Competitive tendering (CT) implies that a contract to operate or provide a transportation service is subjected to competition, in which the bidder with the lowest cost, albeit the bidder offering the most attractive cost/quality combination, is awarded the contract to operate for some time, after which the operation is again subjected to competition. CT has been advocated for by many economists for the reasons that it will reduce the operational costs for governments.
I and my Ph.D. researcher, Harald Høyem at Urbanet analyses- Norway([email protected])
have wondered about how CT impact on operational cost and market concentration. So we investigated Its effects using data from the Norwegian car ferry services which, are very much like public transport services whereas, car ferries transport vehicles from one destination to the other just as public transport does with passengers. We found that: (i) implementation of CT significantly lowered operational costs and, (ii) it led to increased market concentration. The latter finding suggests that CT might not lead to free competition in the long run but rather to monopolistic/duopolistic tendencies, contrary to its intentions. We urge policymakers to reconsider CT carefully because its results could be counter to intentions. If you want a copy of this paper, request for a copy at researchGate.com by asking either [email protected] or Harald Høyem - [email protected]
We would appreciate any comments/discussions on our findings on this important topic. Those researchers with interest/empirical experiences are encouraged to debate.
Hi James,
As you know we (at TØI) has done some research on CT in Norway on occasions. Our data has mainly been on busses, but we have also touched car ferries, fast craft, rail and domestic air services. Regarding your finings. Back in 2009 I came to similar conclusions for the bus sector, in line with Jon-Terje et al.’s (https://www.openstarts.units.it/bitstream/10077/5920/1/Bekken_et_al_ET33.pdf) and Terje and Gisle’s (https://www.sciencedirect.com/science/article/abs/pii/S0967070X07000807) and others. These studies suggest similar developments as your finding (i), it was a tendency towards market concentration in the data set, but this could just as easily be explained by bus markets moving from being regional to national and international. For (ii) this has been our fining in our newer studies, both on bus and coach (https://www.sciencedirect.com/science/article/pii/S0739885917302780 ), (https://www.sciencedirect.com/science/article/pii/S0739885917303189 , https://www.sciencedirect.com/science/article/pii/S0967070X1530069X?casa_token=0dEhJzkhzwoAAAAA:4sx8g5NSN30htf_57w9yDgmXqjORFXofOxaya8f4KR4iTXzF1Ac2LBTOkCsd4KvIYL6KPX6t4xE ) .
However, focusing on cost developments rather than market concentration, we did not find support for lack of competition as a significant cost driving factor on car ferries and fast craft. This finding was significant for bus tenders. For car ferries and fast craft, we were using data from 2010 onwards, so the lack of significant findings may be attributed to the number of observations and the heterogeneity in the data set (https://www.toi.no/getfile.php?mmfileid=45971). Still, the number of bids received for many contracts were alarmingly low, although somewhat better for car ferries than for fast craft, and better still for busses. For rail, we do not have enough observations (in Norway) to make quantitative analyses meaningful. Qualitative studies suggest cost savings from introducing CT, but the driver for this result can be other factors.
I support your call to policymakers to consider the long term effects of CT. However, as it stands, I see no real alternative on the table.
Regards,
Jørgen
Jørgen,
Thanks for these additional comments that attest that our findings confirm earlier findings, at least in the Norwegian context. Further and with regards to your earlier email to me, this is an important topic that requires further research, especially with regards to one of our findings that showed that competition in some instances, may not fulfill what is intended with it, such as that it leads to market concentration. I am interested in pooling our data sets together to examine these aspects further. Readers of this thread who are interested in the topic are, therefore requested to join in with comments and/or suggestions. Overall, thanks for these insightful comments. I have noted the literature you provided that we did not reference in our study and will reference in our future studies.
You might be interested in the latest developments in the UK where the government has announced that franchising in its current form will be scrapped once the Chinese virus is defeated, see: https://trn.trains.com/news/news-wire/2020/10/12-british-government-annoucnes-end-for-rail-franchise-system
It may be that the benefits of CT will be exhausted after the first round of competition: I remember that papers by Andrew Smith and Jonathan Cowie showed that the immediate productivity gains from CT where lost after after a while and that productivity in the rail sector was back at British Rail levels.