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Transport

This paper analyses the main outcomes and consequences of the bidding process for urban bus services that took place in Belo Horizonte, Brazil, during 1997-98, focussing on economic efficiency and changes in fares.

It finds that:

• the operators granted contracts were those offering the highest bid; the bidding process was designed in this way because it was concerned with obtaining fiscal resources for government rather than with efficiency
• the method for remunerating the companies – under which all on-bus revenues were taken by the public transport authority, and then redistributed to the companies according to the average costs they were expected to incur – was not concerned with cost-efficiency, and did not transfer revenue risk to the companies
• contracts were signed for ten years, which meant that the competitive pressure on the companies was weak, and did not require adherence to performance criteria or standards or operational targets
• the number of vehicles in operation and the number of kilometres covered by the system increased dramatically immediately after the bidding process
• however, the number of passengers, which had already been on a declining trend, continued to fall, due to growing unemployment and the increasing use of cheap informal operators such as vans; consequently revenues fell
• the fact that operators increased their service levels while revenues were falling suggests that the policy of centrally determining prices and service levels gave them inadequate incentives to collect revenues
• the transport authority was not allowed to subsidise the system and so had to boost fares by about 12 per cent in order to cover its costs
• service productivity, as measured by passenger per vehicle and passenger per kilometre worsened by 20-25 per cent between 1998 and 2002
• reforms to the regulatory system implemented in mid-2003 appear to have decreased costs, allowing revenue to exceed costs for the first time since 1999, but have also worsened the level of service, as indicated by increasing numbers of customer complaints.

In the light of these findings, the paper concludes that contracting out bus services does not necessarily ensure cost-efficiency in the absence of a well-devised competitive tendering process and an effective regulatory framework, and that more attention should be given to these considerations in the design of future bidding processes.

Summary originally provided by GDNet, an Eldis content partner

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