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Competition in network industries: case of public transport


Adam Fularz
The problem of many developing countries, such as CEEC countries transforming their economies away from central plannig is the decline of public transport ridership. On one hand such decline is caused by intermodal shifts- cars are becoming more affordable to the public with the improvement of economies. On the other hand, public utilities such as bus and railway systems are often left in public hand, which results in lack of market forces that could drive enterpreneurs to innovations, better quality of services, cost reductions etc.
Decisions to liberalise or privatise such sectors are difficult, even if economicaly justified. There are various fears that block or prevent changes: argumetns of public service, or levels of service. There is a tendancy to overemphasize such concerns, to protect political or economical interests. On the other side, those willing to privatise utilities, often intend to sell unregulated monopolies, hoping to achieve higher price for such transaction, forgeting however that this will reduce public welfare in the future (Bobińska 2000).
Lots of discussion was spent on the issue of market liberalistation. However, little was discussed on the borders to such liberalistation, such as the existence of shallow markets (like for example rural areas) where forces of competition might not occur. Regulation, seen as a remedy, might be a good solution in such case, but is it a good solution in deep markets where free competition of many operators could serve the demand without problems? Will free, unrestricted competition produce even better results? Such question is important especially in countries where corruption could be a potential problem. Introduction of a regulated system could, in case of corrupted procedures, have rather inverse effect on the level of prices. 
I.                   Research objectives
Will the modal split change towards increased public transport use if increased competition would take place? How do the institutional changes affect the level of services? What are the institutional mechanisms that stand behind competition in such networks? How shallow has the market to be that a monopoly would occur? How deep must be the market to be freed from regulation? Given the case of Japan: a regulated monopoly- is it a worse solution? Can the infrastructure business be efficiently separated from operations business without loosing innovativity and elasticity of private capital? 
II.                Thesis
An efficient competition can reduce costs of providing such services, but not necessarily prices for customers. Only a mixture of free market approach in deep markets- those with capacity for real competition and a regulation of monopolies in shallow markets can help to achieve best results. Infrastructure business can also be operated by private operators, given that the public wil be protected from abuse of their monopoly power.
III.             Literature review
1. Environment of public transport
Transport is an area of immense state interventionism, thus many economic processes are deeply distorted. State intervenes in infrastructure provision- it owns and builds road and railway networks. In the past many roads and railways have been constructed as private ventures. Over time, roads and railways become nationalised. Pricing mechanisms for their use are often highly inefficient, for example unitary charging via petrol usage completely distorts the situation in city centres, where costs of provision of such services are extremely high and road space is scarce. Thus, road charging schemes were introduced in several towns in the world. However, quick general shift towards such practice is unprobable due to political resistance, high capital costs and technical complexity of such systems. Problems of public transport in keeping its market share might be to a large extent caused by state interventionism. It is hardly possible to trace how the market would look like if users were charged real costs of infrastructure provision. Especially in urban areas public transport could dominate.
2. Organisational forms of public transport
2.1. There are several different forms of organisation of public transport in the world. They vary greatly from country to country. Such forms are: relatively unregulated competition (UK), unregulated competition with restiricted entry (Poland long distance), franchising (Sweden, London), public monopolies (France, Poland, Germany) and other combinations (for details see Wyszomirski 2007).
2.2. In contemporaty railway industry we have a plethora of different organisational forms. Switzerland and Japan are two countries in the world, where many private passenger railway companies have never been nationalised, they coexisted in the market together with nationalised main lines (Batisse 2003). Today these two countries have currently the highest railway ridership per capita in the world. 
Most countries nationalised their railways in the past, but in the beginning of 21. century private ownership and competition partially returned to many of these markets. However, direct competition was mostly restricted to some overlapping destinations, and indirect competition (franchising) is the dominant method. Private railway monopolies that exist for example in Japan, are regulated (yardstick competition, maximal levels of profitability) (van de Velde 2001). Large private railway undertakings in Japan combine their core business with property businesses along their lines. They provide “total community services which, include rail services” (van de Velde 2002, p.280).
In developing countries railways are often still run as public monopolies. The monopoly power of railways results from mixture of technical superiority of railways over busses (for example higher commercial speeds) and subsidies that were often used to reduce ticket prices below the profitability levels of the competitors (such as bus operators) while keeping poor service quality.
IV.             Research methods
Costs of provision of railway and bus services will be examined. Data of various operators will be collected by the author, basing on examples from tendering processes and franchising procedures discussed in the literature (some examples of such data from Polish bus market and their analysis: Tomanek 2003). 
Comparison will be made with unregulated bus markets where urestricted competition exists. Cost functions and price levels on „deep market” routes will be examined. Routes with more competition will be compared with routes with less competition.
Operators often accused other competitors on cherry-picking: picking out profitable slots from a large base. Operators are known to cross-subsidize costs of running off-peak services with the profits made in peak-time, in order to provide better service. This question will be researched, as the level of protection should depend on the depth of the market. This deepth of the market will be at least estimated given the technical constraints such as various loads of the fleet or rolling stock. Levels of services on routes in fully liberalised markets will be analysed with respect to availability of services in off-peak times. Analogies with commercial avaition will be drawn. In this market there is no regulation of competition (except of granddfather rights to slots on popular airports), and cherry picking might occur.
Given the availability of literature and data, Japanese experience with public transport will be discussed as an alternative approach to the above mentioned.
V.                Selected literature
Batisse F., „La decentralisation dans les chemins de fer, un fait mondail qui n`est pas nouveau”, in: Revue Generale des Chemins de Fer2003 nr 2, pp. 45-58
Wyszomirski Olgierd, „Ewolucja systemów organizacji transportu miejskiego w Europie”, in: Przegląd Komunikacyjny 7/2007
„Liberalizacja i konkurencja na rynku transportowym w Europie”, Praca zbiorowa pod red. S. Dziadka i M. Michałowskiej, Prace naukowe, Akademia Ekonomiczna im. K. Adamieckiego Katowice 2001.
R. Tomanek: ‘Organizacja miejskiego transportu zbiorowego w Polsce na tle liberalizacji rynków transportowych w Europie’ in: Transport Miejski Nr 2/2003
„Liberalizacja transportu w warunkach transformacji gospodarczej”. Praca zbiorowa pod red. G. Dydkowskiego i R. Tomanka. Prace naukowe, Akademia Ekonomiczna im. K. Adamieckiego, Katowice, 2003.
Tomanek R.: Ekonomiczne uwarunkowania rozwoju transportu miejskiego – wybrane zagadnienia, w: “Uwarunkowania rozwoju transportu publicznego na obszarach zurbanizowanych”, Materiały konferencyjne XXIX Krajowego Zjazdu Komunikacji Miejskiej, IGKM w Warszawie, Warszawa 2002.
Kazushige Terada, „Railways in Japan  Public & Private Sectors“, w: Japan Railway and Transport Review nr. 27, 2001.
D. van de Velde (ed.) (2002) „Changing Trains. Railway reform and the role of competition, The experience of six countries”, Ashgate :Aldershot
F.Mizutani, K.Nakamura, „Privatisation of the Japan National Railway: Overview of Performance Changes“ in: Interntional Journal of Transport Economics, XXIV (1), 1997.


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