Tendering Ferry Services in Norway: Ratchet Effects?

Abstract

Fjord crossings by ferries are vital in the Norwegian trunk road system. The ferries are operated by ferry companies, each ferry company being a monopolist on a bundle of crossings. The government regulates prices and service frequencies and awards subsidies to the companies in order to make the ferry services economically viable. Tendering has been suggested as a means to induce cost efficiency and thus reduce costly subsidies. In order to gain experience with tendering on this area, this regime has recently been introduced on a few selected crossings. We argue that this small-scale experiment may not reveal the cost savings that may be obtained by a large-scale experiment. This is due to a ratchet effect: The incumbent ferry companies may not have the incentives to submit low tenders as by doing so, the ferry companies reveals that there is much to gain for the government by carrying through a large-scale tender competition in the future. Such a large-scale tender competition may be harmful to the companies as compared to status quo. Realising this, each company may be reluctant to submit low tenders in the competition for the selected tender crossings.