l sS L~~~~~~~~~~~~~o 5} 0t~~~~~~I] ' Regulatory Reform in Transport: Some Recent Experiences A World Bank Symposium Regulatory Reform in Transport: Some Recent Experiences edited by Jos6 Carbajo The World Bank Washington, D.C. © 1993 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 1993 Second printing November 1995 The findings, interpretations, and conclusions expressed in this study are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lIna, 75116 Paris, France. Acknowledgments Thanks are extended to Barbara Koeppel for her valuable assistance in the editing of this document, and to Esra Bennathan for his constructive comments and advice. Thanks also to Tracee Graham and Barbara Gregory who provided excellent secretarial support in preparing this volume for publication. Library of Congress Cataloging-in-Publication Data Regulatory reform in transport: some recent experiences / edited by Jos4 Carbajo. p. cm. Includes bibliographical references. ISBN 0-8213-2331-8 1. Transportation and state-Developing countries-Case studies. 2. Transportation-Developing countries-Deregulation-Case studies. 3. Transportation-Deregulation-Case studies. 1. Carbajo, Jose, 1958- . II. International Bank for Reconstruction and Development. HE148.5.R45 1993 338'.068-dc2O 93-16712 CIP v Foreword The markets for transport services have been costs of correcting them via government interven- traditionally the subject of government regulation tion and public ownership. Two interrelated and public ownership. Rate regulation in the issues are at the center of the debate: whether railways, entry restrictions in the trucking indus- govermment intervention is better than the absence try, minimum levels of service for urban buses of any intervention; and if some regulation is and cargo reservation for shipping are examples necessary, what should be the scope and content of regulatory controls on transport that have been of such regulation. This debate is particularly promoted in many circumstances worldwide. The relevant for developing countries where the economic model that supports such regulations in inefficient delivery of transport services is a all transport modes has been based on the belief major obstacle to productivity growth and the that, under some circumstances, private markets improvement in the quality of life. Equally fail to provide transport services in the most important, the regulatory reform of the transport efficient manner. Theoretically, this same model industries is directly related to the efficient takes for granted that government intervention is provision, operation and management of infra- flawless. It is not at all clear, however, that the structure. The analyses and case studies included government cure works better than the private in this volume, both by practitioners and schol- market illness. The belief that government inter- ars, provide an account of both issues as they vention may produce more welfare losses than the present themselves worldwide. absence of any intervention has been the driving force behind the movement for reform in trans- port which started in the late 1970s. The contri- Louis Y. Pouliquen butions in this volume attempt to capture the most Director important aspects of that regulatory trade-off Transportation, Water and Urban Development between the social costs of market failure and the Department, World Bank vgi Contents Foreword v Contributors viii Introduction and Summary 1 Jose Carbajo 1. Regulatory Reform of Transport 6 Thomas Gale Moore 3. Deregulation of Shipping: Lessons from Chile 19 Esra Bennathan 4. The Evolution of Railroad Regulation in the United States 31 Louis Thompson 5. The Recovery of the Railroad in Uruguay 45 Juan Berchesi 6. Bus Deregulation in the United Kingdom 50 Stephen Glaister 7. Transit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons 71 John R. Meyer and Jose A. G6mez-lbdflez 8. The Political Framework of Regulatory Reform of Transport Enterprises: Bus and Truck Deregulation in Chile 89 Robert T. Brown 9. Trucking Deregulation in Mexico 101 Arturo Ferndndez 10. The Case of Trucking in Sub-Saharan Africa: What Deregulation? 106 Alain Bonnafous wii Contributors Esra Bennathan Stephen Glaister Transportation, Water & Urban Development Reader, The London School of Economics and Department, The World Bank Political Science, London, U.K. Juan Berchesi Jos6 A. G6mezIhbfiez Administracion de los Ferrocarriles del Estado, Professor, Harvard University, Boston, Massa- Uruguay chusetts Alain Bonnafous John R. Meyer Laboratoire d'Economie des Transports, Lyon Professor, Harvard University, Boston, Massa- Robert T. Brown chusetts Economic Commission for Latin America and the Thomas G. Moore Caribbean Professor, Hoover Institution, Stanford University Jose Carbajo Louis Thompson Economist, Transportation, Water & Urban Railways Adviser, Transportation, Water & Development Departnent, The World Bank Urban Development Department, The World Arturo Fernandez Bank Secretaria de Comercio y Fomento Industrial, Mexico l Introduction and Summary Jos6 Carbajo Functional failure is the classic economic ratio- tion improves the allocation of resources. That nale for government intervention in markets. test is the starting point of recent regulatory Market failure is the inability of private markets reforms, including privatization. If the case for to provide certain goods or services even though regulation was based on perceived market fail- provision is economically justified, or to provide ures, the argument for deregulation focuses on them in the most efficient manner. Its various regulatory failure. Regulatory failure occurs causes are imperfect information among market when the outcome of trying to address market agents, the presence of externalities, imperfect failures is inferior to that achievable in the ab- competition, or the existence of increasing returns sence of regulation (Bradburd and Ross, 1991). to scale. Government market intervention may An example is regulatory "capture:" when regu- be direct-the legislation and administrative lators adopt the regulated firms' objectives as regulation of prices, quality of service, entry, and their own. Regulatory inefficiencies, in turn, exit-or indirect, in the form of antitrust regula- arise in the form of a "wrong" amount of regula- tion intended to control firms in the unfettered tion, or when regulations are not implemented in exercise of their market power. the least costly way. In developed and developing countries, the Overall, there is a regulatory trade-off between markets for transport services have been a tradi- the social costs of market failure and the costs of tional subject of public control, going well be- correcting them via regulation, and the contribu- yond the regulations that have health and safety tions in this volume attempt to capture the es- for their motives. Rate regulation in the rail- sence of this trade-off as it presents itself in ways, entry restrictions in the trucking business, different transport markets, in developing and minimum levels of service for urban buses, or developed countries. They range from an analy- cargo reservation in shipping are but some exam- sis of the evolution and reform of regulation in ples of the myriad of regulatory controls on industries that have often been researched (such transport which have been promoted in the name as U.S. railroads and trucking) to the examination of the public interest. The overall effect of such of recent deregulation in less well known markets economic regulations depends on a variety of (Chilean shipping). This has also been the factors (Joskow and Rose, 1989): the motivation opportunity for comparing different regulatory for regulation, the nature of regulatory instru- reforms in the same market worldwide, as in the ments and the structure of regulatory processes, case of the urban bus industries of the U.K. and transport market characteristics, and the legal and of several developing countries. Brief case political environment in which regulation takes studies of trucking in Mexico and Sub-Saharan place. Africa, intercity bus and trucking deregulation in The true economic test is whether the regula- Chile, and railway restructuring in Uruguay com- 2 Introduaion and Summary plement this volume. The intention is to draw lessen competition and raise rates, except for lessons from the experience of those developing powerful interest groups. Contrary to predic- and developed countries where regulatory reform, tions, deregulation has not so far resulted in of one kind or the other, is taking place. A intense competition or market instability. The summary of the contributions follows. evidence is strong that trucking works better when unregulated. Regulatory Reform of Transport Shipping Deregulation in Chile For Moore, the debate about regulatory reform starts from the recognition that we live in an From 1956 to the end of the 1970s Chile reserved imperfect world. Policymakers must choose all coastal shipping as well as 50 percent of between options that achieve better, not perfect, foreign trade cargoes to national vessels. The results. The trade-off is between the unregulated object of the measure, in fact a value quota on private provision of transport services and its service outputs, was to protect and nurture the regulated alternatives. The former does not national merchant marine and promise its entry preclude antitrust legislation; the latter includes into markets controlled by the international liner two options: regulated private provision, or conferences. But during the 1970s these restric- public ownership and provision. tions came into ever more intense conflict with Regulation tends to protect firms from competi- the open-economy policy that characterized Chile tion, whereas government monopolies are neither after 1973. disciplined by the market nor by a regulator. An open-economy policy implies reliance on Privatization and deregulation are alternative exports to stimulate recovery and growth. In ways to restore competitive private markets to Chile, this required export diversification, a industries that governments have traditionally departure from the concentration of exports in controlled. In deregulating or privatizing an terms of commodities and markets, that is, the activity, governments should foster competition. typical consequences of import substitution Among the propositions formulated by the policies. Chile's traditional exports and imports theory of regulation are the interdependence had not been much affected by these restrictions, between the regulators and the regulated party, due to exemptions or enough political power the asymmetry in the information available to which protected their interests. The impact of regulators and regulated firms, the participation cargo reservation was rather felt by the new and of prices and the rate setter's lack of information expanding exports, since the required quality of on true costs, and incentives built into rate-setting vessels and service was not available in the rules, whether based on investment or operating Chilean fleet. Deregulation of shipping was cost criteria, which lead to inefficient allocation undertaken first as a necessary complement to the of resources. general open-economy policy. The history of U.S. railroad regulation shows In 1979, cargo reservation was totally abol- most of these effects. As its origin are govern- ished in external trade, with exceptions based on ment construction subsidies, and its evolution is the principle of reciprocity. In coastal shipping, governed by the interplay of various special cargo reservation was substantially relaxed. interests. Excess capacity forced down rates, and Export industries now had free access to modes, railroads were accordingly sympathetic to regula- quality, itinerary, and timing of transport accord- tions that would support and stabilize prices. ing to their needs and they were quick to take Railroads, grain shippers, and ports were all advantage of this freedom. The direct result was involved in accepting rate regulation. As a reflected in a large, quick switch between ocean result, rates increased in long haul, previously transport modes: the substitution of tramps or competitively priced, and declined little in the bulk vessels for liners. The indirect effect was to short haul. U.S. regulation of buses and trucks, induce more competition in the liner services. on the other hand, was to control competition The removal of cargo reservation affected the with railroads. market structure of Chile's shipping industry only In the United States, Germany, and New Zea- marginally. There was only one clear casualty land, the long run effect of regulation was to among its operators, as well as several mergers, Introducion and Summa?y 3 and some new entry. Several external factors, deregulation of U.S. railroads and trucking was such as the strong rise in exports from 1984 one of the conditions for its success. Political onwards and the reduction in operating costs acceptance was secured by the promise of direct resulting from the drastic reform of the ports, benefits to consumers and shippers, whereas played an important role in the survival of the opponents (trucking industry and unions) were industry. But when the incentives to operate divided and thus unable to influence the final under the national flag had disappeared, ship- outcome. owners cut costs by outflagging on a large scale. The political economy experience worldwide Bennathan finds that the benefits of shipping suggests that political support and the interest and deregulation in Chile were large and prompt to involvement of the critical policy makers are appear. The negative effects of regulation, on the necessary conditions for successful deregulation. other hand, had been neither minor nor diffused. The political significance of the railways in less They were concentrated on a limited group of developed countries (LDCs) is great. They are industries and firms which banded together in an large employers, usually represented by a special effective coalition. Timing of deregulation was minister and ministry. Moreover, many shippers well chosen, since it was introduced when the and final users are themselves public agencies market for ship operators was improving markedly. whose transport costs are borne by the public Above all, the deregulation of shipping in Chile budget. Hence, Thompson urges that a restruc- was seen as a necessary companion to the open- turing of the relationships among governments, economy policy. suppliers, and consumers should be considered before railway deregulation in developing coun- Railroad Regulation and Reform tries is attempted. Berchesi's account of the steps that were taken to introduce service rational- Railways were the first U.S. means of transport ization and reduce costs in the monopolistic to be regulated nationwide, in response to rate market of the railroads in Uruguay exemplify this instability caused by intense competition. Eleven conclusion. legislative landmarks, from the Interstate Com- merce Act of 1887 to the Transportation Act of Urban Bus Deregulation and Privatization 1958, shaped an entire period of U.S. railroad regulation. Thompson attributes the success of Bus deregulation in the U.K. had the primary the first piece of legislation to the commonality of purpose of reducing central and local government interests between the railroads, some major expenditures. Countrywide, bus subsidies had shippers and popular support. A similar regulato- risen from £10 million in 1972 to £520 million in ry framework was applied to trucking (the Motor 1982. The 'Buses" White Paper (1984) stated Carrier Act of 1935), with the same objectives of the government philosophy on bus policy: re- reducing competition and stabilizing rates. moval of quantity regulation, reduction of subsi- Throughout the regulatory period, railroads lost dies, and industry restructuring by privatizing the market share continually, both in the passenger nationalized operators and by separating the and freight markets, with the trends accentuating metropolitan counties operators from the tutelage after World War II. Trucking was the major of the local authorities. beneficiary. The experiences of the National Full deregulation occurred in January 1987. Railroad Passenger Corporation (Amtrak) and the Fares rose between 1984 and 1988/89 by an Penn Central, which gave way to Conrail, were average of 23 percent in real terms in the metro- two precursors of regulatory change. The Am- politan areas but by only 10 percent in the UK as trak case is particularly interesting. Congress, a whole. There was a 15 percent increase in the confronted with the costs caused by the rate and number of vehicle kilometers (1985-89), though service regulations, chose to eliminate regulation by smaller vehicles. Operating costs fell by rather than pay up. Similarly, a significant around 30 percent, excluding depreciation, except change in the regulatory regime was unavoidable in London, where costs fell 14 percent. Overall, if Conrail was not to continue as a major finan- the fall in public expenditure on local buses cial drain on the federal government. (excluding London) between 1984 and 1988 was The industrial restructuring that preceded 26 percent at constant (retail) prices. 4 Introduaion and Swnmary In London, rather than fully deregulating bus ly owned companies have an effective monopoly transport, routes were put out to tender. The on urban bus services in only a minority of philosophy was that of competing for the route developing countries (for example, in most cities rather than competing in the route. Tendering, it of India) and they still face competition from was thought, would avoid the risks perceived in other forms of close substitute services privately deregulation. It would allow local authorities to supplied, such as the motorized tricycle. control fares and plan an integrated set of servic- The interplay between privatization, regulation, es with cross-subsidy, while competition for deregulation, and the continuance of subsidies is tenders would provide the required pressure on based on the experience of several cities of costs. Glaister suggests that tendering may not developing countries, such as Colombo (Sri be as successful as deregulation, in its effects on Lanka) and Santiago (Chile). Four basic lessons costs and prices, unless it is applied to all routes emerge. First, the benefits of privatization and simultaneously. (In London, by mid-1990, only deregulation depend critically on the presence of 30 percent of bus kilometers had been let out.) effective competition. Second, the introduction Some of the difficulties in London stem from the of market-oriented services has other benefits fact that the major incumbent operator is owned besides reduced costs and improved productivity. by the tendering authority and from the fixed Third, the maintenance of unprofitable but socially nature of the contract specification. Franchising worthwhile services, and also the regulation of may, therefore, have some advantages over fares, can be pursued while establishing a viable tendering. and competitive private sector. In developing But the overall conclusion is that bus deregula- countries, the prospect for using subsidies as a tion achieved its primary objective in terms of tool to enhance competition depends on the reduced costs and subsidies. London's experi- prevailing administrative capacity. Finally, the ence with comprehensive tendering contains policy of subsidizing public transport, based on valuable lessons, of merits and some drawbacks, second-best principles, is questionable, since in particular the limited pressure that tendering transit subsidies may do little to reduce the exerted on costs. There has been little change in number of autos used in commuting. the general level of fares. Fare competition in local bus routes has failed to emerge. Cross- Intercity Bus and Trucking Deregulation subsidy has been replaced by explicit subsidy, while patronage does not appear to have respond- Intercity bus and trucking deregulation in Chile ed to the increased services at offer. were the result of global economic policies and Buses form the principal form of motorized not the outcome of sectoral reforms. Free entry public transport in the cities of the developed and into the trucking business resulted from imple- developing countries, and are subjected to vary- menting an antimonopoly government decree ing forms of ownership and regulation. Meyer which was approved in 1975. Freight rate liber- and G6mez-IbMlez discern an empirical cycle of alization would follow. private and public involvement in the provision of Brown describes the historical and legislative urban bus services that is based on ten phases context of transport deregulation in Chile. Policy characterized by several dimensions of bus regu- was shaped by the emergence of an economic lation: type of ownership (private or public), the ideology based upon the concept of the subsidiary scope of regulation as regards safety, roadworthi- state and the consolidation in power of techno- ness, fares, routes, entry and exit of firms, and crats and politicians with a deeply rooted belief in the extent and type of subsidies. The cycle goes free markets. from the industry's emerging stage (with numer- Trucking deregulation resulted in a dual market ous small private firms), through increasing structure. A few large and profitable companies public involvement, to a stage where the public coexist with thousands of independent truckers who authority faces the trade-off between higher operate under financial difficulties. Deregulation of public subsidies and higher fares and decides to the intercity bus market caused a proliferation of return the service to the private sector. new companies in the early stages, followed more Developing countries display a large variety of recently by market concentration and reinforced by systems of bus ownership and regulation. Public- the construction of private bus terminals. Introduaion and Summary 5 Mexican trucking deregulation occurred against the combined effects of vehicle type and quality the background of two macroeconomic policy of the road infrastructure. Any regulatory strategy objectives: the improvement of public finances entails policy measures that must be monitored and the reform of international trade practices. and enforced. The safety characteristics of Fernandez describes the inefficiencies of the vehicles and the control of overloading are some trucking industry which had their origin in a legal of the most difficult technical regulations to be framework of the 1940s and influenced special- enforced. Inefficiencies such as the payment of ized cargo and regular cargo and reviews the unofficial tolls to government employees cannot political context in which the regulatory reform be attributed to regulation and require the im- took place. The regulations of July 1989 were provement of the training and information acces- issued with the aim of promoting competition so sible to all market participants. that companies of different size would co-exist and provide a greater variety of services and References tariffs. A study of trucking costs conducted in 1988 Bradburd, Ralph, and David R. Ross. 1991. and 1989 in Cameroon, Cote d'Ivoire, and Mali "Regulation and Deregulation in Industrial serves Bonnafous as the basis to reflect on the Countries: Some Lessons for LDCs." Work- efficiency with which trucking services take place ing Paper 699. World Bank, Washington D.C. in these three Sub-Saharan African countries. Joskow, Paul L. and Nancy L. Rose. 1989. The results of two surveys, on prices and market "The Effects of Economic Regulation." In carriers, help to analyze the hypothesis that the R. Schmalensee and R. D. Willig, eds., Handz way trucking services operate in the local, region- book of Industrial Organization, Vol II, al, national, and international markets depends on Ch. 25. New York: North-Holland. 6 1 Regulatory Reform of Transport Thomas Gale Moore This paper sketches the origins of regulation, the market that resulted in government takeovers of rationale for government imposing controls, and specific industries. However, government owner- the reasons for deregulation. Although the ship and regulation were also problematic. Now, institutional details differ greatly around the as authorities have a better understanding of both world, the same political and economic factors govenmment and market failure, privatization and have been involved in both the origins of regula- deregulation have become the dominant para- tion and its subsequent relaxation. digm. Both theoretically and empirically, as will One difference stands out: in many parts of the be outlined below, unregulated private markets world, instead of regulating privately owned work better than controlled ones or government- industries, governments choose to own and owned monopolies. operate the utility or mode of transport itself. At The economics of regulation applies to all an International Monetary Fund seminar, Profes- industries supervised by governments: the gov- sor Said El-Naggar, formerly of Cairo Universi- ernment must decide on what constitutes an ty, said, "One of the most distinctive features of appropriate price and quality of service, as well the economic situation in developing countries is as who can offer it. At the same time, regulated the predominant role of the public sector in the firms will attempt to utilize the system to increase production structure." While the motivation for their profits. nationalizing the industry was often the same as This conference concentrates on the deregula- that for regulating it, the results were somewhat tion of surface transport, but all modes share different. Moreover, when the deregulation important characteristics. An airplane leaving movement began to sweep the world, in sectors with empty seats has the same problem as a train where the government owned the operating leaving with half-filled boxcars or a merchant companies the movement took the form of privat- ship without a full manifest. Some modes, such ization. as railroads, subways, and pipelines, are capital- Privatization and deregulation are alternative intensive and inflexible, while others, such as approaches to restoring competitive private trucks, buses, merchant ships, and airlines, are markets in industries that the government has much more adaptable and have less fixed invest- controlled since the 19th century, or early in this ment. century, when many governments nationalized or Less-than-truckload motor carriers, most bus regulated them. The forces and considerations operations, and a considerable portion of airline that led governments to remove them from the service use a hub and spoke mechanism, a system market and, more recently, return them to the pioneered by Federal Express with its introduc- unregulated private sector are virtually identical. tion of an overnight package network. They It was an earlier loss of faith in the competitive must normally provide scheduled service on fixed Regulatory Refonn of 7)ansport 7 routes with sufficient capacity to accommodate considering is antitrust policy. Even though it last-minute shippers or passengers. As a result, cannot turn an industry with only a handful of such carriers customarily operate at less than participants into a perfectly competitive market, capacity. For example, a load factor of 60 it can restrain some of the worst manifestations of percent is now normal in the U.S. airline indus- oligopoly: outright collusion can be prohibited try. By contrast, merchant shipping, tankers, and, most of the time, prevented. Furthermore, truck load carriers, charter buses, and air taxis government policy can thwart attempts to block offer point-to-point transport and can often gain entry of new carriers. Tacit collusion and price full loads on specific hauls. leadership, however, may just have to be tolerated. Unless a transportation company can differenti- ate its service from that of other firms, it cannot Theory of Regulation have an independent pricing policy. Although bus service differs significantly from rail, which Good theoretical reasons exist for believing that is sharply differentiated from air travel, within because unregulated private firms are subject to each of these modes passengers typically see little the discipline of the market, they will perform difference. For example, airlines have tried, with better and enhance consumer welfare more than only partial success, to differentiate themselves either regulated firms or government-owned from other airlines through frequent flyer pro- companies. Conversely, regulation tends to grams, amenities on the aircraft, and ground protect firms from competition. Government facilities. All of these attributes, however, are monopolies are even worse since they are disci- easily copied. As a consequence, there can be plined neither by the market nor by a regulator. little sustainable difference between airline fares Whereas the market forces firms to provide the and service. Thus, because it costs nothing to best service at the lowest cost, regulators have carry a passenger on a flight with empty seats, other goals; they are motivated by a desire to carriers are therefore induced to offer very low please their political superiors, politically influen- fares for standby passengers or others who might tial groups, and the firms they oversee. If the fill the plane. To prevent what the industry regulators are elected, they must raise funds and views as "cutthroat" competition, the airlines or obtain support for the next election. And, if other carriers are tempted to agree quietly on businesses oppose a regulator's reelection, win- fares. ning may be difficult. Moreover, the regulated Cutthroat competition is inherently unstable: industry or its supporters are often a source of one or more firms either are driven from the campaign funds. market or learn to control their pricing. This If the regulators are appointed to a commission need not result in monopoly, although it may by politicians, they are concerned with their mean that only a few firms offer the transport reappointment or with their careers after they service and competition may be less than perfect. leave their posts. Because they acquire consider- Where cartel type agreements are unenforce- able knowledge of the industry, their best job able or impractical, carriers have often sought opportunities will be within it. Furthermore, if government help to stabilize rates and prevent they are on good terms with regulated firms, they "excessive" competition. These industries nor- are more likely to find good employment. The mally claim that such regulation is in the public politicians who reappoint them also look to the interest, but the consumer, shipper or traveler industries for funds in their re-election bids. almost always pays more. Thus the political system is biased towards sup- Whether less than perfect competition is accept- porting the industry's position. Regulators often able depends on the alternatives. We live in an mix and socialize with industry officials. They imperfect world. If regulation is instituted either go to industry meetings to explain government to restrain a less-than-fully-competitive market or policies and hear the trade's position and its to prevent cutthroat competition, will the regulated troubles. Moreover, regulators recognize they firm provide a better or less expensive service? cannot bankrupt enterprises in the industry since Will any of the benefits of regulation outweigh these cannot supply services. And, at least in the the costs? United States, courts hold that private regulated An alternative to industry regulation worth companies must be allowed to earn a profit. 8 Regulatory Reform of 7ransporl Industry usually has the stronger position when uneconomic charges and financial difficulties for governments regulate rates, since industry offi- utilities, which means they may be unable to cials provide almost all the information about make the appropriate investments to maintain and costs, rates, demand, and service. At rate hear- expand their facilities. In general, increasing ings, the regulated firms employ the best legal rates to reflect costs becomes very difficult; the and accounting talent available. Regulators must great difficulties in the Eastern European coun- rely on low-paid government employees to coun- tries at present result from all prices, especially ter industry arguments. of daily necessities such as bread, being con- Not only do regulators have to rely on a few trolled by the state. In many other parts of the civil servants, but most regulatory commissions, world (such as Egypt, Columbia, and Peru) riots especially in the United States at the state level, have erupted when gasoline or bread prices have oversee a large number of firms in different been increased to bring them closer to costs. industries. State commissions typically control Moreover, if regulations do little to keep rates rates and services of telephone companies, elec- down and have the effect of strengthening mo- tric power utilities, natural gas distributing firms, nopolies, it may be better to suffer from an truckers, intrastate railroads and bus operators, unregulated monopoly that is subject to potential and assorted other industries. The Interstate competition than to rely on regulation. Technology Commerce Commission (ICC) oversees dozens of and entrepreneurial effort may erode the market passenger and freight railroads, thousands of position of the firm. Monopoly welfare costs are trucking firms and bus lines, and large numbers never large: the major effect of monopoly is to of freight forwarders and pipelines. Commis- transfer income from consumers to the stockhold- sions must spread their limited resources over ers of the corporation. And the importance of many highly technical topics and are unable to this transfer depends on the relative incomes of develop expertise about the industries they regu- consumers and stockholders and on personal late. values relative to such income shifts. Other factors also weaken their performance. As mentioned above, government officials, For example, whereas commissions are often including regulators, are often tempted to provide subject to intense public scrutiny when they benefits to politically influential groups. For decide on telephone or electricity rates, their example, farmers were involved in securing work on motor carriers or railroads is followed railroad regulations and in opposing regulation of intensely only by the trade. Even when they set motor carriers carrying agricultural goods. In telephone, gas, and electric rates, and despite addition, regulators frequently provide hidden public opposition to increases, commissions must subsidies for special interest groups: organized be concerned with insuring the viability (profit- labor, for example, has been favored repeatedly ability) of the operating companies. by regulators and government agencies, since the At least two studies have shown that regulation greater the number of workers and the better their has little impact on the rates for electricity pay, the more votes for politicians who have charged to residential users. Further, since supported prolabor policies. Other special inter- governments normally prohibit new companies est groups and politically influential consumers, from competing with existing regulated firms, such as the publishers of newspapers and maga- regulations strengthen the monopoly position of zines, which typically enjoy subsidized postal firms already in the industry. However, some rates, frequently benefit from regulations. research has indicated that even for electric Even if regulators were operating solely in the power, which is often considered the quintessen- public interest, which would in most cases be tial natural monopoly, competition has worked, contrary to their personal interest, regulation is producing lower rates. inherently faulty. Not only is information incom- Regulations also politicize prices: any time a plete and biased, since it comes from the indus- change in rates is suggested, political forces are try, but the regulatory process itself is fundamen- mobilized on both sides of the issues, while tally defective. economic issues, such as efficiency, receive little For regulators to determine appropriate rates, attention. In periods of rapid inflation, opposi- they must determine, in addition to the allowable tion to nominal rate increases can often lead to cost of providing the service, a reasonable profit Regulatory Reform of Transport 9 for the corporation. The problem is that, not market discipline frees government agencies to only are costs unclear, but utilities must be employ more workers than are needed and be allowed to earn on their investment at least the generous in wages and benefits, as well as to cost of capital. If the return is less, they will be provide management perks. In fact, since earn- unable to maintain and replace plant and equip- ings are simply returned to the government ment. treasury without benefit to the enterprise, it is An adequate profit rate, however, is a tricky senseless for a government enterprise to earn concept and uncertain at best. Regulators inevita- profits. Managers of government businesses can bly allow a return that is sufficient to attract always find costly ways to improve working capital to the industry. If this is above the cost of conditions or to further "worthwhile" objectives, capital, firms can increase profits by increasing precluding realization of positive returns. investment-the larger the investment, the higher In the United States most public utilities, the rates and the level of profit that utilities can airlines, and railroads have historically been justify to the regulators. Since the desire to privately owned but regulated by the government. increase profits motivates business, firms have an However, regulation limits the freedom and incentive to "over-invest" and this can result in therefore the property rights of firms. In other more capital and less labor than those that mini- countries utilities are usually government owned, mize costs. Thus, not only do regulations fail to which is the extreme example of limiting property protect consumers, but they result in inefficient rights. Hence, to return these activities fully to production. Furthermore, if there is some com- the marketplace requires deregulation in the petition, utilities can underprice their competitive United States and privatization elsewhere. business to justify larger investments (a larger In deregulating or privatizing an activity, rate base) and higher prices in their monopoly governments should foster competition. Structur- lines-a profit-increasing strategy. Not surpris- ing the policy correctly can often result in more ingly, competitors view this as unfair competi- competition than if a single government monopoly tion. To illustrate, if a railroad subject to rate or regulated monopoly is simply privatized or regulation competes with motor carriers for deregulated. For example, governments can transporting certain commodities, it will be break up a monopoly into rival corporations, as induced to cross-subsidize its competitive traffic the United States did with American Telephone and increase its rates for noncompetitive traffic. and Telegraph, and it can encourage firms to Having low rates in the competitive market enter. allows it to justify investing more in equipment to In summary, regulations fail due to the lack of move that traffic. If it is allowed to make a good information available to governments, the profit based on a percentage of its investment in inherent biases of regulators, the rate-setting this equipment, it can justify higher prices on its mechanism itself (which leads inevitably to noncompetitive transport, resulting in increased inefficiencies), and the politicization of price- overall profits. setting. Even though unregulated private monop- In some cases, allowed rates are based on olies charge excessive prices and produce ineffi- operating costs rather than investment. Since ciencies, they are ultimately subject to potential most of the costs for the motor carrier industry competition by entrepreneurs seeking to earn a are operating rather than fixed, the ICC has portion of their profits. Consequently, policy- traditionally looked at the ratio of operating costs makers should weigh carefully proposals to to revenue to determine maximum legal tariffs. In regulate an industry and move wherever possible such instances, the industry profits by agreeing to deregulate existing government-controlled on wages that exceed competitive norms in order enterprises. to justify higher charges and larger profits. Although regulators typically use their powers Origins of Regulation to protect or benefit special interests, the mischief they can perpetrate is at least limited by the According to N. R. L. Mwase, the absence of a desire and needs of the regulated enterprises for perfect market, especially in the developing profit. Govermment-owned firms, however, are countries, caused government to own, control, or free from profitability constraints. The absence of influence, among other things, the pricing system, 10 Regulatory Reform of Transport at least for public utilities. Construction of railroads in the United States For many decades this attitude was used to and in much of the rest of the world was heavily justify the regulation of railroads, trucks, and subsidized. In the United States, the result was other modes of transport. The only surprising considerable excess capacity in many major aspect of Mwase's statement is that he still be- markets. This increased competitive pressure lieves it. Modern theory and evidence suggest often led to rates being bid down to levels the that regulation is not necessarily justified when industry claimed barely covered operating costs, the market is "imperfect." Indeed, government with nothing left over for overhead. Thus, regulation is also flawed. Thus, in an imperfect railroads were sympathetic to any approach that world policymakers must choose which option would stabilize rates at profitable levels. will achieve a better result-not a perfect result. Where rival railroads did not exist, as for The regulation of surface transport has a long many short-haul movements, rates were often history. Under British common law, ferries and significantly higher than for through-traffic that bridge tolls were subject to state control by the faced competition. Moreover, except for a start of the 17th century. In the United States, handful of specially chartered corporations, the first federal regulation of transport came with railroad companies became the first large private the Interstate Commerce Act of 1887, which corporations in history and appeared threatening established partial control over railroads. Prior (to the public). For this reason, grain shippers, to the federal legislation, a number of states businesses in small communities served by only attempted to limit rail rates. State commissions, a single railroad (particularly where they exer- for example, operated in New England before the cised monopoly power), and various port authori- Civil War. Given the interstate nature of much ties wanted rates to be controlled. of railroad transport, however, these state agen- Under these conditions, the railroads supported cies were relatively ineffectual. regulations to stabilize and raise rates on competi- tive routes, grain shippers and small communities Railroad Regulation did so to obtain protection against monopoly pricing, and port authorities did so to reduce Virtually everywhere in the world, the pattern of competition among ports for export of grain. regulation or government ownership of railroads Given the public unease with the size of the originated in the 19th century. Often, railroads railroads, this coalition was able to secure legisla- were heavily subsidized by the government; tion establishing the ICC. The result was that national or regional railroad monopolies were rates increased on long haul and declined a little common. As a result, governments frequently on short haul. built railroads themselves, purchased them from The same pressures existed around the world private owners, or regulated them. but, probably because central governments were In Africa, for example, the French built rail- stronger than in the United States, state owner- roads in their colonies. And while the British ship was often substituted for regulation. In fact, encouraged the private sector to construct rail- in the 19th century, the U.S. government could roads in their colonies, the colonial governments not own and operate a railroad, or almost any took over the roads during World War I for major business, because there was no provision in national defense reasons, as did the Germans in the Constitution that explicitly permitted it. The their colonies. Constitution authorizes the government to provide In the United States, the factors behind the a mail service and a sound currency, and thus establishment of the railroad regulations by the makes government ownership (of the post office ICC are complex. No one explanation (neither or central bank) constitutional. The Constitution that railroads wanted regulation to enforce their also provides for the federal government to cartel nor that farmers wanted regulation to regulate interstate commerce; hence, the commis- control railroad monopolies) is valid. Rather, sion by that namne. Thus, regulations have been regulations arose, at least in part, from govern- used to control the industry, rather than owner- ment subsidies providing for construction and ship. It is not coincidental that the industries from the interplay of various special interest subject to the most extensive regulation in the groups seeking to capture economic rents. United States-railroads, airlines, power compa- Regulatory Reform of TJansport 11 nies, and water companies-were the ones that Trucking and Bus Regulation abroad were government-owned. In the second half of the twentieth century, The regulation of trucks and buses grew out of however, under the less stringent interpretation of their competition with railroads, which had the Constitution, the U.S. government took on enjoyed a monopoly position in many short-haul ownership of railroad operations (Conrail) and markets (although the longer routes were usually passenger transportation (Amtrak). In both cases, competitive). With the advent of motor carriers, the government took possession of money-losing however, short-haul transport was subject to activities to prevent them from being abandoned increased competition. or significantly curtailed. Today, Conrail has In the United States, railroads began to agitate been successfully privatized, but Amtrak, which for extending regulations to trucking and motor few believe can operate without subsidies, re- buses almost from the first horseless carriage; in mains in government hands. fact, they often brought successful suits in state In virtually all major countries, except in Japan courts arguing that the legislation establishing where passenger service was recently privatized, controls over railroads should be extended to rail passenger transport is a heavily subsidized trucks and buses. In response, several states government enterprise. The almost universal imposed limits on motor carriers. The U.S. rationale for taxpayer-subsidized rail passenger Supreme Court, however, held that individual transport is that substitution of rail for auto or air states could not regulate interstate trucking or travel reduces congestion and pollution. It is passenger traffic; consequently, state control of claimed that there are externalities involved motor carriers was largely ineffective. As a result which warrant taxpayers' funds to preserve a of the court decisions, state regulatory commissions, form of transport that cannot survive in the free railroads and the ICC, anxious to limit motor