frm can reduce ts average cost by ncreasng ts producton. The ncreasng returns to scale mply that the Italan LPT sector s a local natural monopoly. 32 These results are consstent wth some fndngs of prevous transportaton lterature n Italy. Fazol (1993) analyzed extra-urban transt companes n a regon of Italy (Emla Romagna) and proposed mergers between frms operatng n contguous areas, n order to reduce the average cost of the servce. Now we can suggest the extenson of ths polcy ndcaton to the entre Italan sector. As the translog specfcaton allows us to obtan values of returns to scale for each observaton n the sample, we computed the punctual elastcty of cost n output and captal: 33 e = b + å b ln P + b ln K + b lny + b ln SP [6] y y y yk yy e = b + å b ln P + b lny + b ln K + b lnsp [7] k k k yk kk Î { L, MS, F } The varablty regstered n the punctual scale elastctes s very low (standard error 0.04) and justfes the analyss of the ndustry n terms of average frm. Fgure 1 shows the decreasng trend of the estmated average costs, consstent wth the presence of scale economes dscussed above. The translog cost functon also allows us to analyze the factor substtutablty that characterzes the LPT ndustry technology. Allen partal elastctes of substtuton are obtaned by applyng the followng formulas (see Uzawa, 1962 and Berndt and Wood, 1975): ksp ysp A j + SS j s j = b, j Î { L, MS, F } ; ¹ j [8] S S j 32 Accordng to the economc theory the presence of scale economes n a mono-product ndustry s a suffcent condton to have sub-addtvty of the cost functon and then to establsh the exstence of natural monopoly (Panzar, 1989; Petretto, 1993). 33 Note n [6] that the elastcty of cost n output s dfferent for each observaton due to the second-order effects. The level of output also nfluences the elastcty of cost n captal [7]. So the 14

16 + S - S 2 A s 2 S Î { L, MS, F } [9] = b where S e S j are the estmated cost-shares for the nput and j, whereas bj and are the estmated parameter for the second-order terms related to nput prces nteracton. [8] s the cross-allen and [9] s the own-allen elastcty. We used these results to derve the Morshma elastcty: M A A s j = S j ( s j -s jj ), j Î { L, MS, F } [10] Ths measure of substtuton s more nformatve than the Allen one, because t permts asymmetry n elastctes. 34 The Morshma elastcty b M s j measures the curvature of the soquant when adjustments are made n nputs and j n response to a change n the prce rato P /P j due to an ncrease n the prce P. Ths wll generally be dfferent from the curvature movng n the other drecton, when changes n P /P j are due to an ncrease n P j. 35 Table 5 summarzes technologcal characterstcs for the average frm of the sample. All elastctes of substtuton are qute low and less than one, so we can state that LPT technology allows a poor opportunty of substtuton between factors. 36 These results confrm the evdence found n almost all the studes concernng the transport ndustry (Secton 3.1) and justfes the use of a translog cost functon nstead of a more smple Cobb-Douglas form. 37 To the use of Morshma elastctes, n our case they are qute symmetrc. producton of the frm (Y ) has both a drect (by e y ) and an ndrect mpact (by e k ) on the long-run returns to scale. 34 On ths pont, see Blackorby and Russell (1989) for a general dscusson and Seldon, Jewell and O Bren (2000) for an applcaton to meda substtutablty n the advertsng ndustry. 35 Morshma elastctes wll be symmetrc only n the case of CES producton functons (Blackorby and Russell, 1989). 36 Substtuton between labor and fuel s possble whereas an ncrease n commercal speed can reduce drvng-hours wth a smultaneous ncrease n fuel consumpton. Furthermore, fuel consumpton can be reduced through a more ntensve mantenance. Labor can be substtute of composte nput materals and servce n relaton to the mantenance servce. Indeed, ths can be done nsde the frm or assgned to an external suppler. At the admnstratve level, a more captal-ntensve management system requres a lower number of workers. Fnally, substtuton between fuel and materals s possble when we thnk of the materals requred for the mantenance servce: a greater care n vehcles effcency can reduce fuel consumpton. 37 A Cobb-Douglas would not be approprate because the elastcty of substtuton s mposed to be equal to unty for all productve factors. 15

