Transport economics Why is transport important?
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- Private Finance Initiative
- The advantages of PFI schemes are
- Transport 2010 The 10 Year Plan
- Privatisation and transport in the UK The position in 1979
- Privatization Privatization refers to three different actions only one of which is strictly ‘privatization’; Privatization
- Public offering
- Deregulation The traditional approach
- Subsidies and Cross-subsidization
- Coach and bus deregulation
- The evidence from express bus deregulation
- Subsidy levels in Hereford
- Details of local bus deregulation
- Results of bus deregulation
- Concerns about deregulation policy Instability
- Co-ordination of services
- Competition between subsidised and commercial routes
- Cross-subsidy was seen as undesirable
- The end of implicit taxation
- Quality of passenger service
- Conclusion - Has bus deregulation worked
1945 to 1994 This was the era of ‘predict and provide’. The government used forecasts to look at the trends in the growth of road transport and provide the road space to accommodate it. The road network expanded and the public transport services were allowed to decline in both absolute and relative terms. In 1989 the Roads for Prosperity programme announced a £12 billion road building package. This was to cope with the forecast rise in traffic volume of between 83% and 142% between 1988 and 2025 and reflected the ‘predict and build’ mentality. Rising demand for transport was seen as a sign of desirable economic growth and rising private car ownership as an example of growing personal freedom. Hence expanding road traffic was seen as a sign of success. 1994 to 2000 In December 1994 it was announced that after the programme was complete there would be no significant major new schemes in the foreseeable future. In 1994 this was due to the very serious financial position of the government which had been borrowing heavily since the recession of 1990. However the New Roads by New Means paper suggests that private enterprise may be allowed to invest in roads, the so called Private Finance Initiative (PFI)15. (Also referred to as PPP – Public Private Partnership.) Proposals have covered both road and rail schemes. For example: Schemes that are entirely private ventures with transfer of assets at the termination of the concession. Channel Tunnel Dartford - Thurrock bridge Second Severn crossing Birmingham North Relief Road Heathrow Express West coast and East coast Main Line Schemes that are predominantly private sector with some government investment. Croydon Tramlink Channel Tunnel Rail Link Manchester Metro While some PFI schemes are financially free standing and others are joint ventures others are services sold to the public sector by the private sector, for example the Northern Line trains or the Birmingham Northern Relief Road. In this case a rental or shadow toll is paid by the government to the private sector provider. The advantages of PFI schemes are: Alternative sources of funding where there are constraints on public spending. Private sector skills are brought into planning and management of projects. Better value for money through economies of scale. Risk is transferred to the private sector. (e.g. The first Severn Bridge never recovered its costs through tolls.) Close links between market demands and construction. Criticisms of PFI: Scheme is simply a substitute for, not addition to needed schemes. Scheme represents no real risk to private firm. In the case of the payment of a shadow toll the higher the risk the higher the shadow toll the commercial firm will require, thus there is little or no net gain to the public purse. Increased value for money is only likely when the lower construction and maintenance costs outweigh the cost of borrowing the finance through private sources (government always borrows at cheapest rate). PFI can be seen as a way of deferring expenditure (some might say hiding). If the government builds a road it appears in current expenditure. If a PFI scheme builds it the costs appear years later maybe as a ‘shadow toll’ paid by the government based on vehicle numbers. The government imposed a PFI scheme for London Underground. This was opposed on the basis of safety and that splitting the network up would lead to the same sort of problems as on the railways. The new London Crossrail scheme is also a PFI scheme, but is currently struggling to find backers in the private sector. The Labour Government elected in 1997 had another agenda that also called for less road building. In July 1998 the government announced a number of schemes would not proceed, having already cancelled and postponed schemes in July 1997. This reflected the widely held view that simply building more roads increases road use and adds to the congestion problem and their proclaimed need for an ‘Integrated transport policy’. What constitutes an integrated transport policy is difficult to pin down, although today it is often described as ‘one that encompassws all modes of