market. carrier competition, petitioned the Congress to Although this paper is not the place to explore extend federal regulations to trucks and buses. the issue fully, rail transport may do little for Partly because of opposition from the trucking congestion or pollution: Amtrak carries less than industry, Congress failed to act until 1935, in the 1 percent of all intercity passenger miles and its depth of the depression, when the American share has been falling. Under even the most Trucking Associations, speaking for large truck- heroic assumptions, it cannot reduce air pollution ing firms, turned to supporting regulations. from travel by more than 0.5 percent. And al- Thus, a competitive mode of transport was though a somewhat larger percentage of intercity brought under federal control. travel is by rail in most other countries, railroads It is unlikely that regulation would have been contribute little if anything to the abatement of imposed on the motor carrier industry without at either congestion or pollution. least weak support from voters and the media. For local public transport, the role of subways Public support for regulations reflected a notion or light rail lines in reducing congestion and that competition had failed as a regulatory mecha- pollution is equally negligible. Where new light nism. The Great Depression contributed signifi- rail lines or subways were built in the United cantly to this rejection of the market. The States, passenger traffic never lived up to projec- growth of socialist ideas, positive reports from tions; rather, passengers attracted to these sys- Communist Russia, and a belief that government tems were often diverted from bus systems. engineering of the economy could cure insta- Mass transit systems have induced few passengers bilities and inequities all contributed to the belief to give up their vehicles. Thus, if most passen- that regulations were superior to the market. gers were diverted from bus to rail, any environ- In the case of trucking, many economists and mental benefit must come from that substitution. transport scholars, as well as vested interests, But, since rail systems are costly to build-with claimed that regulations were appropriate: the respect to energy-the energy savings derived motor carrier industry was viewed as "excessive- from operations must be great enough to counter- ly" competitive. Entry was too easy. Firms balance the amount used in the construction failed to understand their costs. Prices were bid phase. down "too low." 12 Regulatory Reform of Transport In general, however, regulation of motor too much so in the railroad industry's eyes-that carriers was the natural extension of regulation or could perform well without government supervi- government ownership of railroads. Without the sion. Regulation, for the reasons given above, agitation of railroad interests, motor carriers would reduce competition and lead to higher would have remained uncontrolled. For example, tariffs. The critics turned out to be right. in Great Britain the Road and Rail Traffic Act of In the United States, Germany, and New 1933 established controls over entry into the Zealand (to take but three examples) regulation trucking industry. This imposition of controls over time led to higher rates, monopoly pricing, was a direct result of the Depression and the in- and less competition. In the United States, the creased competition with railroads, which found ICC "grandfathered" existing carriers: it awarded it increasingly difficult to compete with the new grandfather certificates of public convenience and mode. Germany imposed controls over its motor necessity that confined the truckers to those carrier industry in 1931. Unlike the British but routes and goods they could prove they had more like the United States four years later, the hauled prior to 1935. After the initial grandfath- Germans established comprehensive rate controls ering, it was virtually impossible for new firms to that tied truck rates to rail rates. The main enter the trucking industry: to secure a new objective was the protection of rail traffic. As in certificate of public convenience and necessity, most countries, the road haulage industry was the commission required the applicant to show taking the most profitable traffic, leaving the not only that there was a demand for its service railroads with uneconomic goods, much of which but also that existing carriers would not be able the government required the railroads to carry at or willing to provide the service. a loss. Bus transport was eating into the lucrative Eventually, the operating rights of regulated rail passenger market. The reduction in earnings carriers were worth hundreds of thousands or of the German state railroad was most disturbing millions of dollars, reflecting the monopoly because for a hundred years the profits of this profits inherent in the restrictions. Organized railroad had financed the government. labor shared about half the profits from restrict- New Zealand, which recently deregulated its ing entry. The losers were the shippers and-- road freight transport industry, introduced con- once more-the consumers, who were forced to trols over road haulage in 1936 "primarily to pay extra for trucking transport. Under pressure protect the government-owned railways' revenue from agricultural interests, however, the U.S. and to establish price stability in the freight Congress exempted the transport of farm products transport industry." Prior to the 1983 act dereg- from regulation, and a competitive industry of ulating the industry, trucking firms were subject exempt carriers developed to handle these prod- to price controls, route restrictions, and distance ucts. limitations. A number of studies showed that unregulated Virtually everywhere, motor carriers were trucking was superior. For example, studies by brought under government supervision not be- the U.S. Department of Agriculture showed that cause they failed to perform satisfactorily, but to after the courts in 1950 ruled that agricultural protect railroad interests. In this process, politi- products such as poultry, frozen fruits, and cians ignored the interests of passengers, ship- vegetables were exempt from regulation under the pers, and, ultimately, consumers who were forced law, freight rates fell 12 to 59 percent, with an to pay more for goods. average of 33 percent for fresh poultry and 36 percent for frozen. The weighted average decline Experience with Regulation for frozen fruits and vegetables was 19 percent. The department also found that shippers tended to From the beginning, economists in many coun- prefer the unregulated service to the regulated. tries criticized the regulation of motor carriers. In the 1970s a survey by the National Broiler They believed that bus transport was not as Council of its members gave further evidence of naturally competitive as trucking; but, as long as the effect of regulation on rates and the quality of there was a rival rail passenger network, competi- service: in comparing rates for the same routes tion was viewed as adequate. Trucking was between the same points, it found that, on aver- generally seen as a highly competitive industry- age, unregulated rates for cooked poultry were Reguloroy Refonn of Transport 13 approximately 33 percent less than rates charged Worldwide Liberalization by regulated carriers. Members also indicated that they preferred unregulated carriers to regulat- Most of the nations of the world have adopted a ed ones or found no difference between the two policy of privatization and deregulation. While on all aspects of service quality. many are simply giving lip service to the concept, Contrary to industry predictions, deregulation a significant number are actively pursuing liberal- has not brought excessive competition or instabili- ization policies. For example, many countries ty to transport markets. Australia was the first are selling state-owned enterprises or reducing major country to deregulate a significant portion government controls over the private sector. of its road haulage industry. In the 1950s, its Even economists in the former Soviet Union are Supreme Court ruled that the government could proposing denationalization and markets, although not regulate the interstate transport of goods. they have yet to accept fully the necessity of Although there are no data on rates, the industry allowing for private property. Until June 1989, is reportedly free of any instability or destructive China was moving towards deregulation and and wasteful competition yet is quite competitive. privatization. Poland recently embarked on an Experience in Europe demonstrates that regula- ambitious program of structural reform, including tions tend to produce higher rates. In 1970, the freeing prices, selling government assets, and United Kingdom, which had never imposed very opening up competition. Hungary has set up an restrictive regulations on road haulers, removed agency to manage and foster privatization. all economic controls over the trucking industry. The worldwide success of domestic liberal- After the limits on entry were abolished, rates ization efforts is the result of a change in intellec- appear to have fallen. tual climate. At the end of World War II the In comparison, Germany, with a more restric- prevailing paradigm was socialism. Most observ- tive regime, sharply limited the number of li- ers believed that, in one form or another, it censed vehicles. As in the United States, the would become dominant. Nevertheless, a grow- value of the licenses for each vehicle rose to ing body of literature on how poorly government hundreds of thousands of dollars. Furthermore, performed helped convince opinion makers, since Germany did not deregulate its motor intellectuals, and officials that markets often work carrier industry, these licenses are still very better than the government. For example, studies valuable, although the threat of deregulation with of unregulated airline markets, demonstrated they the formation of a true common market in 1992 performed better than regulated ones. The work has undoubtedly tempered their value. of James Buchanan and other public choice A study of rates actually paid during 1973-74 theorists showed that government administrators in Germany, the United Kingdom, other Europe- and bureaucrats have the wrong incentives and an countries with light regulation, and in the too little information to ensure good outcomes. United States, showed that costs were highest in In country after country nationalized industries heavily regulated Germany, almost as high in the have performed poorly. Often, they lose money United States, and considerably lower in the and large taxpayer subsidies are necessary. In unregulated or lightly regulated countries. many cases service is inferior to that provided The evidence that unregulated trucking works privately. Moreover, workers, who expected to better than regulated is forceful. The theoretical benefit from government ownership, have fre- justification for believing that a free market quently found that the government was no better works better than regulation is unambiguous. an employer than were capitalists. Nonetheless, it took a change in the ideological Finally, the obvious failure of socialist systems climate for the political system to change its around the world has proved the case for liberal- policies. Partly this change reflected the success ism. Germany worked better than the Commu- of airline deregulation; partly it reflected the nist East; South Korea is more successful than the success of unregulated trucking elsewhere; and socialist North; South Vietnam, before it was partly it reflected a new appreciation of the overrun, was more prosperous than the North. market as an allocator of resources. Hong Kong, with no natural resources, has become 14 Regultory Reform of 7ransport the second richest economy in Asia, while China Motor Carrirs stagnates. Taiwan, although less liberal than Hong Kong and Chile, prospers. Chile, which, Congress has deregulated truck and bus opera- under Pinochet, adopted free market principles, has tions almost entirely, but some controls remain. the most prosperous economy in South America. Operating licenses (certificates of public conve- The strong evidence that unregulated private nience and necessity), are still required and motor enterprise works better than either a government- carriers must file rates or tariffs with the ICC. In owned firm or a private, regulated one has con- recent years, the ICC has been fairly liberal in vinced much of the world to reduce government granting new operating licenses-often granting regulation and to privatize. Unfortunately, there nationwide authority to carry almost all types of is strong opposition. The status quo, whether a freight. Occasionally rates have been suspended governmental establishment or a regulated indus- or denied, but the commission has been generally try, provides benefits for some at the expense of permissive. others. Thus, those that benefit oppose privatiza- Such increased freedom produced a decline in tion or reduced government supervision of private freight rates and greater willingness of trucking enterprises. Even where industries were deregu- firms to go off-route to pick up or deliver freight, lated, those that profited from regulation want to although rates for truckload shipments fell farther restore government management. Maintaining a and more quickly than those for less-than-trucklo- liberal economy requires a continuous and often ads. At the same time, non-union firms and frustrating battle. For example, in 1989, the subsidiaries of existing motor carriers have secretary of transportation of the Philippines sharply eroded the strength of the drivers' union, supported a limited decontrol of "jeepney" routes the International Brotherhood of Teamsters. (small buses on fixed routes in Manila). Howev- Nonetheless, regulation does continue and a er, the Land Transportation Franchising and commission less sympathetic to competition and Regulatory Board, owners of jeepneys, and the more regulation minded could become quite Alliance of Drivers Association opposed the move restrictive. In fact, throughout the 1980s a and won. struggle ensued between the Congress and admin- In the United States some politicians, airline istration, the former favoring pro-regulation union officials, and academics have questioned appointees to the commission and the latter the benefits of airline deregulation. Since orga- favoring those who were pro-market. nized labor lost benefits under deregulation, In its last term, the Reagan administration sent union support for re-regulation is understandable. a bill to Congress to abolish ICC control over Although almost all passengers benefitted from rates and entry of motor carriers. The Team- decontrol, travelers in a few smaller cities have sters' union and the American Trucking Associa- had to paid higher fares. Naturally, politicians tions vigorously opposed it. For its part, the from those districts also advocate recontrol. Bush administration came out strongly for abol- Nevertheless, only one study out of dozens on the ishing all remaining controls on motor carriers, effect of airline deregulation concluded that there intercity buses, interstate rail passenger transport, were no significant benefits from the liberaliza- interstate barge operations, ferries, pipelines tion. (other than water, oil, or gas), carriers of house- hold goods, freight forwarders, and freight Deregulation in the United States broker services. Even with administration sup- port, however, it would be a struggle to move Deregulation does not mean abolishing all regula- legislation through Congress. tions, since antitrust and safety constraints are normally maintained. In the United States, the Railroads airline industry, for which all economic controls over entry and prices were abolished, is still With the 1980 Staggers Act, Congress increased subject to antitrust oversight and Federal Aviation the freedom of railroads to negotiate rates and Administration (FAA) supervision of safety. The price their services freely, except in cases of "mar- Federal Highway Administration in the Depart- ket dominance." As a result, railroads became ment of Transportation oversees highway safety. aggressive competitors, successfully going after Regulatory Refonn of Transport 15 new markets. In addition, the ICC deregulated a caused the improved market performance of the number of services, such as intermodal piggyback U.S. economy, it is noteworthy that during the service and certain grain rates. Railroads also 1960s and 1970s U.S. growth was significandy vigorously used the authority acquired in the slower than in Europe. Staggers Act to contract with major shippers. The other outstanding performer during the On average, since the passage of the Act in 1980s was the United Kingdom. Between 1985 1980 real rail rates have declined. Coal compa- and 1988, the "sick man of Europe" enjoyed the nies and a few other "captive" shippers have fastest growing economy in the Common Market. complained that their rates have risen, but data It is plausible that this strong performance published by the ICC fail to show any significant stemmed from the British program of privatiza- increase in rail rates for coal shipments. Because tion which, in turn, increased the competitiveness of pressure from these coal companies, some of its economy. As argued earlier, when an power companies, and certain grain shippers, a economy is heavily government owned, privatiza- number of influential legislators in Congress have tion is the equivalent of deregulation. attempted to strengthen railroad regulation: in Even if increased freedoms for private firms recent years, they introduced several bills to roll fail to improve the performance of an economy, back the Staggers Act, but the administration suc- they normally bring benefits to consumers. cessfully opposed them. Because regulation is inherently biased toward reducing competition and producing benefits for Surfiace Freight Transport BeneJts the regulated and other special interests, it rarely, if ever, helps consumers. Almost universally, Overall, curtailed surface freight regulation has whenever deregulation occurs, prices fall, service led to significant savings for the American econ- improves, and consumers are better off. This is omy. One study indicates that the benefits range particularly true for transport. between $39 billion and $63 billion annually. Transport modes, with the possible exception These benefits have come largely in the form of of railroads and pipelines, are normally quite reduced inventory costs resulting from "just-in- competitive, which leads to low rates and good time" shipping, which has been enhanced because service. Motor carriers and sea transport are trucking and rail firms are able to offer better potentially fragmented industries with many service-more off-line and guaranteed delivery- carriers. Even rail transport, if it faces active than they could under regulation. trucking and barge industries, is subject to com- petitive pressures. Conclusions Unfortunately for most developing countries, government control and ownership is the norm. A less regulated economy will provide more Deregulation and privatization would do much to flexibility and rapid growth than one that is move these economies towards a more efficient highly controlled. Between 1982 and 1989 the system that would eventually produce badly United States, following a series of important needed growth. The benefits of free markets and deregulatory measures, enjoyed one of the highest a private transport sector are also applicable to rates of growth among Organization for Economic the rest of the economy. As Hong Kong proves, Co-operation and Development (OECD) coun- an unregulated free market economy performs tries. Financial markets, transport, and commu- well; as mainland China demonstrates, govern- nications were given new freedom and the econo- ment ownership and regulation strangle economic my flourished. While it is impossible to prove growth. that moderating controls on the private sector alone 16 Regulatory Reforim of Transport QUESTIONS AND ANSWERS Q: Based on your views about deregulation, ment loans. In other words, isn't it some- how do you see the problems with the what dangerous to apply deregulatory savings and loan institutions in the U.S.? policies across the board without having Moore: some adjustment mechanism in place? 7he savings and loan institutions reflect too Moore: much control in one area, liberalization in the I never claimed that deregulation of any wrong area without deregulation of the one industry is Pareto optimal, including the most important areas, that is, the deposit airline industry. 7here, pilots clearly lost guarantees. Because the federal government from deregulation, since they got lower wages gives $100,000 deposit guarantees to deposi- as a result. Also, there is a belief that some tors at savings and loans and other banks, businessmen ended up losing because they they encourage the S&Ls to take high risks. used tofly half-empty planes and now it is no When the government deregulated part of the longer so since airfares are cheap. I do not industry, they should have also addressed claim that deregulation was Pareto optimal these guarantees because now, under the for the airline industry. In trucking, wages current deposit guarantee system, if there is a went down for the truckers. But before, they financial difficulty, the S & L has an incentive were vastly overpaid, getting half of the to make a big, risky loan. If you lose, taxpay- monopoly gains. I do not see why the rest of ers pay; if you win, your stockholders win. the shippers and the public should pay for As long as they had that kind of guarantee for higher-than-competitive wages for part of the substantial deposits, it was insane to permit trucking industry. The other part of the them to make very risky loans. You have to trucking industry, the owner-operators, were control both areas or free up both. just getting a normal return on their efforts. Why it is good that some truckers exploit a Q: One objective of this conference is to estab- monopoly position? In the railroad industry, lish preconditions and conditions, not only deregulation reduced employment, which for deregulation as such but also for a judi- makes productivity go up and that is what is cious blend of regulation and deregulation. involved in economic growth. If we can pro- In reading through the paper by Professor duce more with less labor, that is economic Moore, it seems the only area where there growth. That is not negative, that is good. is clear Pareto optimality in any sense is All these things are in fact benefits, not the airlines, where all parties seem to have necessarily to monopolistic labor that lost gained. In trucking the main effect has out, but to the economy in general. been to actually reduce wage levels, and in the railroads, one effect has been to reduce Q: My concern is the framework in which we employment. Even if one applies some sort discuss regulation, which is a direct inter- of Hicks-Kaldor test of compensation, vention by government in the transport which many people consider inadequate, it sector. In fact, it is only one type of possi- does not necessarily prove that deregulation ble intervention. The sector is also affected is beneficial to society. This applies partic- by macroeconomic and sectoral policies. ularly in developing countries, where, very These seem highly relevant to developing often, other preconditions necessary for countries; so, it may be misleading to put absorbing the labor force displaced by such so much emphasis on the United States, activities are not yet in place and a lot of which has no transport policy-which is a countries are subject to structural adjust- hindrance. In many developing countries, Regulatory Reform of Transport 17 there would be great concern if they were So an appropriate government regulatory to go through the experiences of Penn mechanism is a desirable policy. Motor Central, Greyhound, Eastern, Braniff, and carriers replaced the horse and buggy, but if American President Lines-examples which they had not, downtown Washington would be indicate considerable lack of global policy filled with as many horse and buggies as towards the transport sector, leaving It up there are now cars and the pollution and to pieceneal regulation by different agencies. stench would be such that nobody would want Moore: to go there. Natural economic forces pro- I do not see how macroeconomic policies fit duced a cleaner environment even before in this discussion, and nobody knows what there was an Environmental Protection Agen- macroeconomic policies do. We could have cy. It is not coincidental that the richest coun- a long discussion as to whether budget defi- tries in the world also have the cleanest cits are positive or negative for the economy. environment. But if motor carriers are, in As far as the United States not having a fact, particularly harmful to the environment, transport policy and that this constitutes a then a gasoline or fuel tax might easily be a hindrance, I would suggest it is quite the usefid remedy and I would not oppose it. I opposite: it is a hindrance to ha one. would oppose trying to use a regulatory When Jimmy Carter developed an energy scheme-say, raising the price oftrucking-to policy, it resulted in long queues at gasoline encourage people to use rails. What you stations in the United States and a misalloca- want is to impose a tax on all motor carriers' tion of oil. Thank God we do not have an fuel because burning of the fuels adds to energy policy anymore! Instead, w have a environmental problems, and to directly market that generates energy and transport, attack it that way rather than use a regulatory but this does not mean firms will not go mechanism. bankrupt-that is part of the natural compet- itive mechanism. If Greyhound [the major Q: To extend the point about externalities, interurban bus company] makes it, fine. If aren't they much broader than the environ- Greyhound does not make it, there will be ment? Europeans frequently argue that other bus companies. The question is wheth- they are willing to subsidize passenger er it is desirable to have bankruptcy. It is transport by as much as 50 percent because part of the competitive mechanism to drive they want cities to have a certain look, the firms to be efficient and provide good services look of Paris and Geneva and not of Los at good rates to the public. What developing Angeles. This is a legitimate, political countries ought to do is get rid of transport decision. A second point: isn't it too soon policies that are standing in their way. to assess the effect of deregulation? It is not good enough, two or three years later, Q: You mentioned that the trend worldwide is to argue that tariffs have fallen 20 to 30 towards deregulation. Most of us concur. percent and therefore it is a success story? But, there is an area where regulations It is pretty clear that the U.S. airline in- may return: the broad area of environmen- dustry has not gone through all of the tal concerns. There are vehicle and fuel dynamics, and we don't know what it is standards, and I would not be surprised if going to look like in the final analysis. pricing by different modes becomes the Amtrak is still 50 percent subsidized. subject of the environmentalists who argue Greyhound is having enormous problems that different modes should be priced and has just declared Chapter 11 bank- differently according to their environmental ruptcy. In other words, it is going to take effects. What are your views? possibly two or three decades to work itself Moore: through until we can reach a definitive I would agree that the environment is an area conclusion. where government should play a role. There Moore: are externalities from industry, or any human I consider Washington, D.C. and San Fran- activity, that can degrade the environment. cisco very beautiful cities, and I would put 18 Regulasory Reform of 7ansport both of them up with Paris as three of the regulations, which prevent some seors most beautifid cities in the world. Los Angel- from crem-skiumming. There Is lterature, es is not the only alternative in the world for particularly on the United ingdom In the a deregulated environment. We still have San 1980s, which considers these matters. Francisco and Washington, D. C. As far as What Is your opinion? judging the effects of deregulation, you are Moore: absolutely right, except that we will never I support antitrust regulations, but when you have a definitive answer. We will never get talk about economic regulation, such as to an equilibrium and say, this is the way the control of entry and control of rates, even if industry is going to look The Industry will you talk about cream-skimming, Ifyou control continue to evolve over time. Ten years from one area, you have to control the other. It is now someone will say it is too soon to judge, like the savings and loan example. Either and, in some sense, it is always too soon. you free up the industry or you don 't. There Actually, we have had 13 years of airline has been much discussion about ways to deregulation because deregulation started improve regulation. Yardstick competition is before Congress acted. It goes back to 1977 an example which is not new. The Tennessee for airlines, back to 1978 and 1979for trucks Valley Authority in the United States, which and rails, well before the passage of the act. produces electric power, was considered a We have already had over a decade of experi- yardstick for Judging private power compa- ence and the evidence is unambiguously nies. Yet, it has had more nuclear power beneficial, not to everybody, but in general. plants shut down than any other electric Ten years from now we will know more, but power company in the United States and we will not have the final answer, probably in the world. None of them is operating. They have spent billions on buUd- Q: If I may, in one sentence, try and capture Ing them and It has been a disaster which the the thrust of what you said, regulation Is public doesn't realize. I am not sure that bad, deregulation is good. My concern Is yardstick competition is a very efficient way that if you say regulation Is bad and rates to regulate an Industry. I have looked at a regulation is good, I would agree with you. variety of ways and I have yet to see one that But there are other regulatory Instruments works. People keep hoping there Is some- which allow, within a deregulated frame- thing the government can do. I keep looking work, the use of market incentives that re- for something the government can do right. sult in better outcomes for society. These There are things the government can do, but are structural regulations, such as fanchis- these are usually a mess, especially in the ing, yardstick competition, and even conduct regulatory area. 19 2 Deregulation of Shipping: Lessons from Chile Esra Bennathan In 1956, Chile introduced a system of cargo tution, supported by controls or foreign trade, reservation in coastal and external shipping."/ foreign exchange, and internal prices, Chile's In 1979, that system was dismantled, almost exports, until the early 1970s, were highly con- wholly with respect to external shipping and centrated in terms of commodities and markets. partly with regard to cabotage.2' In both its Copper, nitrates, iodine, and iron ore made up rules and the methods of implementation, Chile's 80-90 percent of export value. Copper moved in system of 1956 was similar to what other devel- liners, nitrates and iodine partly in liners but oping countries have instituted and still retain. largely in tramps, and iron ore in bulk carriers. What was distinctly unusual was the fact and The dominant exports were controlled by a small form of abolition (or "deregulation') in 1979. number of corporations that could make their T he question arises, therefore, whether Chile's voices heard by the government and could hold policy and experience were conditioned by unique their own in negotiations with liner conferences circumstances or whether they have wider rele- or in the international charter markets. The vance. break in national economic policy came with the With regard to coastal and foreign shipping, change of government in September 1973. and to shipping policy, Chile is similar to various Controls were removed gradually but consistently other developing countries. Its geographic posi- throughout the 1970s, the economy was opened tion at a great distance from the world's main to world markets, and exports were relied on to markets and, moreover, in a region of relatively stimulate recovery and growth. Success was light ocean traffic, make for relatively high ocean contingent on an expansion and diversification of transport costs. Competition among carriers is export products and markets, particularly because weak in such circumstances, and the market external conditions were not helpful: copper power of traditional liner cartels is correspond- prices, which had attained a historic peak in ingly strong. In other countries, the causes may 1970, fell and continued falling until 1978, rose differ but the results are the same. Chile's steeply for two years, and eventually resumed national merchant fleet is similar in tonnage to their downward trend. The terms of trade were that of other middle-size maritime developing deteriorating throughout most of the 1970s and countries (say, Colombia or Malaysia), and the beyond. Growth of national income was there- national shipping industry includes a small num- fore slow, but the government persisted in its ber of well-established firms, one state-owned open economy policy. The results are reflected and another that ranks among Chile's 20 largest in the share of exports in GDP: 15 percent in nonfinancial corporations in terms of the value of 1973, 23 percent in 1979, and 31 percent in company assets. 1986. Like other countries that pursued import substi- Chile is not, therefore, a special case in terms 20 Deregulation of Shipping: Lessonsfrom Chile of its shipping situation, national shipping indus- flag. The combination of objectives is not un- try, economic structure, external conditions common and is, in fact, similar to U.S. law. The affecting trade, and the declining markets for its measure had the backing of the navy, because main traditional export, or in the turn of policy national ships can be commandeered in emergen- from import substitution to export orientation. cies and all maritime personnel are automatically What is unusual is the persistent and systematic members of the naval reserve,4' and of labor, manner in which open economy policies have because employment on national vessels is re- been pursued, extending to the country's ocean served to nationals. transport and the national shipping industry. Chile's national merchant fleet did indeed grow substantially. Its total tonnage doubled between Cargo Reservation and Consequences 1965 and 1979, not as fast as world tonnage, increased, but faster than world tonnage of The law of 1956 reserved all coastal shipping to general cargo vessels, which continued to form Chile's national vessels. It also reserved 50 the bulk of Chile's fleet (as is also the case in percent of foreign trade cargoes. The reservation other developing countries).5' Chile's share of applied separately to each category of cargo and export tonnage at the end of the 1970s was about separately to exports and imports. 20 percent and of export freight revenue, about National vessels were vessels registered in 30 percent. In imports, the cargo share was Chile, which required 75 percent Chilean owner- higher, at 47 percent, and in the associated ship, and flying Chile's flag, which required freight revenue, 45 percent. In general car- registration as well as a Chilean crew and compli- go-essentially in liner transport, which was the ance with prescribed manning scales.3' mainstay of the national companies' opera- To supplement their fleets, national companies tions-the tonnage share was about 40 percent in were permitted to charter foreign vessels for up both exports and imports. However, the compa- to 50 percent of their own tonnage and operate nies that acquired the tonnage and were involved them as national vessels, provided the chartered in external transport were only modestly profit- vessels did not belong to Chilean owners. able at the end of the decade. Financial rates of Most profits of national shipping were taxed at return on total resources employed by the two concessionary rates, but the resulting savings, as leading private companies in 1979 (a year of well as 13 percent of profits, were tax exempt strong cargo movements and an improved inter- and were to be allocated to a capital construction national freight market) were 11 and 8 percent; fund. The free sale of national vessels was the state-owned company operated at a loss. prohibited. Thus, it is unclear how much benefit the enter- To protect trade and industry (the shippers), prises derived from the protective system which rates charged for the transport of reserved cargo imposed on them labor costs well above the levels could not exceed the levels prevailing internation- of foreign shipping industries. ally. For liner transport, this limitation soon The impact of the regulations on exporters and came to mean the rates posted by the liner con- importers was determined by the 50 percent rule ferences. For other modes-tramps and bulkers- and by the method of applying it. Chile's trade rates were those established for comparable routes were covered by liner cartels, and the operations in competitive international markets, national companies joined them whenever they which were difficult to determine in individual could or else priced their services according to cases. the conference tariffs. With half the trade re- The 1956 measure had multiple objectives. It served to Chile's flag, not enough was left of the was to protect the national merchant marine by market to attract independent carriers that might imposing a quota-in fact, a value quota-but to have established regular services to compete with do so at minimum cost to the country's exporters the conferences, nor would such competitive and importers. It was to enable Chile's shippers entry have been in the interest of Chile's shipping to enter territory dominated by the international companies. liner conferences, and it was carefully designed The scope for external competition was further to lead to the growth of a merchant fleet owned narrowed by the way in which the law was and manned by Chileans and under the country's applied, which involved an administrative assign- Deregulation of Shipping: Lessons from Chile 21 ment of individual shipments to either national or much depends on opening the economy. Experi- foreign flags. Shippers had difficulty predicting ence after 1973 showed plainly that this expan- to whom the assignment would be allocated, and sion had to come from new export industries or exemption depended on the issue of waivers by from new markets for established products. By each of the national companies that operated on 1979 it was clear that impediments to such new the routes in question. Liner conferences pool ventures had to be eliminated if the momentum of cargo and revenues. A Chilean conference the new exports was to be maintained. While the member, when asked to issue a waiver because it low productivity of public ports was generally had no ship available to take the cargo, could seen as the country's main shipping problem, and therefore not be indifferent to the competitive could indeed be blamed for the continuing decline status of the ship that the shipper was proposing of coastal shipping, negotiations for port reform to use. It would readily waive its rights in favor had been under way since 1974 and by 1979 were of another conference member but would be less still not resolved. Thus, deregulation of shipping cooperative when the ready vessel was an inde- was undertaken first, as a necessary adjunct to the pendent competitor. Further, when nonliner general policy of opening the economy. shipping seemed appropriate for the cargo, there was the possibility of conflict with the conference Deregulation (or with Chilean companies outside the confer- ence but applying the conference tariff) over The law of 1979 abolished cargo reservation whether the cargo was not really "liner cargo." totally in external trade, except with countries Even when there could be no disagreement on the that reserved cargo for their own ships. In those point, the assigning procedure prevented shippers cases, Chile reserves the same share for national from contracting with foreign shipowners or vessels that the others reserve for theirs. The bulkship consortia for the regular transport of trade affected in this way by the principle of their products simply because they could not be reciprocity-essentially with other Latin Ameri- certain they would be allowed to load the cargo can countries-was somewhat less than one-quar- on those ships. Moreover, the provision that ter of Chile's total trade in the early 1980s. Even Chilean national carriers should not charge more so, until 1985, ships of all freely trading coun- for their service than was charged internationally tries were allowed to compete for what was for similar service left ample room for dispute reserved to the Chilean flag under the reciprocity and delays. rule. In 1985 there was a partial retreat from this The evidence of the 1970s indicates that tradi- fully competitive system in that cargo notionally tional exports and imports were not noticeably reserved to Chile's flag under the reciprocity affected by the regulations: either they were principle became so in reality. exempt from the restrictions, were powerful Cargo reservation in coastal shipping was enough to protect their interests, or had adapted substantially relaxed. Cargoes above 5,000 tons to the system in terms of the quantities and could be put to public tender, open to all flags; destinations of their exports. It was the new or for lesser volumes, private quotations could be the expanding exports that felt the impact of obtained from any flag. In each case, the lowest cargo reservation: fresh fruit, fish, pulp and bid or quotation could be accepted, with prefer- paper, fishmeal, and simple manufactures sought ence to Chilean national ships in the case of equal connections with new markets and had to estab- bids or offers. This measure also underwent lish themselves by prompt delivery of goods in change in 1985, signifying again a certain retreat good state. However, the quality of vessels and into a more protectionist regime: shipments of service that was demanded by some of the new 900 tons or less were reserved to Chilean national commodity flows was not available in the Chilean vessels, presumably to protect Chile's operators fleet. Exporters found access to available foreign in the transport of general cargo, which was bulk shipping services blocked by the obligation reviving strongly after the reform of the ports in to give half their annual cargo to Chilean vessels, 1982. Larger shipments were open to interna- as well as by the assignment method. tional competition, subject to preference margins An expansion of exports is the most obvious and taxes that thus acted like import duties, condition for the success of a policy where so replacing the original quantitative restriction. 