17 The Allen elastctes can also be used to calculate the own-prce elastctes of the derved demand for nputs (Berndt and Wood, 1975). 38 Table 5 hghlghts stcky factor demands, n partcular for labor. In Italy, the strong nfluence of labor unons and collectve negotaton make the labor market n the LPT sector partcularly rgd. However, the elastcty n prces s strctly connected wth the quas-fxed technology reflected by hard possbltes of substtuton between nputs. A fnal ssue we consder n ths work s related to the specfc envronmental condtons that characterze the supply of the servce by each frm. To ths end, we have ncluded n the model as an explanatory varable the commercal speed of LPT vehcles. Our fndngs show that t s a determnant factor n understandng the dfferences n the operatng costs of sngle frms. For the sample average frm, ncreasng speed by 10 percent can reduce varable costs by about 2.3 percent. Ths mples mportant consequences n terms of local programs concernng traffc regulaton. 7. Conclusons and polcy suggestons The econometrc analyss of cost structure of the Italan publc transt systems, carred out through the estmaton of a varable cost functon for a panel of 45 companes over the perod , ndcates the presence of sgnfcant longrun scale economes for the average frm of the sample. Ths mples that a medum-szed company could gan advantages n terms of average operatng costs by expandng ts producton level. 39 We realze that ths may not be easy to mplement, gven the close connecton wthn the LPT sector between the servce supply and the specfc constrants the company has to face when operatng n a local context. Actually, t could be desrable to nduce mergers between frms operatng n contguous terrtoral areas, by creatng productve unts that operate on an ntegrated local network and 38 They are obtaned from the followng formula: h P = S s A ; Î { L, MS, F }. 39 As we found a low varablty of the scale elastcty throughout the sample, the result can also be extended to both the small- and large-szed frms. 16

18 supply both urban and extra-urban servces. Ths strategy mght be partcularly sutable n Italy, gven the hgh-densty dstrbuton of urban centers throughout the country. It s also supported by the results of a prelmnary analyss of the Italan LPT sector based on factor productvty and average cost ndces. 40 Companes operatng n both compartments (urban and extra-urban) seem to enjoy sgnfcant cost economes. A thorough nvestgaton nto the presence of possble cost advantages assocated wth the jont supply of urban and extra-urban transt servce (scope economes) represents an nterestng research cue. 41 Although t could be dffcult to collect data from every sngle compartment, ths type of analyss consttutes an appealng challenge for future studes. The presence of persstent economes of scale also confrms a natural monopoly at the local level. Ths would call for a correctve regulatory polcy to acheve an acceptable outcome n terms of socal welfare (Braeutgam, 1989; Petretto, 1993). A good ndrect nterventon could be to redesgn the condtons of accessblty to the network by promotng some forms of competton-for-themarket (e.g., compettve aucton for the sngle lcense). The LPT reform n progress n Italy seems really orented towards such a drecton. The prncpal goal s to curb the waste that has often condtoned the decsons of sector operators n the past. 42 Publc regulators must also defne polces for local moblty. To ths end, they dspose of many nstruments, such as: nter-modalty development, LPT lanes, parkng regulaton, tarff polces, focusng publc opnon on envronmental problems. Moblty regulaton plays an mportant role both on the effectveness sde and the cost effcency of the publc transt servce. Indeed, the control of traffc congeston can mprove the commercal speed of LPT vehcles. Reducng the number of labor-hours requred to supply a gven servce would have postve effects on the level of operatng costs. Our analyss tends to confrm these 40 See Fraquell, Pacenza and Abrate (2001). 41 Ths would requre the specfcaton of a mult-product cost functon ncludng two categores of output. 42 We can fnd many examples regardng ths ssue. From our econometrc analyss, t emerges that companes are overcaptalzed, probably due to a fnancng government polcy whch has been too generous n the last decades. Ths aspect led the frms to nvest also when t was not necessary and, on the contrary, a more ntensve explotaton of the exstng rollng stock was requred. 17

