Cost Developments and Competitive Status of the Bus Industry – Evidence from 15 Years of Competitive Tendering in Norway



Cost Developments and Competitive Status of the Bus Industry – Evidence from 15 Years of Competitive Tendering in Norway

Authors

Jørgen Aarhaug, Institute of Transport Economics, Nils A Fearnley, Institute of Transport Economics, Fredrik Alexander Gregersen, Institute of Transport Economics

Description

Our paper investigates the developments in the Norwegian bus industry following the large-scale ramp-up of competitive tendering in the early 2000s. We conclude by drawing recommendations for a functioning market with real competition for contracts.

Abstract

The prospects of cost reductions for local authorities are among the key motivations behind competitive tendering of bus services. In Norway, cost savings were an explicit justification for the introduction of competition for local public transport operations in the early 1990s. Across Europe, competitive tendering is the main rule following EU regulation 1370/2009. The regulation refers to higher quality and lower costs as expected effects of competitive tendering.
However, in order for competitive tendering to achieve such goals, several market conditions must be satisfied. These include efficient competition, a level playing field, well-functioning markets for bus operations and buses.

Our paper investigates the developments in the Norwegian bus industry following the large-scale ramp-up of competitive tendering in the early 2000s. We utilize a complete dataset of all 156 local bus contracts awarded through competitive tendering in Norway since 2000. We also analyse the Central Register of Establishments and Enterprises (CRE) for structural developments in the bus industry.

We first present some overall tendencies in our datasets, including but not limited to developments in number of bids per tender, contract size and cost developments. Second, we build regression models in order to identify key drivers of cost developments. The model finds that over time, the cost per kilometre has increased more than the inflation rate. Furthermore, the model finds as expected a significant effect of the number of bidders on the contract price. On average, an additional bidder for a contract reduces the contract cost per kilometre by NOK 2 (€0.25).

This finding leads us to a further investigation of drivers behind the number of bids that each tender attracts. One finding is that larger contracts, i.e. larger production of bus kilometres, tend to attract more bids. Furthermore, the maximum allowed age of buses in the tendering contracts emerges as an interesting variable in our study. Higher maximum ages tend, as expected, to reduce costs but are, on the other hand, associated with fewer number of bidders. Our paper discusses this dual effect in light of characteristics of bus fleet markets, fleet ownership trends and the way tenders are designed.

Combining CRE data with evidence from bus contract awards, we document that while the total size of the bus sector has increased in terms of vehicle mileage and number of employees, the number of companies has fallen. This is the case both for the total number of companies and for the number of companies submitting bids to the tenders. We relate this fact to the observations of number of bids and real price increases over time.

Publisher

Association for European Transport