22 Deregulmion of Shipping: Lessonsfirom Chile The totality of these measures amounts to a and timing of transport irrespective of flag be- more thorough liberalization of shipping than was came particularly important during the years of undertaken by other countries that practiced cargo crisis and recession. The government persevered, reservation. The partial retreat from the line with only temporary retreats, in an open economy drawn in 1979 and the redrawing of the line in policy. The growth of exports that could make the cabotage regime suggest that reform was not up for steadily failing revenues from copper and driven by doctrine but by the quite pragmatic iron ore was indeed essential for success. But considerations of the wider costs and benefits of from 1979 to 1982, the incentives to export were protection. There was also an element of caution severely eroded by the combination of a fixed in shipping policy: Chile signed the UNCTAD exchange rate, high inflation and backward Code of Conduct for Liner Conferences, which indexation of wages. Some of the major new prescribes the division of conference line cargo or exports faced unavoidably high ocean transport revenue among the companies of the importing costs: for fresh fruit and fish, pulp, paper and and exporting countries and third countries in the other forestry products, this amounted to 15-25 proportion 40:40:20. Chile's reciprocity princi- percent of the price in the foreign market. In ple is not compatible with the code. Further, the those circumstances, unhindered access to the government did not encourage competition with most reliable and economic transport available liner cartels: in 1981, after economic conditions was essential for exporters who were trying to plummeted and Chile's companies were experi- retain their markets or gain new ones. encing losses, it helped the state-owned company Once cargo reservation was removed, trade, enter the European cartel, but at the expense of and industry responded-both directly and indi- the existing Chilean member. Competitive rectly. The direct result was reflected in a large undermining of the cartels in trade with Chile did switch, quickly accomplished, between ocean follow on the reform, but only as an indirect transport modes. With respect to Chile's exports result. to the United States, the results can be quantified. The substitution of tramps or bulk vessels for After Deregulation liners went furthest in the shipping of refrigerated cargo: the share of liners dropped from 40 The years after deregulation put Chile's shipping percent in 1978 to 4 percent in 1986. Substitu- industry to a harsh test. The international ship- tion was also substantial in dry cargoes (pulp, ping depression that started in 1974 resulted in paper, other wood products, fishmeal, and ni- growing excess capacity and falling rates until the trates) that move in loads large enough to fill a end of the decade. After a revival at the turn of substantial part of a tramp or the smaller bulker. the decade, rates started to slide again and contin- On that and other routes, exporters chartered ued sliding for three years. The severest test, directly in the international market or entered into however, came with the fall of Chile's economy contracts with international bulkship pools. into deep recession in 1981-82. Different exporters consolidated their individual The 18 months after the deregulation of ship- shipments and chartered jointly or integrated their ping in 1979 saw high activity in the economy shipments into trade flows to or from other and foreign trade. However, trade volumes and regional countries. values dropped sharply in 1981, followed in early The indirect effect, however, was to induce 1982 by a financial crisis and a deepening of the more competitive behavior on the part of the liner recession: GNP in 1982 fell by 16 percent. By conferences and the liner services that followed 1983-84, when the recession turned into slow their pricing lead. As shipments switched from recovery, Chile's shipping companies, like other liners to tramps or bulk services, and when corporate enterprises, had lost a substantial part Chilean conference members could no longer of their capital. inhibit competition by working the levers of Export industries reacted immediately to the cargo reservation, conference pricing in Chile's new freedom in shipping, searching the interna- trades became more competitive. More room tional markets for the most economical way of was given to service on negotiated terms, and transport to established and new destinations. cargoes that had formerly been in contention Free access to service modes, quality, itinerary, between conferences and tramps were now of- Deregulation of Shipping: Lessons from Chile 23 fered transport by competitively priced confer- in this trade rose by 2 percent. Had charges fol- ence bulk services operated by the conferences lowed the same path as those paid by exporters themselves. on the east coast of South America, the increase Judging from the statements of exporters and would have been 23-37 percent, depending on the importers, the largest benefit to Chile's trade responsiveness of freight charges to differences in resulted from the removal of restrictions on the the relative quantities within these baskets of choice of ocean carrier and service. But the identical commodities-essentially, on whether savings from this direct effect of deregulation are the charge per ton is lowered as quantity rises. distributed over a great variety of functions and (The third line in the panel, weighting freight activities and are therefore difficult to quantify. charge changes with east coast relative quantities The indirect effect, working through increased and modal mix in 1978, confirms that the faster competition between carriers, expressed itself in rise in the east coast index cannot be explained by the freight charges relative to those in the foreign differences in the base year composition of the trade of other countries which continued to oper- two samples. The residual explanation is then the ate cargo reservation. difference in shipping regimes and its conse- An analysis of the determinants of liner freight quences.) We estimate, therefore, that deregula- charges in U.S. imports shows that liner rate- tion was associated, six years after the event, making in Chile's trade became more competitive with a saving of some 22-25 percent of the after deregulation than in the export of similar freight bill on Chile's exports to the U.S. This is commodities from the east coast of South Ameri- also likely to have been the order of the general ca, where cargo reservation continued to rule. indirect effect of deregulation, via a more com- An alternative way of tracking the indirect effect petitive supply of ocean transport. of deregulation, in the same sample of exports to A higher freight bill would, of course, have the U.S., is to compare the percentage changes of raised the operating revenue of Chile's shipping freight charges from Chile and from the east coast companies. For a rough idea of the order of of South America for the same list of exports losses and gains involved, assume that freight (Table 1.) The index of Chile's freight charges charges in 1986 had been raised by 10 percent Table 1: Average Freight Charges per Ton for 20 Commodities Imported by the United States, 1986 (Laspeyres index) 1978= 100 From east coast From South Weight Qile Americaa 1. Each origin's cargo quantities and modal distrib- 102 123 utionb in 1978 2. Chile's cargo quantities and modal distributionb 102 137 in 1978 3. East coast of South America cargo quantities 82 123 and modal distributionb in 1978 a Brazil, Argentina, and Venezuela. b Liners and tramps, including bulk carriers. Source: Bennathan (1989), part II. 24 Deregulation of Shipping: Lessons from Chile across the board, on imports and exports, with no negative results, the two leading private compa- change in the cost of supplying shipping service. nies were earning returns on total resources of The freight bill on the country's exports and the same order as on the eve of deregulation. imports would have risen by $90 million, while The survival of the enterprises owes something Chile's shipping companies would have added to events outside their own sphere. Exports rose $34 million to their gross profits. Assume, again strongly from 1984 onward. Operating however, that Chile's companies had decided not costs in Chile's trades were reduced by the to follow such a general increase in freight drastic reform of ports and the resulting increase charges, had therefore kept their prices constant, in port productivity. Important help also came and had managed to raise their share of aggregate from the growth of coastal shipping, to be attrib- freight revenue (from an unchanged national uted in part to the improvements in the public tonnage of exports plus imports) by one-half, ports, but for the rest to the industry's own from 38 to 57 percent. If the ratio of the compa- efforts. nies' operating and sales expenses to their operat- An immediate response to deregulation and the ing revenue was on average equal to 0.89 (as disappearance of the incentives to operate under reported in 1986 by Sudamericana, Chile's Chile's flag was outflagging on a large scale. By leading shipping company) the result would have 1983, some 30 percent of Chile's merchant been to add $16 million to the gross operating tonnage was under foreign flag, the obvious incomes of Chile's companies but $38 million to escape from the high cost of manning rules and the aggregate freight bill for Chile's exports and wage levels. In the next stage, with better access imports. This back-of-the-envelope calculation to finance, the quality of the companies' fleets shows that in any plausible circumstances relevant was improved by introducing new or young ships to Chile in the 1970s and 1980s, only competition and by adapting the technical composition of the among the foreign suppliers of shipping services fleets to what the market seemed to indicate: could restrain prices sufficiently to yield net gains more bulk carrying capacity in multipurpose to the economy. Chile's cargo reservation vessels, container capacity, and, especially, reefer scheme, like that of other countries, did nothing ships. All the leading firms became more active to stimulate such competition; if anything, it had in providing bulk services, in chartering vessels the contrary effect. Deregulation provoked for operations under their own control, or in substantial external competition, with effects that chartering on behalf of customers. All entered are reflected in the development of Chile's freight into port cargo operations. New services were charges relative to those of its cargo-reserving inaugurated. Management in several firms was competitors. reformed and entrusted to new executives. The speed and scale of the response by Chile's There is little doubt that membership in confer- producers and traders to deregulation testify to ences or intercompany agreements protected the the restrictiveness of the system that was with- revenues of Chile's shipping companies in Latin drawn in 1979. Since the restriction was intend- American internal trade. In the main interregion- ed to protect and promote the national shipping al trade, however, the market shares of liner industry, what occurred after the industry was conferences were being eroded by defections, by deprived of protection was the most noteworthy the growth of independent operations for the chapter in Chile's experience with deregulation of transport of traditional liner cargoes in quasi-bulk shipping. form, and by the growing independence of con- Among the firms that made up the industry, tainer consortia. To suggest conference member- deregulation and the consequences of economic ship as a major reason for the survival and crisis and recession appear to have caused only recovery of Chile's shipping companies is to do one clear casualty. In addition, deregulation less than justice to the vitality and adaptability of seems to have motivated some mergers. But the firms as they emerged after deregulation and there were also additions: the official list of the economic crisis of the following years. shipowners grew from 19 firms in 1980 to 23 in Protection of the national shipping industry is 1986. The leading firms lost part of their capital not, however, an accurate description of the overt in the years of crisis, but by 1986 much of the objective of Chile's cargo reservation law, nor a loss had been recovered. After two years of full one of the presumed ultimate aims. Cargo Deregulation of Shipping: Lessons from Chik 25 was exclusively reserved for ships owned by national companies. In that sense, deregulation Chileans and flying Chile's flag (enhanced by a seems to have done not much worse, or no limited volume of chartered foreign flag tonnage, worse, for the shipping industry than cargo provided it was not owned by Chileans). Overt- reservation had done, and at a substantial saving ly, the object was to build up a merchant fleet to trade and industry. owned and operated by Chileans. Underlying this were a "naval" objective and an economic Conclusions one. Deregulation did nothing to further the naval objective, which was to increase the ton- Chile's experience is relevant to the regulation nage under Chile's flag and manned by Chileans: and deregulation of ocean transport in the follow- national tonnage in this sense was about the same ing ways: in 1986 as in 1979 and rather less than in 1980 (when ships under contract of purchase were * Governments do not ordinarily legislate protec- finally paid for and added to the fleet). The tive measures against the interests of important question is then, whether deregulation conflicted existing groups of producers. Chile's cargo also with the objective of promoting the national reservation rules of 1956 did not conflict in shipping industry, at minimum cost to Chile's any critical way with the interests and needs of trade and industry. The mechanisms in the the main exporting and importing industries of regulatory apparatus that were to protect users that period. (Nitrates, which might have been against monopolistic exploitation by the sheltered hurt, were explicitly exempted from compli- shipping companies were obviously failing in the ance with cargo reservation.) Minor exporting 1970s, in relation to the new export flows, and interests, on the other hand, tend to get over- they failed in ways not foreseen by the authors of looked, and new entrants into the production of the protective system. In that respect, it was tradables have to fight their way across the regulation that had failed. The positive economic obstacles of the protective system. The costs objective, to promote the national shipping indus- of the system fall on new initiatives but only try, was framed in terms of target shares of attract attention and cause concern when tradi- national flag vessels in export and import freight. tional exports get into difficulties or new In those terms, deregulation defeated the econom- export industries, having surmounted the ic objective: by 1985-86, Chile's flag share of transport barriers erected by the system, take export freight had dropped by two-thirds and that a visible place in the foreign trade accounts. of import freight, by one-half, below the levels of Cargo reservation acts like a tax on new enter- 1978-79. prise, and the costs tend to get counted too By the mid-1980s, however, Chile's companies late. were earning no less than 40-50 percent of their * Immediately after deregulation, Chile's export- freight revenues from operating under foreign ers and importers transferred large portions of flags, whether in vessels owned by Chilean their cargo from customary to alternative companies or chartered by them for their own or modes-from liners to chartered vessels or their customers' use. The aggregate share of alternative bulk services, much of it to be Chile's national companies in freight revenue carried by foreign companies. By that tirme, from Chile's exports and imports after deregula- however, Chilean companies already had con- tion was, if anything, somewhat higher than the siderable experience in chartering and in oper- revenue share of the nationalflag had been before ating with bulk or tramp vessels. They also deregulation.6' Under cargo reservation, how- owned or controlled vessels appropriate for ever, the share of the national companies should such operations and were seeking in the 1970s not have been very different from the share of the to adapt themselves to the new demands. But national flag. If that is a valid assumption, it the dimension of the transfer of cargo between follows from the data that deregulation did not modes and flags after deregulation indicates the significantly affect the revenue share of Chile's inadequacy of local resources. Protected shipping companies. If an industrial promotion industries, even those as vigorous as the objective has to be stated in terms of market country's shipping industry, do not on the share, the natural focus would be the share of the whole adapt very quickly to demand changes, 26 Deregulation of Shipping: Lessons from Chile nor can a national fleet of medium size possi- less than what national shipping companies bly reproduce the variety of technical resources could provide to their customers by recourse to available internationally. In a restricted market chartering and contracting with alternative it is difficult to obtain a reliable idea of what shipping modes available in the international kind of transport service local exporters and markets. The cost to users who have to com- importers find optimal for their trades, at given ply with cargo reservation is raised corre- prices of their products and inputs, and within spondingly and in the various ways that appear the range of operational technology. The from the study of Chile's experience. Looked general conclusion from Chile's experience is at merely as a measure to promote industrial that the real cost of protection is not easily development, cargo reservation thus appears ascertainable and certainly not predictable, inefficient and even less justifiable as an eco- even within broad limits. nomic policy than the standard quota method * The side effects of cargo reservation, as of of protecting industrial production. other forms of protection, are difficult to * A distinctive characteristic which shipping foresee and control. Provisions intended to shares with air transport but with few other minimize or limit the cost of regulations to industries is that its productive equipment, in transport users are therefore likely to fail in the shape of ships of all kinds, qualities and their purpose. A side effect of the country's technologies, can be leased or chartered in a cargo reservation rule and the way in which it highly competitive international market on a was administered was to suppress competition great variety of terms. Cargo reservation amongforeign ocean carriers even though that systems, however, typically require the pro- should have been in the interest of the country tected operations to be carried out with the and its industries. It had the effect of strength- operators' own vessels. This condition is ening the hold of liner cartels over Chile's implicit in restricting protection to national flag trade for longer than might otherwise have vessels, since flag is conditional on the ship been the case and of reinforcing the internal being registered in the country and registering cohesion of the cartels. Once the restrictions usually requires national ownership of the total were lifted, competition among foreign suppli- equity or a large portion of it. Chile, like ers of ocean transport caused Chile's freight other regulating countries, reinforced the rates to fall significantly relative to those facing incentive for national ownership by restricting its competitors in international trade who the national companies in the chartered foreign continued to protect their shipping. tonnage that they could employ in carrying * Cargo reservation, in Chile as elsewhere, is reserved cargo. intended and designed to protect national flag shipping, not the total operations of national For the purpose of industrial development, shipping enterprise in the transport of national however, the acquisition of capital assets, where exports and imports. Two explanations are they are not essential for carrying on the busi- available for this common feature. First, the ness, seems less important than acquisition of government intends to retain full control over experience and contacts in the domestic and the beneficiaries of protection and their use of world markets through which shipping services the proceeds. The intention is to ensure that are traded. It is those skills that have made for profits are invested in further ships, increasing success in international transport services. The the site of the nationally owned fleets. Second, reasons for requiring operation with owned protection of national enterprise by quotas on tonnage are similar to those for limiting the pro- the import of shipping service is more readily tection of cargo reservation to national flag accepted by other states and by the internation- operations. The naval interest argues for this al liner cartels if limited to national flag trade requirement, and so does the belief that only rather than the potentially larger trade of commitment to high fixed costs guarantees seri- national shipping enterprise. Organized labor ous commitment to the activity. Finally, the also approves because use of flag normally rules of intemational liner conferences require requires the employment of nationals. Thus, members to operate principally with their own the volume of shipping entitled to protection is vessels. But liner conferences have an interest in Deregulation of Shipping: Lessons from Chilk 27 raising the financial scale for entry into ocean ences accordingly looked on deregulation with shipping, while industrial policy should aim at considerable misgivings, which were justified by lowering barriers to entry. Nor is good choice of the event. investment guaranteed by these rules. If invest- In many cases, as Beesley points out in his ment is to be encouraged, there are more neutral study of Britain's deregulation of road transport methods. The decision on what to own and what (1988), benefits from deregulation do not reveal to lease is best made on the technical and com- themselves sufficiently promptly to be readily mercial judgment of operators. Hazarding a identified, attributed, and measured. Transport guess, a neutral policy for the promotion of users adapt themselves to the system and only Chile's shipping enterprise would probably have respond concretely to the opportunities opened by resulted in a different composition of Chile's deregulation when they perceive a balance of owned fleet than what emerged in 1979, with advantages in reorganizing their business methods more reefer and tramp or small bulk ship capacity and in adapting or changing their capital plant. and fewer conventional liner-type ships. The passage of time and the change in general These conclusions relate directly to the effects circumstances then covers the track. It follows of regulatory regimes commonly imposed on that the faster the benefits of deregulation reveal shipping and to their removal. But Chile's themselves, the worse have been the effects of experience may also be examined in the light of regulation. Our study suggests that the benefits standard questions that arise in the study and the of shipping deregulation in Chile were prompt practice of deregulation, in transport as in other and were sufficiently large to be widely acknowl- sectors. edged and measured with reasonable credibility. Stigler, in a celebrated article (1971), states By that evidence, the negative effects of regula- that regulation theory must furnish an explanation tion had become significant when deregulation of who will receive the benefits. Where is one to was undertaken. look? Chile's navy supported regulations that The timing was therefore tactically right. The promised to nurse a fleet legally under the count- government was not driven by fundamental ry's control and therefore enhance its strategic principle, as appears from subsequent realign- naval potential.7' Labor benefited from high, ments and retreats from the first radical measures obligatory manning scales, to which Chilean flag of deregulation. With the navy, labor, incumbent ships had to conform, and from wage scales companies and their foreign partners in the cartels negotiated with the participation of government arguing for continuation or, at best, limited and, hence, of the navy. Deregulation may have reform of the regulations, and with some uncer- resulted in a lower rate of wage hikes, but the tainty about the effects of deregulation in ministe- increase in shipping activity has prevented unem- rial circles, the government was unlikely to ployment. The owners form a third obvious embark on the dismantling of a long-established group of potential beneficiaries. But the accounts and widely practiced system of regulations (and of incumbent companies, over the period exam- one that could in no sense be imputed to the ined in our study, show no clear gains in profits. policies of the preceding regime) had its effects The regulations appear to have raised costs but been judged minor, or perhaps substantial in the not, to any significant degree, profits. aggregate but widely diffused in incidence. But Stigler proposed that regulation, as a rule, is the negative effects were not minor and not acquired ("captured") by the industry and operat- diffused; rather, they were concentrated on a ed primarily for its benefit. But regulation also limited and visible group of industries and firms. has side effects. Benefits slide away beyond the The lobby for deregulation thus conformed to confines of the industry as usually defined. In Olson's (1965) criterion for the effectiveness of industrial countries, there is considerable evi- coalitions in that it was relatively small and com- dence that the benefits of regulation of telecom- pact-principally exporters of forest products, munications and aviation were shared, if not fruit, vegetables, and fish, jointly pursuing a absorbed, by the suppliers of equipment." In well-defined and limited objective. And the Chile's case, benefits partly went to the interna- urgency with which they pressed their case was tional shipping conferences and their members, reinforced by the cost, much higher in shipping European, American, or Japanese. The confer- than in road transport, of escaping the effects of 28 Deregulation of Shipping: Lessons from Chile regulation and the suppression of competition by 6. The national flag share, in this calculation, a resort to own-account operations. Timing was includes revenues earned from chartered also tactically good in that deregulation was vessels within the legal limit of 50 percent of introduced when the market for ship operators owned tonnage that Chilean companies could was improving markedly. Freight rates all over employ like national vessels, in cabotage or the world were recovering from a deep shipping the remaining trades. recession in the mid-1970s, and they improved 7. Inasmuch as the regulations protected the na- markedly in 1979. A few years earlier, or indeed tional state-owned shipping company, they four years later, the opposition of the industry to also protected employment opportunities for any move that threatened the increased competi- senior naval personnel on retirement from the tion would have been more determined and service. probably, more convincing to the policymakers. 8. For example, Olson and Trapani (1981). Above all other factors, however, deregulation of shipping in Chile should be seen as a logical and References very effective adjunct to any open economy policy. Beesley, Michael E. 1989. "United Kingdom Notes Experience with Freight and Passenger Dereg- ulation. n In European Conference of Ministers 1. That is, the government required that a cer- of Transport, Road Transport. Paris: OECD. tain proportion of cargo be carried on Chil- Bennathan, Esra, with Luis Escobar and George ean-registered ships. Panagakos. 1989. Deregulation of ShiRping: 2. Cabotage refers to transport between two What Is to be Learned from Chile. World points within a country. Bank Discussion Paper 67. Washington, D.C. 3. Registration is thus a necessary but not suffi- Olson, C. Vincent, and John M. Trapani. 1981. cient condition for flagging. Exceptionally, 'Who Has Benefitted from Regulation of the a vessel on Chile's register could be permit- Airline Industry?" Journal of Law and Eco- ted to fly a foreign flag (cf. Law 12.041 of nomics 24 (1). 1956, Art. 3, and the Navigation Act, Law Olson, Mancur. 1965. The Logic of Collective 2.222 of 1978, Arts. 3, 9, 12, 13, and 14). Action: Public Goods and lheory of Groups. 4. Decree Law 2.222 (1978), Art. 98. Cambridge, Mass: Harvard University Press. 5. World tonnage of general cargo vessels- Stigler, George J. 1971. "The Theory of Eco- tramps but mainly liner-type ships-rose by nomic Regulation." Bell Journal of Economics about 50 percent. (2). QUESTIONS AND ANSWERS Q: Without disagreeing with the general con- the table which compares freight costs clusion of your important study-in partic- before and after the period of deregulation ular, that regulation is bad at times of in Chile with the average freight rates on major technological and commerci change- the east coast, you would have reached the I take issue with the comparison you make same conclusion: Peru and Ecuador alo between freight costs on the east and west enjoyed a reduction in freight costs over coasts of South America. Strictly spealdng, this period. Yet these two countries main- this is not comparing like with like because taned their cargo reservation and probably if you had substituted Peru or Ecuador In strengthened it during this period. This is Deregulation of Shipping: Lessons from Chile 29 not to say that the abolition of cargo reser- there is no such theory very clearly in my vation was not a positive step in Chile. It mind, I think it is important to ask in what Is simply to observe that exogenous factors circumstances you can get out of a scheme may influence freight rates more heavily that has shown itself, as no doubt was true in than deregulation itself. Regulation may Chile, to be strictly counterproductive. In be very important at certain moments in certain circumstances, I think, things should the history of a country's shipping, usually happen. If Chile had not done what it did in connected with major technological changes 1979, iff had been at the World Bank at that like containerization or commercial changes time, I would have advised it to act in this like the emergence of new export commodi- manner. The same goes for Turkey. When ties, such as frozen food in Chile. The general economic conditions are such that Bank should focus on determining when shipping stands against the achievement of these changes occur and on what its reac- what, by common agreement, is a major tion to these pressures should be. How do policy objective the World Bank, project you view this? officers should give up. This is really my Bennathan: reason for not concentrating on what led to I would maintain that the comparison I make cargo reservation in many countries. Import between Chile and the east coast is the right substitution, on the whole, is out offavor in one. It is perfectly true that Peru and some trade and services even more so than in Colombian ports experienced much the same industrial production and agriculture. No rapid change in rates as Chile, but Chile re- one would say that import substitution in food mained the main trader on that coast, and in the Asian countries has misfired. That was certain liner conferences tend to charge very caused by technological changes. However, much the same rates. The competitive pres- in services, import substitution for airlines, sures arose in Chile and Peru and to some road transport, and shipping has misfired. extent in Colombia. The same happened in The same is true of insurance. Import substi- bulking. Moreover, the Chileans dragged the tution of insurance was attempted by restric- Peruvians to some degree through joint ven- tions similar to those we discussed in ship- tures into a relatively liberal system. As re- ping, and the consequences have been unfor- gards the simple freight rate comparison, if tunate. My question is really not so much you look at conference tariffs and also at the what did Chile get out of regulation-because prices quoted according to Drurys by tramp- I am sure that if it got something out of it, it ers, or at rates at which charter contracts sat too long on its loss. The 1970s were the were concluded on the west coast, they are time to get out of regulation. In a sense, I more or less dominated by what goes on in was intrigued to find it took them so long, in Chile. For that reason, in order to make this the course of all those reforms that were clear in my own tables, I distinguish Chile, meant to open the way to foreign trade and east coast, west coast, and others. I don't restructure the Chilean economy, to get rid of believe that I perfectly standardize. If the cargo reservation. When they did deregulate, difference had been small then, lacking Dr. they embraced it forcefully, and that is what Moore's optimism, Iprobably would not have Ifound very impressive; that the act of dereg- found anything; but the differences are not ulation wasfollowed, almost inmnediately, by small. Whichever weighing system you use in a crash of the economy and by a retreat of all the Laspeyres index, the differences are quite the neighboring countries into high degrees of telling. If I understood your second point, I protection. do not know whether the cargo reservation Robert Brown: introduced in Chile in 1956 was an instance The reason it took so long is that it took a of a successfid infant industry measure. I long time to convince the navy. In fact, the have my doubts, but I do not know. What we first two laws in the transport sector, as you are trying to do at this conference is to take point out, strongly reinforced cargo reserva- a step beyond the theory of regulation and tions under the Pincohet government. On the look at the theory of deregulation. Whie quantitative side, I am afraid it is more sticky 30 Deregulation of Shipping: Lessons from Chile still because Chile did not just deregulate on. The particularities of Chile may not seem too maritime shipping. Rather, it had a revolu- relevant to, say, Africa. But what is critically tion in the ports, and I would defy anyone important is that the cargo reservation in Chile statistically to disentwine the impact of the since 1956 and the reservations that continue in increase in port efficiency and deregulation of Colombia, Peru, Brazil, and Argentina have had shipping. It is a single package. I believe a disastrous effect on the introduction of new there is a paper in the Bank on port dereg- technology, in particular, containerization. All ulation where we make practically no mention these countries got stuck with obsolete traditional of shipping deregulation. All the benefits of general cargo carriers at a time when they should Chile's increase in commerce are due to what have been opening up to containers and new they did in the ports. If we put these two kinds of ships. This did not happen-I would say, studies back to back, we would have a rea- in large measure, because of cargo reservation. sonably balanced picture of what really went And that is a lesson for other parts of the world. 31 3 The Evolution of Railroad Regulation in the United States Louis Thompson To answer the simple question, "How should statically: in fact, it has changed considerably governments approach the issue of controlling over time, as has the ability of economists to railroads, with regulation being one of several define the objectives and measure the impact of alternative methods of control," several topics economic regulation. must be explored. This paper discusses the U.S. The first nationwide regulation of transport in experience in detail because it is so fully docu- the U.S. was in railways. Interestingly, it came mented and, in fact, relevant to World Bank about because of a belief that there was too much borrowers. The four broad topics are: (1) the competition: railways had been over-built in growth of transport regulation in the U.S., and many areas of the country-especially the North- why it flourished; (2) the results of regulation up east-mainly because of financial speculation in to 1980, when the regulatory equation was the creation of railway companies. As a result, changed; (3) the deregulatory experience in the the perceived "high fixed cost, low variable cost" U.S.; and (4) similarities and differences between structure of railways tended to generate severe the U.S. and developing countries, lessons for the rate cutting and tariff instability whenever rail- Bank in railway (and transport) management, and ways directly competed for traffic, and the rail- a framework for looking at the issues of control ways did not favor this sort of competition, for and regulation. obvious reasons. Not so obvious is the fact that many of the major shippers did not like it either The Growth of Transport Regulation because, in a period when the producers/shippers enjoyed monopolies or monopsonies, their objec- According to Moore (1972, p. 3), "The current tive was not to minimize transport costs but to situation of railways is only intelligible in the factor uncontrollable competitive elements, context of its history." A brief history of rail- including transport charges, out of the competi- ways and regulation in the US is therefore useful. tive equation. Both shippers and railways wanted "Regulation" in this paper means "economic rail rates to be public and to be averaged over regulation," that is, public intervention in the large and small shippers. Another major thrust rates or services offered by an entity that sells was "locational" (regional) interests: farmers goods or services to the public. To the extent located farther from major markets who wanted that the distinction can be made, this definition their rates averaged and stabilized so that they excludes public interventions for reasons of would have the same transport costs as farmers worker health and safety, or working conditions, located nearer. Also, port authorities in smaller although these have obvious economic implica- ports, or ports more costly to serve, wanted rates tions. Also, as will be discussed below, the vis-a-vis larger ports to be equalized in the same definition of regulation should not be viewed fashion. To the shippers, controlling instability 32 The Evolution of Railroad Regulation in the United States was often just as important as equalization. monopoly position. So, they could always afford Many countries in which the Bank now works, a little more of a social burden (rates reduced for especially Eastern Europe, still have this attitude, political purposes) if they were protected by in which predictability and comfort are preferred regulation from undue competition. (This is a to the uncertain challenges of the private sector. familiar phenomenon in many of the Bank's The first piece of legislation, the Interstate borrowers: for example, about three years ago Commerce Act of 1887, deserves some discussion the government of Kenya, ordered the railway to because it set the stage for nearly a century of hire additional staff purely to create new employ- regulation. It is especially important to under- ment. The government did not offer to compen- stand the political philosophy which led to adop- sate the railway for this imposed inefficiency, tion of the act. The act provided: believing that the railway could simply increase its rates in order to cover the costs.) * All rail charges should be "reasonable and It is important to realize that the pressure to do just." exactly the same things came simultaneously from * There should be no discrimination in rates the railroads, from some major shippers, and between persons, and concealed rebates of from a part of the public, although for very tariffs were prohibited. different reasons. The railroads wanted to col- * Geographic discrimination (rates which "fa- lude and increase rates, and many shippers vored" one port over the other) was prohibited. wanted to equalize rates (no matter what their * Long hauls were not allowed to be charged at level) in order to control competition). At the rates less than short hauls. same time, politically powerful interests (for * Pooling of traffic was barred. example, Midwestern farmers) were encouraged * All rates should be public and charged as to think that they were getting something for free, published (no secret rebating.) even though the overall impact was bound to be * The Interstate Commerce Commission (ICC) adverse. This is the wonder of politics, and it is would be created to oversee the regulations and not confined to the U.S. to collect and publish information. Recognizing this commonality of interests (if not of objectives) is critical because there are An important characteristic of the Interstate some who argue that the 'history of regulation Commerce Act legislation is the language of the clearly indicates that it was established mainly to objectives: much of the thrust is aimed at non- reduce the competitiveness of railroads ... to economic or even antieconomic considerations. maintain cartel pricing and increase the profitabil- For example, the basis for the notion of "reason- ity of railroads" (Moore 1972, p. 93). While this able and just" rail charges was equity, not eco- was at least one of the railways' objectives, it is nomic efficiency. The emphasis on geographic only a partial explanation. The real power of the equalization was an explicit attempt to reach idea came from the fact that major shippers also political objectives, with the knowledge (at least supported the law, and, however paradoxically, later, if not at the beginning) that the result would it was consistent as well with a powerful strain of be clear inefficiency in transport operations. This populist politics. If just one of the supporters had is not to mention, of course, the hopes of the acted alone, the original legislation would proba- railways and certain shippers that competition bly not have passed. would be suppressed, along with the "ruinously Unlike other modes of transport, railroads have low" (according to the railroads) rates. Although an important place in the country's folk- Congress had some sense of the economic ratio- lore-which partially explains the attitudes of nale (or "irrationale") for the legislation, the those regulating railroads from the start: Images overwhelming motivating force was political such as John Henry or Casey Jones are combined perception, and those perceptions exist today. In with "Let the public be damned" notions,"1 to a report for the World Bank, Eric Beshers (1989, suggest the overbearing power of railways or p. 1) called this perception the myth of the mirac- their financiers on public consciousness. These ulous railroad-that the railroads were rich, images strengthen the myth which is not unique powerful, and unscrupulous and that they were to the U.S. Myths, like songs and stories, per- probably earning exorbitant profits from their haps especially because of songs and stories, The Ewlution of Railroad Regulation in the United States 33 endure long after the words were written. the ones demanding that rates be suspended); (2) Transport regulation, as in many other areas, gave the ICC control over the classification of also illustrates the phenomenon that political or commodities in order to remove another degree economic models can be more appealing than of railroad pricing freedom; (3) allowed shippers reality: When reality departs from the model, to designate the route they preferred, a measure there is a tendency to try to fix reality rather than intended to increase competition; and (4) reinvig- adjust the model. Mostly in this spirit, the 1887 orated the "long haul/short haul" clause. Interstate Commerce Act needed "fixing" a World War I was an interesting interlude in the number of times over the years. The equity story. During this period, the federal govern- goals, along with the aims of the interest groups ment actually took over the direction of railroad that passed the law, were inconsistent with eco- operations in the name of promoting the war nomic efficiency. The reason it was not fixed for effort. The result was that, in a time of booming nearly 100 years is because the political myth was traffic, a $568 million profit in 1917 was turned much stronger than reality. into a loss of $1.5 billion by 1920. This was an The first attempted fix was the Elkins Act of expensive, but depressingly familiar, lesson with 1903, that (1) made it a punishable offense for the public operation of railroads. railway corporations or railway officials, to offer The next step was the Transportation Act of or engage in rebates or concessions; (2) made it 1920. Somewhat traumatized by the experience, unlawful for shippers to solicit or receive rebates; and the cost, of the ill-fated venture into railway and (3) made it a misdemeanor to depart from management, Congress wanted to make the published rates. railroads financially sound and stable again. The It is clear that this was a bill to satisfy shipp- act provided that the ICC should (1) set "just and ers' interest, although the railroads did not op- reasonable" rates so that railroads could earn rou- pose it. Shippers who opposed the earlier prac- ghly a 6 percent rate of return on assets (railroads tices because they were more concerned with that earned more than this would have to place limiting competition than with lowering their half the excess into a recapture fund which would costs obviously benefitted from the new law's be paid to the weaker railroads to keep them provisions. In fact, this strain of thought fre- alive); (2) consider the revenue "needs" of the quently affected regulatory practice. weaker railways (a provision that became another The next piece of legislation, the Hepburn Act method of providing an internal cross-subsidy for (1906), (1) permitted the ICC to set maximum inefficient operations and services) when deciding rates (establish a quantitative definition of unjust the division of joint rates, that is, on how to and unreasonably high rates); (2) required a 30- divide revenues when more than one railroad was day notice of rate changes; (3) prohibited rail- involved in the shipment; (3) establish minimum roads from shipping commodities they or their rates (to define and prohibit rates that were "too subsidiaries produced (the "commodities clause"), low"); (4) control intrastate rates, under certain in order to prevent them from gaining a compet- conditions, and entry and exit (including the itive advantage on these products; (4) extended abandonment of branch lines) in the railroad ICC jurisdiction to pipelines and express compa- business; (5) approve traffic and rate pooling nies; (5) permitted the ICC to set through rates (where competitors divide the business among and joint rates for shipments that traversed two or themselves instead of competing); and (6) develop more railroads; and (6) increased the penalty for a plan for consolidating the "weak" and "strong" offering rebates (which was already illegal). railway lines in order to keep as much mileage in With such provisions, the act aimed to continue operation as possible. This last was not a manda- the general thrust of reducing competition and tory authority but could be used in approving stabilizing rates. merger cases. It was eventually used to force The process continued with the Mann-Elkins inclusion of weak lines into the mergers of stron- Act of 1910. This legislation (1) permitted the ger carriers. ICC to suspend the implementation of proposed Then came the Emergency Transportation Act rate changes for up to 6 months (a measure that of 1933, which provided for (1) a new "rule of restrained railroad competition as much as it ratemaking," which required the ICC to consider protected shippers because railroads were often the impact of the rate being set on the movement 34 The Evolution of Railroad Regulation in the United States of the traffic, the need for adequate transport at terms, conditions, and rates of the carrier's the lowest cost, and the need for revenues suffi- tariffs. The contract carrier offers specialized cient to provide the required services; and (2) a services, under defined contract conditions, with federal coordinator of transportation who would a particular shipper and does not offer similar improve coordination of routes and movements service to the general public. The exempt carrier among competing railroads, facilitate the creation is not regulated as to tariffs and entry. of traffic pools, and identify gaps in regulatory Much of this basic structure continues today. authority. Unlike railroads, control over entry, especially This act (although it was never implemented as the "grandfather clause," was extremely impor- the proponents hoped) deserves discussion be- tant to the trucking firms because there were (and cause of its intent. In effect, the U.S. Congress are still) very few economic barriers to entry in was still exploring the idea, initiated in the trucking. Thus, for the trucking industry and the Transportation Act of 1920, of increased federal banks that financed them, limiting entry was criti- intervention in the management of the railroads. cal, as it created very large economic rents, and The role of the private sector was actually dimin- turned trucking certificates into financeable ishing, even though ownership of the railroads commodities. Also, important to understanding remained in private hands. the incidence of regulation is the fact that the The next step, which was one of the most "exempt" commodities Oargely agricultural important regulatory initiatives, was the Motor products) were significant, amounting to more Carrier Act of 1935. This brought trucking than 60 percent of intercity ton per kilometer. under the full regulatory framework that had The "contract" status, which created a direct and applied to the railroads. It was a natural response productive relationship between shipper and to the Great Depression, which nearly destroyed carrier, did not exist for railroads. The primary the railroads; many went into bankruptcy, and proponents of the legislation were railways, large several never really emerged from bankruptcy, ("grandfathered") truckers, the ICC and labor, a although they survived in their weakened state slowly growing force, both in trucking and rail- into the 1960's and 1970's). The general thrust roads. Larger shippers and smaller trucking in trucking was the same as it had been for the companies opposed the legislation because the railroads to reduce competition and stabilize rates. former did not want competition to be constrained The act covered three broad areas-entry, rates, and the latter feared for their survival if they had and service-and it created three types of trucking to compete with large, protected firms. services: common, contract, and exempt (Table Congress took several steps to try to close the 1). As the terms suggest, the common carrier final gaps. The first was the Transportation Act offers to carry goods for anyone who meets the of 1940 which brought inland water carriers under Table 1: Types of Carrier, under the Motor Carrer Act of 1935 Common Contract Exempt Entry Operate under a certificate of Need a permit of PC&N Unrestricted public convenience and neces- Less restrictive (safety regulations) sity (PC&N). Grandfather Clause Rates Just and reasonable Publish minimum tariffs Not regulated All rates to be published only Service Specified routes, commodi- "Specialized service;" Private carriage, ties, and end points. Very limited number of custom- local, fish, and specific and restrictive. ers, distinct needs agricultural products lhe Evolution of Railroad Regulation in the United States 35 regulation. However, it immediately exempted The trucking industry was a major beneficiary about 85 percent of their traffic from regulation of the railway decline. First, this was the result and established a new transportation policy that of the changes in the structure of the