Abstract
We study the impact of different regulatory designs on the cost efficiency of operators providing a public service, exploiting data from the French transport industry. The distinctive feature of the study is that it considers regulatory regimes as endogenously determined choices, explained by economic, political, and institutional variables. Our approach leans on a positive analysis to study the determinants of regulatory contract choices, which, in turn, affect the costs of operating urban public transport. Our results show that given similar network characteristics, networks operated under fixed-price contracts exert lower costs than those regulated under cost-plus contracts. This finding is in line with the theoretical prediction of new regulatory economics that fixed-price contracts provide more incentives for efficiency. Importantly, ignoring the endogeneity of contractual choices would lead to significantly underestimating the impact of contract type on cost efficiency. Our findings provide useful policy implications suggesting that the move toward more high-powered incentive schemes is indeed associated with significant cost efficiencies. Moreover, they highlight the importance of accounting for the endogeneity of regulatory contract choices.
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Notes
Loi n° 82-1153 du 30 décembre 1982 d’orientation des transports intérieurs.
Unlike the rest of France, the Ile-de-France region has only one authority responsible for organizing urban transport, namely “Syndicat des transports d’Ile-de-France (STIF)”. It is responsible for organizing, coordinating, and financing public transport on the behalf of the local authorities in this region. STIF takes its decisions in consultation with three transport carriers—RATP, SNCF, and OPTILE—compensating them for operating transport and the improvements they make at its request.
Loi n° 82-213 du 2 mars 1982 relative aux droits et libertés des communes, des départements et des régions.
Loi n° 83-8 du 7 janvier 1983 relative à la répartition de compétences entre les communes, les départements, les régions et l’Etat.
Loi n° 93-122 du 29 janvier 1993 relative à la prévention de la corruption et à la transparence de la vie économique et des procédures publique.
This tax is a local contribution of employers that allows to provide funding for the urban public transport. It was introduced in 1971 in Ile-de-France to meet operating and investment costs of urban transport networks. In its current form, it is imposed on both public and private sector employers with more than 9 employees within an urban transport area of a population of more than 10,000. In addition to the revenues from the sale of tickets and public subsidies, the transport allocation helps to cover the costs of urban public transport.
Veolia Environnement is an international group with activities in water provision, water sanitation, waste treatment, cleaning and sanitation services, energy services, and transport.
RATP is the operator of urban transport in Paris. It is a public company.
Within fixed-price contracts, two forms of contractual schemes can be further distinguished depending on the division of commercial risk between the private operator and local authority: gross-cost contracts and net-cost contracts. Under gross-cost contracts, the commercial risk is borne by the local authority. Local authorities collect commercial receipts and operators are reimbursed based on their expected operating costs. Under net-cost contracts, private operators carry both the industrial and commercial risk and are reimbursed based on their expected operating deficits. As the focus of the paper is on cost efficiency of the supply, we do not tackle the issue concerning informational asymmetries on the demand side and related incentive problem.
As stated in the 2015 report prepared by the French court of auditors (fr. Cour des Comptes) concerning, among others, the state of urban public transport in France, information provided by the operators to the local authority is often incomplete, erroneous, or non-explicit. This makes it difficult for the authority to analyze the effectiveness and efficiency of the management of the service delegated to the operator. Additionally, as underlined in the previous 2005 report of the French court of auditors, the control of the execution of the service undertaken by the organizing authorities and the means of expertise that they possess are still underdeveloped. The insufficiency of the reports provided by the operator to the organizing authority and the complexity of the organization of the service make the evaluation even more difficult. In addition, there are no national statistics measuring the structure and evolution of the population of passengers. This also concerns data allowing comparisons of the average consumption of their vehicles as compared to other networks.
In our empirical investigation, we perform a test to verify whether the transcendental logarithmic cost function is a good representation of the cost structure of transport operators in our study.
Please note that undertaking a robustness test by excluding the 1% top and bottom percentiles of each of the price variables, our results remain quantitatively and qualitatively largely similar to the baseline results.
Please note that we observe 29 switches of regulatory regime, with 85% concerning changes from a cost-plus to a fixed-price regime. Therefore, our results should be interpreted having in mind that predominantly switches from cost-plus to fixed-price contracts drive our estimation results.
In our analyses, we considered other political dimensions, including the role played by closeness to municipal elections or mayor’s tenure (see Coviello and Gagliaducci 2017). Our results suggest that these are not relevant dimensions in the industry studied. The results are available upon request.
In addition, in order to verify whether the transcendental logarithmic cost function gives a good representation of the cost structure of the transport operators in our sample, a likelihood-ratio test on the technology restrictions implied by a Cobb-Douglas functional form is performed. The results of this exercise lead to the rejection of these restrictions and, therefore, to retain the model presented in equation 6. The results are available upon request.
Please note that spatial dimensions do not seem to be relevant when considering regulatory contract choices in the French urban public transport. Urban transport networks are not directly neighboring and are dispersed geographically. Moreover, organizing transport authorities in France belong to an association of Transport Authorities (fr. Groupement des autorités responsables de transport). Through the association, they are aware of the contractual choices made by the remaining networks, independent of whether these are neighboring networks are not. Therefore, individual regulatory choices may rather be influenced by the general industry trends. This is in line with our results suggesting a positive trend on the choice of fixed-price rather than cost-plus contracts.
Please note that the contract governing the relationship between the local authority and transport operator specifies the characteristics of the service to be provided. This is, for instance, the case of quality.
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We are extremely thankful to CEREMA, GART, and UTP for providing the complete database on urban public transport in France for the purpose of our research. We thank Özlem Bedre-Defolie, Tomaso Duso, Matthias Finger, Emmanuel Frot, Philippe Gagnepain, Marc Ivaldi and Stéphane Saussier, as well as audiences at conferences at EARIE, ESNIE, and the EUI conference on the Regulation of Infrastructures and two anonymous referees for their valuable comments.
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Piechucka, J. Cost efficiency and endogenous regulatory choices: evidence from the transport industry in France. J Regul Econ 59, 25–46 (2021). https://doi.org/10.1007/s11149-020-09423-y
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DOI: https://doi.org/10.1007/s11149-020-09423-y