19 arguments and suggests that n future greater nterest wth regards to these aspects must be taken. References Andrkoupolos A.A., Lozds J. and Prodromds K.P., Technologcal Change and Scale Economes n Urban Transportaton, n Internatonal Journal of Transport Economcs, 19, 1992, pp Berechman J., Analyss of Costs, Economes of Scale and Factor Demand n Bus Transt, Journal of Transport Economcs and Polcy, 17, 1983, pp Berechman J., Cost Structure and Producton Technology n Transt: An Applcaton to Israel Bus Transt Sector, Regonal Scence and Urban Economcs, 17, 1987, pp Berndt E.R. and Wood D.O., Technology, Prces, and the Derved Demand for Energy, The Revew of Economcs and Statstcs, 57, 1975, pp Blackorby C. and Russell R.R., Wll the Real Elastcty of Substtuton Please Stand Up? (A Comparson of the Allen/Uzawa and Morshma Elastctes), The Amercan Economc Revew, 79, 1989, pp Braeutgam R.R., Learnng About Transport Cost, Technques of Transportaton Analyss, 1999, pp Braeutgam R.R., Optmal Polces for Natural Monopoles, n Handbook of Industral Organzaton, vol. II, a cura d R. Schmalensee and R. D. Wllg, North Holland, Amsterdam, Button K. and O Donnell K.H., An Examnaton of the Cost Structures Assocated wth Provdng Urban Bus Servces, Scottsh Journal of Poltcal Economy, 32, 1985, pp Caves D.W. and Chrstensen L.R., The Importance of Economes of Scale, Capacty Utlzaton and Densty n Explanng Inter-Industry Dfferences n Productvty Growth, The Logstcs and Transportaton Revew, 2, 1988, pp Caves D.W., Chrstensen L.R. and Tretheway M.W., Economes of Densty vs. Economes of Scale: Why Truck and Local Servce Arlne Costs Dffer, Rand Journal of Economcs, 15(4), 1984, pp Caves D.W., Chrstensen L.R., and Swanson J.A., Productvty Growth, Scale Economes and Capacty Utlzaton n U. S. Ralroads, Amercan Economc Revew, 1981, vol. 71, pp Caves D.W., Chrstensen L.R., Tretheway M.W. and Wndle R., Network Effects and the Measurement of Returns to Scale and Densty for U.S. Ralroads, n Daughety, A., Analytcal Studes n Transport Economcs, Cambrdge, Cambrdge Unversty Press, 1985, pp CNR, Il trasporto pubblco locale n Itala: anals, prospettve and contrbut della rcerca, Progetto Fnalzzato Trasport 2, Roma, Dalen D.M. and Gomez-Lobo A., Regulaton and Incentve Contracts: An Emprcal Investgaton of the Norwegan Bus Transport Industry, Insttute for Fscal Studes Workng Paper, London,

20 De Borger B., Cost and Productvty n Regonal Bus Transportaton: The Belgum Case Study, Journal of Industral Economcs, 37,1984, pp European Commsson, Improved structure and organsaton for urban transport operatons of passengers n Europe (ISOTOPE), Transport Research, Fourth Framework Programme, Urban Transport VII-51, Fabbr D., La Stma d Frontere d Costo nel Trasporto Pubblco Locale: una Rassegna and un Applcazone, Economa Pubblca, 3, 1998, pp Fazol R., Flppn M. and Pron P., Cost Structure and Effcency of Local Publc Transport: The Case of Emla Romagna Bus Companes, Internatonal Journal of Transport Economcs, 20, 1993, pp Flppn M., Magg R. and Pron P., Ineffcency n a Regulated Industry: The Case of the Swss Regonal Bus Companes, Annals of Publc and Cooperatve Economcs, 63, 1992, pp Fraquell G., Pacenza M. and Abrate G., Il Trasporto Pubblco Locale n Itala: Varabl Esplcatve de Dvar d Costo tra le Imprese, CERIS-CNR Workng Paper, Torno, 3, Gagnepan P. and Ivald M., Incentve Regulatory Polces: The Case of Publc Transt Systems n France, mmeo, GREMAQ - IDEI, Unversté des Scences Socales de Toulouse, France, March Gagnepan P., Structures Productves de l'industre du Transport Urban et Effets des Schemas Reglementares, Econome et Prevson, 135, July-Sept. 1998, pp Levagg R., Parametrc and Non-Parametrc Approach to Effcency: The Case of Urban Transport n Italy, Stud Economc, 49(53), 1994, pp Matas A. and Raymond J.L., Techncal Characterstcs and Effcency of Urban Bus Companes: The Case of Span, Transportaton, 25, 1998, pp Mnstero de Trasport and della Navgazone, I trasport n Itala, Isttuto Polgrafco and Zecca dello Stato, Roma, Obeng K., The Economcs of Bus Transt Operaton, The Logstc and Transportaton Revew, 20, 1984, pp Panzar J.C., Technologcal Determnants of Frm and Industry Structure, n Handbook of Industral Organzaton, vol. I, a cura d R. Schmalensee and R.D. Wllg, North Holland, Amsterdam, Petretto A., Mercato, Organzzazone Industrale and Intervento Pubblco, Il Mulno, Bologna, Pacenza M., The Publc Transt System n Italy: a Crtcal Analyss of the Regulatory Framework, CERIS-CNR Workng Paper, Torno, 16, 2000a. Pacenza M., The Local Publc Transportaton Sector: Cost Analyss, Insttutonal Aspects and Incentves Issues, Unversté des Scences Socales de Toulouse, D.E.A. Econome Mathématque et Econométre, 2000b. Seldon B.J., Jewell R.T. and O Bren D.M., Meda Substtuton and Economes of Scale n Advertsng, Internatonal Journal of Industral Organzaton, 18(8), 2000, pp Thry B. and Lawarree J., Productvté, coût et caracterstques technologques des socétés belges de transport urban, Annales de l économe publque, socale et coopératve, 4, 1987, pp