economy, aimed at "preserving the inherent advantages" of which placed a premium on the quality of service each of the modes. Freight forwarders were that trucks could deliver. Second, it was due to brought under regulation in 1942 (with entry the massive federally funded highway construc- similar to contract trucking status, and with rates tion program, the Interstate Highway System. similar to common carriers). The Reed- After WWII, over $230 billion in Federal funding Bulwinkle Act of 1948 legalized rate bureaus went to the national highway system; $82 billion (railroad rate-setting cartels) under ICC control. was earmarked for the Federal Aviation Adminis- The Transportation Act of 1958 was a final tration; and only $22 billion was spent on rail- attempted patch in the regulatory balloon: it tried, roads-about $19 billion of which was for Am- somewhat tentatively, to free railroads to compete trak. In fact, business was booming for freight with (unregulated) water transport, but it was modes other than railways. There is evidence the ignored by the ICC. favorable traffic trends were accompanied by financial health: The other modes did not suffer Regulation Results from regulation, to anywhere near the same degree as railways, if at all. There was no crisis During the time the regulatory framework was in trucking or water shipping, as there was with being erected and developed, the economy under railways, which was driving the need for regula- regulation was very much a moving target. For tory changes. example, the dominant role of railways at the beginning of the regulatory period was clear: Change in the 1980s even as late as 1929, railways carried about 74 percent of the volume of intercity freight per ton- Why were changes in the regulations needed in km. The major competition was shipping on the the 1980s? First, there was a clear shift in the Great Lakes, a source of traffic which is no nature of the market for freight and passenger longer significant. If this shipping is excluded, the transport and of the roles of each of the carriers. figure is higher still-about 90 percent. By 1988, Passengers had clearly turned away from railway however, the share had fallen to only 37 percent travel, and freight business had long since shifted (which accounted for only 9.6 percent of reve- as well. Although the myth died hard, there was nues). an emerging realization that the fable of the A similar picture developed in the passenger bountiful railway would have to be reexamined. field. In 1929, railroads carried over 77 percent There were two significant precursors to of the volume of intercity public carrier passen- general regulatory reform: the formation of ger-km (and over 15 percent of all passenger-km Amtrak and the reorganization of the Penn Cen- includes the private auto). By 1987 this had tral. A short discussion of each is important to dropped to just 3.4 percent of the public carriers understand both the power of the myth and the (only 0.7 percent when private auto traffic is way change was approached. counted). The trends in traffic after World War The Amtrak experience offers significant II accentuated the shift, resulting in a dramatic lessons. Intercity rail passenger service had loss of passenger business and a clear decline (in rapidly declined after WWII (when gasoline was relative position) in freight. rationed and highway travel tightly restricted). Profitability followed the same trend. Many By 1970, industry experts estimated that railroads railroads were in extremely shaky financial condi- were losing over $300 million a year on passen- tion by the end of the 1970's, following a period ger service (almost $900 million in 1988 dollars of near financial disaster at the beginning of the and about half their potential net income), and the decade marked by the Penn Central bankruptcy financial viability of many individual carriers, and the collapse of several Midwestern farm and thus of the entire industry, was threatened. railroads. The length of railroad lines actually Equally important, at least in the minds of rail peaked around 1910, after which the system passenger service proponents, was the belief that continually shrank. the quality of rail service had drastically declined 36 The Evolution of Railroad Regulation in the United Staes and that the primary focus on freight by the operating subsidies while the secretary of trans- existing private railway companies ensured that portation was asked to consider other solutions passengers would never receive adequate atten- (in the hope that more drastic action would not be tion. necessary). Next, Congress decided, in effect, to As a result, Congress and the Nixon adminis- nationalize the railroad-by now called Con- tration created the National Railroad Passenger rail2V-and an intensive analysis and restructur- Corporation, better known as Amtrak, to assume ing effort was initiated. the responsibility and financial burden for provid- The result of the planning process was a set of ing intercity rail passenger service. Amtrak projections, including network reductions, which which is wholly owned by the federal govern- were too optimistic. As Conrail continued to ment, was conceived of as a for-profit corpora- founder, it became clear that a number of major tion. It is managed exactly as private corpora- actions, including a significant change in the tions are managed and, significantly, is entirely regulatory regime, was necessary if Conrail was free of all of the regulatory constraints on pricing not to continue as a major financial loss to the and service frequency that had burdened the federal government. Other necessary changes, formerly private sector passenger operations. especially devolution of local rail commuter Amtrak has clearly achieved its objective of services to local governments and flexibility to lifting the burden of passenger losses from the reduce redundant labor, were completed in 1982. freight railways; however, it has also been an Thus, in a very direct and painful way, the expensive proposition, costing the federal gov- Conrail dilemma confronted the federal govern- ernment about $19 billion since its founding in ment with another aspect of the real cost of 1971. This figure includes operating subsidies, adverse regulation (the government, as owner, capital payments, and the $2.2 billion invested in had to pay the bill for the cross-subsidies imposed the project to upgrade passenger service between by Conrail) and, even more painful, made the bill Washington, D.C., and Boston. direct and transparent. The overall cost of the Amtrak was the first major break in the pre- Conrail experience was not low-about $7.8 vailing belief that railroads could, or should, billion before the privatization sale, which netted carry all the historical burdens to which their about $2 billion. In fact, Amtrak and Conrail supposed 'monopoly" status entitled them (the dramatized in a concrete way the costs of ineffi- myth of the miraculous railroad that can pay for cient and destructive regulatory policies and anything). Its creation was also significant forced explicit action to be taken. because Congress, when confronted with the need to cover the cost related to rate and service Deregulation in the U.S. regulations (as opposed to burying them in the accounts of a private sector corporation), chose to The response, long delayed, was thorough regula- eliminate regulation entirely. It was an important tory reform. The year 1980 saw a pair of dra- precedent. matic legislative initiatives-the Staggers Act and The Penn Central experience also helped create the Motor Carrier Act-which have changed the an environment for regulatory change. In 1970, face of transport regulation (and of the health of the Penn Central railroad entered bank- the carriers) in the U.S. ruptcy-just three years after it was created from The Staggers Act radically changed the ability the merger of three large railroads (the Pennsyl- of railroads to market their product, in terms of vania, the New York Central, and the New both pricing and quality (for which the customers Haven). Moreover, the merger had been hailed were willing to pay). Its most important provi- as the genesis of a powerful carrier that would be sions were the following: able to survive the shrinking rail traffic condi- tions in the northeast U.S. At first, Congress * Rate-making regulation was substantially re- ignored the problem; but as it was confronted laxed, subject to findings concerning the rela- with the fact that the railroad would be liquidated tionship of the rate in question to its variable (which would translate into loss of jobs and rail cost, the degree of market dominance (that is, service and considerable negative impact on the monopoly position) of the carrier and geo- regional economy), the legislators provided graphic service involved, and the overall The Evolution of Railroad Regulation in the United States 37 adequacy of the carrier's revenues. some evidence that the number of less than * Contract rate-making was explicitly legalized. truckload (LTL) carriers was reduced, with a * Railroads were allowed much more flexibility resulting increase in concentration in this market to abandon unprofitable lines. segment. (LTL amounts to about 5 percent of * Antitrust limitations were substituted for cer- intercity tonne-km, but about twice that percent- tain prior rate-making restrictions. age in revenue.) It appears that the major truckers' union (Teamsters) may have lost as T'he Motor Carrier Act created an even more many as 120,000 members, but the total number radical change. It provided the following: of drivers has grown by about 800,000 (to 2.6 million) since 1980. Average hourly earnings * Entry into the contract and common carrier have continued to increase in current terms. In trucking business was deregulated. Among total, Winston estimated the economy benefited other factors, this change permitted "exempt" by about $8.1 billion from trucking deregulation, carriers to compete fully with "regulated" of which $3 billion was in reduced private car- carriers for otherwise empty "back" haulage. riage costs, $4.3 billion in lower rates to shippers * Rates were deregulated, although they were (primarily in the LTL area), and $0.8 billion in still required to be published and to be en- the value of better service. forced. There will never be a precise quantification of * As in the Staggers Act, antitrust restrictions the benefits to the economy of regulatory reform. were reimposed in place of prior regulatory There may well have been some losers (primarily controls. LTL truckers and union interests); but what does not seem in doubt is that the experience overall The results were astounding, for both rail and has been a resounding success, and this would be trucking. For rail, traffic remained relatively accepted by almost all carriers and almost all stable after 1980 while productivity of labor and significant shippers. This consensus holds for all physical assets increased dramatically. Further, the areas of reform and is based on a general accident rates have fallen by over 60 percent. agreement that the quality of service has im- Moreover, recent estimates are that more than 60 proved far faster than rates. There remains some percent of rail business now travels under con- criticism, especially by electric utilities, which tract rates, which permit railroads and customers would like lower rail rates on coal, and by orga- to enter into mutually advantageous long-term nized labor interests, but Congress and the Reagan relationships. Average freight rates dropped and Bush administrations rejeed proposed changes. every year after deregulation, in current as well There are few who would turn back the clock. as constant terms. In addition, profitability Given the enormous inertia which had built up reached levels not seen since the turn of the in the system and the power of certain entrenched century. A recent paper (Winston 1990) conclud- interests, how was it possible to bring change ed that rail shipper benefits increased by $5 about? Why did it happen in 1980 (rather than billion as a result of better service, offset by a $1 later)? And why was it successful? Several billion increase in rail rates over what they would reasons can be postulated These have obvious have been (if the mix of commodities carried and applications for World Bank borrowers, although average lengths of haul had remained the same), the mix of reasons and the relative importance of leading to a net benefit to the economy of over each will be unique to the country involved. $4 billion (one of the lower estimates). Perhaps the most important, at least with In trucking, physical outputs are at an all time regard to railroads, was that the 'do nothingw high, as is net income, at least in current dollars. alternative was no longer tenable. The Penn In addition, the initial wave of carrier financial Central and the Midwestern railroads' bankrupt- failures (in the deregulatory environment) may cies had made some regulatory reform imperative have run its course and is dropping. The number if broad-scale ederal subsidies were to be avoid- of carriers has more than doubled since 1980 as ed. This was not true in trucking, but the validi- a result of the ease of entry, although growth has ty and impact of deregulatory arguments were occurred among small, Class III carriers, while seen to have the same general force and positive Class I and II carriers have decreased. There is value, if not the same critical importance. 38 The Evolution of Railroad Regulation in the United States There was also concern about inflation, the intercity passenger business. However, the emergence of "consumerism", and a disaffection subsequent bankruptcy of Conrail, plus the fact with the status quo. These factors created the that it was the predominant carrier of commuters, framework in which legislators could attach them- led to getting Conrail out of the commuter busi- selves to the general idea of deregulation, even ness and transferring the burden to local authori- when their usual constituencies would have ties. This setup was a major contribution to dictated otherwise. At least partly because of this Conrail's financial success and a major relief of phenomenon, the "elite opinions" converged on a managerial burden which Conrail was ill the idea of deregulation (see Derthick and Quirk, equipped to carry. 1985). Also, a success model had emerged with the abolition of the Civil Aeronautics Board, Lessons for the Bank which before had to regulate entry and fares in the airline industry much more tightly; the re- How does this experience apply to developing sults, in terms of lower fares, had already begun countries? First, there is no substitute for de- to emerge. tailed knowledge of the actual situation and its Next, the proponents were promising direct history. What are the circumstances of regula- benefits (lower rates and better service) to con- tion? Who is being regulated? Who is doing the sumers and shippers. Thus, the coalition in favor regulating and by what authority? What is the of deregulation was promising benefits and not degree of enforcement? What are the objectives asking for sacrifices. At the same time, oppo- Oegal as well as actual or mythical), and how nents (such as the trucking industry and the well does practice conform to the legal frame- Teamsters) were divided and unable to control the work? Many appraisal reports have made sweep- outcome, especially because their arguments were ing proposals with regard to financing transport related to their own self-interest, clearly at the changes without furnishing or considering the expense of consumers. Another likely oppo- actual regulatory situation and its history in the nent-the railway unions-were sufficiently country. preoccupied with other issues, such as the labor Second, while good economic and legal analy- sacrifices necessary to save Conrail, that they sis help, politics, not economics, is ultimately the may not have fully understood the potential critical factor. To bring about change, politicians adverse impacts of deregulation on rail employ- must be involved-at the highest levels possi- ment until it was too late. Some of the railway ble-and the proponents of regulatory change unions may also have understood that a healthy must be prepared to provide analysis that antici- rail industry, even one that would pressure for pates and answers political objections, especially improved labor productivity, was their best hope issues of distribution and equity, and not solely of long range employment stability. questions of economic efficiency. Change comes The impact of restructuring in the rail area, when political leaders deal with vital noneco- which preceded deregulation, was also signifi- nomic concerns, not just with rational debate. cant. Before 1970, U.S. private sector railways This also implies a much closer and more inten- were expected to provide intercity and commuter sive role for the World Bank than is required by passenger service as a public service. To some the traditional transport investment project. extent, the imposed cross-subsidy between freight Third, support from those in decision and and passenger service was manageable as long as policymaking positions is crucial. In the U.S., there was no competition. However, after those promoting regulatory change were in fact WWII, the emergence of the highway system and the elite, whether in academia, business or poli- the dramatic growth of air travel destroyed the tics. This was especially true of the ICC and market for intercity rail passenger service. What executive branch political leadership during the were left were the losses, not the passengers. critical stages. Thus, it is important to focus on Commuter service had generated losses for many the people occupying the critical positions of years, but had never constituted a large enough power in developing countries because political problem to make a solution imperative. The opponents can destroy a reform program. The creation of Amtrak (and its complete deregula- experience in Uruguay, with regard to reforming tion) removed the freight railways from the the railway, illustrates what can be accomplished, lhe Ewvlution of Railroad Regulation in the United States 39 even under very difficult political circumstances, ever, in many developing countries-for example, when the right people are in the right place at the Pakistan and Egypt, where shippers and receivers right time. are mostly other government ministries whose It is not true that the experience in the U.S., transport costs are paid out of the overall bud- the U.K., or Canada can be dismissed as non- get-this is simply not true. If the consumption transferable to developing countries. Rather, decisions of the market are not rational, then much of what has been learned is directly appli- rational regulation, or even private sector compe- cable. But, this experience must be adjusted to tition, will not work. Thus, donors such as the suit specific situations. World Bank need to approach the regulatory issue The model in the industrial economies tends to from the point of view of the structure and start with the underlying (and unquestioned) as- decisionmaking objectives of both transport sumption that transport suppliers and consumers suppliers and consumers. They must consider the should operate under generally competitive condi- ownership and objectives of both, as well as the tions, although some regulatory intervention may regulatory procedures in force, formal and infor- be desirable. However, in developing countries, mal, before developing useful approaches. In railways are government ministries; and in this many cases, the answer will not be regulatory context, regulation of rates-for example, by a reform or deregulation, but a thorough clarifica- separate regulatory agency-is untenable because tion and restructuring of the relationships among it can erode the financial viability of the railway government, transport suppliers, and transport and completely confuse the managerial objectives consumers (to the extent that these are different set for the railway (because the regulatory agency is parties) and the roles they play (see Table 2). often unable to resist the opportunity to play Table 2 summarizes the possible interactions politics at the expense of the transport agency) among the types of services being provided and the transport system suffers. (freight, urban and intercity passenger), the struc- Another problem could evolve if the various ture of the supply function (private sector versus types of nongovernmental regulation which lie local or national public sector), the structure of barely beneath the surface of the official regula- the demand function (private sector versus public tions are overlooked. There are a multitude of sector), and the appropriate regulatory regime. restrictions, including those set by (1) voluntary For example, when both freight suppliers and trade associations, which conspire to fix rates, customers are national public authorities, that services, or the quality of goods (generally under which is considered as a regulatory issue (for the banner of protecting the consumer from the example, what rate should be charged) should dangers of "unscrupulous" competition); (2) trade actually be governed by transport and financial unions (even in the absence of formal contracts policy. The same is true of local commuter between unions and employers) which constrain services provided by local, public transport the ability of employers to manage costs or authorities. It is only where the private sector quality of service; and (3) established patterns of participates significantly in both supply and business (such as the notorious distribution demand that further tests for regulations are system in Japan), which restrict the ability of needed to prevent abusive monopoly power. suppliers or buyers to react to change. In many In summary, deregulation is often far too cases, these problems can deter regulatory chang- restrictive a word to describe what is actually es. Thus, it is vitally important to identify them needed if donors are to help free up the various in advance and eliminate them at the same time modes to supply, and free the shipper to buy and as regulatory change is implemented- while the utilize efficient transport. Instead, such issues right political moment still exists. should be framed more broadly in terms of An important, and exactly parallel, point restructuring, which denotes the critical need first should be made about the demand side of the to define basic objectives, then to clarify roles equation. The World Bank tends to assume that and responsibilities, and finally to discuss the shippers or receivers of services are influenced appropriate regulatory framework. In most by commercial considerations (either maximizing developing countries, this is the only sequence net income or, at least, minimizing cost). How- which has a chance of success. 40 lhc Evolution of Railroad Regulation in the United States Table 2: A Taxonomy of Regulatory Regimes Transport Supply Customer Regulatory Produa Model Model Regimes Exampis Urban passenger Auto: private Individuab None: get taxes, charges right Norratl (except get taxes right) Taxi: priveta Individuals LoIal; hres, services and entry (with care) Normal, Lagos Buainemn Sam London Taxi: public Individuala Local; discourage, no advantages Volan xi (Hungary): phasing out (Turkey, Northern Ireland) Bua: private Individuals Local; fares end routes Argentina, Sri Lanka, Philippines Bus: public Individuals No regulation; owned and operated directly; Washington, D.C., Bombay extensive controla Transit: public Individuale No regulation; owned nd operated directly Normal, Hong Kong, Carcas Rail: private Individuals Local; fares and routes, subsidy paymta. MBTA in Boston (Amtrak), Tokyo possibly under contrct. Rail: public Individuals No regulation; opente under contrct plan Normal, Nigeria, Poland, India Intercity Auto: private Individuals None: get taxes charges right. Normal pasenger Bus: private Individuals National: fares end routes Argentina, US Bus: public Individuals No regulation; owned and oporated directly, Hungary, Poland disourage when possible. Rail: private Individuals Franchise operation over track owned by oth- Thailand, Malaysia ers, control through franchise. Rail: public Individuals None, use contnact plan with nation gover- U.S., Societd Nationale des che- mant, some regionalilocal payments. mins de far Frm;ais, Kenya, Cameroon Air: private Individuals National, rates and services Air: public Individuals None, use contrct plan with national govern- U.S., Argentina, Nigeria mest, omn regional/local payments. Modt national *irlines Freight Truck: private Private, corporate NationAl, minimal rates, srvices, safety. Nornal, Mexico governmnt aency None; rely on corpetition and contract Common: Egypt, Pakistan Truck: public Private, cotponte None, hould be rre. Etbhiopia, Bangladesh governaent aency None, use tranport contacts TawAnia, Hungary, Poland, Bur- ma, Paki an Rail: private Private, corponte National, mninimal rates, ervices, safety. U.S., CP Rail, Chile (A&B) govenmaent agency None; rely on coapetition and contrcte None Rail: public Private, corporate None; use contracts where posible. Common in Europe, Chile, Can- government Agency None; use contracts and contrct plan dian National Railways, Egypt, Padsan, Zaire, China The Ewvlution of Railroad Regulation in the United States 41 Notes 1. Commodore Vanderbilt, in 1883. INU Discussion Paper 38, Infrastructure and 2. The stock of Conrail was owned entirely by Urban Development, Washington, D.C.: 1. the federal government, but Conrail was Derthick, Martha and Paul J. Quirk. 1985. The legally set up and managed as if it were a Politics Of Deregulation, Washington, D.C.: The private sector corporation. Brookings Institution. Moore, T.G. 1972. Freight Transport Regulation, References American Enterprise Institute, Washington, D.C. Winston, et al. 1990. The Economic Effects of Beshers, E.W. 1989. Conrail: Government Cre- Surface Freight Deregulation, Washington, D.C.: ation and Privatization of an American Railroad, The Brookings Institution. QUESTIONS AND ANSWERS Moore: other things have not taken place or not in (Opening comment.) Some people argue we the right sequence, you run a risk that the should not deregulate airlines because they process might go in the wrong direction. In will become less profitable and therefore less that regard, the fact that U.S. deregulation safe. There was a big conference at North- occurred at the start of the period of nine western University about three years ago on years of economic growth may have a bear- the question of safety and economic regula- ing on the results you have shown. Regula- tion, and no relationship wasfound. Infact, tion becomes very strong in depressions if you look atprofitability by airline, and look and In periods when the industry has felt at their safety record, the airline has become threatened by the economic environment. safer after deregulation. I am not saying it In many developing countries, they are im- was because of deregulation, because they plementing economic reforms that can were becoming safer before deregulation. But result in the short run in no economic the pattern is unchanged after deregulation. growth or either negative economic growth If you look at the pattern of accidents, those until the whole process of structural reform that are related, say, to mechanical difficul- provides a basis for growth (which is the ties that might be the result of inadequate ultimate objective). If that is the context in maintenance, have not increased as a propor- which you are operating, it may not be the tion of total accidents. Accidents that are right time to introduce deregulaton, and related to pilot error have not increased. So you could run the risk of jeopardizing the there's no evidence that accidents have gotten chances of success. Could you comment on worse and safety has gone down, and there is that? no relationship between profits and safety. Thompson: First, economic expansion makes the results Q: I would like to discuss briefly the subject of of deregulation look better than they would in sustainability. It seems to me this Is a cru- a period of economic depression. Second, it cial issue when we discuss reforms of the is easier to sell a major change when the type you have described. It is related to harm will be masked or covered by a change the timing of the reforms. If you imple- in the economy. There is no question about ment reforms at the wrong time, when that. It is harder to explain thefact that rail- 42 The Evolution of Railroad Regulation in the United States road rates for the first time in many years hurt is the problem you have to address ifyou went down in current terms-notjust constant are going to be successful in regulatory terms but current tenns-every year. At the reform. same time, profits were going up. There is anotherfact that was not mentioned: Over 60 Q: You mentioned what happened to safety percent of railroad rates within a period of with the railroads after deregulation, but eight years are moving under contract rates, you did not mention what happened to it not common carrier rates. The reason is that with the trucking industry. Could you talk the railroads finally can work with their cus- about that? Also, in the airline industry, I tomers to provide them the service they want would agree there were some technological and under the terms they want. It can be advances that clearly improved safety seen as a win proposition for everyone con- about the same time that deregulation was cerned under the right circumstances. De- introduced. But, the one very important pending on the economy, you win less, and statistic that you didn't talk about is the depending on the interrelationship between near-misses that have occurred. The Gen- the political system and the state of the econ- eral Accounting Office of the U.S. govern- omy, it may be harder to sell deregulation. ment has kept very close track of them and But all other things being equal, it ought to since deregulation, they have increased be saleable, at a different schedule or slightly dramatically. In fact, most people who different way, just about everywhere we go. observe this feel they are still terrifically underreported because pilots now have a Q: I want to talk about risk aversion. I was strong incentive not to report them, since it struck by the explanations you gave for can look as if they are to blame. There is regulations in the early railroad years. an enormous amount of underreporting, Users and customers preferred to inhibit and the near misses, for many observers, their own opportunities for getting favor- are as important as or maybe even more able rates provided they could also inhibit important than the number of accidents. their competitors from doing so. People Thompson: perceive costs far more readily than they In trucking, the evidence is unambiguous. perceive benefits. If we are going to make There is some evidence of increased accident the case for deregulation, we have to rec- rates. Many observers argue it is a result of ognize that there has to be a disproportion an increase in new, small trucking compa- between the benefits and the costs before nies. There is no evidence at all that the people will be persuaded that risk is worth older, established trucking companies are taking. How do you see this? getting any less safe. With respect to near Thompson: misses, it is the governmnent that runs the air Another way to put that is we have to look at traffic system, not the airline companies. the interests of consumers. It may well be They go where they are told to go. To the that consumers have no interest, or no per- extent that near misses are increasing it has, ceived interest in this wonderful deregulatory in my opinion, a lot more to do with the competitive environment that we are attempt- staffing, resources and operations of the FAA ing to provide. They may not even under- and not with those of the private sector com- stand or believe that it is in their interest. panies themselves. I would be prepared to And if they do not, rightly or wrongly, we argue that the best way to increase safety is have a problem and we should be prepared to deregulation, not regulation. That is the deal with it. Whether it should exist or not is reason why the railways are now safer in the not the point. United States-because they have the assets Comment: and the resources necessary to be safer. One of the more interesting points in your Also, the impact of being unsafe is a lot more paper is the emphasis on coalition building immediate than it used to be. because efficiency arguments are not the ones Moore: which are going to dominate. Who will get We should be talking about near collisions The Evoltion of Railroad Regulation in the United States 43 and not near misses. The major reason the how many you have. The problem with the number went up is that the FAA changed the U.S. rail industry was exactly that. People definition of a near collision and required were not rewardedfor goodperformance, and airlines to report those that occur at a greater there was no feedback from progressive man- distance; a larger number of them come under agement. And in a lot of developing coun- the definition. In trucking, one should stan- tries, they have exactly the same problem. dardize in terms of the number of ton-miles that are being moved or the number of truck- Q: When we talk about deregulation, we all miles driven. Then, the best evidence is that are for it and we have examples to back up safety has continued to improve under truck- our position. But, there is definitely a ing deregulation. You just have many more difference between economic deregulation truck-miles being driven. and safety deregulation. Those of you who Comment: do not want regulation under any circum- The example of the airlines is a rather ex- stances drop the words "safety regulations" treme one because it is very clear what hap- and call them safety standards. The more pens when airlines don't maintain well. But we deregulate, the higher the safety stan- all this is rather abstract relative to many dards we need to set. I believe a well-run developing countries. Safety regulation, if enterprise is better served by maintaining you think in terms of bus services in Nepal or high standards. In all probability, It n India where there is less of a culture of makes higher profits if it maintains better safety, is extremely important. But in terms standards, but society cannot rely on those of airlines, not many planesfall, even outside efforts. We need to have safety measures the United States. Railways are very difficult to protect ourselves. So let us caU themn from a managerial point of view: running safety standards and strengthen thern when them under regulation or deregulation is we go for deregulation. On the other probably one of the most management-inten- hand, we did a study for Malaysia and sive activities a country can have, particularly Thailand because Thailand wanted to start in developing countries. Beyond regulation regulating its trucking industry. Both or deregulation, railways shouldfindfeasible countries are rather similar. General ways to manage, and even in developed coun- trucking in Malaysia, which is highly regu- tries very few have been able to manage lated, was about double the cost of that in railways well. That is a challenge. Thailand except for one segment, and that Thompson: was container traMc, which was about the The thrust of what you are saying is correct, same in both countries. Thailand already and the railway is a very complicated, disci- had that part of the market regulated. pline-intensive, confidence-intensive organi- They were proposing more regulations and zation. Ittakesmorepeopleperton-kilometer we tried to use these figures to dissuade than trucking. There are at least two hin- them. They have not regulated and we drances we could remove. First, it is impos- hope they will not. When the U.S. Indus- sible to manage a commuter and an intercity try was regulated, it was because, as you passenger and freight organization in the already said, they wanted to be protected same way with the same people. They are from ruinous competition. That was exact- different markets, take different skills, and ly the same word they used in Thailand. have different challenges. The longer we let They felt that in this free society, there Is the same management try to operate those certain behavior they do not like and by two, we are askingfor trouble. Second, it is franchising certain services and giving always difflcidt to get good people, underpay them to certain truckers, they might them, and ask them to do stupid or conflicting achieve certain advantages. In the 1980s It things. In many cases the objectives the was fashionable to be in favor of deregula- railways are trying to meet and the rndes of tion. In the past it was equally fashionable the game they are living under are impossi- to talk In terms of regulations and Umita- ble, no matter how good the people are, or tions. Now countries we work with find 44 The Evolution of Railroad Regulation in the United States themselves in a pre-deregulation stage, and they sometimes have good arguments for to restructure, what I mean is the structure of this. How do you feel about this? the railway or the trucking companies. And Thompson: the regulation and structure of the consumers One factor in U.S. deregulation was what was have all got to be linked. If you don't have an called the issue entrepreneurs. These were appropriate interaction between them, one or people who understood a general thrust and the other is not going to work. In its function were able to relate that in a way that was comn- as relating what the conswner wants to buy to prehensible to the decisionmakers. This is one what the producer wants to sell, if regulation job we can certainly perfonn. If we understand is not set up that way because one or the other what people need and we do not just provide has got the wrong incentives, then it is not them with purely academic studies, but instead going to produce the intended result. figure out what they really need and give it to them, we could help the process. Q: One of the most important points that needs to be stressed is that the bankruptcy Q: You have set up a paradigm in which, of the railroad industry, the decline of its before deregulating, restructuring should financial viability, was enormously impor- be considered. I am concerned as to whe- tant. It relates directly to the point that we ther that is appropriate. In all our railway were not deregulating in an era of good projects, we are still trying to restructure times. The impetus came because the to the point that we can get to deregula- railway industry was bankrupt. Two tion-for example, with the Pakistan rail- things happened: One, suddenly the world way. I think we have to clarify a bit more woke up to the fact. Two, there was a what we mean by "restructuring before failure of government. Government regu- deregulation." Do you do it in every case? lation is supposed to keep a healthy indus- Do you do it in Costa Rica versus Argenti- try. It didn't and there was great soul na? What does it mean for other modes? searching about how this could have hap- Why in railways and why not in bus or pened. How could an industry which is truck? And last, if Conrail had been done guaranteed a rate of return go bankrupt? differently-if, rather than spending all the The bill designed to create Conrail put the $7.8 billion to restructure, they had gone burden of restructuring labor onto the straight to deregulation and divestiture- federal taxpayer at the very outset. Gov- what would have happened? ernment had to do something because the Thompson: bankruptcy law was in place. Had govern- It is an irrelevant question because we could ment not interfered, we automatically not have gotten therefrom here. The politi- would have gone into liquidation of the cal coalition and the political understanding northeastern railroads. The law read that that was necessary to deregulate the industry if you could not reorganize as an ongoing did not exist until Congress had paid the concern, the next step was liquidation, and price of the Conrail disaster. It could not the Congress and the politicians were sim- have been done before then. All the wishfid ply afraid to allow that to happen. How thinking needed to be eliminated because we do you see this? tried everything that people earnestly wanted Comment: to work but did not. It was only at that point One could imagine that it could have taken a where people were able to say to their various different scenario. The solution that was constituencies that we tried and we just can- actually put in place was not necessarily the not do that anymore. So when I say you have only imaginable solution to that problem. 45 4 The Recovery of the Railroad in Uruguay Juan Berchesi By the recovery of Empresa de Ferrocarriles del preneurial goals defined at the start of the cen- Uruguay is meant (1) the restoration of a means tury, when the railroad operated as a monopoly of transport which provides society with a service and a means of uniting the country, remained un- at an economic cost, competitive with that of changed, despite changes in technology, produc- alternative methods; (2) the return to health of a tion, and demographics, and in development of railway company that was bankrupt and doomed the highway system. to disappear unless decisions were reached in The AFE functioned as a closed system, quick order; and (3) the salvaging of an instru- resting on its laurels and continuing to assume ment that could facilitate integration with neigh- that the world should adapt itself to the railroad, boring countries. rather than the reverse. Its operating structure The AFE (Administraci6n de los Ferrocarriles remained virtually unchanged throughout the del Estado-the State Railroad Administration) century, during which it functioned as a self- with its US$30 million operating deficit ($10 per sufficient entity insofar as its inputs were con- capita, or US$10,000 per kilometer of railway), cerned. was an economically and financially bankrupt Guided by a philosophy geared to production company. Its assets covered a mere 25 percent rather than to the market, the company sold what of its operating income. Wages-the lowest of it produced irrespective of what the market any public enterprise in Uruguay-accounted for demanded; and the quality of that product de- almost 80 percent of the company's expenses. clined consistently in reliability, safety, and The company was overextended, with 3,000 punctuality. As a result, it was rejected by the kilometers of railway and 9,200 employees to market, and revenue plummeted. In order to serve less than I million tons of freight a year survive and retain its clientele, the railway imple- and 5 million passengers. It carried less than 675 mented a policy of very low rates, which only U.T. per annum-an extremely low traffic density aggravated the situation. Further, to play a social rate. role, it offered special discounts to segments of Its assets were completely depleted. Its road the population (and thus guaranteed political infrastructure was in wretched condition, its support). However, during the 1980-1985 peri- traction capacity was on average more than 30 od, AFE cornered less than 8 percent of the years old and poorly maintained, and its signaling freight market and less than 5 percent of passen- equipment was on the verge of collapse. All this ger traffic. was the result of more than 40 years of operating Finally, the company lacked a transport policy: without a company policy or an acceptable invest- From the time the railroad was nationalized in ment policy. The company had no objectives and 1948, there was no government policy to define its services were administered without regard to the roles of the different modes of transport or their cost, efficiency, or profitability. The entre- their relationship with the railroad. 