Optimal Performance-based Subsidies in Norwegian Intercity Rail Transport

Optimal Performance-based Subsidies in Norwegian Intercity Rail Transport


N Fearnley, J-T Bekken, Institute of Transport Economics, NO



The Norwegian Ministry of Transport?s (MoT) 2002 White Paper on Public Transport prescribed performance-based contracts for PSO passenger rail purchases. The rationale was that such contracts provide a better allocation of risk and responsibilities between authorities and the operators, and will further give incentives for cost and market efficient solutions.

The Norwegian Institute of Transport Economics (TOI) was commissioned to develop the main principles of such a contractual regime for the three Norwegian intercity lines.

The aim was to design a contract in which the incentives combine the social benefit maximising objectives of the MoT with the Norwegian State Rail?s (NSB) commercial goals. This is a novel and promising approach to contracting for public transport services.

TOI has developed a simulation model for public transport. The model maximises social surplus or profits for a public transport system with the relevant constrains applied to capacity, fares and total amount of subsidies. Formally it is a matter of non-linear programming with non-linear constraints.

The model has been used to estimate socially optimal subsidies, which encourages NSB to increase patronage and to take benefits to existing passengers into account. By optimal subsidy regime we mean that the arrangement maximises net social benefit compared to the present situation. Within the model net social benefit comprises: (1) change in NSB?s profit (producer surplus); (2) change in passengers benefit (consumer surplus); (3) changes in environmental and congestion costs; and (4) resource cost of public funds.

Model runs show that a profit maximising and unregulated NSB will run a substantial financial surplus, but the cost to society exceed this profit considerably, such that the welfare loss is estimated to NOK 320m.

Through a series of model iterations we have designed a combination of subsidies per passenger, per train kilometre and for seat capacity. With these incentives, NSB will, on a commercial basis, strive towards service levels that resemble the social surplus maximising levels of service. The subsidies internalise the benefits to existing and new passengers and the effect on road congestion of rail service improvements into NSB?s decision criteria. They also reflect the fact that rail fares are regulated. The performance-based subsidies will bring about a welfare gain of NOK 8 million.

As a safety net, we recommend a set of additional conditions and bonus/malus arrangements. Most important are (1) bonus/malus for train cancellations and delays, based on the principles of internalising passengers? benefits or costs into NSB?s decision criteria; and (2) the threat of tendering if quality measurements and performance levels fall below a certain level.

The final negotiations over the performance-based contract between MoT and NSB will take place in February-March 2003.


Association for European Transport