Competitive tendering as a contracting mechanism for subsidising transportation: The bus experience

Abstract

Competitive tendering (CT) is a popular mechanism for the provision of transport services where a major objective is the containment of the cost to government of service provision. Although the primary focus is recognised as cost efficiency, whereby the cost outcome should be conditional on a given level of service, difficulties in establishing appropriate tests for service level compliance has become a cause of concern about the effectiveness of the CT paradigm as a value for money initiative. While recognizing the growing evidence that competitive tendering can reduce levels of subsidy, typically in the 20-30% range, what is lacking in the support is an explicit statement that such gains are usually a windfall gain when first introducing CT, and especially when the incumbent is a public supplier (or a public operator almost exclusively dependent on government funding), and that financial gains through retendering are notably absent. Furthermore the risk of discouraging investment back into the provision of services because of uncertainty of continuity is starting to show up as incentive-incompatible and a discouragement to quality operators who would in the normal course of business reinvest much more. This has led to a growing interest in and support for performance based contracts (PBCs) in which the incentive structure is more conducive to the growing the business (under a trusting partnership between the regulator and the operator) and where CT is a last resort noncompliance strategy. This paper reviews the international successes and failure of CT as a subsidy reduction strategy within the bus sector, and promotes the idea of PBCs as a way of recognizing the real role of subsidy under the umbrella of a value for money objective.