46 The Recowry of the Railroad in Uruguay Definition of Policy commercial approach, offering training, concen- trating investment in areas of greater impact, up- Recently, the government for the first time dating technology, and applying free-ranging defined the transport sector's objectives and tariffs. established those of the railroad subsector. The most salient features of that policy were as fol- Strategy to Implement Change lows: An analysis of AFE's problems showed that the * The railroad will provide only those services it main challenge was finding a way to institute can render at an economic cost and that can changes. The key question was-given the compete with rates offered by alternative and persistent diagnosis, the same management indica- socially acceptable methods; tors, the same status of economic and financial * It will seek to ensure that the price of service bankruptcy confirmed by consultants' studies and reflects the social and economic costs; findings, some of which dated back more than 30 * The railroad must achieve an earnings-to- years-how was it possible that no change what- outlays ratio that will cover the necessary soever had been put into effect before? investments, as well as operating costs. It was clear that the strategy needed to imple- * The managerial and entrepreneurial efficiency ment sweeping changes was, and continues to be, of the AFE must be improved. at least as important as the changes themselves, particularly when the transformation was to occur The government also wished to orchestrate a in a country where democracy had only recently social policy, that is, one that called for transport been restored. The fact that political conditions revenue to be redistributed to society through were assessed at the same time as the entrepre- direct transfers (subsidies) to the user, not to the neurial situation was diagnosed made it possible mode of transport, on the premise that the latter to create a strategy that might overcome the method was not only inefficient but discriminatory almost certain resistance to change. as well. Change will only be possible in a company If the railroad performs services that are such as a railway if the proposed restructuring is economically unjustified-such as maintaining designed to consider the political system as an low-density lines, defined as such in the program integral part of the issue. Thus, it will be neces- contract-it must be compensated by the govern- sary to adapt general technical proposals to the ment. specific needs of each country. Tlhe government defined a long-term policy Although it is still early in the process, it is which sought to establish a program-contract that clear that certain planned tactics facilitated chang- would set forth the rights and obligations of each es. Also, various unforeseen situations were party-the Ministry of Transport and Public utilized to advantage. First, basic guidelines Works (MTOP) and the AFE-based on compli- were identified and approved quickly, at the ance with agreed-on objectives. highest level of government. This action made it possible, right from the start, to establish busi- The New Rairoad Company ness-oriented strategies that embodied the basic philosophy while the final restructuring project The new policy thus identified the major parame- was worked out. For example, freight transport ters of the railway's future services. These was prioritized; tariffs were raised substantially; included establishing a freight company specializ- benefits (free passes and so on) to students, ing in large-scale and long-distance hauling, retirees, railroad employees, and their families suspending passenger service, changing the were reduced; no additional personnel were delivery of express shipments and parcels, elimi- hired; a policy for gradually reducing staff was nating all AFE services unrelated to hauling instituted; and very low-density passenger service freight (such as medical care and restaurants), was suspended. (Eliminating lightly used serv- substantially reducing staff, selling unnecessary ices would result in a 25 percent cut in the pas- assets, significantly increasing operating efficiency senger service and would close 60 out of a total by restructuring the organization, shifting to a of 214 stations.) The Recovery of the Railroad in Uruguay 47 Second, a communications policy to support ment's executive branch to transfer surplus staff the changes was established, aimed at the deputies to other public agencies, subject to the approval in the government party, political parties, the of the legislative branch. This, along with natural general public, and railway users. It was based attrition (as employees left to take to other jobs on a qualitative and quantitative market study that or retired), reduced payroll expenses. In light of identified the following factors as the chief the economic situation-both of the country and obstacles to the scheduled changes: the railway-it was not possible to give retire- ment-package incentives, since no resources were * The population's abiding affection for the rail- available for such "golden parachutes." way; Sixth, a 1985 railway workers' strike, which * The public's belief that railway was very lasted more than 90 days, showed the country important to the country, although it could not could get along without rail service without give reasons why; seriously harming its economy and revealed the * The public conviction that the railway plays a weakened state of the railway workers' union. It social role, particularly for the disadvantaged was also the first time in the labor history of sector; Uruguay's public sector that employees' wages * Public resistance to firing employees but the were docked for the days they had not worked public would accept change if the workforce due to the prolonged strike-a fact that greatly were reduced by attrition. facilitated the restructuring project. Finally, the Ministry of Transport and Public Rapport with legislators was so useful that it en- Works set up bus service at all points that might abled the government to service three parlia- be isolated by the lack of rail passenger service. mentary interpellations. The general public and Conditions on some routes were also improved, the users were clearly informed of the new and arrangements were made for emergency rail entrepreneurial policy. Repeated publicity in the service at certain regions in the country that mass media and elsewhere also explained the might be isolated in the event of heavy rains. railway's situation-the damage it was causing the population, the deficit, and the fact it played no Results social role. Third, an international consultant was hired to Although no immediate spectacular changes could conduct in-depth studies of the railway's possible be expected, given the gravity of the situation, role in Uruguay. The ensuring report, coupled results have been favorable. with those prepared by technical staff of the Table I compares freight carried in 1989-the Ministry of Transports and the Railway, formed second year of AFE's operation as a specialized the basis of the strategy selected, particularly freight company-with 1987, the last year that the with regard to suspension of passenger service. AFE operated as a traditional railway, and with Fourth, a consistent effort was made to avoid 1984, a representative year (in the freight area) discussing the railway's problems and solutions in and the final year of management by the old ideological terms. Efficiency rather than privat- board. In 1989, 1,102,659 tons of freight and ization was emphasized, although peripheral 242,969,936 ton-kilometers were moved. Rates privatization did take place. The respective rose from US$1.83 per ton-kilometer in 1984 to merits of public and private enterprise were not US$3.07 in 1989. Billing for mass freight services compared, since Uruguayans have a deep-seated in 1989 amounted to US$7,361,545, compared respect for the public sector. with US$4,604,147 in 1984. Total AFE revenue Fifth, the number of staff was reduced. This for 1989, when the railway handled freight only, was another critical feature of the strategy, for it was equal to 92.8 percent of total earnings for was unthinkable to fire workers at a time when 1987 and to 90 percent of the 1984 figure, even the recently restored democracy was in full though the earlier figures include freight, passen- swing. Arrangements were made with the govern- gers, and parcel service. 48 The Rccovcy of the Railroad in Uruguay Table 1: Freight Performance in 1989 Output Over 1987 Over 1984 Tons carried +16.3% +11.4% Ton-km +13.1% - 5.2% Freight revenue (US$) +23.0% +59.9% The area of international traffic has unquestion- the equivalent of a 53.17 percent cut in person- ably had the most impressive results, thanks to nel. Of the total, 914 left the company and 3,929 the policy of openness and integration espoused were assigned to positions in other agencies. by the government of Uruguay and the credibility Because of the current reduction-in-force system, gained by the railway in neighboring countries. AFE is still paying wages to 5,558 workers. In-transit traffic rose to 58,770 tons in 1989 The mechanisms used to substantially reduce (5.3 percent of total tonnage and 8.52 percent of the payroll have been among the most impor- total ton-kilometers of freight carried). When tant keys to progress in the entrepreneurial total international transport is considered (in- restructuring, and among the clearest examples transit traffic plus exports and imports shipped by of adapting purely technical solutions to politi- rail in 1988), the figure rises to 127,432, the cal realities. equivalent of 12.9 percent in tons and 21.6 Railway express service, which has been percent in ton-kilometers. International traffic for operated by a private company since September 1989 amounted to 167,336 tons (15 percent of the 1986, is another area that shows positive results. total amount of freight hauled and 26.65 percent The company assembles the freight, hires entire of the ton-km) while in-transit traffic soared from railroad cars, and delivers shipments to consign- 8,669 tons in 1984 to 58,770 in 1989-represen- ees. AFE sells the space but does no handling ting a 578 percent increase. and has managed to set up, in conjunction with T'he situation with personnel has progressed the private sector, a company that combines the dramatically and, given the impact of manpower advantages of a private concern with those of the on operating expenses, is a critical variable for railway. It is still too soon to estimate revenue- financial soundness. Today, AFE has 4,266 em- which will undoubtedly be higher than past AFE ployees, 4,843 fewer than in April 1985 when the earnings. Most important, however, users are new board of directors took office and introduced receiving better service and a real choice. Table 2: In-Transit Traffic From an Orignating Country to a Destination Country via Uruguay (thousands of tons) % of Total Ton Year Tons % of Total Ton-Km Kms 1983 2,046 0.2 1,184 0.5 1984 8,669 0.8 4,996 1.8 1986 3,143 0.3 1,843 0.9 1987 7,442 0.8 3,647 1.7 1988 39,335 4.01 13,833 6.5 1989 58,770 5.3 20,696 8.52 The Recowry of the Railroad in Uruguay 49 With respect to medical service, the AFE agement information system; and introducing new system is another holdover from the self-suffi- communications systems. This will entail a cient British railway of the past which-for lack further adjustment in the number of stations, of clear entrepreneurial objectives-continued traffic supervisors, and traffic control centers. At throughout the period of state administration. present, several projects are underway. They The new policy (operating the company as a include: specialized freight carrier), dictates that AFE should no longer be the direct provider of medi- * Constructing new diesel workshops, with an cal care. This is particularly evident considering investment of US$4,800,000; that benefits produced a deficit for the company * Reconstructing 15 ALSTHOM locomotives of $975,000 in 1988. Services were transferred (eight already completed); to private purveyors of group medical assistance * Improving signal and communications equipment; in Montevideo and in the interior to care for * Upgrading road infrastructure, which includes present subscribers to the AFE system. At completion of documents for public bidding on present, authorities are implementing this revised the project to repair 120 kilometers of roads; structure, accepting offers from companies spe- * Conducting a study on strengthening coastline cializing in comprehensive medical care for all bridges to raise the 14-ton-per-axle limit and employees, retirees, and their immediate families. heighten the possibilities of international and The specific duties of the Medical Service and in-transit traffic; Hygiene Division, which had a staff of 170 at the * Providing technical assistance in different areas end of 1989, will include labor assistance, certifi- with RENFE, FA, the French government, cation, and auditing of the private agencies Brazil, and others; providing service to members. This solution will * Developing a broad plan of general and techni- substantially reduce the cost of medical services cal training; to the railway. * Orchestrating the administrative restructuring The creation of the new railway company also project, the focus of which is organic restruc- required that the transport management office be turing, a promotion system based on productiv- restructured in order to consolidate and expand ity, and payment of incentive bonuses. freight transport. This was particularly necessary because the office was unnecessarily large in The Acid Test: The Operating Deficit proportion to activity in this sector. In the course of restructuring, the office identified permanent The AFE operating deficit for 1981-84 exceeded and seasonal traffic for the medium term, the US$31 million a year. The restructuring process origin and destination of freight shipments, the that began in 1988 reduced it to US$20,539,666- number of trains, the need for crew, and station more than 34 percent below the 1981-84 average activity. As work was nationalized, the 154 and 22.10 percent less than the 1987 level. stations manned by AFE personnel were classi- According to the balance sheet and statement fied with respect to commercial and technical of earnings for 1989, the operating shortfall for railroad performance. This allowed freight this year was US$14,481,000, almost 45 percent activity to be concentrated at only 77 stations, less than in 1987 and 53 percent below the annual and traffic supervisors' offices were reduced from average for 1981-84. It is interesting to note that seven to five. The restructuring operation will if the items of personnel and labor were based on continue to make progress in determining the current levels, the deficit for 1984 would be close number of personnel needed, improving the man- to US$10 million. 50 5 Bus Deregulation in the United Kingdom Stephen Glaister This paper is an overview of the context sur- Within the essential framework of safety regu- rounding British bus deregulation in mid-1984, lation and provision for social needs, the when the decision to deregulate was taken.' It obstacles to enterprise, initiative and efficiency compares the predictions and outcomes as of June must be removed. The need to act is urgent. 1990, drawing on many studies which have been or are about to be published. In order to evaluate The White Paper proposed the following: the policy, it is important to understand the primary problem it was intended to solve, which * Abolishing road service licensing. Instead of was to reduce central and local government having to apply for a road service license, expenditures. The Conservative government also operators who serve short runs under 15 miles sought to introduce competition into markets, would be required to register the route and increase private ownership of public sector assets timing of their services with a new licensing through privatization, and secure government authority and give notice of intent to begin, income by non-tax means-but these were sec- modify significantly, or withdraw from a ondary objectives which only became important service. Services with a minimum sector after the privatization of British Telecom in length of over 15 miles would be classified as November 1984. "express' and would remain exempt from any quantity restrictions under the 1980 act. It was The 1984 Bus Policy expected that a competitive market would be created, resulting in lower fares, reduced costs, The philosophy, aims and means of the new bus greater variety and responsiveness of services, policy are described in Buses, the government's new opportunities for operators, and increased White Paper, which notes: patronage. Taxis and hire cars were seen as a potentially important intermediate form of The total travel market is expanding. New transport between the car and the bus; restric- measures are needed urgently to break out of tions on numbers licensed would be relaxed, the cycle of rising costs, rising fares, reduce and taxis would be permitted to accept more services, so that public transport can win a than one separate fare. bigger share of this market. We must get * Competition. To facilitate and foster competi- away from the idea that the only future for bus tion, the industry would be restructured. The services is to contract painfully at large cost to National Bus Company was to be broken into taxpayers and ratepayers [local property tax separate companies immediately and sold to the payers] as well as travellers. Competition private sector; the Scottish Bus group was not provides the opportunity for lower fares, new to be privatized until 1990. The remaining services, more passengers. For these great publicly owned operators in metropolitan gains, half measures will not be enough. counties and municipalities were to be made Bus Deregulation in the United Kingdom 51 into "arm's length" companies, owned by local rapidly, largely due to the policies of local au- authorities and set up with standard company thorities. Countrywide, it rose from £10 million accounts so that any subsidy would be visible in 1972 to £520 million in 1982, a thirteen-fold and explicit. The extensive system of cross- increase in real terms. Because the government subsidies of unremunerative services-a delib- was determined to reduce public expenditure (for erate function of the route licensing system macroeconomic reasons), the situation in the bus under the 1930 act-would be abolished. The industry could not be allowed to continue. previous anomalous exemption of the bus Moreover, there had been a long-standing desire industry from the provisions of competition to put the industry on a sounder, more commer- law was to be removed. cial footing. * Subsidy. After operators had registered com- Although revenue support was classified as mercial services, local authorities would be public expenditure and partially funded from the required to secure any additional services center, its magnitude was determined by local needed through competitive tendering with authorities: in fact, the bulk was supplied by the equal access for any who would care to bid. Greater London Council (which had taken re- Companies owned by local authorities would sponsibility for London Transport from central compete equally with the private sector, includ- government in 1970) and the six metropolitan ing the ex-National Bus companies. If a local counties which represented the major conurba- authority chose to allow particular tions. The administrations of the "mets" were by groups-such as the elderly-to travel at con- this time left wing and saw the provision of cessionary rates, all operators would have to be cheap, high quality public transport as one of given access to the compensation on the same their major functions. (Interestingly, revenue terms. support in London was first introduced on a * Safety. Provisions to ensure safety were not significant scale by the Conservative Council of greatly changed. Operators' licenses would be 1972-76 to allow a fare freeze that would con- required and vehicles would be subject to form to a national policy of price restraint.) regular and random inspection. Traffic com- Subsidies were given as block grants predomi- missioners would have limited powers to 'stop nantly in dense urban areas that were expected to operators who behave foolishly on the road have potentially high ridership. Rural areas, from running local services at all" and, where which have increasing car ownership, received there is traffic congestion, to "impose condi- rather little support. tions about routes and stopping places." Both left- and right-wing central governments had attempted to moderate this aspect of local In interpreting the U.K. experience, care must government expenditure, among others, with little be exercised about attributing any one effect to a success for several years. The dispute became particular cause, since there were distinct and more acute when the Conservative government, simultaneous changes. These included reducing which assumed power in 1979, produced a new subsidies substantially, removing quantity regula- system of control of public transport expendi- tion, and privatizing the nationalized operators tures, the Protected Expenditure Limits, under a while separating the others from their local 1983 act. But it did not succeed in controlling authorities. Further, it is in principle possible to expenditures. It felt that local bus subsidies were introduce any one of these changes without the running far ahead of central government provi- others. In the bus deregulation scenario, authori- sion, that no effective controls existed, and that ties decided they needed to change all three in the industry did not have a sufficiently commer- order to achieve the objectives. cial outlook. Thus, it sought solutions. The Problem to Be Solved Reducing Cost In its White Paper, the government stated that "in The prospect of closing the gap must have some of our major cities the cost of subsidizing seemed daunting. Simple calculations show that public transport is now unacceptable." Based on if this were to be achieved by removing subsidies 1983 data, bus revenue support was growing very at constant service levels and constant unit costs, 52 Bus Deregulation in the United Kingdom fares would have to increase by an average two in bus operating costs per vehicle-kilometer: and a half times in metropolitan areas and much from 1985 to 1989, the drop, excluding depreci- more in some. To close the gap by reducing ation, was around the predicted 30 percent, with output at constant fares would have implied an the exception of London, where costs fell 14 outcome which would have been just as politically percent. Real weekly and hourly earnings difficult. However, unit costs had increased, dropped-although they rose in other industries especially where subsidies had risen: the White so that, relative to general male weeldy earnings, Paper noted that from 1972 to 1982, unit costs costs per bus-mile fell not by 30 percent but by rose 15-30 percent over inflation. Leaving 44 percent. Also, the work force was reduced London aside, if costs were cut by 18 percent, which, together with the increases in output, the saving would be over £200 million a year, suggests considerable increases in output per against revenue support totaling £350 million. employee. Costs also fell due to the substantial After reviewing comparative data on bus reduction in fuel prices-worth 2-3 percentage workers' earnings, the government concluded that points (White and Turner 1990). costs could be reduced up to 30 percent. The Two caveats are needed. A factor that helped issue was how best to achieve this. reduce costs was the new pay scale associated Alternatives were considered, and authorities with the ever-increasing number of small vehi- decided the method most likely to succeed-and cles. Thus, the fall in cost per vehicle kilometer the only one that could meet the timetable set by overstates the fall in cost per seat kilometer by the public expenditure requirements-was to about one-third. Second, the estimates exclude introduce genuine competition into bus labor depreciation. This is important because it has markets. This would entail creating a competitive been alleged that operators failed to renew their industrial structure-that is, both deregulating and vehicle stock (White and Turner 1990). If this is privatizing. true, some missing components will inevitably Interestingly, while most of the controversy appear in the cost accounts sooner or later. about bus deregulation and much of the subse- However, this is a difficult issue to resolve. quent evaluation have concerned the effects on First, many new vehicles were purchased. passengers (that is, the effects on the demand Second, leasing grew significantly, which also side), the prime motivation for the policy was to affected the depreciation issue. Further, opera- change things on the supply side. This was to tors were initially quite cautious in assuming a meet global requirements for reducing subsidies life of only four to five years for the new, small- while minimizing damage to passengers (through er vehicles. Seven or eight years has since been fare increases and service reductions). found more appropriate (Banister and Mackett 1990); thus, depreciation was substantially less Costs and Subsidies than previously thought. Deregulation, alone, did not reduce subsidies. Full deregulation occurred in January 1987, al- In real terms, with the exception of London, though a transitional arrangement started in revenue support peaked before 1984 due to other October 1986. London was exempted. measures to limit local authority expenditure, The policy worked better than many dared such as the system of protected expenditure limits hope. Between 1984 and 1988-89, fares in under the 1983 act. After 1984, subsidies metropolitan areas rose by an average of 23 dropped more rapidly; advocates of deregulation percent in real terms but by only 10 percent in claim this is due to reduced labor costs resulting the country as a whole. Further, there was a from the new policy. remarkable increase in output where a decrease Although revenue support was reduced, two might have been expected-a 15 percent increase other important items-fuel duty rebate and in total vehicle kilometers from 1985 to 1989 concessionary fares compensation-remained (although the average vehicle size fell). Over 80 stable at constant retail prices. Local authorities percent of the existing routes continued as com- paid the former to operators to compensate them mercial operations (G6mez-Ibaflez and Meyer for allowing elderly and other concessionaires to 1989). travel free or at a discount. The government This was possible because of the predicted fall regarded it as a subsidy to passengers rather than Bus Deregulation in the United Kingdom 53 operators and calculated the amount on the were, and continue to be, widely respected by all grounds that operators should be in the same sides. Operators were generally satisfied with the financial position as without the scheme. Such system and opposed its change. From an admin- schemes were not universal and were much more istrative point of view, the system continued generous in metropolitan areas. The government smoothly enough, and the changes proposed would have liked to contain them, but once involved complex, major legislation and some given, they were politically difficult to reduce. obvious risks. For this reason, the White Paper only proposed However, fundamental change was possible, in that all operators have equal access to revenues spite of opposition from administrators, due to and that calculations be reviewed to ensure that the ground having been laid several years before. they truly reflected the costs of providing these In the late 1970 the Conservatives (then in oppo- concessions. sition) drafted an agenda for reforming the trans- It might have been possible and reasonable to port sector. The National Bus Company demon- abolish the system of fuel duty rebate because it strated there was substantial scope for improving distorted the price of one particular input. How- the economics of the industry, and by 1979 the ever, it was retained; and increases in the fuel intention to deregulate the industry was firm. If duty rebate, due to increased vehicle mileage, there was not sufficient consensus at the time the were offset by the fall in fuel prices. 1980 Act was formulated, it would develop and Another subsidy was the Rural Bus Grant, a materialize in the 1985 Act. In fact, once minis- small transitional arrangement (now ceased) ters were convinced of their goals, they rejected created to provide relief in rural areas. half-way measures, such as retaining the quantity The lesson here is that if some forms of subsidy licensing system in urban areas of a certain size are subjected to new market disciplines while or density (which would have failed to apply others are not, there is a risk that substitution will pressure where it was most needed). occur away from the disciplined subsidies in There was much debate during the early 1980s favor of the others. among professionals about the benefits of deregu- The overall fall in public expenditure on local lation and competitive markets for consumers. buses (excluding London) from 1984-1988 was Ministers were receptive to arguments by econo- about 26 percent at constant retail prices. (It is mists and others in favor of competition in con- much the same when London is included, al- sumer markets. However, these alone were not though the fall was due to a smaller cost reduc- sufficient to convince ministers and their civil tion and a larger revenue gain.) At the same servants. Instead, the overriding concerns were time, there were additional administrative and those outlined above-the increasing gap between other costs in local authorities connected, for subsidy and official provision, the determination instance, with the tendering process-which to reduce public expenditure, and the acceptance reduced the saving from 26 percent to 16 percent. that labor costs could be substantially reduced Reduced costs must be seen as the major (but only if competition was introduced into the success of the 1985 Act. Public expenditure was relevant labor markets). reduced in the face of rising real labor costs in a The line of argument fitted well with more labor-intensive industry. Yet physical output general objectives of the administration to weaken increased, fares rose only moderately, and con- the power of the labor unions and break up cessions were protected. nationally negotiated agreements on terms and conditions. In the bus industry, the dominance of How the Battle Was Won the National Bus Company, together with a relatively few large companies serving left wing The system of quantity licensing was introduced metropolitan areas, made it easy for the Transport in 1930 and implemented in the subsequent and General Workers' Union to keep a firm grip decade, with the aim of tidying up a chaotic, on negotiations. Deregulation and fragmentation freely competitive industry which had expanded of ownership were recognized as a means of rapidly after World War I. As an administrative loosening this grip and facilitating the develop- tool, it worked well, and the traffic commission- ment of new and individual labor contracts. In ers who presided over the quasi-judicial process fact, it is estimated that about one-third of the 54 Bus Deregulation in the United Kingdom labor cost savings was due to deterioration of route." This was promoted by many operators, terms and conditions and two-thirds were due to notably through an organization of operators in increased productivity (Hibbs 1990; Hesseltine the metropolitan counties, which argued that and Silckock 1990). Managers noted that one of tendering would avoid the risks perceived in the biggest advantages of the post-1986 situation deregulation (for example, bad road behavior in resulted from their leaving the two negotiating an attempt to win passengers). Also, it would bodies that had for many years set the national allow local authorities to control fares and plan agreements on pay and conditions. As a result, an integrated set of services with cross-subsidies. plant bargaining grew, and wages reflected the At the same time, competition for tenders would local labor market. Without this, minibus opera- provide the required pressure on costs. tions at specific rates could not have developed Competitive tendering was included in the (see below). Some observers also noted that 1984 Act, which set up London Regional Trans- municipal operations had always been constrained port, and the two systems have since worked side by the unions through their influence in the by side-one in London and the other in the rest Council Chamber and its committees. Manage- of England, Wales, and Scotland. It is still too ment was undermined, and moves to improve soon to assess the outcomes with any certainty productivity were often blocked. This was most since neither system is close to a long-run equi- significant in Labor councils, but occurred else- librium state. Some analyses have been made where as well. (Bayliss and Tyson 1988), but no comparative When the legislation was introduced, union statistical study has been carried out. London representatives were slow to recognize its impli- Regional Transport has been conducting an cations and were late and muted in their opposi- internal review of its own system, and a more ton. No doubt this was partly due to the fact detailed analysis is available elsewhere (Glaister that the period was one of a general weakening in and Beesley 1990). labor union influence. Route Tendering in London The Alternative to Deregulation: London LRT's role is to plan and secure public transport The White Paper proposed that London would not services. London Buses Limited (LBL) is a be deregulated "for the time being." The 1984 wholly-owned subsidiary that provides the net- Act created London Regional Transport (LRT) as work bus services and bids for the remainder, a nationalized industry to take over the operation which LRT puts out to tender, in competition of London transport from the local authority, the with other operators (many of which are privat- Greater London Council. The govermnent ized ex-National Bus companies). LRT specifies decided to defer deregulation in London until the the service to be provided in detail. The con- changes imposed elsewhere could be evaluated. tracts, valid for three years, are for the cost of Although the govermment repeatedly stated its operation: standard fares are charged, all tickets intention to deregulate London, it has not used are valid, and revenues are remitted to LRT. To the existing provision under the 1985 Act because date, about 30 percent of bus kilometers have it is judged to be inadequately drafted, and thus been put out to tender, of which just over half a conflict might arise. Also, the future of the have been won by LBL. They have done rela- concessionary fare schemes was not thought to be tively well in winning the large networks, which adequately protected. have been offered under a single contract, and Before, during, and after the preparation of the less well with the smaller single routes. bus deregulation bill, there was general agree- Each time a set of contracts is awarded, LRT ment that costs could and should be reduced- estimates how much less the services would cost although there was no agreement on where or by to run than if services remained in the network. how much. The most credible alternative to the These estimates have varied, but they average 20 line the government adopted was to put routes out percent gross and 16 percent net of additional to competitive tender but disallow competition on administration and enforcement costs. This is the road. This became summarized as "competi- consistent with experience with similar kinds of tion jfr the route rather than competition on the tendering for various local authority and hospital Bus DeregukItion in the United Kingdom 55 services in the U.K. and U.S. (Glaister and slow to introduce small vehicles, despite the Beesley 1990). conspicuous success of the routes that were In general, the quality of service improved on converted. In the case of one pair of network tendered routes because of the closer attention (that is, not tendered) bus routes that LBL did required for contract enforcement. Revenues convert to minibus operations, total costs are rose due to the increase in bus miles delivered. estimated to be 8 percent lower than they would Tendering in London can be considered a have been and revenues are 22 percent higher. success. Results have been good, the adminis- One reason may be that LBL felt constrained in tration has run smoothly, and the sensitive situa- its freedom to invest in new capital assets by the tion created by an in-house supplier bidding system of approvals-a private firm would simply against outside competitors has generally been make a commercial judgement and act accordingly. handled satisfactorily. However, the London Another reason may be that LBL is waiting to see experience illustrates the weaknesses of the which size and type of small vehicle is appropri- system and why full deregulation was favored ate before investing heavily. outside of London. First, official statistics show The manager of the pair of converted minibus that bus unit costs in London as a whole fell 14 routes points out that, in the light of experience, percent in real terms over a period when they fell he made several significant changes to his services 30 percent elsewhere. Further, after five years, in the first few months before he got them less than one-third of the services was subject to "right." He feels that had the routes been operat- direct competitive pressure. While the threat of ed under a tender specification, rapid fine tuning tendering has undoubtedly changed attitudes and would not have been so easy. This is a small conditions of work and labor practices, it is illustration that tendering may actually inhibit probably unreasonable to attribute the entire 14 market-led innovation because, once let, a con- percent drop to this factor. For example, a tract specification is fixed for a matter of years significant amount was saved by introducing unless it can be renegotiated. But renegotiation driver-only operation of many buses. Thus, the is difficult and costly and is not initiated by an London experience suggests that tendering might operator who is making a satisfactory profit on not have been as successful as deregulation unless his contract. In this respect, franchising may it could have applied to all routes immediately have some advantage over tendering-which is and pressured costs more than it apparently did rather similar to the present situation for the non- on the tendered routes. tendered sector in London. Second, LRT hesitated about whether to accel- Finally, there is the administrative problem of erate the scale of tendering because it was con- tendering all services in a large urban area. So cerned this would take routes away from its far, it appears to have gone well enough in subsidiary (while preparing it for future deregu- London. But in equilibrium, with three-year lation and privatization). Also, it questioned contracts, one-third of all routes would have to be whether a tender would have unfavorable cash retendered every year. That is a tall order, and effects on the group as a whole, at the start, the temptation will be considerable to simplify in because of fixed costs in the short run and sever- ways that make the problem more manageable at ance payments to displaced staff. Such hesitation the expense of competitive pressures on bidders- illustrates that any system of comprehensive such as longer contracts, bundling routes into tendering by a body not fully exposed to com- large contracts, and negotiating extensions rather mercial pressures will find good reasons for than reletting. proceeding slowly, especially if it owns the The London experience confirms that to have incumbent operator! attempted to put all bus routes in the country out Third, change and innovation have been slower to competitive tender in a short period of time- in the LBL network operation than outside the as the alternative to deregulation would have city. Tendered routes were carefully reassessed required-would have been administratively and significantly changed, often by introducing difficult. The use of market signals, under small buses. But this is less true where the deregulation, to indicate which routes could be impetus of tendering was absent. In fact, LBL was provided without intervention, greatly simplified the 56 Bus Deregulation in the United Kingdom task of tendering the unremunerative remainder. tion will ever happen, LBL may loose its sense of When interviewed, managers in the bus indus- purpose and become harder to manage. The try stated they would not wish to return to the point has been made many times in other con- system as it was before the 1985 act. They texts: if fundamental change is decided upon, it prefer competition in the market to a tendering or is better to make it quickly and with conviction. franchising system because that gives them Some of the difficulties with tendering in freedom to manage and develop their businesses London stem from the fact that the major incum- in their own way, without having to deal with a bent operator is owned by the tendering authority. higher authority. Their greatest complaint about This inherently unsatisfactory situation is to be the former system was not regulation, but the avoided. In the case of London, given the lack increasing interference from political bodies, of credibility of rapid deregulation, there may which inevitably accompanied the rapidly grow- now be a case for abandoning the policy for a ing subsidy in the context of route licensing. specified number of years and immediately The virtues claimed with regard to tendering privatizing the bus companies. This might be have been realized in London. Fares and servic- done by creating explicit fixed-term contracts for es have been unified and integrated. Information each of the services currently secured by LRT has been provided to passengers, and change has (not necessarily by competitive tendering) and been transparent from their point of view. There selling the companies with the benefit of these has been no predatory behavior and no bad- contracts. By appropriate layering of contract driving behavior. Tendered routes have been lengths, LRT could review and tender the con- carefully planned without the same slavery to cost tracts as they came up for renewal. and demand conditions as a market solution demands. The Speed of Change In comparing the two systems, it is important not to weigh an idealized (but not, in practice, Bus policy has been successful in its primary aim: realized) planned solution with a hypothetical free subsidies were reduced without dramatic loss of market solution. It is not possible to reach a service within a couple years. But many analysts definitive conclusion on the relative merits of expected secondary advantages that were de- tendering and deregulation. However, if tender- scribed in the White Paper, although others ing is the selected option, the experience in thought it was far too optimistic. London and elsewhere provides an excellent At the time the White Paper was published, model: various forms of contracts and proce- few explicitly considered how long it would take dures for letting, enforcement, and administration for the industry to settle down, except some have been shown to work reasonably well. argued that deregulation was the only possible One other point can be illustrated by the pres- way of securing the requisite cost savings in the ent situation in London. There is a risk of things specified time. As for the secondary effects, the going wrong because of uncertainty and delay authors of the White Paper implicitly expected over deregulation. LRT declared itself in favor them to occur at a similar speed. In retrospect, of deregulation; so has LBL-a remarkable this was not sensible, especially in an industry difference from the 1984 situation in which the declining for years and from which so much incumbent operators and their owners were subsidy was to be removed (Beesley 1990a). strongly opposed. The bus company has been History gives some indication of the rate of reorganized for some time now into a set of adjustment to be expected in the industry. The separate subsidiaries in preparation for deregula- impetus for the explosive development of tion. Subsidiary company managers have been England's bus industry in the 1920s was the hired on that basis, and relations with labor have ready availability of mechanically mature war been conducted in that context. The tendering surplus vehicles and demobilized soldiers. From program is being modified to take account of it. 1919 to 1937 the number of omnibuses operating Yet the government has hesitated and delayed the grew at a more or less constant absolute rate planning date for deregulation several times. The from about 6,000 to 46,000 (Glaister and Mulley date now stands beyond the next general election. 1983). In other words, even in the heyday of this If enough doubts surface about whether deregula- then highly profitable industry there was w sign of Bus Deregulation in the United Kingdom 57 reaching a static equilibrium after eighteen years. The Secondary Expectations of the 1984 After the 1930 act another kind of change was Bus Policy imposed on the industry: traffic commissioners who administered the new system of quantity and This paper does not list all the effects of bus quality licensing, took a strong line to rationalize deregulation; rather, it identifies a few matters the "chaotic" industry by encouraging mergers where the literature poses some interesting ques- and agglomeration and by standardizing fares. tions or where there have been recent develop- The annual reports suggest that rapid change in ments. The following were identified in the these respects continued from 1931 to 1937-38. White Paper as secondary effects that could be The outbreak of war then clouds the picture. expected. The 1980 Transport Act created the opportunity for local authorities to declare experimental trial A competitive market would be created areas-and three were created. The Act also deregulated long-distance coach services, and It is difficult to say how much competition has after the first three years, much of the initial occurred, beyond conceding that it has so far rapid change in the long distance market had been less than what was optimistically expected. sorted itself out (see Cross and Kilvington 1985). Generally competition increased in the second But local bus deregulation in 1986 and the cre- year of deregulation, and a good deal of on-the- ation of an unambiguous profit motive for the road competition can be witnessed in particular dominant operator (National Express) by privat- places. According to Tyson (1989), competition ization in March 1988 were important factors was more than was anticipated in metropolitan suggesting that even in the case of the long areas, with at least thirty operators in each area distance services, a longer period is needed to and an average of three bids for each tender for assess the truly competitive market (Beesley subsidized services. 