passenger and freight transport’. We might call this the ‘weak’ definition of integrated transport as a strong definition would take account of environmental concerns for example. Integrated transport policy would certainly mean the ability to switch between transport modes easily. For example riding your bike to a railway station, taking the train and then a bus to work. To make this work there must be safe bicycle routes, adequate secure bike racks at stations, and sufficient timetabled buses leaving from the railway station. The aim of such a policy is to reduce private road transport demand. (As such this is just one small example and overall such a policy covers all transport use). Suprisingly then in 2000 there was a Transport White Paper that presented a 10 year vision. It reintroduced many road schemes that had been cancelled or put on hold. 2000 onwards The year 2000 is possibly an arbitrary date but it was the first year that the government published a long term plan that tried to address integrated transport policy. As time went on the plans became wider in scope and included explicit attempts to improve the environmental sustainability of transport with, for example, carbon reduction targets included by 2007. Transport 2010 The 10 Year Plan16 The government announced a ten year plan for transport as part of the Comprehensive Spending Review in July 2000. Key details of the Government's 10 Year Plan for Transport, Transport 2010 are as follows: a significant increase in spending in real terms compared with previous ten years total public spending and private investment will be £180bn. capital investment (public and private) will be £121bn. Almost 75% real increase on previous ten years The £180bn is made up of: £60bn for rail £59bn for local transport £25bn for London £21bn for strategic roads £15bn for future projects and other transport areas Total roads spending (including local roads and London roads): £59bn The government suggests that the £180bn investment means: reduction in road congestion below current levels 100 new by-passes widening of 360 miles of strategic roads elimination of local road maintenance backlog 50% increase in rail use (measured by passenger kilometres) 80% increase in rail freight modernisation and upgrading of East Coast, West Coast and other Main Lines improved services on the London Underground and London buses up to 25 new tram lines in major cities and conurbations 10% increase in bus passenger journeys better rural transport a safe and secure transport system
The Conservative government faced particular problems; Rising levels of public subsidy Long term decline in use of public road and rail transport Road transport dominating rail in freight traffic Growing environmental concerns over transport Social concerns over public transport provision for the poor A transport network that was struggling to cope with rising demand Unlike previous governments the Thatcher administration was committed to reintroducing market forces in as many areas of the economy as possible. Their guiding principles were; A belief that market forces were the best way to ensure an efficient allocation of resources. To achieve this is was necessary to replace local and national monopolies with contestable markets. Public services needed to be accountable and provide ‘value for money’ - nationalized industries would no longer be bailed out Public expenditure needed to be reduced in order to reduce inflation, reduce the burden on the productive economy and limit the deficit on the current account of the balance of payments
Privatization - a change of ownership from the public to the private sector e.g. bus services. Deregulation - the removal of barriers to entry which protect most nationalized industries and allow them monopoly power. Franchising - the right to operate a particular service with or without public sector assistance. The types of nationalized industry privatized in the public sector fall into various categories; 1. Transport services - such as the National Freight Company (NFC),Sealink, Inter-city coach services, local buses and passenger train services. 2. Transport infrastructure - such as Associated British Ports, British Airports Authority and the railway infrastructure.
1. Management Buy Out (MBO) - here the present managers and employees buy the company from the government having raised the money from banks, often secured against their personal assets. e.g. NFC. 2. Public offering - where shares in the company are sold to the public and financial institutions. e.g. British Airways.
The negative externalities generated by transport services would not be regulated by private firms and the external benefits of public transport would not be considered either. Transport is an essential service and when in public ownership a meaningful transport policy can be developed and delivered. The subsidised public sector allowed a redistribution of income towards the less well off. Workers preferred working in state industries - less confrontation etc.
