Vouchers or Tendering? A Comparison of Two Approaches for Handling the Mohring Effect in Public Transport.
J. Ahlberg, Swedish National Road And Transport Research Institute And Centre For Transport Studies, J-E. Nilsson, Swedish National Road And Transport Research Institute And Centre For Transport Studies, R. Pyddoke, Swedish National Road And Transport Res
The overall research issue is to make a comparison of vouchers and tendering as means for implementing a welfare maximising solution for public transport. The Spence model will be used as a means for benchmarking the two alternatives.
van Reeven (2008) triggered a debate over the overall relevance of the Mohring effect (Mohring 1973) as a motive for subsidising public transport. In the present paper, the validity of the Mohring effect is taken for given, and the focus is rather on establishing the cost minimizing implementation of public transport supply and usage. In this, the relevance of second best motives for subsidies is disregarded.
We use the approach of Sonesson (2006) and Gómes-Lobo (2011) to spell out the particulars of this debate, based on the seminal Spence (1975) model. The welfare maximising price and supply is compared to two different implementation approaches. One is the by now familiar tendering solution, by Gómes-Lobo (2011) characterised as a regulated monopoly. The other is a voucher approach where a commercial, profit maximising operator receives a subsidy sx for each traveller and possibly also a (positive or negative) subsidy sb per bus. Two outcomes are conceived of for the voucher approach, one where the market collapses into one single operator (much as in Britain outside London) and a second, oligopolistic outcome. The overall research issue is to make a comparison of vouchers and tendering as means for implementing a welfare maximising solution for public transport. The Spence model will be used as a means for benchmarking the two alternatives.
The background to the analysis is that Sweden’s taxpayers and its users of public transport today split the bill for local and regional public transport even between them. The subsidy is implemented by way of competitive tendering. A (regional) public transport authority awards a contract to the bidder that is willing to provide pre-specified services at lowest cost. The difference between costs and ticket revenue is made up for by the subsidy.
The market for public transport, both by bus and rail, was opened for entry in January 2012. Any fit, willing and able operator is now entitled to provide services on a commercial basis. During the first year after market opening, little has happened. Since a commercial entrant has to compete with the existing service provider who only charges the customers half the costs for running buses or trains, there are probably very few examples where an entrant could offer a viable service in terms of price and quality.
Gross cost contracts are standard in the industry. This means that supply is specified in great detail, including routes and stops, departure frequency, technical requirements on the vehicle, prices and so on. Bidders’ main degree of freedom lies in the roster schemes for staff and rolling stock.
In combination with rapidly increasing costs for providing the services, the rigidity of this system makes it relevant to consider alternatives to tendering. The interest in a voucher approach emanates from its current use in Sweden. School children can choose between private and public schools and the provider of teaching is remunerated by the same amount per pupil irrespective of who provides the service. The same approach is used in primary health care. Providers charge each patient a nominal amount on arrival and are then remunerated according to a system based on the number of people that register with each health centre. Transferred to public transport, operators would be given complete freedom to design routing, frequency, charges etc. The public sector intervenes (primarily) by way of a subsidy per passenger, meaning that the (value of) demand from the perspective of an operator is higher than from the users’ point of view.
It is obvious that an introduction of this type of system must be based on techniques which could validate patronage. If not, it is impossible for operators to make credible claims for subsidies. Except for requiring the investment in this type of monitoring equipment, it is also necessary that the PTA requires tickets to be interoperable. If not, there is a substantial risk that passengers could not benefit from the supply of public transport by more than one operator.
Gómes-Lobo, A. (2011). Monopoly, Subsidies and the Mohring Effect: A synthesis and an extension. Universidad de Chile, SDT 336, www.econ.uchile.cl/SDT
Mohring, H. (1972). Optimization and Scale Economies in Urban Bus Transportation. American Economic Review, Vol. 62, No. 4 (Sept), pp. 591-604.
Sonesson, T. (2006). Optimal System of Subsidization for Local Transport. Vinnova Rapport 2006:09.
Spence, A. M. (1975). Monopoly, Quality, and Regulation. Bell Journal of Economics, 417-429.
van Reeven, P. (2008). Subsidisation of Urban Public Transport and the Mohring Effect. Journal of Transport Economics and Policy, 42, 349-59.
Association for European Transport