1989). Companies have generally expanded into areas It is worth noting that the principal physical where they have local knowledge, avoided con- assets in the industry are vehicles and real estate frontation, and preferred to compete for tendered (office buildings and maintenance depots). Tradi- routes rather than lodge commercial registrations. tionally, the life of the large, heavy vehicle was In many areas, operating territories are similar to reckoned at about fifteen years; and at deregula- those before deregulation, and it is possible there tion the vehicle stock was not particularly old. has been a tacit agreement not to trespass on each The relevant real estate markets were insulated other's territory. Active competition has been from full market pressures by town planning reported in Scotland (Hills 1989). restrictions. When competition is sluggish, the National statistics fail to report numbers of asset lives are such that the industry can carry on small operators; however, they show a 10-15 for some years before it is forced to confront percent increase each year in the number of capital market pressures. medium-size operators. It is also noteworthy that many bus companies Still, it is too soon to conclude on this topic. were bought by their managers. One other asset Competition will increase if and when the invest- in the industry is bus professionalism, which has ing institutions at home and abroad decide the been turned to good advantage with the improved British bus industry is profitable. The prices at use of human and mechanical resources (Hibbs which the last few of the National Bus Companies 1990). But proper marketing, use of price dis- were sold and the active trading in bus companies crimination, and other standard commercial now occurring may be indicators that competition techniques working on the demand side have yet is increasing. to be fully developed. This is interesting in view One disappointment has been that owner- of the fact that price competition has not devel- drivers have not become common, as they are in oped in the industry. the taxi industry. The requirement for an opera- Thus, it is fair to claim that two or three years tor's license seems to be an inhibition. In an is too soon after deregulation to make a final important test case, the holder of an operator's assessment. license attempted to let his drivers effectively own 58 Bus Dereguation in the United Kingdom their vehicles through a leasing arrangement. was implemented. Conversely, fares might rise This was prevented by a ruling that each driver on routes previously receiving generous cross needed an operator's license under the arrange- subsidies. ment. This may have closed the door to an The new arrangements for tendering for non- important route for easy entry by individuals with commercial services greatly reduced some forms a minimum of qualifications, which was impor- of cross-subsidy and forced responsible authori- tant in the bus boom of the 1920s. ties to consider what is worth paying for. But price competition did not develop to any great lTrffic might be congested extent, and fares scales remain uniform. In addition, differences remained in average fare A fear often expressed with regard to bus deregu- levels among apparently similar areas. lation is that a flood of competing vehicles will cause road congestion. Thus, the 1980 act gave Serices would be more varied; operators would reserve powers to the traffic commissioners in the have new opportunitis event such congestion had to be controlled. Generally, there has not been enough growth It was believed that in the UK buses were too of service to cause traffic problems. Further, the large and the forces of competition would greatly agility of minibuses is manifest by the greater encourage the use of various types of smaller speeds actually achieved. There is also some vehicles. Bus size increased systematically over isolated evidence of substitution for car use the decades, partly due to the "new bus grant" (Banister and Mackett 1990). The Traffic that was available for large and technically com- Commissioners have not had to use their powers. plex vehicles (which subsequently proved expen- In the most notorious case-in Glasgow, where sive to maintain), and also from the attempts to competition was and continues to be fierce-they measure efficiency in bus operations in terms of declined on the grounds that the problem was costs per bus kilometer instead of by a more caused by inadequate parking enforcement rather market-oriented criterion. It is also possible that than bus traffic. However, LRT's experience is the big bus is optimal for many market circum- that the Traffic Commissioners have very limited stances (see Gwilliam, Nash and Mackie 1985a, detection capabilities and even less enforcement b). But many concluded that capacities of the power. order of thirty to forty passengers would suit many circumstances better than the seventy or Fares would fall and cross subsidies would be more of the conventional double decker. (See reduced Banister and Mackett 1990 for a summary.) There were actually two distinct predictions This was an oversimplification of a quite complex concerning vehicle size. The first was that where series of propositions. The system of quantity the market was large enough, smaller buses licensing had fostered uniform pricing-rates per would be used as a means of product differentia- kilometer that did not vary much by time or tion, filling the gap between the large bus and the place. It also enforced cross subsidy-permission taxi. They would operate at higher speeds, run to run profitable services was granted if operators with greater frequency, and generate their own also agreed to offer unremunerative services. market at higher fares than the big bus, with Operators themselves introduced other kinds of which they would coexist. On the whole this has cross subsidy. However, these were considered not happened; there are places such as Oxford, difficult to identify, often perverse in their ef- where small and large vehicles compete, but their fects, and not subject to political scrutiny: fares are not very different, and it appears to be Competition was expected to drive fares closer to the result of two different views of how best to avoidable costs, by route and period of the day. cater for the same market rather than create Costs would be generally reduced which would distinct markets. allow fares to be reduced on heavily loaded The second proposition was that taking service routes, except to the extent that peak load pricing frequency, capital, labor, and maintenance costs Bus Deregulation in the United Kingdom 59 and depreciation into account, smaller vehicles Patronage will increase would displace the larger ones in markets too small to sustain more than one type of vehicle. Official statistics through 1989 indicate that Although there have been examples of moves in patronage has not increased. Observers have the opposite direction, there are signs this was noted that after standardizing for the fare increas- substantially correct. Minibuses generally contin- es, the decline in patronage is much as it would ue to displace larger vehicles: in 1985, roughly have been on the basis of secular trends (G6mez- forty locations were served by 400 minibuses. lbaflez and Meyer 1989, White and Turner By 1987, 390 locations were served by 5,600 1990). Thus, any increase in vehicle kilometers minibuses. In fact, growth should continue, rein- would appear to be unproductive. Costs per- forced by the recent development of technically vehicle-kilometer have fallen considerably, but superior small buses and the experience that vehicle kilometers have increased while passenger vehicle life is longer than some had expected. kilometers have remained stagnant. Thus, load Several benefits have been noted from the use factors have fallen and costs per-passenger-kilo- of minibuses. They achieve higher speeds often meter have fallen little. becoming economically viable without increasing This is the great disappointment of the policy. fares. Greater route coverage, better penetration It is also a mystery. One explanation is that the of residential areas, and hail-and-ride operations potential benefit of the extra vehicle kilometers have all occurred. Passengers comment favor- was not converted into better service quality ably on the increased security from robberies and (White 1990). This was because of irregular assaults offered by the proximity of the driver. running, or vehicle bunching, lack of service Press reports have been generally highly favor- coordination, or confusion among passengers able. However, minibuses also have higher load because of frequent changes, or some other factors, which causes complaints of crowding, factor. There can be no doubt that some of these and extra waiting time at stops. factors played a part. For instance, some author- There are also important effects with regard to ities put a great deal of effort into opposing drivers. First, driving-license requirements are deregulation and none into preparing for it; thus, less demanding. Also, drivers enjoy better there were unfortunate short-term consequences contact with passengers and achieve greater job for passengers. satisfaction. In addition, because the vehicles are However, this explanation may not be com- less daunting to drive, new labor markets have plete. In most detailed case studies, bus output opened up. increase was accompanied by an improvement in The minibus has led to substantially less advan- observed or estimated service quality. For tageous terms and conditions of work (for driv- example, some have documented the favorable ers), both in London and under deregulation small-vehicle experience in terms of patronage (Banister and Mackett 1990). However, it is (although they can find little direct evidence on unclear to what extent these effects have anything service quality) and note that the full market to do with the technology of vehicle size. Nor potential for minibus operations has not yet been are they necessarily related to deregulation: identified (Banister and Mackett 1990). Another skeptics point out that minibus experiments pre- estimated a 5 or 6 percentage point fall in sched- date deregulation and that the vehicles are being uling efficiency since competition started, which introduced in a regulated London. Nevertheless, is not enough to vitiate the considerable increase it appears it is the commercial pressure brought in bus kilometers (Evans 1990). And in spite of to bear by deregulation that has changed attitudes the expanded service the level of patronage did and speeded change. not increase. Some operators have taken advantage of oppor- One problem in assessing patronage outside tunities offered by the technology of small vehi- metropolitan areas is the quality of the data. In cles to do things differently. For instance, in many cases, "before" data are the outcome of a Exeter repair shops were closed and the main single day's observation. In all cases, "after' technical activity was contracted out on a perfor- data are difficult to calculate because bus routes mance contract to the Ford dealer. change rapidly. To state the obvious, if a funda- 60 Bus Deregulation in the United Kingdom mental change such as deregulation is to be tween modes and operators has been substantially evaluated, good statistics must be recorded both restored (Tyson 1990). Also, in Tyne and Wear, before and after the event-particularly with a separate company was created-jointly owned respect to passenger usage. However, this was by the Passenger Transport Executive and the bus not achieved in the U.K. operators-to administer a travelcard scheme, Observers state the most convincing explana- issuing tickets and allocating revenues according tion for why patronage did not change: a known to agreements among its members. infrequent service was replaced by an unknown frequent one, so effective waiting times were not Safety would decline reduced (Evans 1990). If this is correct, the remedy is simple: inform passengers about the Safety was a subject of great debate: it was services. The White Paper foresaw some of these alleged that competition would lead to neglect of problems but took the line that providing good vehicle maintenance and personnel training. One information would be in the operators' own observer reported on the various irregular driving commercial self-interest. A precaution was practices that allegedly took place before regula- taken: the registration system for commercial tion in 1930 (although no evidence appears to services and the rule requiring operators to wait demonstrate how common this was. (Foster forty-two days for entry and exit were to provide 1985)). Nevertheless, some predicted such authorities with a central source of information practices would reappear, and the operator licens- and to constrain the rate of change, which could ing system and extra vehicle inspection resources confuse passengers. Managers seemed slow to were created as precautions. adopt good marketing practices and commercial Until now there have been few serious prob- pricing: in 1984, the U.K. bus industry spent lems of this kind. Official accident statistics less than 1 percent of its revenue on marketing show a steady continuation of the previous de- (Wooton 1984), and there is little sign this pro- cline in injuries and deaths per passenger kilome- portion increased greatly. If normal commercial ter. Thus, it seems that the quality regulation has incentives are not operating, there may be a case been sufficient so far. Further, one should note for some short-term action by public authorities. that times are different and drivers better educated, To a degree, this was done by some local authori- trained, and generally more responsible than in ties from the beginning, where they accepted this the 1920s. as one of their functions (Tyson 1989, 1990). Barriers to Competition: Collusion, Preda- Coordination and integration would be provided tion, Merger by the market The White Paper took a simple line on competi- The White Paper took a strong-free market line tion: regulation was the important barrier. on coordinating and integrating services. To the Technical conditions in the bus industry were extent these are valued by passengers, they would thought to be such that economies of scale, command a price and would automatically be network effects, and information asymmetries provided by the normal commercial process. would not permit significant barriers to continue. This path was controversial, however, because it Although predatory practices had been observed eliminated the need to intervene in route planning in the trial areas, it was argued that it would not and in ticketing systems. be commercially sensible, or even possible, to It was always accepted that some central ward off competition on many fronts simulta- agency would be required to administer concess- neously without the support of a protected, ionary fares schemes. Local authorities under- regulated sector. It was accepted that the histori- took this, and the schemes seem to have worked cal experience under competition was for territo- well. rial companies to form and, in dense urban areas, Other forms of integration, notably the inte- for operators to create associations. grated travel pass, have had a mixed experience. For various reasons, authorities expressed litde However, after a period in which many schemes concern about these matters. Because sophisticat- were withdrawn, the availability of tickets be- ed pro-competitive legislation now exists in the Bus Deregulation in the United Kingdom 61 U.K., corruption and criminal enforcement of official statistics do not yet show greatly in- cartels are not likely to be as much of a problem creased concentration. It seems those taking this as elsewhere in the world; and associations and line must rely on the specialist trade press from territorial monopolies would be so constrained by which it is difficult to gain a representative the threat of competitive entry that they would picture (Beesley 1990b). Nevertheless, the have to behave almost as if the industry were Monopolies and Mergers Commission ruled on perfectly competitive-that is, it was argued that several cases, establishing that two geographically the market would be contestable, to use the contiguous companies would cover a "substantial modern terminology. part' of the U.K. within the meaning of the At the time deregulation was debated, oppo- legislation and that such mergers would be nents questioned this proposition. It is certainly viewed with concern. Conversely, mergers not true that once the primary binding constraint to involving geographically contiguous bus competition was removed, other less important companies-of which there have been several- constraints emerged. What is not yet clear is regarded as being of little concern. whether they are sufficiently damaging in practice General U.K. competition law is currently and sufficiently resistant to removal as to destroy under review. The present failings include the the case for deregulation. difficulty of detecting non-registration of register- Some of the present barriers were created able agreements; inadequate sanctions for non- deliberately, such as the 42-day rule for entry and registration; slowness of action; the difficulty of exit, the registration system, and the requirements defining and detecting collusion and predation; for an operator's license. All of these ensured and the difficulty of interpreting merger. Reme- that a single operator would be large enough to dies have been proposed, including the possibility operate a whole route and able to run a mis- of adopting the US sanction of triple damages to judged service for a period of time. Owner- a party shown to have been injured by anti- drivers have not been encouraged by the opera- competitive behavior (Beesley 1990b). tor's license requirement. Some have argued that It would appear that the White Paper underesti- the operation of concessionary fares schemes mated the importance of potential failures of constituted a barrier (Gwilliam 1989, Beesley competition and that U.K. competition law is 1990a). presently not ideally suited to deal with problems In spite of the confidence that company size that occur. However, it is unclear how important would not matter, it was decided, as a precaution, competitive failures have been in practice, and it that the National Bus Company (NBC) would be seems unlikely a great deal of damage has been broken up into relatively small companies (some done. It is particularly difficult to frame legisla- 200-300 vehicles each) and privatized in such a tion and implement laws that will not unintention- way as "to promote sustained and fair competi- ally hinder desirable, market-led integration and tion." However, privatization was not a neces- coordination. sary accompaniment to deregulation, as the situation in Scotland illustrates, where the indus- Cost-Benefit Calculus try was deregulated but not privatized until several years later. Researchers have carried out preliminary cost- The market value of the NBC was recognized benefit analyses of bus deregulation. In brief, to be small in the absence of regulation. Thus, they conclude that if increased vehicle mileage according to press reports, early sales realized had been translated into extra patronage, the rather little. However, later sales realized more result would have been highly favorable (Evans than had been hoped for. 1990, White 1990). As it was, the costs of Recently, it has been alleged that one or two running unproductive, extra vehicle miles con- ex-NBC companies are aggressively buying up sumed some of the benefits gained from unit cost companies, leading concentration of ownership, reductions. However, there is still a net benefit and auguring badly for competition. The general in the metropolitan areas but a slight net loss in view seems to be there is a clear tendency toward the shire counties. concentration in the bus industry. However, it is Particular issues raised in the analysis of costs almost impossible to know for sure if this is true; and benefits of bus deregulation are: 62 Bus Deregulation in the United Kingdom * How should changes in labor markets be stantial amount but not as much as was hoped by evaluated? Since quasi-monopoly rents (be- the government. Competition for tenders has cause of unionization) were dissipated with the been strong. Traffic congestion has not been a creation of a competitive labor market, how do problem. we value the deteriorating terms and conditions There has been little change in the general of workers in the industry? The standard level of fares after the initial impact of subsidy economist's answer does not find favor with reduction. The failure of price competition to some people, especially those who believe emerge in local bus routes was unexpected. regulation should create good terms and condi- Cross-subsidy has been reduced and replaced tions for workers in the industry. by explicit subsidy. Smaller vehicles have flour- * Similarly, what is the opportunity cost of the ished, as predicted, but they have not created labor (the appropriate shadow wage)? differentiated markets. * How do we decide what would have happened Patronage does not appear to have responded in the absence of deregulation? What would to the increased service offered. It is not under- the exogenous trends have been? In particu- stood why, but irregularity, change, and poor lar, what would have happened to labor costs- information and marketing may well be factors. would they have risen in line with retail prices If so, the benefits of deregulation could be greatly or with real earnings? increased by improving those aspects, and poli- * Is it legitimate to count subsidy savings of £1 cies may need to be created to respond to this as £1? What is the shadow cost of tax reve- need. nue? (Some researchers conclude that the Initially, some coordination of services and evidence suggests a cost of £1.20 to £1.50 per ticketing was lost, but it is now re--establishing E1 of tax raised (Dodgson and Topham 1987).) itself as a commercially attractive undertaking. Safety does not seem to have been compro- Conclusions mised. Privatization of publicly-owned National Bus The primary objective of the bus policy was Company operators was successfully accom- achieved: competition reduced costs and subsi- plished, as was the transition from regulation to dies, and bus kilometers substantially increased. deregulation. Companies owned by local au- Over 80 percent of the network was offered thorities were separated although they have not commercially. Some items of subsidy were not yet been privatized. However, barriers to com- subject to market discipline, and these did not petitive entry and anti-competitive practices were decrease: however, it is too soon to make a final underestimated: no such barriers have been too assessment of bus deregulation. problematic although they could become obstacles The legislation was carried due to single-mind- in the future. The present pro-competitive legis- edness on the part of the politicians, a long lation is too slow, inflexible, and generally period of preparation, and lack of opposition inappropriate. It is currently under review. from unions and others-in spite of its radical nature and the fact that it replaced a smoothly- Appendix operating administrative system by the vagaries of the market. The bus industry developed in the latter half of The alternative of comprehensive tendering was the nineteenth century under the mild safety adopted in London. This works well and serves legislation intended for hackney carriages. It was as a good model; but it also illustrates some of profitable and highly competitive. Though subject the practical drawbacks of tendering-in particu- to local cartels-the horse bus associations-the lar, the relatively limited pressure it puts on industry's power was circumscribed by the costs. Experience in London and elsewhere continual threat of competitive entry. World War shows the importance of obtaining a proper I consolidated the technology of the motor lorry separation between ownership of bidding compa- and motor bus. The ready availability of surplus nies and the authorities offering the contracts. vehicles and demobilized soldiers after the war It is difficult to generalize about the extent of gave the opportunity for a rapid and profitable on-the-road competition. There has been a sub- expansion of the bus industry. The number of Bus Deregulation in the United Kingdom 63 accidents involving buses grew commensurately revenues to fall behind increasing costs. In the with bus traffic and attracted the attention of the early 1980s, public transport subsidy became a legislature. The 1930 Road Traffic Act created deliberate policy, leading to conflict with central a system of licensing operated by Traffic Com- government and the eventual reversion to a missioners and Traffic Courts. The primary nationalized industry in 1984. intention was to impose safety restrictions, but some protection from competition was given to Notes license holders to compensation for the extra cost imposed by the safety requirements (see Glaister 1. A first draft of this paper was presented at and Mulley 1983). Traffic Commissioners chose the World Bank Seminar "Regulatory Reform to rationalize the industry by encouraging merg- in Transport," held in Baltimore, Maryland ers, reducing what they saw as "wasteful compe- on June 7-8, 1990. tition," forcing the provision of unremunerative services by cross-subsidies as a condition for References granting licenses to operate profitable routes, and by enforcing price controls. The notion of giving Banister, D.J. 1985. "Deregulating the Bus commercial protection to the railways and tram- Industry-the Proposals." Transport Reviews ways arose late in the consideration of the legisla- 5 (2) 99-103. tion and was of secondary importance. However, Banister, D.J., and R.L. Mackett. 1990. "The it became essential in the administration of the Minibus: Theory and Experience, and Their legislation because applicants for route licenses Implications." Transport Reviews 10 (2). were required to demonstrate positively a public Barker, T.C., and M. Robbins. 1974. A History need and the statutory right that incumbents and of London Transport, George Allen and Unwin. competitors had-and used-to object. The Bayliss, B.T., and W.J. Tyson. 1988. "Compe- decline of the bus industry started in the late tition for Local Bus Services in Great Britain." 1950s: cars took away ridership, and it became International Commission on Transport Eco- harder to sustain cross-subsidies. The regulatory nomics, UITP. system made the industry slow to adapt to the Beesley, M.E. 1985. "Deregulating the Bus changing market. Many urban operators were Industry in Britain: A Reply." Transport Re- already owned by local authorities. Most of the views 5 (3). rest were nationalized and formed the National Beesley, M.E. 1989. The Role of Government Bus Company under the 1968 Transport Act. in a Deregulated Market. ECMT, Paris. One of the first actions of the 1979 Conservative Beesley, M.E. 1990a. "Bus Deregulation: government was to remove price and quantity Lessons from the U.K." In D. Hensher, ed., restrictions on long-distance coach services. Proceedings of an International Conference on After that, all bus services, except in London, Competition and Ownership of Bus and Coach were deregulated, and the National Bus Company Services, TransportationPlanning and Technol- was privatized under the 1985 Transport Act. ogy. London: Gordon and Breach. Passenger transport in London has always been Beesley, M.E. 1990b. "Collusion, Predation and treated under separate legislation. The under- Merger in the U.K. Bus Industry." Journal of ground railways were built in the 1860s and the Transport Economics and Policy, 24 (3) 295- deep tubes at the turn of the century-both as 310. private ventures. They were never very profit- Bennathan, E., L. Escobar, and G. Panagakos. able, in contrast to the privately-owned buses. In 1989. Deregulation of Shipping: What is to 1933 bus and rail were amalgamated into a Be Learned from Chile. World Bank Discus- single, monopolistic industry, with the aim of sion Paper #67. allowing buses to cross subsidize the ailing Cross, A.K., and R.P. Kilvington. 1985. "De- railways. In 1969 the organization came under regulation of Inter-city Coach Services in Brit- the control of the local authority, the Greater ain." Transport Reviews 5 (3). London Council. Outside subsidy on a signifi- U.K. Department of Transport. 1984 D=. cant scale was unnecessary until the mid 1970s, Her Majesty's Stationery Office, Cmnd 9300. when government-inspired price restraint caused Dodgson, I.S., and N. Topham. 1987. "Shadow 64 Bus Deregulation in the United Kingdom Price of Public Funds: a Survey," in Transport Transport Economics and Policy 23 (1) 29-44. Subsidy, Policy Journals. Gwilliam, K.M., C.A. Nash, and P.J. Mackie. Dodgson, J.S., and Y. Katsoulacos. 1990. 1985a. "Deregulating the Bus Industry in Brit- "Competition, Contestability and Predation; ain-(B) The Case Against." Transport Re- The Economics of Competition in Deregulated yviws 5 (2) 105-132. Bus Markets." In D. Hensher, ed., Proceed- 1985b. "Deregulating the Bus ings of an International Conference on Com- Industry in Britain: A Rejoinder." Transport petition and Ownership of Bus and Coach Reviews 5 (2). Services, Transportation Planning and Technol- Gwilliamn, K. M., D. M. van de Velde. 1990. ogy. London: Gordon and Breach. "The Potential for Regulatory Change in Evans, A. 1987. "A Theoretical Comparison of European Bus Markets." 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"NBC's urban port Economics and Policy 24 (3) 255-282. minibuses. A review and financial appraisal." Foster, C.D. 1985. "The economics of bus dereg- TRRL Contractor ReDort. CR42 Crowthorne. ulation in Britain." Transport Reviews 5 (3). Tyson, W.J. 1989. "A Review of the Second Glaister, S. 1985. "Competition on an Urban Year of Bus Deregulation." Report to Associ- Bus Route." Journal of Transport Economics ation of Metropolitan Authorities and Passen- and Policy 19 65-84. ger Transport Executive Group. 1986. "Bus Deregulation, Compe- Tyson, W.J. 1990. "Effects of Deregulation on tition and Vehicle Size." Journal of Transport Service Co-ordination in the Metropolitan Economics and Policy 20 (2) 217-266. Areas." Journal of Transport Economics and 1987. "Public Transport Subsidy," Policy 24 (3) 283-294. Policy Journals. White, P. and Turner R. 1990. Conference on Glaister, S., and M. E. Beesley. 1990. "Bidding Competition and Ownership of Bus and Coach for Tendered Bus Routes in London. 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Journal of Transport Administration, Office of Private Sector Initia- Economics and Policy 24 (3) 311-332. tives, Washington, D.C. Wooton, J. 1984. "Overview and Information Gwiliam, K. M. 1989. "Setting the Market Free: Technology in Public Transport." University Deregulation of the Bus Industry." Joural of of Newcastle, April. Bus Deregulation in the United Kingdom 65 QUESTIONS AND ANSWERS Comment: Third, you have to build a constituency to You have made the deregulation of the bus support it, and this takes a long time. industry in Britain look too easy. Based on Fourth, you have to do it in stages so you your paper, it appears as if the new Minis- can demonstrate there will be benefits that ter Nicholas Ridley came into office at the exceed the costs so you can carry the public end of 1983, by 1984 he had a White Paper with you. ready, in 1985 the act was passed, and by Glaister: the end of 1986 deregulation was in The other thing you have to get on your side force ...three years from start to finish. in Britain is the administration, the civil Unfortunately, it was not as simple as that. service. They were very doubtful about this The key decision to deregulate the bus until the 1984 policy review for the local bus industry was actually taken in 1977 by industry. It helped a great deal that we had Norman Fowler, then shadow Minister of the 1980 Act and that it had worked well. Transport, who was chairing a committee of backbench conservative members of Q: A question of clarification of a somewhat parliament preparing the agenda for the technical nature about the change and next conservative administration. The quality of service and its quantification. policy agreed by this committee was sum- You mentioned in the paper that the elas- marized in the document called "The Right ticity of patronage with respect to changes Track," which actually mentioned reform in vehide-kilometers was not as expected, of the bus industry as one of the corner- and I would like some clarification of what stones of the new policy-it even used the were the underlying assumptions, in partic- terminology reform of the regulatory sys- ular with regard to how the drop in load tem. What motivated this decision to pro- factors is related to increased change in mote deregulation of the bus industry was, travel times on buses. You commented primarily, the rapidly rising costs of reve- that there was not a lot of price competi- nue support, not union bashing. The tion. But was there, at least initially, some intention in 1977 was to improve the effi- degree of quality-of-service competition? ciency of the bus industry as demonstrated And the industry equilibria that emerged, by the National Buses Market Analysis are they not so surprising if one considers Project, which showed that bus companies appropriate valuations of the changes and voluntarily managed to cut 20 percent of quality of service? their costs with only 3 percent loss in pa- Glaister: tronage. When the Conservative govern- What you would expect, at the crudest level, ment came to power in 1979, having done would be simply that if you have twice as this prior work, they were able to pass the many bus kilometers, then headway would Transport Act in 1980. But in 1979, al- drop by half, with its likely effects. One though the intent was to deregulate the understands things are much more complicat- entire industry, not enough political sup- ed than that. When people look at detailed port existed to carry it through. Thus, we case studies of what actually happened, they can say that, first, it takes a long time. find that patronage grew depending on what Second, studies are important, but it is the happened with generalized costs. The trouble political commitment that counts most. is that one is dealing with very broad aggre- 66 Bus Deregulation in she United Kingdom gates that move in different directions. The tered commercially and then have time to step national statisncs are grotesquely aggregated, in and fill in the gaps. It was, as I recall, and it is very difficult to generalize. But on something of a concession that the 42-day the quality competition side, there was and is rule was included. We argued that since it a lot. was in operators' interest not to change things so quickly and they wouldn't damage Q: I have the same question about the mea- their own markets, there was no reason to surement of vehicle-kilometers. It is sim- intervene. That may have been naive. It has plistic the way you stated it because it is created what some people say is a barrier, very likely that with the overall decline in and the industry is now arguing that the time patronage, without deregulation, you would delay should be eliminated. have expected what you got. How do you Q: Competitiveness is at the heart of whether see this? deregulation will work. You mentioned Glaister: that no price competition emerged. Could That was quite right. So even having stan- you comment on two other points: One, dardizedfor the trend you would have expect- what was the experience with terminals? ed, you still find the patronage has not in- Obviously, favorable terminal locations in creased. the city center are a big advantage and there are efforts to control them. Second, Q: I would like to discuss the point of why you mentioned that there was no market- deregulation happened. Isn't the real ing, and that surprised me. One study reason that the British government faced a argues there are economies of scale in huge crisis and there was just too much marketing-that is, a large bus company, money going to bus subsidies? The other through national advertising campaigns, point is why in the world do you need a could have an advantage. pro-competition law? And what is that? Glaister: Glaister: It is obvious that terminals would create an By the pro-competitive law, I simply mean advantage. That was recognized in the 1980 standard antitrust legislation. The British act. But the National Bus Company, the antitrust legislation is nowhere near as pow- national long-distance operator before 1980, erful as in the U.S., where it is antirnerger owned the coach station in central London, and antipredation. We do not have triple which was, of course, the hub of the long damages or anything of that kind. You can distance operation. They used it exactly as predate and then be told to stop. And that is you would have expected-and they cleaned the end of it. up. Service was better and cheaper, but there was not much competition because of Q: Would you elaborate a little bit more on the presence in that coach station. That was the 42-day rule, because I think you put corrected in 1985 because the industry be- some doubts on its validity. It seems to me came subject to the normal pro-competitive that it would help to provide Information to legislation, and all operators had to have the market for the improvement of its equal access to the bus stations. So there functions. have been cases which have actually gone Glaister: against operators' attempts to keep other Yes, that was exactly the argument. When the operators out of bus stations. Now there is, policy was debated, many people were saying in principle at least, free access to all operat- there would be chaos, so we needed a mecha- ing assets of that kind. It is possibly true that nism to gather information and reduce the there are increasing returns to scale and speed of change-hence, the 42-day rnde. other barriers created by advertising. Na- Another reason was recognizing that local tional Bus Company's express services are authorities would have to subsidize some another example: i)fyou run a big operation, services. 7hey clearly needed to know which you can advertise all your services nationally ones were going to be provided and regis- in both directions. If you operate mainly in Bus Deregulation in the United Kingdom 67 one direction, you are not going to get any employment because of the increase In backhauls because you can't advertise over vehicle mileage. So they traded more jobs the whole of the area served. he fact is that for lower wages. Whether users gained or bus operators are not spending a great deal lost is really tough to tell. Clearly, they of money on advertising. I do not have an lost from the fare increases. But whether answer as to why. there were service improvements to com- pensate, we don't know. Another catego- Q: There are just a few amendments I wanted ry, the bus investors, are gaining. When to make to your presentation. One was to you run the calculations about the 20 per- disentangle deregulation, privatization, and cent cost reduction coupled with the 23 subsidy cuts from one another. Three percent fare increase and 14 percent rider- separate policies are being implemented, ship decline, it appears money is going into and you cannot disentangle deregulation some pocket, and I think the bus industry from privatization (in Britain); but, you is a really profitable operation. can do some crude calculations about subsi- Glaister: dy costs. There is not a lot of evidence that Yes, that is a very important point. Of course implementing deregulation and privatiza- you will not get a lot of new investment and tion, along with subsidy cuts, helps the competition untilpeople take the view there is industry absorb the cuts with less pain (in money to be made out of buses. There is some terms of fare increases). The second im- suggestion now that people are beginning to portant point, which tends to be over- understand that. The last of the national bus looked, is that levels of competition vary a companies were sold for a good deal more lot across the U.K., especially in the metro- than the others, and there is a lot of trading politan areas. Conventional calculations of companies now, at really quite high prices. about whether deregulation and privatiza- Not because of the property involved but be- tion were having much effect worked much cause some people think you can make money better in areas where people thought the out of running buses. As soon as that be- environment was more competitive. In comes established, and when interest rates places like West Midlands, where an en- come down a bit, some big investments will trenched monopoly had everything and had start, and that will change things even more. not given it up, the policy looked terrible (in the calculations). In Strathclyde, where Q: In your paper you said there was an actual it was warfare between the bus companies, or potential embargo on a transport com- the calculations looked very good. It is pany in one route taking over the opera- important to understand what the British tions of another adjacent route. What is experience strongly suggests, and the ag- the intrinsic logic of this approach? Obvi- gregate statistics for the nation as a whole ously, it has something to do with econo- mask it. The whole emphasis on doing a mies of scale, but I am not sure exactly quantitative cost-benefit analysis is a little what. Second, how do you think that beyond the state of the data and the art, would apply to, say, a country with a fairly particularly because it is so diMcult with sparse population and a somewhat lower aggregate statistics to get any estimate of level of ridership? the value people place on service changes. Glaister: What is interesting is that you cannot there have been some cases before the Monop- identify winners and losers but probably olies and Mergers Commission concerning the can make an assessment about whether it is merging of two companies. But the legislation a gain or loss. The clearest winners have does not stop a company owned in, say Exeter, got to be the taxpayers in the British con- from operating a route next to Oxford or in text. The clearest loser is probably labor, Oxford. There is no prohibition on who runs although even there it is uncertain because which route. It's just that a company with one they get lower wages and tougher work territory cannot be owned by one with adjacent rules, but there has been a big increase in territory. 68 Bus Deregulation In the United Kingdom Q: My question has to do with transferability, Glaister. not so much to other countries as to other At the moment there Is almost nothing, just sectors. You talked about the administra- the business of registration. The commission- tive burden of tendering in the London er receives a registration, publishes it, and markets being very high and the risk of that is the end of it. That really does not privity also being high. Is there something demand resources. There may be a case for about the bus Industry that makes tender- taking that registration information and using Ing a risky proposition? For example, in It more aggressively to market the services, garbage collection the evidence is that while such as providing coordinated timetables and public garbage collection is more expensive, so forth. The silly example at the moment is garbage collection organized through ten- that there may be a commercial, registered dering has been cheaper than through free day-time service and a competitively-tendered competition. evening service on the same route. And yet Glaister: there is no timetable which shows both servic- Yes, the rule of 20 percent (cost reduction) es. That is just crazy. A passenger will not applies to garbage collection, hospital servic- know that {f he comes In during the day, he es, and other things. I do not think there is can get back at night on the same route. anything special about transport. Certainly, in the U.K., under the Local GovernmentAct, Q: On the question of transferability, let us as- which requires tendering of other government sume that an administration has decided to services, there is a system of appeal: if an privatize its national bus company and that independent bidder does not win, he can it is of the same size as the one in the U.K. require, through a third parry, an investiga- What are the steps it would need to take to tion as to whether the tender was awarded dismantle this organization? It has its de- fairly or not. There is no such system in the pots, its bus fleet, its unionized labor, and bus industry since It is not under the same many other assets. How do you go about it? legislation, and that might be a problem. I Robert Brown: do not think there is anything inherently On transferability, we need to know a lot special about buses except that specifications about the struaure, because transferability of the product can be quite tricky. There are probably depends more on the industrial many dimensions to route specifications, and structure than any other single variable. The enforcement is difficult. Chilean case is interesting because it went much further than the U.K. in deregulating. Q: Concerning transferability, can you tell Today anyone who has a valid safety inspec- about the structure of the regulatory au- tion certiflcate can take a bus and run it thorities, how they function, how big they anywhere. No prior authority is needed. He are, what they do, what are their capad- can charge anything he wants, go anywhere ties, and what are the drawbacks of trans- he wants. But Santiago de Chile is a case ferring the administrative structure over to where deregulation has been a real failure the new regulatory body? and undoubtedly will sharply reverse in the Glaister: next few months. We are right down to the I gave a figure of 4 percent as the difference line as to how long some deregulation will between the net and the gross cost savingsfor last and how fast it will get undone through tendering in London. That has to do with some sort of franchising agreement. It is administering the tendering process and interesting to see the differences and similar- enforcing the contracts. Presumably one ities between the experience in the U.K. and couldfind out how much the Itaffic Commis- in Chile. In the latter, it took about ten years sion system cost, but it will depend on the for the process of deregulation actually to availability of data. occur. It did not start until 1979, at the same time that shipping was being deregulated. It Q: On the routes that are not tendered what did not really flnish until 1989, when com- kind of system exists? plete free access was permitted. Between Bus Deregulation in the United Kingdom 69 y1979 and about 1987, the number ofvehicles 20 percent of its income to ride the bus. doubled in Santiago, from 5,000 to 10,000, Second, there was a doubling In the number with no corresponding increase in the number of buses without even a close corresponding of passengers. In fact, it is likely that the increase in ridership. Average ridership per number of passengers decreased during that bus has dropped from 1,OOO passengers per period. There Is also a route structure where day to less than 500, which means there are there are, for example, 50 bus routes and 50 empty buses all over the city at all times of taxi-bus routes. Taxi-buses are just smaller day. This, in turn, has led to very severe buses, but because of the variations on this, congestion and pollution. So there are buses there are over 450 separate routes. Because bumper to bumper, three lanes across, empty, of this great increase in the number of vehi- over a semi-empty subway in the middle of cles, there is a great proliferation of where the city. Transit times have become progres- those buses go. Two facts are important: sively longer because of the congestion. All one, individual bus routes became much of these pushed costs up, and this is what, in longer. But at the same time, the connections fact, justifies the very high pnce they are between them were greatly increased through paying at present. this dense supply route structure. People who used to take two buses to get from home to Q: There is great pressure to regulate buses In work now could find one bus that would go some of the African countries because of all the way. Quality of service in that sense the accident and safety problem. That was increased considerably, but the cost has been indeed the origin of regulation in the U.K. deemed too high. In the first place, Steve However, we need some way to offer gov- Glaister mentioned that tariffs in England ernments a chance to solve the safety issue vere relatively stable, when they have actual- without jumping immediately to the other ly gone up 23 percent in real terms. In the end, which is to create a national bus coum- case of Santiago, tariffs went up 140 percent pany, as Is being done in Kenya. Also, I in real terms between 1983 and 1989. No would like to know if there are fewer auto- tariff competition evolved, and we believe mobiles on the road because of the bus ser- there are strong theoretical reasons why it vice, that is, If people are leaving their cars cannot. As happened in England, bus size at home. fell, but in England this did not create verti- Glaister: cally differentiated services, as Glaister antic- The point you made about safety regulations ipated. In Chile they started with vertically Is very good. Almost all economic regula- differentiated services-the small taxi-buses tions in transport start out as safety regula- and the big buses. But with deregulation, tions and then end up being severe economic tariffs became equal on both services. At the regulations of other kinds. The option Is same time, there was a tendency for the size always taken to add other things, which then of vehicles to diminish to the extent that some change them entirely. bus owners took their buses, cut out a chunk Moore: in the middle, and soldered the ends back I know nothing about Santiago, but I am a together again on both ends. There has been little suspicious about all those firms and the a strong tendency towards smaller and small- excess capacity. I know something about the er vehicles. It was also mentioned that safety origin of bus regulation in the United States, was not a problem in the U.K., but It has and it is often dressed up in terms of safety; been a very serious problem in Chile. Here, that is usually the secondary consideration. individual bus owners on a single route try to And I ask whether It is true in the U.K., or pass the bus ahead to get to the corner first was it the railroads thatpushedfor regulation where passengers are waiting. This has initially because buses were beginning to take caused very serious safety and accident prob- away their business? Railroads were the lems in Santiago. The strong disadvantages principal forms of passenger transportation are that tariffs went up 140 percent in real early in this century and in the 1920s before terms, which means that a poor family uses automobiles became more widely owned. It 70 Bus Deregulation in the United Kingdom was the railroads that pushedfor bus regula- elected. It is a political process. They do not tion in the U.S., and I suspect that railroads take rational economic decisions to maximize had a role to play in the U.K. the associations' profits. Instead, they make Glaister: decisions which ensure that everybody who As a matter offaa, the railways in the U.K. belongs to that association stays alive economi- were not very active in the bus legislation of cally. That is the objective of the association. 1930, although they may have been In the So when the government freed fares in 1979, trucking laws in 1933. The fmportant thing people immediately began to buy buses, and was that they were given the opportunity to they put them into Santiago so that service object to applications, so they were important began to improve tremendously. With this big in the implementation of the legislation. I do influx of buses, people had tofind something to not think they were very active in lobbying do with them. They made them run longer during the formulation of legislation. distances looking for passengers, and this made costs rise. In addition, the dollar was Q: Why is there a lack of tariff competition? devalued in 1981 and the price of the dollar Robert Brown: went up very much in pesos. As a conse- The key to this is the industrial structure. quence, tariffs went up. As this happened, There are 10,000 buses and taxi-buses with ridership began to drop. Since people could approximately 8,000 owners. 