21 Uzawa H., Producton functons wth constant elastctes of substtuton, Revew of Economc Studes, 29, 1962, pp Vton P., A Translog Cost Functon for Urban Bus Transport, Journal of Industral Economcs, 29, 1981, pp Wndle R.J., Transt Polcy and the Cost Structure of Urban Bus Transportaton, n J. S. Dogson and N. Topham eds., Bus Deregulaton and Prvatzaton, Averbury: Aldershot, Wunsch P., Cost and Productvty of Major Urban Transt Systems n Europe, Journal of Transport Economcs and Polcy, Ma 1996, pp Zellner A., An Effcent Method of Estmatng Seemngly Unrelated Regressons (SUR) and Tests for Aggregaton Bas, Journal of the Amercan Statstcal Assocaton, 57, 1962, pp

22 Table 1. Effcency ndcators for the urban bus servce n Europe (yearly values) Country Vehcle-kms (thousands) /servce worker Operatng costs (Ecu) /vehcle-km Italy Other European Countres (France, Denmark, Fnland, Sweden) Unted Kngdom Source: European Commsson (1998) Table 2. Econometrc cost studes on the Italan LPT sector Authors Type of Model LPT sample Output Economes of scale (mean pont values n parenthess) Fabbr (1998) Varable cost functon, translog form 9 urban and extra-urban bus companes, Regon Emla Romagna, Vehcle-kms - hgh economes of sze n both the short (1.66) and the long run (1.71); - mportance of sze economes decrease wth ncreasng frm dmenson. Fazol, Flppn and Pron (1993) Total cost functon, translog form 40 extra-urban bus companes, Regon Emla Romagna, Seat-kms - hgh economes of sze (1.70) and network densty (2.61); - mportance of sze and network densty economes decrease wth ncreasng company dmenson. Levagg (1994) Varable cost functon, translog form 55 urban bus companes, Italy, 1989 Passenger-kms - very hgh economes of use ntensty n both the short (8.29) and the long run (5.40); - relevant sze economes n the short run (1.43) but weak sze dseconomes n the long run (0.92); - relevant network densty economes n the short run (1.38) but weak network densty dseconomes n the long run (0.89). Source: Pacenza (2000b) 21

23 Table 3. Descrptve statstcs Varable Mean Standard devaton Varable operatng cost (VC, mllons Lre) 56,422 71,871 Producton (Y, mllons) 437,708 1,232,347 Captal (K) Labor prce (P L, mllons Lre/worker) Fuel prce (P F, Lre/ltre) 1, Materals & Servces prce (P MS, Lre/seat-km) Average commercal speed (SP, Kms/h) Cost-shares: - Labor (S L ) Fuel (S F ) Materals & Servces (S MS )

24 Table 4. Parameter estmates of the translog varable cost functon [1] Regressor * Coeffcent Standard Error T-Rato[Prob] Constant [.000] lny [.000] lnk [.019] lnp L [.000] lnp MS [.000] lnp F [.000] lnsp [.000] lny*lnp L [.000] lny*lnp MS [.000] lny*lnp F [.135] lnk*lnp L [.000] lnk*lnp MS [.000] lnk*lnp F [.098] lny [.068] lnk [.144] lny*lnk [.107] lnp L *lnp MS [.000] lnp L *lnp F [.000] lnp MS *lnp F [.000] 2 lnp L [.000] 2 lnp MS [.000] 2 lnp F [.000] lny*lnsp [.000] lnk*lnsp [.000] lnp L *lnsp [.000] lnp MS *lnsp [.010] lnp F *lnsp [.000] lnsp [.714] R-Squared.9851 *All the ndependent varables have been dvded by ther sample mean value before the transformaton n logarthms. 23

25 Table 5. Technology characterstcs evaluated at the mean of the data (average frm) * Returns to scale 1.86 [0.04] Morshma elastctes of substtuton j=l j=f j=ms I=L [0.08] 0.27 [0.16] =F 0.38 [0.06] [0.17] I=MS 0.27 [0.14] 0.40 [0.08] - Own-prce elastctes L, PL F, PF MS, PMS [0.05] [0.07] [0.12] * Standard errors n square brackets. Fgure 1. Estmated average costs 2 1,8 1,6 1,4 Average costs 1,2 1 0,8 0,6 0,4 0, Output: total places * travelled kms 24