The consumer benefits from a wider choice, higher quality of service and lower prices. Wider share ownership is achieved - this is a political point. The revenue raised from the sale of nationalized industries reduces the PSNCR and benefits taxpayers. Deregulation The traditional approach The transport market was heavily regulated, by both central and local government. There were two basic types of regulation: Enforcement of minimum standards - such as safety. Commercial regulation - a licence system was used to limit competition, determine fares and service frequency. Deregulation (the removal of barriers to entry) aims to create a more competitive or contestable market. While quality licences have been strengthened to maintain safety standards - and this in itself is a form of barrier to entry - coach and bus markets have been opened to competition. The air travel market and rail has seen some deregulation. Road haulage was deregulated in 1969, but the privatization of NFC in 1982 meant there were no public sector companies operating in that market. Recall that a contestable market is one where there is freedom of entry and exit. Thus excess profits attract new competitors and losses mean firms leave. As a result of perfect contestability excess profits are competed away as in the perfect competition model. An important question is; are the deregulated transport markets more or less contestable than before? Also have the attempts to deregulate these markets improved the allocation of resources in terms of efficiency and equity? Subsidies and Cross-subsidization A consequence of deregulation has been the loss of subsidy paid to passenger transport. We shall take buses as an example. The argument for paying subsidy to bus companies are well known. It provides lower fares for the less well off and otherwise unprofitable routes are operated providing a social service to less populated areas (such as rural areas). Publicly owned bus companies also engaged in cross - subsidization of routes. They allowed revenue from well used, profitable, urban routes to subsidize unprofitable routes. The combination of public subsidy and cross - subsidization allowed a network of services rather than a few profitable ‘trunk routes’ that a completely private service would be able to operate. Cross - subsidization, which is internal to the business, was attacked on the grounds of efficiency. Some fares must be higher than they need be to allow the unprofitable routes to operate. Potential cost savings are not, therefore, passed on to the customer. It is a form of implicit taxation i.e. users of popular routes are being ‘taxed’ by the bus company in order to redistribute income towards those who use unprofitable routes. Cross - subsidization can also be wasteful. Some marginal routes are supported too generously. It is unusual for a thorough cost - benefit analysis to be carried out on each route. Subsidies are external to the business. Privatisation aimed to reduce the sums paid in subsidy, seeking ‘value for money’ in public spending. Coach and bus deregulation The bus market was deregulated because of the perceived success of the deregulation of the express bus service. This had led to reduced fares, higher quality services and more passengers using long distance coaches. The 1984 White Paper on buses argued: Co-ordination and planning on the pre-1986 scale was unnecessary and wasteful when a significant proportion of bus services could be provided commercially. The old form of network subsidy blunted competition and acted as a disincentive to operators to find new ideas and cut costs. There was little incentive to develop new markets as a new operator had to ‘prove’ the need for a new service to the traffic commissioners. The evidence from express bus deregulation In fact the success of express bus deregulation was not due to the greater contestability of the market, but to the National Bus Company (NBC) and its subsidiaries which dominated the market after the initial period of deregulation and the essentially local operators who ventured into the market withdrew. The private sector reacted in one of three ways to express bus deregulation. No action - because of the risk and small size of each firm. Entered the market and failed. Most of these services were from their home base to London. The main reason for failure was the competition from a large company (NBC), poor terminal facilities and poor management and marketing. Entered the market and were successful. These represented 2% of firms in the industry. The response of the large operators to competition was to lower fares and concentrate on major routes at the expense of cross country routes. There was clear evidence of a high cross elasticity of demand with BR and commuter buses have become popular. The benefits accrued to commuters and travellers to London especially (even those travelling on BR as fares fell). The losers have been those using less popular routes and BR actually lost revenue. The evidence of coach deregulation was, surprisingly, used to justify bus deregulation. Bus deregulation The deregulation of buses was intended to lead to more services and lower fares. Also councils would be better able to judge the costs and benefits of supporting a service by a tendering system. Operators would tender a price for the operation of a route that provided a social service. The lowest tender got the right to operate the route with the subsidy requested. Value for money in public expenditure was then assured. Various trials were held to test deregulation, one of the areas being Hereford. The