7hey are orga- no longer afford to ride the bus and had to nized into associations, but the associations walk, the average cost of operating a bus per are not run like companies. Rather, they are day, per passenger, went up again. Since the run like unions. There are 50 routes and 50 associations had to keep their least efficient associations. People who run these unions are members happy and content, prces rose. 71 6 Transit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons"' John R. Meyer and Jose A. G6mez-Ibafiez In the past decade many countries have reduced vide a useful focus because they have been the public regulations on prices, service quality, subject of more experimentation with varying entry, exit, and other aspects of private industry forms of ownership and regulation than most behavior and have turned to private firms to other commonly provided local public services. provide services formerly offered by public For example, one of the most ambitious and agencies.21 unprecedented experiments in deregulation and The United States (starting under Presidents privatization occurred with bus services in Great Ford and Carter) has been a leader in deregula- Britain in the mid 1980s, when the national tion at the national level, most notably with the government ordered the deregulation and privat- relaxation of government controls over airlines, ization of local bus services throughout the telecommunications, banking, trucking, and nation, excepting only the Greater London metro- railroads. Europeans, by contrast, and particular- politan area.3/ Prior to these reforms, most ly Britain (under Prime Minister Thatcher) and local bus services in Britain were provided by France (under Prime Minister Chirac), have been publicly-owned bus companies, as is still the case leaders in privatization, in large part because the in the United States and most other developed European countries nationalized many industries countries. Many developing countries have also that have always remained in the private sector in experimented with different forms of ownership the United States and thus had more state enter- and regulation of urban buses in the past two prises (ranging, for example, in Britain from decades, and the United States has had some Telecom to Jaguar) to sell back to private inves- limited experience with public bus authorities tors. The developing countries also experimented contracting with private bus companies to provide with privatization and deregulation in the 1980s, services. with varying degrees of enthusiasm and effective- Buses are the principal form of motorized ness, while political developments in the Soviet public transportation in the cities of both devel- Union and Eastern Europe at the end of the 1980s oped and developing countries, with bus ridership suggest that privatization may become a truly typically higher than that of all the other public massive and timely worldwide phenomenon, modes combined. In developing countries, urban popular with a remarkable range of governments transport systems are strained both by rapid and under various policy orientations. population growth and by the shift, as incomes To study these phenomena, this paper focuses grow, to higher quality and more costly transpor- on experiences with deregulation and privatization tation modes. In the poorest cities, the shift is of urban bus transit services. Urban buses pro- from foot-powered modes (walking or bicycles) 72 lransit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons to motorized public transport, while in the or privately owned. The government may pro- wealthier, it is from public transport to the vide subsidies directly in the form, for example, private automobile. In both, however, the most of cash payments to offset the firm's deficits, important motorized modes are typically the exemptions from fuel or other taxes normally conventional-size bus (with thirty-five or more paid by other businesses, or the provision of seats), the minibus (which has thirty seats or government-purchased vehicles or facilities. fewer, and often as few as ten to fifteen), and the Alternatively, the government may avoid direct shared-ride taxi or jitney. Because buses and expenditures by establishing a system of subsidies minibuses often carry 50 to 80 percent of all across different types of bus services, commonly motorized trips, good bus transportation is impor- called cross subsidies. A system of cross subsi- tant both to meet the aspirations for a motorized dies usually requires an exclusive franchise to mode in the poorer cities and to forestall unneces- operate the profitable services, since without such sary growth in automobile traffic in the wealthier protection, others could be expected to enter cities (of both the developed and developing these lucrative markets and capture or compete world). away the profits. Options and Trends in Urban Bus Service he cycde of pivate and public involvement Basic options Many cities in both developed and developing countries have experienced a fairly similar cycle Almost every country has struggled with the of private and public involvement in urban bus question of how best to provide urban bus services. service. The cycle, which can be divided into ten Among the basic choices are the form of owner- phases, begins with the private sector being ship, the degree of government regulation or largely responsible for urban bus service, fol- control over the business decisions of bus firms, lowed by an increasing degree of public involve- and the extent and means by which bus services ment and, at least in some cases, by a partial or are subsidized. complete return to private provision. The basic ownership options are a public The first phase in the cycle is the entrepreneur- authority or a private firm, although hybrid forms ial stage when the industry first emerges. At this are also possible. In West Africa several impor- stage service is typically provided by numerous tant urban bus companies are owned jointly by small firms, often with only a few vehicles in the government and private investors, for exam- each fleet. In some cities, particularly in the ple, while in a number of U.S. cities local public developed countries, this phase occurred over 100 authorities own the urban bus company's assets years ago, when horse-drawn vehicles were the and employ the drivers but contract with private reigning technology, although there was often a management companies to manage the company. resurgence of small entrepreneurship once the Government regulation is primarily an issue motorbus appeared. In the newly developing where bus companies are privately rather than countries, this entrepreneurial phase usually publicly owned or operated. The scope of regu- occurred much later, and in a few instances may lation varies widely. Regulations governing even hold today. safety are common, such as requirements that The second phase is characterized by mergers vehicles be inspected and licensed for road wor- and consolidation of small firms into a few domi- thiness or that drivers be licensed. In many cities nant companies, often with little overlap between local authorities also regulate entry and exit of their route networks. In cities which were large firms from the business by requiring permission and wealthy enough around the turn of the century for a firm to initiate or abandon specific services to support horse-drawn or electric street railways, or routes. The government may also set fares or the emergence of the railway technologies was establish standards for service frequency, hours partly responsible for this consolidation. Those of operation, and other aspects of the quality or cities which bypassed the street railway phase or quantity of service. where entreprenership reemerged once the motor- Subsidies to keep fares lower or extend services bus developed usually experienced consolidations are an option whether the bus company is publicly and mergers as well, although often at a later date. Transit Bus Privatization and Deregulation Around the World: Some Perspeaives and Lessons 73 Consolidation is typically followed in phase overstaffing, and vehicle utilization declines three by regulation of fares and franchising of the because of inadequate attention to maintenance or firms (to control routes and entry). These were slack scheduling practices. Eventually costs rise often a response to the perceived or real market to the point where bus subsidies become a signifi- power of the newly consolidated and larger firms cant burden on the public treasury. In this ninth created in phase two. In other cases regulation phase, public authorities face an increasingly may be more a response to a period of general difficult and unattractive choice between further inflation and public outcries against fare increases increases in public subsidies or significant and on services which had become increasingly unpopular fare increases or service reductions. popular and on which the city depended. Another In some cities this dilemma is resolved by common argument for regulation was to eliminate entering a tenth phase, in which the responsibility so-called "chaotic" or "destructive" competition for bus service is returned to the private sector. where too many competitors ostensibly appeared, Usually this is accompanied by a severe reduction with unfortunate consequences for service stability, or outright elimination of public subsidies, in the safety, reliability, etc. hope the greater efficiency of the private sector The fourth phase involves a gradual downward will be enough to offset the loss of subsidies trend in the profitability of the private firms fol- without forcing fare increases. In most cases, lowed, by a fifth phase of capital withdrawal and public regulation of fares is retained in effect, service reductions. Profitability usually declines resuming the cycle in its third phase. In a few because government regulators are reluctant and notable exceptions, specifically the U.K. and a slow to allow fares to increase during periods of few cities in the developing world, fare regulation inflation. In developed countries, profitability is also eliminated and the cycle returns to its often declined because of the rapidly increasing second phase. popularity of the automobile and the reluctance of regulators to allow firms to prune routes and Differences between developing and developed adjust service frequencies accordingly. Whatever cities the cause, the result is that service is provided in aging and often dirty or otherwise under- There are several important differences in the maintained vehicles. In developing cities, where way the cycle of private and public responsibility demand for public transport is increasing, the plays out in developed and developing countries. supply of vehicles is soon inadequate; thus, First, dissatisfaction with inadequate service existing routes are overcrowded, and service is provided by regulated private companies is not not extended to growing outlying areas. the only, or even the primary, motivation for In the sixth phase, public authorities usually public takeovers in various developing countries. take over the ailing private bus firms, followed In some, public ownership is an important politi- by a seventh phase in which an infusion of public cal symbol, either of independence from former subsidies is made to restore capital and services. colonial regimes or of the socialist ideology of Public subsidies are commonly viewed as the the government. In many countries public take- only option for maintaining or expanding services overs coincided with independence from colonial at reasonable fares, and they are apparently more rule, especially in Africa where the urban bus acceptable when accompanied by public owner- services in the largest cities often were provided ship. In developing countries, public assistance by monopoly franchises granted to European- is usually intended to expand service to accom- owned companies. modate increasing demand, while in developed In both developed and developing cities, the countries, the concern is to stabilize service in the consolidation of numerous private bus firms into face of stagnant or falling demand. a single public authority commonly was promoted Public takeovers and subsidies are usually fol- as a source of greater efficiency by rationalizing lowed by an eighth phase of increasing operating route networks and eliminating redundant servic- inefficiencies and real unit costs. Often wages es. Further, in some developing cities, particu- for bus company employees increase steadily and larly in Asia, public ownership was often under- more rapidly than other comparable wages (or taken to hasten the replacement of smaller public inflation), labor productivity declines due to transport vehicles (for example, pedicycles, 74 Transit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons motorized tricycles, jitneys, or minibuses) with developing than the developed countries. Urban modern and larger conventional buses that would bus companies have been publicly owned and ostensibly use congested street space more effi- subsidized in virtually every major city in North ciently. Critics argued that pedicycles and motor- America and Europe since the late 1960s;41 ized tricycles impeded traffic because they were Britain, which completed the public takeover of slow; certainly both they and the jitneys, and its private bus companies in the 1960s, is now even minibuses, required more street space per (since 1986) virtually the sole exception.5' passenger carried than the modern conventional The patterns of urban bus ownership and bus. Whatever the merits of these arguments, regulation are thus more varied, and therefore elimination of pedicycles and motorized tricycles inherently more interesting, in the developing was consistent with the modern image that many countries. Urban bus services are still provided developing countries wished to project. entirely by the private sector in many cities; The argument (to a certain extent spurious) was reliance on private ownership is particularly also made that the choice of transport technology common in the cities of Latin America and Asia. dictated the form of ownership: it was alleged In most, however, local public authorities specify that small private operators would be unable to fares, the routes that firms can serve, and some- raise the capital needed to purchase modern times the number of vehicles or the frequency of buses, even though private operators of conven- service. Although private ownership is not tional buses often were already in existence, and necessarily a bar to public subsidy, the two rarely their expansion might have been encouraged by a occur together. more generous regulatory environment or better Mixed systems of public and privately-owned franchise terms. Private operators were also buses are currently found in many developing sometimes alleged to operate dangerously-for cities, particularly in Africa. Often, convention- example, by racing competitors to stops, although al, full-sized buses are operated by a publicly this, too, conceivably could have been remedied owned corporation, but significant minibus by providing exclusive franchises on individual services are provided by private operators. The routes or more stringent enforcement of traffic relative sizes of the public and private sectors and regulations. the degree of regulation and control of private A more fundamental difference between devel- firms by local government vary. Dakar, the oped and developing countries' public transit capital of Senegal, is an example of a mixed experiences is that the cycle of private and public system where the public sector dominates; the responsibility for bus service is more compressed public bus company is the exclusive provider of in the latter. In large part, this is because buses bus services within Dakar itself, while private carry a much larger portion of urban trips in minibus operators are restricted to the suburbs, developing countries, creating a serious public and minibus fares and licenses are rather tightly policy dilemma for local officials. On the one controlled. Accra, the capital of Ghana, is an hand there is enormous political pressure to keep example of a mixed system where the private bus fares low and affordable because buses are sector dominates: Accra's two publicly-owned the main mode of urban transportation. It is bus companies carry only 20 percent of all metro- tempting to hold fares down even in the face of politan public transport trips, while the remaining inflation, conceivably even by subsidizing bus 80 percent are carried by private firms operating fares from public funds. On the other hand it is conventional buses, minibuses, and converted risky to keep bus fares too low. Direct fare trucks, and the private carriers are only loosely subsidies from government could easily absorb a regulated by local authorities. large share of the local public budget, and overly Often, mixed systems emerged because of stringent fare controls (without direct government inadequate service provided by recently national- subsidies) could easily leave the bus firms, ized and deficit-ridden public bus companies. A whether public or private, without sufficient common solution is for the government either to resources to provide this essential public service. reverse its position and privatize, to allow fare As a consequence, the public takeover phase is increases or, more often, to allow another less sometimes done less completely, and there is regulated and privately operated mode, such as more experimentation with mixed systems in the minibuses, to fill the gaps. In the last situation, Iransit Bus Privaization and Deregukation Around the Workld Some Perspecaies and LesoAS 75 the emergent private companies either may be system in which public companies had provided allowed to charge a higher fare (as in Cairo, virtually all bus services for two decades. The Egypt) or may be so much more cost efficient new scheme (which was fully and formally than the public or conventional bus system that implemented in 1986 after several years of debate they can make a profit at the old low fare (as and experimentation) relaxed government controls seems to be the case in Jakarta and Ankara). over entry into the industry and allowed private Publicly-owned companies have an effective or public bus companies to operate virtually any monopoly on urban bus services in only a minori- service they deemed profitable and to set their ty of developing countries, and even those often own fares. The old public bus companies were face competition from other forms of privately- ordered spun off as corporations that could no owned transportation that offer services similar to longer receive direct non-competitive government that of a bus. The largest and most obvious subsidies. Some of these public bus companies example is in India, which undertook public have since been sold to the private sector, often ownership of urban bus companies only after through management or labor buy-outs, and those independence. Now public companies operate that remain publicly-owned must be operated as almost all bus services in all but one or two of for-profit businesses. India's largest cities. The publicly-owned bus Britain's reforms are also interesting because companies face significant competition, however, the government privatized and deregulated while from privately-owned pedicycles and motorized still preserving the possibility of subsidizing tricycles. For shorter trips particularly, the latter socially worthwhile but unprofitable services. offers a service that is superior to or reasonably Local authorities can decide to supplement the competitive with that of the conventional bus; profitable or commercial routes with additional consequently, pedicycle or motorized tricycles subsidized services where they feel social con- may carry as many or more passengers daily as cerns warrant, but they must secure them through bus services in most large Indian cities. The competitive bidding among privatized operators, popularity of motorized tricycles may also ac- with the lowest bidder normally awarded the count for the relative scarcity of minibuses in service contract. The British reforms thus pro- India, at least compared to other developing vide at least a partial test of whether privatization countries; in fact, some hold six passengers and and deregulation are compatible with the preser- might almost be classed as small minibuses. vation of some subsidies. In any event, the substantial importance of buses in the developing world has generally Pnvatization with regudation forced both a higher reliance on the private sector and a greater tolerance for more innovative or In many major cities of the developing world, the hybrid forms of public and private involvement. failure of public firms to provide adequate bus By contrast, the developed world can afford to service at a reasonable cost has forced a rethink- rely relatively consistently on publicly-owned and ing of public ownership and often a partial or heavily subsidized urban buses, with Britain complete return to the private sector (for exam- being the only major exception. ple, in Buenos Aires, Argentina; Ibadan, Nigeria; Kingston, Jamaica; and Colombo, Sri Lanka). In Significant Reforms and Policy Experi- all but a handful of these cases, privatization has ments been accompanied by some forms of public regulation, particularly over fares. Britain's refonns The Kingston case was typical: the private Jamaica Omnibus Service was taken over by the Much can be learned about the potential for government in 1974 because the company could privatization and deregulation from recent experi- not maintain service at low, regulated fares. But ments. Among the most significant is almost by 1983, government turned bus services back to surely that implemented in Britain in the 1980s. the private sector, an action apparently forced by The British central government turned back the rising costs and deficits incurred by the public trend common to developed countries by ordering company. local governments to privatize and deregulate a In some cases, the shortcomings of public 76 Transit Bus Privatization and Deregulation Around the World: Some Perspeaives and Lessons ownership became apparent even before the initial prevalent among public firms. takeover was completed. In Jakarta, Bangkok, Because of the lower costs achieved, privatiza- and Manila, for example, the public sector as- tion often does not lead to fare increases.6/ At sumed ownership of most or all private firms the same time, private operators profit in cities providing service with conventional-size buses in where bus services are provided by both types of the 1970s, intending to expand service and gradu- operators and both charge the same fares. In ally replace privately-owned (but publicly regulated) Jakarta, for example, public and some private pedicabs, motorized tricycles, minibuses, and firms operate conventional buses and charge the jitneys, or at least restrict them to feeder services same fares, but the former need a 50 percent on secondary streets or in outlying areas. In subsidy while the latter make a profit. A similar Jakarta, although pedicabs were successfully situation exists in Accra and Calcutta. In a few restricted, the growth in the subsidies required by cases, such as in Khartoum, a private operator of the public bus company forced the government to conventional buses apparently charges less than slow or stop its program of restricting private the public operator. motorized tricycles and minibuses (which still carry the majority of the city's public transport Privatization while maintaining subsidics trips) and to leave fourteen bus companies still in private hands. In Manila the government's Privatization and deregulation in the developing efforts to establish a large public bus company world are seldom accompanied by the mainte- and to organize the remaining private operators of nance of any significant direct public subsidy, as conventional buses into consortia to rationalize Britain did through its system of contracting for routes (with the "carrot" of subsidized vehicle supplementary services. Some modest aid may leases) proved so costly and ineffective in com- be provided in the form of a waiver of fuel taxes peting with private jitney and small bus operators or the public provision of bus stations, but very that the government is considering turning back few (or none) of the subsidies that former public its buses to the private sector. In Bangkok, the bus companies enjoyed are made available to government was successful in nationalizing all their private successors. Perhaps this is because private operators of conventional buses; but large avoiding the heavy and growing burden of subsi- deficits did not allow much expansion of services, dies is such a major motivation for privatization and the public buses are outnumbered by privately in the first place. If direct subsidies are main- owned minibuses (many of which are illegal and tained in developing countries, usually they are unregulated). provided only for a public bus company, which As in Britain, privatization has often allowed is not disbanded but remains in competition with cities in developing countries to eliminate or unsubsidized private operators. check growth in subsidies while maintaining or Direct subsidies are occasionally provided to expanding services, largely because the costs of private operators as temporary measures to ease private bus companies are often much lower than transitions from one regulatory regime to another. those of their public counterparts. While public In Medellin, Colombia, for example, government companies need not have high costs, and some regulators held down fares so long that private clearly do not (as in Bombay and Madras), public operators could not earn enough to replace oet bus companies frequently have costs twice as high alone expand) their aging fleet of buses, and as their private competitors. This is due to services had become increasingly dirty, unreli- excessive staffing, lower vehicle utilization, and able, and inadequate. The government finally greater farebox-revenue leakage. Also, private authorized a substantial fare increase, but only for companies often pay their employees less, partic- new buses. It also gave operators of old buses a ularly if they use minibuses, which usually have modest daily subsidy to encourage them to con- less stringent requirements for driver licensing. tinue running for a while longer at the old fare. Public bus companies are rarely able to deploy The subsidy smoothed the transition to the new more than 60 to 70 percent of their bus fleets higher fares, and was modest and limited to the during the peak while private operators often short remaining useful life of the old vehicles. deploy 80 to 90 percent. Finally, fare evasion by A few developing countries contract with passengers and theft by bus crews are more private operators to serve individual routes that Ransit Bus Prvatization and Deregulation Around the World: Some Perspectives and Lessons 77 the public bus company finds unprofitable, but schemes work. With operators protected from generally subsidy is not involved, so the problems competition on their lucrative services (in order of contract management and enforcement are not to generate the profits needed to subsidize unprof- severe. This occurs in Istanbul and Bangkok, itable services), the risk is that the protection may where private operators are happy to take over be more than needed, so that firms earn excessive the routes because they can make a profit at the profits or indulge in sloppy management or other same fare the company charges-in fact, they pay forms of inefficiency. the authorities for the routes. The risk of excess profits is significantly less In the rare case where a subsidy policy is where a route association rather than a single preserved, the usual form is a cross subsidy so as firm is granted the exclusive franchise, as long as to avoid any direct burden on the public purse. members compete with one another and entry into Problems of accountability and control are also the association is reasonably open. Route associ- often less obvious or more workable. For exam- ations are organizations of very small private ple, when dismantling its public bus system operators (usually with one to three buses each) because of rising subsidy costs and inadequate that band together to provide common facilities service, a government may fear that the private (such as bus stations and maintenance depots) and sector might find it unprofitable to serve some to coordinate their schedules on a route. Where routes at the contemplated regulated fares. One they permit new operators to join, they should solution might be to divide the city into sectors, compete away any excess profits above and each including some profitable and unprofitable beyond those required to cross subsidize the routes, and offer private bus companies the unprofitable services (as in Daejong). With opportunity to bid for exclusive franchises to single firms, however, the risk is that even if the serve the profitable ones if they also agree to franchises are initially rewarded on the basis of serve the others. competitive bids, they subsequently may be Cross-subsidy schemes of varying types have extended or renegotiated through a more informal been employed in Buenos Aires, Santiago, and less competitive process. Even in such cases, Daejong (Korea), Casablanca and Rabat. In government fare regulations may prevent excess Daejong, for example, the city has sixty bus subsidy profits being earned. In Rabat and routes, forty of which are profitable and twenty Casablanca, for example, franchises have not unprofitable; the private operators are organized been re-bid for a while, but operators are proba- into associations which rotate among the routes bly not earning excess profits because the govern- weekly so that each takes its turn providing ment has not allowed fare increases and has profitable and unprofitable services. imposed a new tax on the operators. The choice between cross- and direct subsidies A problem with cross-subsidy schemes is can raise equity concerns. Whether it is fairer ensuring that the less lucrative as well as the for some bus riders to be subsidized by other bus more profitable services are provided. Franchi- riders rather than by the general taxpayers de- sees have incentives to skimp on the former, say, pends on particular perspectives and the situation. by cutting frequencies or hours of operation, a Cross subsidies may seem more equitable if many problem that was reported in Rabat and Casablanca. of the taxpayers are rural residents who don't Government officials operating a cross-subsidy enjoy the benefits of subsidized urban bus services, scheme may underestimate the need to monitor, for example, while general tax revenues may since no direct public subsidies are involved; seem fairer if the most lucrative bus routes are however, in practice, the monitoring requirements patronized by the poor or if the burden of general for cross-subsidy schemes differ littlelittle from taxes falls mainly on the well-to-do. those of all but the simplest direct subsidy and may Cross subsidies are also not free of administra- be a major strain on government departments. tive or regulatory problems, although these are probably no more demanding than the account- Psivatiza*ion with dergulaion ability and control problems raised by direct subsidies. One special problem, for example, is In some cities, certain types of public transport have the potential anticompetitive effects of the exclu- always been privately operated and largely unregu- sive franchises necessary to make cross-subsidy lated (beyond requirements for vehicle inspection 78 Transit Bus Pnvatization and Deregulation Around the World: Some Perspectives and Lessons and driver licensing). However, it is difficult to In Santiago the private sector provided a wide infer what the effects deregulation might have since variety of public transport prior to the reforms, there is no former regulatory regime or comparable including services with 35-seat microbuses, 20- existing regulated service to provide a benchmark seat taxibuses, shared-ride taxis plying specific for comparison. routes, and regular taxis. Microbus and taxibus The only two widely noted examples of transport fares were deregulated and restrictions on their privatization and deregulation in the developing entry and routes relaxed in 1979 while taxi entry world are Colombo, Sri Lanka, and Santiago, restrictions were relaxed in 1978 and fares for Chile. Their reforms are slightly different from one shared ride taxi service deregulated in 1981. At another's and from similar British reforms. In the same time the government gradually disbanded Colombo the government in 1979 permitted private its publicly owned bus company, shrinking its operators to render bus services largely free of fare fleet from 710 microbuses in 1978 to forty-four and route regulation but maintained the previous in 1980 and none in 1981. publicly-owned bus company. In Santiago a pub- Santiago's reforms brought a dramatic expan- licly-owned bus company which shared the market sion in public transport capacity but large fare with regulated private operators was disbanded in increases for some forms of transport. Between 1980 while fare and route regulations covering the 1978 and 1984 the number of microbuses in- private sector were also relaxed. In neither case creased by more than 50 percent, the number of were subsidies for unprofitable routes made avail- taxibuses nearly doubled, and the number of taxis able to private operators, as in Britain, although in providing either shared ride or regular services Colombo the public operator continues to receive almost tripled. Fares approximately doubled in substantial subsidies. real terms (that is, net of inflation) on the micro- In both Colombo and Santiago the reforms led to buses and taxibuses, although fares on the shared increased service and higher fares, as in Britain. and regular taxis remained roughly constant in Unlike in Britain, however, the Colombo and real terms during this period. The fare increases Santiago reforms appear to have led to ridership were larger than the estimated increases in the increases, perhaps because the service improve- running costs of a microbus or taxibus, which rose ments were greater and (at least in Colombo) the by 20 percent during the period largely because of fare increases more moderate than they were in a 100 percent real increase in the price of fuel. Britain. Ridership appears to have increased dramatically for In Colombo, overcrowding and inadequate Santiago's taxis, whose fares did not increase, but service led the government to turn to private not much on its microbuses or taxibusesY. operators. As of 1985, the public operator, the Microbus and taxibus fares apparently in- Central Transport Board (CTB), operated around creased rapidly because of the anticompetitive 3,000 buses in the Colombo area, most with actions of their route associations, while taxi seated capacities of fifty-five passengers each, fares were stable because no taxi route associa- while the new private operators deployed 4,000 tions existed. Many of the private buses were buses, most with seated capacities of ten to thirty operated by small entrepreneurs with only two or passengers each. Although the private operators three buses each (while there were one or two are free to set their own routes and fares, the large operators with fleets of fifty buses). Tradi- CTB's policy of maintaining fares at extremely tionally the small operators pooled themselves in low levels has limited the private operators' route associations for specific routes, which ability to raise their fares, which are only about financed bus terminals and dispatched vehicles on 5 percent higher than CTB's. As a result, some a commonly-agreed route and schedule. After private operators have resorted to overloading, deregulation, these route associations set fares and they do not serve some of the CTB's most and would war on new entrants who chose not to unprofitable routes. Ridership has increased join the association or attempted to set their own significantly in the years since deregulation, due schedules or fares. The associations seem to to a combination of normal population and in- have been relatively effective in defending their come growth as well as the substantial increase in fare and schedule policies because the small size capacity and bus frequencies stimulated by dereg- of the individual operators made it risky to ulation.7' challenge the associations' rules. Rhansit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons 79 Basic Lessons network that large firms can offer. In developing countries, bus ownership also may offer relatively The impoflance of competiton attractive opportunities for ambitious or entrepre- neurial persons of modest means to earn a reason- At least four lessons emerge. First, the benefits able income. of privatization and deregulation depend critically While the competitive prospects seem greater on whether effective competition can be estab- in developing countries, there still may be a need lished and maintained. When it exists, deregula- for government intervention to maintain competi- tion and privatization have great potential to tion, although it typically takes a different and reduce costs and improve the quality of urban bus less urgent form than in the industrialized coun- services; without it, reforms may bring little tries. In Britain the need is for vigilance against improvement and, conceivably, even a degrada- collusion among the few dominant firms in each tion in service or (as in Santiago's case) unwar- metropolitan area or predatory behavior by large ranted increases in fares as firms abuse their firms against their smaller rivals. In developing monopoly positions. countries, route associations may provide impor- Interestingly, the prospects for effective compe- tant benefits in coordinating schedules and reduc- tition among private bus operators appear greater ing unsafe driving by small independent firms; in developing than developed countries. The but as the Santiago case illustrates, they some- striking feature of bus transit in the major devel- times appear to limit competition by restricting oping cities is the enormous number of small entry or encouraging higher fares. private operators, at least where local govern- ments have not severely restricted entry. Mini- Service innovations vs. cost cutting bus services, in particular, are often provided by independent operators with one or at most a few A second basic lesson is that these policies can vehicles each. Even standard size bus services provide important benefits, not just in reducing are often provided by a half-dozen or more costs and improving productivity but also in operators, each with fleets of fifty vehicles or encouraging more market-oriented services. fewer. Competition is often further enhanced Much of the rhetoric (particularly in the United because the minibus and standard bus operators States) has focused on the potential for cost not only compete with one another but with cutting, and deregulation and privatization are shared-ride taxis, jitneys, or motorized tricycles therefore often viewed as largely a means to as well. By contrast, in Britain, with the most transfer wealth or income from labor (who previ- openly competitive bus transit of all developed ously may have been overpaid or underworked) countries and several years after deregulation and to taxpayers or consumers (who, after deregula- privatization, most metropolitan areas are domi- tion, often pay less for labor's services). nated by one to three large bus firms with smaller However, reforms in both Britain and several firms rarely accounting for more than 10 percent developing countries illustrate that competition of the patronage. has the potential to induce major service innova- Several factors may account for these differences. tions and improvements as well as to cut costs. British metropolitan areas were served by large In Britain, deregulation and privatization stimulated and well entrenched public firms as recently as the spread of minibuses, which replaced less fre- 1986; in time, a less concentrated industry struc- quent double-deck bus services or extended ture may emerge. But even with time the British service to low-density and previously unserved bus industry is unlikely to be populated by small housing estates. To the extent innovation occurs, firms to the same degree as commonly found in it may be there are few or no losers and mostly developing countries. Bus ridership is generally winners. Labor may suffer some pay cuts or much higher per capita in the developing world, have to work harder, for example, but may also and these high-passenger volumes may allow a gain from the increased employment opportunities large number of competing firms to be financially provided in a larger, leaner, and more market- viable. At the same time, the high bus frequen- oriented industry. Consumers may lose from cies on many routes may reduce the advantages higher fares (particularly if the efficiency savings of the regular schedule or coordinated route from competition are not enough to offset the 80 Transit Bus Privatizaiion and Deregulation Around the World: Some Perspeaives and Lessons withdrawal of public subsidies or restrictive fare quate and overcrowded because of the high costs regulations), but the improvement and expansion of the public operator and the continuing inability of services may more than compensate them, or unwillingness of the government to foot the especially where the past lack of competition and subsidy bill for service expansions. Conceivably, limits on fares or subsidies had severely con- if the unsubsidized private operators were allowed strained services and inhibited innovation. to provide standard as well as deluxe or premium fare services, they could provide the same or The perils of maintaining subsidies or regulating greater capacity at a similar or only slightly fares higher fare than the public companies-since the latter are relatively inefficient. And a publicly- Third, a viable and competitive private sector can subsidized alternative may do more damage be established while a government still maintains (restraining innovation by privately operated subsidies for unprofitable but socially worthwhile services) than good (providing a more affordable services or regulates fares, although the capacity alternative), especially when the fare differentials to pursue these policies simultaneously is proba- are small. bly greater in developed than developing coun- Most developing countries have maintained tries. The British experience, for example, fare regulation during privatization in an attempt suggests that subsidized services, procured from to ensure that fares would remain reasonable even private firms through competitive bidding, may while subsidies were discontinued. Experience actually promote rather than inhibit competition suggests this poses as many risks as subsidization, by providing a niche for small firms to enter the however, because of the extreme pressure on market. In developing countries the prospects for public officials to set unrealistically low fares for using subsidies as a tool to enhance competition private buses. These, in turn, lead to service seem somewhat weaker, largely because adminis- inadequacies and shortages. In several cities trative capacities to implement competitive bid- where the bus industry has recently been privat- ding schemes are generally more limited, and the ized but not deregulated, dissatisfaction with alternatives (notably cross-subsidy) have some inadequate service, usually blamed on the compa- serious drawbacks. But the need for subsidies is nies rather than on fare regulators, may eventu- probably reduced, largely because low labor costs ally lead to a renationalization of bus service and and high patronage make it more likely that a fruitless repetition of the cycle of private and extensive bus services can be self-supporting. public ownership. The experience of developing countries sug- gests there are few advantages to a mixed system The limits of the second best of subsidized public and unsubsidized private firms, largely because the former are usually less Finally, experiences with bus deregulation and efficient than their private counterparts. This is privatization cast some doubt on the empirical especially true where they both offer service on foundations of an important economic concept-- similar routes and charge the same fares. Wher- second-best pricing-often used to justify govern- ever services and fares are indeed comparable, ment intervention in a market economy. Normal- little would be lost from the travelers' perspective ly, economists assert that economic efficiency and (and much gained for taxpayers or recipients of welfare are improved if prices in a sector are competing public services) by phasing out subsi- brought closer to the costs of producing particular dies to the publicly-owned firms. The rationale products or services. However, this assumes for subsidizing public but not private firms in a competitive markets elsewhere in the economy, mixed system is slightly stronger in the rarer particularly for complementary or competitive cases where the public firms charge a significant- goods or services. Thus, a move toward more ly lower fare or provide clearly different services cost-oriented or competitive prices in a particular from those provided by their private counterparts. sector might actually reduce rather than improve But even where services or fares differ, subsidy economic welfare if the particular sector comple- schemes can have significant drawbacks. The ments or substitutes for other goods and services most important common problem is that the that are sold in noncompetitive markets (so that publicly-subsidized services may remain inade- prices diverge widely from costs). Transit Bus Privatizasion and Deregulatlon Around the World Some Perspeaives and Lessons 81 Earlier it was observed that tariff or other trade higher fares subtracted. barriers imposed by one country or group of Recent, and relatively realistic, behavioral countries (for example, the EEC) might imply models of high-density commuter corridor opera- that static measures of economic welfare could be tions also suggest that transit subsidies may do improved if all other countries also deviated from little to reduce the number of autos used in free-trade principles. Of course the new equilib- commuting. Rather, transit subsidies may tend to rium would not be as good as that achieved if all pull commuters from other modes, mainly walk- countries pursued free trade, and hence the term ing and car pooling. In essence, the cross elastic- "second best." As another example, taken from ities are greater between walking and transit. the transport sector, an argument can be made Thus, higher transit subsidies may not greatly that a state-owned or government-regulated reduce the number of cars on the road in peak railroad might improve economic welfare by hours but instead reduce the number of people charging higher markups over cost to its custom- walking to work or riding in car pools. ers in competitive markets while charging less to Skepticism about the efficacy of second-best those who were monopolists; this restructuring of policies