Regulation in Transport: The Practice

1 83 IV. Regulation IN TRANSPORT: THE Practice A. Introduction Many governments implementing economic reforms in recent years have increased the role of the private sector in the provision of transport infrastructure facilities and services. Instead of eliminating the need for Regulation such reforms have emphasized the need for effective Regulation and regulatory institutions for a number of reasons, including: ! The existence of natural monopolies; !

2 The limitations of competition for the market ; ! The existence of assymetric information between transport operators and regulators; ! The need for private investment in infrastructure facilities; ! The need to assign risks between operators and government. This chapter examines the scope and implications of economic reforms in transport for the Regulation of infrastructure facilities and services, both in general and for specific modes. B. Transport: economic reforms Transport is pivotal to economic development. On the one hand, the achievement of economic growth and poverty reduction requires good physical access to resources and markets while on the other, quality of life is generally dependent on the quality of physical access to employment, health services, homes, education and other amenities.

3 Conversely, in many developing countries the inadequacy of transport infrastructure and the inefficiency of transport services are recognized as being among the main bottlenecks to socio-economic development and social Until the 1980s, transport infrastructure facilities (rights of way, track, terminals and associated traffic management) in developing countries were primarily provided by the public sector for all modes of transportation (road, rail, air, maritime and inland water) and at all levels (international, national, regional and local, both urban and rural). In transport service provision (conveyance of passengers and freight), railways were usually a public sector monopoly, while in air and maritime transport national flag carriers were also usually in the public sector.

4 In contrast, in trucking, bus and inland waterway transport the private sector was predominant, despite the fact that state-owned enterprises for transport existed in many countries and non-transport state-owned enterprises often possessed their own fleets. Even in these subsectors, however, governments have usually played a critical role by determining charges for the use of public infrastructure and by regulating the type, quantity and prices of private sector 33 Thoopal, Railway pricing and charges , ESCAP Regional Seminar on Transport Pricing and Charges for Promoting Sustainable Development, New Delhi (December 2000).

5 34 A. Armstrong Wright and S. Thiriez, Bus services: reducing costs, raising standards , World Bank Technical Paper 68 (Washington , World Bank, 1987). 84 The provision of transport infrastructure facilities and services by state-owned enterprises, with restricted entry to the market, was widely believed to facilitate the achievement of multiple government objectives by increasing government leverage in policy implementation. By way of example, governments have often attempted to secure one or more of the following objectives simultaneously, in the public transport sector: !

6 Service coordination (including integrated route structures); ! Through ticketing; ! Coordinated scheduling of services; ! Multi-modal coordination; ! Centralized information systems; ! Safety; ! Environmental protection; ! Cost and price minimization; ! Service quality; ! Affordability. However, it has become increasingly recognized that monopoly per se is unlikely to contribute to ensuring sufficient, low cost and "affordable" For example, in the absence of subsidy, the imposition of an obligation on operators to provide uneconomically low fares may actually accentuate poverty by reducing the availability and quality of services.

7 Similarly it is now widely recognized that it is better to address environmental impacts directly with the relevant technical or operating standards or taxes, rather than to approach them indirectly through the control of market entry. Further, state-owned operators, in most sectors, including the transport sector, are now widely regarded to have failed for a number of reasons, including: ! Misguided intervention whereby governments, for example, have often imposed unsustainable fare and service conditions on public transport operators, overestimating what can be accommodated through internal cross subsidy; !

8 Excessive operating costs for example, public transport costs per passenger kilometre have been shown to differ by 100 per cent and more as between public and private fleets in a number of developing country cities such as Accra, Ankara, 35 The World Bank has stated that an increasing proportion of transport supply comes from the private sector in competitive market conditions. This includes 75 per cent of bus services, 95 per cent of road haulage, 100 per cent of paratransit; and an increasing proportion of rail services.

9 By the year 2000, 100 per cent of rail freight transport in Latin America was provided by the private sector. In addition, privatising road maintenance has reduced costs by from 25 per cent to as much as 50 per cent in Colombia. Labour costs have been reduced by 50 per cent in rail privatizations in Argentina and Brazil. Competitive franchising of bus operations has reduced operating costs by between 25 per cent and 40 per cent in a number of European countries such as United Kingdom, Denmark, Finland and Sweden. Even in international transport concessioning of ports have reduced costs by 30 per cent in Brazil, while withdrawal of protection from national monopoly operators has reduced shipping costs by 30 per cent in Venezuela.

10 Further examples of the scope for improved efficiency through regulatory reform can be found at pol_ 85 Calcutta, and The introduction of competition has reduced operating costs per vehicle mile by over 30 per cent in several European countries; ! Perverse management incentives where, for example, entry to transport markets is restricted, prices are usually controlled to limit the rate of return on capital.