results of this experiment were; Dramatically increased services. Lower fares. Lower public subsidy But also Reduced passenger information. Demand was not sufficient to support all the operators. Timetables which ran from 8 am to 6.30 pm. Bunching of departures leading to congestion. Fewer services as operators withdrew. Rural routes only saw competition for contracts. The main aim of the trial was to halt the decline in rural bus services. In this sense it failed as part of the rural network was lost. However there was a competitive market for the contracts and subsidies fell and the quality of the service was reduced. Subsidy levels in Hereford Oct1981 - Mar1982 Oct1982 - Mar1983 Oct1983 - Mar1984 Subsidy at Oct 1982 prices £80,797 £52,592 £44,292 Remember that these figures are old! £80,000 represents £2 a person for Hereford at the time, around £10 to £12 in current purchasing power terms. Details of local bus deregulation The previous system saw operators being given ‘Road service licences’ by Local Transport Commissioners. Outside of London this system was replaced by a system of registration where any PSV (Public Service Vehicle) operator’s licence holder could run a bus service. Those wishing to operate a bus service simply register with the ‘Traffic Commissioners’. No time limit or commitment is required, although 56 days notice is required to cease service. The local authority can only object on the grounds of: Road safety. Congestion. District or county councils decide on the level of subsidy available. There are two possible systems: 1. Full cost - the council pays all the costs of the service and receives all of the revenue. 2. Subsidy - the operator gets the revenue and receives an agreed sum from the council. The first method allows the council to vary fare levels, the second tends to lead to pessimistic forecasts of revenue from operators who therefore seek higher subsidies. Both require a check on quality of service and reliability, the first requires a check on revenue. The subsidy method is used by all but one council. In London almost all services are operated on the basis of a London Transport bus agreement. This is a tendered franchise from London Transport Buses to operate one of their services. It is a valid point to ask which system works better. One where the competition is between operators ‘on the road’ (i.e. outside London) or where the competition is between operators for franchises (in London). We shall return to this. The theoretical benefits of contestability By increasing the level of competition in the bus sector and moving towards a contestable market it was hoped that there would be: a fall in average operating costs (improved productive efficiency) lower fares a reversal in the decline of bus use a reduction in state subsidies the end of cross-subsidisation improvements in the quality of service as the sector became more responsive to the needs of the consumer (dynamic efficiency) improvements in the quality of the bus stock greater supply of bus routes new services
There has been a wasteful duplication of services on many main routes. There has been a misallocation of resources between busier and quieter routes. Network facilities have been neglected - such as reduced ticket co-ordination, poor timetable information and poor linking of connecting services. Reduced vehicle quality (although there was significant investment at first).
Poor co-ordination would be particularly serious in tourist areas. Competition between subsidised and commercial routes - In urban areas a subsidised rural route may be undercut by a commercial firm, making the subsidy a waste, or the commercial firm may be undercut by the subsidized operator which is anti-competitve. (The subsidy was intended for rural not urban travellers.) Cross-subsidy was seen as undesirable in the government white paper because it was assumed to be the subsidization of loss making routes by profitable routes. In fact routes can subsidize themselves, i.e. peak time surpluses allow the running of off peak services and urban portions of routes allow the subsidization of rural portions. Eliminating all cross subsidies could lead to the requirement for more council support for services. Many existing bus operators have withdrawn from established routes due to the low returns. While other operators could enter the market in practice few have the suitable vehicles or capital to do so. There could therefore be a shortage of operators on the marginal routes. Specific effects of bus deregulation Operating Costs Operating costs the introduction of competitive pressure has forced firms to cut costs and raise productivity. Outside of London over the period 1994/5 and 2002/3, the operating cost per vehicle kilometre has fallen from £1.03 to 97p at 2004/5 prices. However in the year 04/05 they rose to £1.03, mainly due to fuel, staff and insurance costs. A similar trend is observed inside London (but higher costs due to local factors including slower journeys.) Rising Fares Despite falls in operating costs fares continued to rise in real terms. Over the last decade real fares have increased by around 20% for local bus services outside London. During the same period, private motoring costs have decreased by 4%. Deregulation has not had the desired impact on the level of fares. In London, Transport for London, have maintained fares meaning a fall of 3% in real terms, due to various fare concessions and saver cards, including the Oyster Card which has proved very popular. Overall bus prices in London have risen by 15% in real terms in the last decade. 
