PPP in Suburban Railway Transport and the Cost of Social Inclusion

PPP in Suburban Railway Transport and the Cost of Social Inclusion


A Dementiev, Higher School of Economics, RU


In a theoretical model we compare two delivery models of suburban rail passenger transport in Russia - Compensatory Agreements and PPP and find that the latter guarantees better quality of services but social inclusion may decrease.


Transport authorities worldwide seek for the delivery mechanisms that would tie the service provider objectives to public policy needs while maintaining incentives to innovate. A potential conflict of interests between public purchaser and private provider of transport services may at least partially be smoothed if they co-operate at the tactical level and build a partnership relationship.
In this light the ongoing reform of suburban railway transport in Russia provides a relevant case study material to analyse the creation of Suburban Passenger Companies (SPCs) in the form of joint ventures between local authorities and regional divisions of Russian Railways (RZD). This specific form of PPP aims at internalizing the conflicting objectives of the public partner (local authorities) and service provider (RZD). Though the latter is a 100% state-owned joint-stock company its corporate objectives and declared state policy goals make it possible to consider the company as a private profit maximizer rather than common public service provider. The nature of the conflict results from the fact that local authorities de jure have Public Service Obligation (PSO) to provide transportation services but have very limited budgets to fully finance the purchase of such services from the monopoly operator which is regional division of RZD. However, local authorities can influence the regulator?s decision to set tariffs at the ?socially acceptable? level which can?t often cover the cost incurred by RZD. Moreover, numerous passengers eligible for federal and regional benefits when travelling on suburban trains enjoy concessionary fares by law.
Thus RZD produces losses which regional authorities may at least partially cover pursuant to so called ?Compensatory Agreements? which by design appeared to be incomplete from the contractual point of view and poorly enforced. In the absence of clear procedures for cost structure determination on the railway transport in Russia local authorities may not trust the information on cost reported by RZD. However at a local level only 14 regions (out of 70) agreed to fully compensate for the concessions determined locally. This form of ?co-operation? (viewed as default option) predictably resulted inconstant negotiations with low incentives to invest in the sector for both parties. Not surprisingly, the majority of regions have demonstrated low interest in sharing the losses with RZD.
The alternative to Compensatory Agreements was the establishment of SPCs. 11 regions have formed SPCs with RZD so far and 4 new SPCs are to be established in the nearest future. Some of them managed to turn to profitability within two or three years after establishment, all of them improved quality of services. If such a form of PPP proves to perform better in terms of financial results and quality of services why not implementing it economy-wide? Are there any regional factors that make railway undertaking of any form profitable or is this result attributed to the establishment of joint venture only? What theory tells us about parties? incentives to form such a partnership and why the corporate structure of created SPCs varies across regions?
To address at least part of these questions we build a theoretical model which captures the basic stylized facts of the PPP creation process in Russia by comparing Compensatory Agreements and PPP practices in Russian suburban rail passenger transport. Then we discuss the findings of the model in terms of policy recommendations that might be derived from the theoretical analysis.
The model shows that Compensatory Agreements provide poor incentives for local authorities to comply with signed contracts, for reasons such as distrust of estimated losses incurred by the railway and a lack of incentives for the railway to control costs. They also provide few incentives for the railway to improve service. The PPP model seeks to internalise the conflicts between local authorities and the railway, which is seen as a prerequisite for moving the relationship towards a trusting partnership.
The analysis of the two delivery models suggests that the PPP model is likely to produce a higher level of organisational and technological innovation and better service quality than the Compensatory Agreement but that neither model is likely to produce the socially optimal level of organisational and infrastructure innovation. The PPP model is seen to always produce an improved outcome for the railway but need not do so for the local authority. For example, consumer welfare can rise of fall after implementation of a PPP model (e.g. service levels may improve but fares increase, while the ?benefit? from ?free travel?, or fare evasion, and consequently social inclusion may fall), which affects the local benefits from that approach.


Association for European Transport