Passenger Numbers Bus use continues to decline. Rising fares have contributed to the decline in bus use. Over the last decade bus use has declined by over 18%. There are, however, signs that the decline in passenger journeys are levelling off. Clearly deregulation has been unable to reverse the long term decline in passenger numbers. Bus miles are, by contrast up. This means that more buses are running but with fewer passengers. 
The obvious difference between London and the rest of the country is striking. It is most likely that the rise in bus use in London is due to the combination of policy measures, including the congestion charge and increased provision of services. However privatisation has reversed the decline in the provision of bus services. Despite falling passenger journeys, buses are driving further. This reflects the provision of more frequent, but smaller buses. Bus Operating Subsidies Subsidies initially declined - Subsidies for local buses declined in real terms from £513m in 1988 to £222m in 1998. The introduction of competitive tendering for unprofitable routes has reduced the cost for the state and has freed money to be spent in other areas. Part of the rise in fares can be explained by the decline in subsidies. In 2002 82% of bus services outside London were run commercially. However there has been greater subsidy in recent years. Transport for London have raised total spending on busses by 511% between 1997/8 and 2006/7. The Rural Bus Subsidy Grant was introduced in 1998. The table below shows the latest available figures for bus subsidies. 
The end of implicit taxation Prior to deregulation many loss making rural bus services were cross-subsidised by profits from urban routes. This was seen as a form of implicit taxation on the urban bus users and economically inefficient. Many argued that the benefits gained from the provision of rural routes were less than the cost of providing these services. Since deregulation this distortion in the market has been removed. However, the number of rural bus services has declined. The decline in rural services has a huge impact on low income families in rural areas and could be socially divisive.
Initially there was some evidence that the bus sector has become more responsive to passenger needs. The supply of local bus services increased by 12% between 1997 and 2007. This means that new routes have been developed. The nature of the bus stock has changed to allow more regular, but smaller, buses on popular routes. In 1998, 32% of buses are were mini/midi buses. There has also been an increase in the number of low floor and kneeling buses. On the negative side, there has been a decline in the number of off-peak services as firms concentrate on busy routes. The quality of the bus stock has declined as the bus stock has been allowed to age (as new investment is deemed unworthwhile). Also, with so many different companies, it has become impossible to co-ordinate timetables and allow through ticketing. Employment and safety The number of workers employed in the bus sector has declined by 12 % over the last decade. This has been driven by the need to reduce costs in a competitive market. While operating costs have been reduced, some commentators believe that this has been at the expense of passenger service and safety. Conclusion - Has bus deregulation worked? Some of the theoretical benefits predicted by economists have materialised. Deregulation has, however, failed to reduce passenger fares and the long term decline in bus use. Without an increase in bus use the future for congested urban areas looks bleak. In 2006 the House of Commons Transport Committee concluded that the bus industry could ‘not be made to work’ without overhaul. The committee thought that bus service overall was poor quality and unreliable (although statistics don’t show that) and there were too many old inaccessible vehicles. Directory: files -> quia -> users users -> L y aura un quiz sur le vocabulaire users -> 007. Explain and demonstrate basic cad commands and techniques users -> Vocabulary review users -> Three Approaches to Defining Jazz Mark Gridley, Robert Maxham and Robert Hoff Copyright 1989 by Oxford University Press users -> Inventions and Inventors Web Quest Introduction users -> How do we handle these contacts? users -> A brief History of the Personal Computer users -> Lecture #13 the civil war from The Election of Lincoln to the Surrender at Appomattox Election of 1860 users -> Hours: 05 Term: Winter/Spring 2005 Days users -> Ch. 1 Thinking Geographically Download 4.92 Mb. Share with your friends:
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