is further strengthened if, as seems rail tariffs would encourage the monopolists to likely, the shadow price on each unit of deficit produce more and the competitors less, which spending is greater than one. Specifically, an would be beneficial since the monopolists' higher additional $1.00 in taxation may create losses prices otherwise lead to underconsumption of elsewhere in the economy of more than $1.00 their goods while the competitors' low prices because of distortions caused by the additional tax induce overconsumption of theirs. or by collection or other administrative costs. If Second-best principles sometimes are used to so, the benefits of implementing a second-best justify subsidies to urban bus services on the pricing scheme that involves government subsidy, grounds of compensating for overuse of autos, as most such schemes do, must be correspondingly particularly for commuting to central city work- greater to render a net improvement in welfare. places. Autocommutes are priced substantially Estimates of the shadow price attached to an extra below marginal costs (because drivers typically unit of taxation range up to nearly $1.60. These fail to pay the full costs of the congestion or estimates mainly pertain to industrialized coun- pollution they create and, often, the parking they tries (the United States, Britain, and Australia, use). Most efforts to privatize or deregulate for example), but it seems unlikely they are buses impose a strong move toward competitive markedly lower in developing countries. markets and unsubsidized prices for bus services; The negative-externality-offset arguments for at the same time these policies do little to rectify transit subsidies remain, though somewhat stron- the substantial departures from cost-oriented ger in less developed countries. Specifically, the prices for automobile use that often motivated extent to which privatization may have intensified government intervention and subsidy support for safety and traffic congestion problems in less buses in the first place. Experience suggests, developed countries is unclear. Reports of however, that a move to a more market-oriented aggressive driving by highly motivated private bus industry, and the removal of bus subsidies bus operators are fairly common, particularly designed to compensate for the underpricing of where a large number of small firms or individual auto use, does not invariably increase auto traffic owner-operators ply the same route. Some congestion or otherwise generally exacerbate observers argue that better public provisions for larger urban and environmental problems. on-street bus stops, off-street terminals, and the Indeed, the bus industry appears to have a much enforcement of traffic regulations would ease better chance of competing with the automobile if these problems. In some cities the problem has it is lean and market-oriented than if it is public- been relieved by the development of route associ- ly-subsidized and heavily encumbered by govern- ations, which set schedules and sometimes share ment regulation and constraints. In the British revenues among the independent operators on a context, for example, minibuses, express servic- given route, but route associations, as already es, and other innovations unleashed by deregula- noted, may also act to limit competition in unde- tion and privatization seem to have added almost sirable ways. as many commuters as reduced subsidies and Privatization is sometimes blamed for increas- 82 Transit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons ing traffic congestion by promoting the use of possibility that the retention of public regulations, smaller public transport vehicles. (his criticism particularly over fares and entry to the industry, may be misguided in some of the wealthier might eventually seriously limit the ability of developing countries, where passengers deprived private operators to maintain or expand services of minibuses or jitneys might select an autobike, and thus possibly lead to renewed calls for public or even an auto, rather than a conventional bus takeovers and subsidies. For this reason, the few for their commute.) As noted earlier, there is of cases where privatization has been accompanied course no inherent reason why private operators by full deregulation-including fares (Chile, Sri could not be required to use larger vehicles. Lanka and Britain)-should be studied. Private operators tend to select smaller vehicles In general, privatization and deregulation when given the opportunity, however, because would seem to be policies from which most they are cheaper to operate and are usually very parties win and few lose. In Britain, subsidy popular with customers. Smaller vehicles often cuts, rather than privatization and deregulation, can serve outlying areas where larger vehicles were largely responsible for taxpayers apparently would be unprofitable or they provide a frequen- gaining, at some expense to riders and labor. cy of service and a guarantee of a seat that the Nevertheless, privatization and deregulation larger vehicles find difficult to match. Indeed, probably made the subsequent fare increases minibuses and similar vehicles are often so smaller than they might otherwise have been, popular with the public that government planners very definitely stimulated service innovations and have been forced to back down from their efforts improvements, and made it possible to maintain to suppress them, as happened in Hong Kong. or expand the number of vehicle miles of service The cost and service advantages of smaller vehi- (and thus the number of driving jobs) in the face cles are obviously important considerations from of the subsidy cuts. The open question in the the public's perspective and should be balanced British case is whether the benefits were, on against the greater demands for street space in average, enough to offset the adverse effects of deciding whether vehicle sizes should be restrict- the subsidy cuts on riders and labor. Were the ed. service innovations in some markets enough to compensate for the widespread fare increases Overall Assessment experienced by the average large city rider, for example, and did employment opportunities On the whole, privatization and deregulation expand enough to offset the fact that new drivers seem to have been beneficial in virtually every were hired at lower wages? instance, taken separately or together. Even in In the developing countries these calculations its common and relatively unpromising form of often appear to come out more favorably for all privatization with continued regulation, such parties. Privatization frequently generates large reforms appear to have benefitted nearly all service expansions with little or no fare increases, parties in developing cities where they have been even without deregulation and even when public tried. Taxpayers have benefitted because the subsidies to bus operators are simultaneously burden of public bus subsidies has been limited. withdrawn or reduced; consequently, riders Riders have probably benefitted in most cases, almost surely gain, and labor has even more job particularly where services expanded greatly with opportunities to compensate for lower wage rates. the introduction of private operators at little or no This happy outcome may occur because privatiza- increase in fares. Finally, labor may not have tion evokes larger unit cost reductions in develop- lost much, or may have conceivably gained, as ing countries than it has so far in Britain, due to service expansions usually mean more jobs, albeit a combination of greater competition among often at lower wages. private bus operators and, in some cases, greater Nevertheless, major risks do attend privatiza- inefficiency of public companies. tion with regulation. The first is the unresolved Deregulation also may offer somewhat greater issue of traffic congestion and safety, particularly benefits in the developing countries than else- where the local government's resources to pro- where, although the experience is limited. In the vide bus stops or terminals or to enforce traffic few cases where fares have been deregulated, fare regulations seem limited. The second is the increases were relatively modest, perhaps because Tyansit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons 83 competition among operators was stronger. 4. There are a number of useful histories of Continuing regulation often risks inadequate public involvement in the urban bus industry services, moreover, since regulators in the devel- and its predecessor, the street railway, includ- oping world are under great pressure to set ing Edward S. Mason (1932); Richard unrealistically low fares. In short, deregulated Dolomon and Arthur Saltzman (1972); and fares probably lead to less excessive fare increas- David W. Jones, Jr. (1985). es and more gains in improved or more adequate 5. Local authorities in some U.S. cities contract service. As a consequence, the desirability of with private bus companies to provide a maintaining public subsidies in a privatized and portion of their service, but nationwide con- deregulated urban bus industry may also be less tracting accounts for less than 10 percent of in the developing countries than elsewhere. the vehicle miles operated. However, local officials in developing countries 6. Britain is a notable exception, although fare seem unwilling or unable to establish subsidy increases in Britain are due largely to subsidy contracting schemes of the type employed in cuts and would have been larger if the cuts Britain, and the alternatives of simple direct had not been accompanied by privatization. subsidy programs or cross subsidies can create 7. There is no careful study which isolates the service distortions or monitoring problems. If effects of deregulation from economic privatization and deregulation by themselves offer growth, ethnic strife or other factors that the prospect of expanded services with only undoubtedly influenced ridership during that modest or no fare increases, the risks of continu- period. ing subsidies may not seem worthwhile. In sum, 8. Estimating the effects of privatization and privatization and deregulation are probably deregulation on ridership is difficult because desirable public policies, taken separately or the Chilean economy suffered a severe reces- together, for both developed and developing sion starting in 1982, shortly after the re- countries, but the advice can be rendered with forms. fewer equivocations and qualifications in the less developed parts of the world than in the devel- References oped. Armstrong-Wright, A. 1986. Urban Transport: Notes A World Bank Policy Study. Washington, D.C. 1. A version of this paper was first presented at Armstrong-Wright, A., and S. Thiriez. 1987. the World Bank Seminar on Regulatory Bus Services: Reducing Costs. Raising Stan- Reform in Transport, held in Baltimore, dards, World Bank Technical Paper 68. Maryland, on June 7-8, 1990. Another Washington, D.C. version has been subsequently published in Barrett, R. 1988. Urban Transport in West the International Journal of Transport Eco- Africa, World Bank Technical Paper 81. nomics, Vol. XVIII, No. 3, October 1991. Washington, D.C. 2. For a review of trends in privatization, see Boiteux, M. 1964. "Marginal Cost Pricing." John D. Donahue, Public Ends. Private Translated and reprinted in J. R. Nelson, ed. Means: The Privatization Decision (New Marginal Cost Pricing in Practice. Englewood York: Basic Books, 1989) and Raymond Cliffs: Prentice Hall. Vernon, The Promise of Privatization (New Browning, E. 1976. "The Marginal Cost of York: Council on Foreign Relations, 1988). Public Funds." Journal of Political Economy 3. For the authors own views on the British 84, (2) 283-298. reforms, see Jose A. Gdmez-lbahiez and John Diandas, J. 1989. 'Bus Managers and Users Vis- R. Meyer, "Privatizing and Deregulating a-vis Ownership, Regulation, Competition, and Local Public Services: Lessons from Systems." Paper presented at the 17th Annual Britain's Buses, Journal of the American Summer Meetings of the PTRC, London. Institute of Planners, Vol. 56, No. 1 (Winter Dolomon, R. and A. Saltzman. 1972. "A Histori- 1990). For a more pessimistic view, see cal Overview of the Decline of the Transit Indus- White (1990). try." Highway Research Record 417. 84 7Itnsit Bus Pr'vatizion and Deregulation Around the World: Some Perspectves and Lessons Donahue, J. D. 1989. Public Ends. Private ment Strategies and Public Policies: Radial Means: The Privatization Decision. New CommuterArteries. Ph.D. Dissertation, Cam- York: Basic Books. bridge: Harvard University. Fernandez, J. E., and J. de Cea. 1985. "An Lancaster, R. and R. Lipsey. 1956. "The Evaluation of the Effects of Deregulation General Theory of the Second Best." Review Policies on the Santiago Chile Public Transport of Economic Studies 24 11-32. System." Department of Transport Engineer- Mason, E. S. 1932, The Street Railway in ing, Pontificia Universidad Catolica de Chile. Massachustts. Cambridge: Harvard Universi- Fouracre, P. R., and D.A.C. Maunder. 1986. ty Press. A Comparison of Public Transport in Three Meade, J. E. 1955. Trade and Welfare. Lon- Medium-Sized Cities of India. Transport and don: Oxford University Press. Road Research Laboratory Research Report Meyer, J. R., M.R. Straszheim, and R. 82, Transport and Road Research Laboratory: Mnookin. 1971. "Problems of Resource Crawthorne. Allocation in a Context of Second Best." In Fouracre, P. R., D.A.C. Maunder, M.G. Pathak, Principles of Transportation Planning. Vol. 1 and C.H. Rao. 1981. Public Transport Sup- Washington, D. C.: Brookings Institution. Rly in Indian Cities. Transport and Road Rimmer, P. J. 1986. Rikesha to Rapid Transit: Research Laboratory Report 1018, Transport Urban Public TransRort Systems and Policy in and Road Research Laboratory: Crawthorne Southeast Asia. Sydney: Pergamon Press. G6mez-Ibaftez, J. A., and J.R. Meyer. 1990. Roschlau, M. W. 1989. "Nationalization or "Privatizing and Deregulating Local Public Privatization: Policy and Prospects for Public Services: Lesson from Britain's Buses." Transport in Southeast Asia." Transportation Journal of the American Institute of Planners Research A 23 6 414. 56 (1). Vernon, R. 1988. The Promise of Privatization. Jones, D. W., Jr. 1985. Urban Transit Policy: New York: Council on Foreign Relations. An Economic and Political History. Engle- White, P. R. 1990. "Bus Deregulation: A wood Cliffs: Prentice Hall. Welfare Balance Sheet." Journal of Transpno Kerin, P. D. 1990. Efficient Transit Manage- Economics and Policy 24 311-332. QUESTIONS AND ANSWERS Q: It has been said that, after deregulation in gers might be willing to pay more, but for the U.S., railway rates were a little higher various reasons they are prevented from than they had been, but the quality of the doing so by the regulatory intervention? service to the shipper improved dramatical- Meyer: ly. This means the Interstate Commerce Overall, I would say that around the world, Commission had, in the past, prevented the the bus experience would be the same. I railway and shippers from striking the kind would interpret the American rail deregula- of relationship the latter would have pre- tion experience slightly differently, however. ferred. They would have been happy to It is a bit tricky to do pre- and post-deregula- pay more if they could have gotten contract tion rate conparisons in American railroading rates, guaranteed service, and the quality because of substantial product modifi cations. they wanted. Is there an equivalent of this Further, I am not sure there have been many with regard to bus services, where passen- tariff increases on a quality-adjusted basis, as Iransit Bus Privatization and Deregulaion Around the World: Some Perspectives and Lessons 85 people argue. In the case of coal, we can This has been aimed at upper-middle-income document many instances where tariffs were groups and has succeeded. In developing3 reduced, certainly in western coal. countries, I am not sure it is really all that different. Some of the minibus, air condi- Q: Is the developmental cycle mentioned in tioned, guaranteed-seat service would seem to your paper a given? It shows that each aim toward that same niche of the market as country has to come to understand that the British minibus express service to the government is a bad regulator, and I won- suburban areas. I suspect the problems of der if there is a way for the Bank to help weaning the very wealthy in some developing people avoid all these steps. Couldn't the countries away from their private automobiles other steps be skipped by introducing more would be substantial, and there would not be intelligent antitrust actions to make sure enough of a market to make it worthwhile. the market stays competitive? Meyer. Q: You have said that to deregulate you first With regard to the first question about the need a reasonably competitive environ- nature of the development cycle, clearly, we ment. This, of course, does not exist in hope it is avoidable. If you are back in phase Eastern Europe. What is your advice in four or five, a choice can be made of a little terms of the sequencing? Besides the na- less regulation and a little less permissiveness scent private sector, which must be allowed onfares, and optingfor the public ownership to develop, would you also recommend solution, which is phase number six. The deregulating the very large rirms in the cycle I described is empirical, and there is public sector, breaking them up, or enter- nothing inevitable about it if you are not too ing into leasing arrangements? far down the road already. Unfortunately, Meyer: my casual empiricism would suggest more I cannot claim to be very expert on Eastern countries ares in stages eight and nine than Europe since I have not been there recently. are into stages three and four. Could you Some kind of program to make modest arrest it in stage two? Yes, you probably amounts of capital available at reasonable could, but in most instances, it is already well rates to small, start-up operations, would beyond that. In a few cases, where you are help get the entrepreneurial part of it going still in stage two, or not too far in stage and challenge the large public monopolies. three, you can put the proper government In a sense, Eastern Europeans have the worst policies in place, try to maintain a competitive combination. They have the problems of environment and that would be best of all. developing countries and at the same time have a very monolithic, all-powerfud estab- Q: You mention that service innovation was lished government monopoly in place, proba- often the result of privatization, but little bly stronger than in the developed countries, has been done to cater to middle- or upper- and certainly much stronger than in the devel- class consumers, at least in many Asian oping countries. On the other hand, no cities. There they most likely rely on cars nascent capitalist, small-capital group exists and for this reason buses haven't done to be available as a potential interest group. much to reduce congestion. Generally, this They need to be developed, and this could has to do with the general subsidy that goes mean some kind of program to make sure that into car ownership. Is there any other capital was available for start-ups. At the reason this is happening, and what can be same time, a start must be made on breaking done to cater to those groups? up the big monopolies. Butfrom what little Meyer: I've seen, this is going to be very difflcult. The British experience is trunyfascinating and suggestive. While they have not succeeded in Q: The question is how do we arrive at dereg- getting people out of their Rolls Royces, there ulation, since this is often a political issue. has been a lot of service innovation there, for Your Shakespearean "ten stages of buses" example, minibus service to suburban areas. provides a very useful framework for think- 86 Iransit Bas Privatization and Deregulation Around the World: Some Perspectives and Lessons Ing about this. The key points are dissatis- Meyer: faction, consensus that something needs to First, leadership emerging to build the con- be done, consideration of options, decision sensus surely helps, but political institutions and then action. This applies to regulation also help. One of the striking things in the as well as deregulation. More specirically, British case is how the parliamentary system the cycle basically breaks down as follows: concentrates power in the hands of the cabi- first, widespread dissatisfaction amongst net and the prime minister in particular. the public. In Britain, in the bus industry, This enabled this whole reform to come off. people standing at bus stops noticed drivers In many of her reforms, Mrs. Thatcher went were rude, knew buses were full on some beyond the unwritten constitution or conven- routes and empty on others, were not ser- tions of British politics and explored new vicing new housing developments, and com- domains. But I am not quite sure how often plaints to management got evasive answers. that could happen or how long the British The second key element is leadership. A would tolerate that. In the American context, leader has to emerge who basically focuses with its widespread diffusion of powers and on this and starts building a consensus. At non-centralized balance of powers among the same time, opposition emerges which different groups, it would be very difficult, comes from vested interests that will be almost impossible, to do so on such a scale. affected. Generally, they have at their If you take this into the context of the devel- disposal the machine of public relations. oping countries, one can make fascinating Bus companies and railways normally have speculations. Like many economic reforms, a public relations department and therefore it seems this one might be more easily imple- can try to win back public support. Next, mented with less democracy than more. I am there has to be a break in the opposition. not saying that makes less democracy desir- In the United States deregulation of air- able, but just observing on the facts of the lines, it was one airline (United Airlines) situation. Also, a strong person helps. breaking from the pack and saying it Opposition from vested interests is certainly would benefit from deregulation. In the very real, and certainly a breakdown or British bus context, it was the non- division in that opposition helps, and that was metropolitan counties that broke from the part of it in the case of U.S. airlines. All the rest of the local government structure, airlines except United were opposed to dereg- saying they wanted deregulation. It was ulation, although with varying degrees of also the management of the National Bus intensity. And by the time deregulation hap- Company that broke. That divides the pened, it wasjust lip service opposition. The opposition, which reaches the stage of a comments about the nonmetropolitan counties new action and introduces a new regime. in the British case was not completely accu- Given this kind of cycle, where does the rate. But again, how do you do it? You can Bank fit in? Since transport deregulation have PR, lunches, dinners, and cocktails and is an inherently political process, what can keep talking to the various parties. Usually Bank staff do to try and facilitate deregula- there are some incipient divisions within most tion? regulatory schemes that can be played upon. Contnent. How far you want to go and how Machiavel- In many developing countries, the context is lian one wants to be in exploiting these, I am one, which, for example, in the Chilean case, not sure. Widespread dissatisfaction, as an we may caU a culture of collusion. It is aform initial condition, is pretty easy to achieve. of 'cultural cartel- which operates in a very Almost all regulatory schemes begin to mess peculiar way to protect members of a partcular things up sooner or later in one form or group of buses. In other countries you have another. The basic problem is that by trying wry serious corruption. If we are going to talk to balance the different parties via redistribu- about the characteristics of the system, we dons, you also set up a lot of incentives to always sweep corrnuption under the rug. drcwnvent those redistributions by those being Transit Bus Privatization and Deregulation Around the World: Some Perspectives and Lessons 87 asked to pay. For example, this is the inher- in Morocco shows this. When private ent problem with most Ramsey pricing companies were allowed to run seat-only schemes, which are so widely advocated by services at twice the price, they filled the economists. They are just not practical in the buses from the first day and continue to fill real politics of the world. It is necessary to them until now. I am sure there are many mark up things which have very inelastic examples of this. What is not universally demands and not those that have elastic de- appreciated is what happens on exactly the mands. But as time goes on, because of the opposite scale of the income distribution. incentives created by those markups, things Because this meeting has focused much that are inelastic become elastic, and things more on intercity than urban, I find this a that are elastic become inelastic. That is the little curious. One never mentions poverty. history of American railroad regulation from In fact, the poor are double losers in most 190Y to 1960 and one fundamental reason of these situations. Because public compa- why it began to break down. Regulation must nies are so inefficient, average costs are also have built into it an awful lot of inertia high, and fares are not enough to cover to have adapted very well to these changing costs-yet they are still not low enough for elasticities and circumstances. So widespread the poor. In my calculations on Morocco, dissatisfaction will come one way or another based on assumed family scenarios, I found from almost any regulatory schemes that have that 30 and 40 percent of disposable in- been in place. Corruption, is an intriguing come went to pay for these "low fares". issue and why a lot of things were originally This is tragic. When you deregulate and moved out of the private sector into the public introduce higher-class and higher-price sector, at least in the U.S. - and I have a services, you take care of many people on hunch that may be true elsewhere. Waste one end. But you still have the poor who collection, for example, and many other cannot pay those fares. What do you do activities that were done reasonably efficiently for them? by the private sector, also were done quite Meyer: corruptly. At the turn of the century, the On the first point, with the public sector hav- populist movement arose in the U.S., and ing a continued role, I think that is very focused on getting corruption out of the sys- possible. Probably the most important part is tem. This is why many went for government creating a competitive environment or con- ownership. Franchising can be done at tributing to it. In fact, although it raises certain rates or even subsidized rates; but some very difficult questions about subsidized then corruption may rear its ugly head, so vs. unsubsidized competitors, there might still there is a turn to govern mnent ownership. be a very real role for a continuing public- Will we get a reemergence of this if we pri- sector presence. That is particularly true if vatize? I think so. That is one reason dereg- the public-sector company that continues is ulation should go along with privatization, so not too inefficient and is fully exposed to one can create a reasonably competitive competitive forces. 7he public operator environment (because that also tends to re- provides a potential yardstick, and if you duce the corruption problem). really go the full route with deregulation, it may give you something of a safety valve or Q: Is there a case for advising our member a fall-back position. So I would not rule out governments to keep the public sector as a continuing role for some kind of public marginally unprofitable as they can, rather presence, but one that really operates by than to go through a whole disaster of some kind of market rules: Not too much bankruptcy and privatization and so on? subsidy (or no subsidy, preferably). Also, it is clear there are quite a few people who can afford and are willing to pay for Q: Is there any correlation between economic better services but have been prevented cycles, in terms of upturns and downturns from doing that because of overregulated in the economy, and the timing of reform? systems. The experience with deregulation As you move through your cycles or phases, 88 Transit Bus Prvatization and Deregulation Around the World Some Perspectives and Lessons say cycle eight or nine, when you reach the Meyer: point where things are really tight and You have clearly identified the worst times to costs are increasing, can you put in more do it and the most probable. However, I subsidies, or do you have to privatize? would not be all that pessimistic. The best Deregulation usually occurs at about the time to do it is when there is widespread worst time, when the economy is In a dissatisfaction at the peak of the business downturn. The money is not there, but at cycle, which is likely to be inflationary. the same time you have this big enterprise However, inflation tends to intensify other (whether a railway, national truck compa- problems. But if you have reasonably fidl ny, or national bus fleet) with 20,000 or employment, you are less likely to have the 30,000 people. And you don't want to dissatisfaction you are describing and where dump them in the street, which is what you you would be adding to already extensive might do while trying to move to phase ten unemployment. The best timing would be, (in terms of privatization). What kind of from the political standpoint, when you have guidance can you give on this, since we some inflation and, at least moderate prosper- face this kind of scene in many cases? ity in terms of employment conditions. 89 7 The Political Framework of Regulatory Reform of Transport Enterprises: Bus and Truck Deregulation in Chile" Robert T. Brown When the military government assumed power dered on being an ideology), rather than an in Chile in September 1973, its first efforts in outcome of an analysis of the sector itself. the economic sphere were dedicated to restoring Free access to trucking resulted from the appli- the production of goods and services and reviv- cation in 1975 of a new antimonopoly law and ing international trade. The transport sector freight rates were freed at the end of that year. continued to be heavily regulated, and there The importation of large trucks was promoted was no indication the new government intended through highly differential customs tariffs and, to disturb Chile's tradition in this regard. because of the impact of other government The seriousness of the chaotic state of Chile's policies, the number of truck operators in- economy was aggravated by the 1974 global creased sharply in 1977-many of whom had depression, and the government undertook a borrowed in dollars to finance the purchase of severe economic adjustment program in early their vehicles. 1975. There was considerable concern within In 1982, Chile (and most of Latin America) the military, the government's economic advi- entered a severe economic crisis which had sors, and the business community about the disastrous effects on the trucking sector. The economic, social, and political costs being government was forced to intervene and subsi- incurred, but extreme free-market economists dized the repayment of truckers' loans but made within the government prevailed. Economic no effort to reduce the overcapacity which controls were rapidly eliminated, customs duties existed in the sector. Rates fell to levels so low were reduced, and the economy was opened to that they were frequently less than the truckers' the rest of the world. total costs. As a result, it was politically im- The principal mechanism used to bring about possible for the government to impose user these changes was the decree law, a law ap- charges adequate to recover a fair share of proved by the four members of the governing highway maintenance costs, which in effect military junta, which replaced Chile's parlia- constitutes an additional subsidy for truck trans- ment between 1973 and 1990. Specific mea- portation that still exists. sures were implemented through the traditional This situation caused a grave distortion in the supreme decree, an instruction issued by a relationship between truck and rail transporta- minister and countersigned by the President of tion. The state railroad has received no subsidy the Republic. since 1979, suffered major operating losses, Deregulation of the transport sector was the and gone heavily into debt to cover its losses, result of a global economic policy (which bor- thereby worsening its financial difficulties and 90 The PoUtical Framework of Regulatory Reform of lhansport Enterpnris: .Bus & 7tuck Dffegulation In Csik distorting its competitive position even further. and political interrelations evolved-largely The trucking sector slowly improved with the sustained by copper exports-which was not all recovery of the Chilean economy in 1984, that different from the guild system of the although the debt overhang continues to be a Middle Ages: there was a place for everyone, serious political problem. Under deregulation, and everyone had a place. trucking companies have tended to replace the Public and private industrialists worked traditional one truck-one owner structure with comfortably behind high and protective tariff larger fleets, which become more specialized in barriers, aided by inefficient and costly ports specific markets. At present, there is consider- and high maritime freight rates for imported able dichotomy between the large companies, goods. Large farmers, although hurt by poor which in general are profitable, and the thou- terms of trade for their products in relation to sands of independent truckers who continue to industrial products, were compensated through have financial problems. low land taxes, easy access to subsidized credit, Deregulation of the interurban bus sector and labor legislation favorable to their interests. began in 1977 and was not completed until the Small farmers were protected by state market- end of 1979. Passenger fares increased nearly ing systems for their products and also benefit- 80 percent between 1977 and 1979 but, with ted from low land taxes. Organized labor in the entry of new companies, dropped abruptly large industry, mining, banking, and the state- in 1980. Although deregulation caused a prolif- owned services sector was able to maintain eration of new companies, the tendency in wage levels well in excess of those of other recent years has been for the larger companies workers. The middle class had easy access to to grow larger and for many of the smaller to stable, lifetime employment in the public sec- be absorbed by them or disappear. This con- tor. Social mobility was provided through free centration has been aggravated by the govern- education through the university and entry into ment policy to permit the installation of private the professions, whose lesser stars were ensured bus terminals, thus reducing the opportunity for employment through laws reserving certain the traveling public to compare fares and ser- posts in the government for them. The state- vices before selecting the carrier of their owned railways, shipping line, airline, and choice. urban bus company lived tranquilly with the Part of the difficulties that emerged from the heavy annual subsidies they received from the deregulation of trucks and buses resulted from government. The private shipping lines were the lack of timely information about transport protected by cargo reserve laws. Private truck markets. The government did not dedicate and bus operators were defended by blanket even minimum resources to this aspect; thus, governmental regulations, low taxes, and subsi- neither the government nor transport producers dized imports when they needed to renew their knew what was happening. vehicles. Nevertheless, despite severe (and largely There were, of course, groups left out of unnecessary) problems in the trucking sector these comfortable arrangements, notably land- and the worrisome tendency toward concentra- less agricultural workers and the nonunionized tion in the bus sector, deregulation has been a urban workers, whose political power was success: at present, except from the small, weak. There were also tensions, as one or independent and indebted truckers, there is little another of the privileged groups sought to political pressure to reinstitute govermment obtain a bigger slice of a pie growing only regulation of highway freight and passenger slowly, but these tensions tended to be resolved transport. through inflation rather than through mecha- nisms which might seriously rock the status Historical Context of Transport Deregu- quo. lation The one factor whose absence was most notorious during those idyllic decades was During the period of development based on competition. And perhaps it was this absence import substitution, which predated World War of competition, as well as the absence of any II and lasted until 1970, a structure of economic need to change in order to survive economically, The Political Framework of Regukntory Reform of 7)anspon Enteipnses: Bus & Tlhck Dereguloion in Chile 91 that made the country a pleasant place for so political parties to be in recess, and outlawed many people. the leftist parties, brought order into the process The seeds of change were planted between of land reform, declared the public sector to be 1959 and 1964, when a first tentative agrarian in a state of reorganization, and returned facto- reform law was passed. The seeds were nur- ries which had not been legally expropriated to tured between 1965 and 1970, when a new their owners. Most of the decrees dealing with agrarian law put teeth into the reform and large economic matters resolved specific urgent farms began to be broken up, perhaps as much problems and did not reflect a consistent atti- to attain political objectives as to increase agri- tude regarding the direction the economy should cultural investment and output. But this tran- follow. Only a few of the first decree laws quil garden changed dramatically during the dealt specifically with transport. One declared Allende government between 1971 and 1973: the state railways to be in reorganization and at the same time that the legal expropriation of gave the director sweeping powers to hire and some farms accelerated, others were simply fire, although the removal and naming of top seized by their workers and the owners evicted. executives had to be approved by the Under- Factories were taken over by the government secretary of Transport. using a decades-old, forgotten law, and attempts Another decree sought to restore private were made to force banking, shipping, and transport in the nationalized shipping sector. A other services into the public sector. As food third, which extended the period during which and other goods shortages grew and foreign owners of motor vehicles could legalize the reserves fell, ever-widening controls extended transfer of ownership, explicitly recognized the over the economy. The black market exchange role of the private highway transport sector in rate increasingly separated from the artificially bringing down the Allende government. low official rate while prices set by the govern- Most of the decree laws pursued short-range ment for nearly all goods and services became objectives and said little about the junta's un- increasingly distorted and less useful as signals derlying political philosophy in the area of to producers and consumers. By 1973 the transport. A notable exception was a law economy was out of control and, with the adopted in May 1974, which not only re- breakdown of markets, constant strikes in all affirmed the traditional maritime cargo reserves sectors, and a citizens' revolt beginning, the of 50 percent of imports and exports for Chil- country's entire social fabric was disintegrating. ean flag vessels but also increased the reserve At the end of this period the transport sector of imported bulk cargoes to 100 percent. This was much in evidence. Merchant ships were decree law put Chile squarely on the path to queued up waiting for a berth at which to un- regulation and protection of the transport sec- load. A major part of the country's truck tor, with scant heed to the needs of the ship- operators went on strike in July 1973. The pers. It was, however, in open conflict with truckers were joined by urban and interurban that adopted in December 1973, which estab- bus operators. Thus, when the armed forces lished 'norms for the defense of free competi- took control of the government in September tion." This latter decree law transmitted a clear 1973, they were most conscious of the role the and coherent message on the evils of monopo- transport sector had played in the demise of the listic practices and the need to guarantee free government they replaced. competition. In summary, on assuming power in 1973, The Early Decree Laws of the Military Chile's military junta dedicated its efforts in the Goverment economic field to restoring the shattered nation- al economy and to resolving specific problems There is no indication that the military govern- as they arose. While several decree laws con- ment came to office with a preconceived or co- tained elements of what would later become the herent economic philosophy. Between Sep- dominant philosophy of the military govern- tember 1973 and June 1974, the ruling junta ment, others were oriented toward returning adopted its first 500 decree laws, including Chile's economy to its traditional, comfortable, those which dissolved Congress, declared all government-regulated, noncompetitive path. 92 The Political Framework of Regulatory Reform of Sanspott Enteprises: Bus & Ihack Deregulation in alek Emergence of an Economic Ideology program was the consolidation of the power of the extreme free enterprisers-the so-called For a government to bring coherence into the Chicago Boys-in key government positions actions of its many agents and to be able to and the withdrawal of the gradualists and oth- communicate with the community it governs, it ers, including military officers, who objected to is necessary that there be a statement of the the high social cost being paid (many of them political, social, and economic principles which would have been content to return Chile to its guide its policies and actions. No such state- traditional noncompetitive path). In this power ment was made when the military junta took shift the key player was the President of the control of the government in September 1973. Republic, General Augusto Pinochet, who Rather, the first decree law stated simply that showed his ability as a shrewd politician com- the military were against the Marxist-Leninist pletely in charge of the direction the economy philosophy that was being imposed on the was taking. Thus, by December 1976, the country, but nothing was said about the alterna- second pillar of the government's economic tive they proposed. This gap was filled six policy was firmly in place: an unquestioned months later by the Declaration of Principles of commitment to the socially-oriented free-market the Government of Chile, issued in March economy. 1974. The Declaration of Principles was a highly Chile's Global Economic Policy and the abstract philosophical statement of the relation- Transport Sector ship between the individual and the state. It provided a conceptual framework which eventu- Based on the principles of the subsidiary state ally brought coherence into the economic ac- and the socially-oriented free-market economy, tions of the government by defining the concept the economic policy which took hold in Chile of the subsidiary state, one of the two pillars of in 1975 was monolithic and global. Sectoral the government's economic policy. policies were deduced from the global policy The second pillar of the policy, which later rather than being built up from sectoral reali- led to the massive deregulation of the transport ties. Sweeping, even revolutionary, reforms sector, took longer to emerge. The deteriora- initiated by a tight-knit group of economists tion of Chile's economy during 1974, the in- were imposed, with slight regard to the opin- crease in world petroleum prices and their ions of the sectoral ministries. The state-con- impact on the Western economies, and the trolled social security system was abolished and resulting fall in the price of copper, Chile's replaced by competing financial companies major export, made it clear during the first which managed individual retirement accounts quarter of 1975 that the government needed to for workers. Import duties were reduced to a apply far more vigorous economic policies to uniform rate of 10 percent. Collective bargain- defeat the problems inherited from the Allende ing was restricted to the level of the individual government. To this end, an adjustment pro- plant or worksite. Collective farms were bro- gram, called the Economic Recovery Program, ken up and individual family plots sold to the was immediately implemented to balance the workers. Foreign capital was given free ac- external sector and to reduce the still high rate cess, and Chilean banks were allowed to seek of inflation, primarily by drastically chopping foreign loans without restriction. State-owned the personnel and expenditures of the central enterprises were liquidated, as was the case of government and government enterprises, which the urban bus company, while others were had been financed in large measure by printing auctioned off, frequently to foreign buyers money. (although workers also became stockholders in T'he drastic adjustment program brought, as many of these firms). Other state-owned com- anticipated, a severe depression in 1975, but it panies, including the railways and the ports also brought down the rate of inflation to a company, were required to reduce their person- manageable dimension and brought administra- nel drastically. In the face of this avalanche, tive and fiscal order into the public sector. A the people nominally responsible for the trans- similarly important result of the adjustment port sector were swept under and left without The Political Framewoi* of Regulatory Refibn of Dhvnpor Entpiies: Bus & Thx* Deregulation in CVule 93 influence to affect the course their sector was register in the Undersecretariat of Transport taking. and belong to an association of truckers-a In 1977, the National Planning Office distrib- requirement which led to a considerable expan- uted its National Strategy for Economic and sion in the number of local truckers associa- Social Development, and for the first time the tions. government's policy framework for the trans- This system was consolidated under the port sector was presented in an integrated man- Allende government: in January 1972 a law ner. Nevertheless, because it was not given established the National Register of Transport even minimal resources, the Ministry of Trans- Professionals as an independent organization port was never able to carry out the functions and required all for-hire truckers (as distinct which the National Stragy assigned to it, and from own-account operators) to become mem- in fact, these were not carried out by anyone. bers and to pay annual dues in order to obtain In addition, important elements of the strategy, license plates. A prerequisite for registration such as the incorporation of infrastructure costs was membership in a local association of truck- into the real costs of transport operators, were ers affiliated with the National Confederation of not implemented in the trucking sector, and as a Truck Owners Associations. The Confedera- result severe market distortions were created. tion then successfully promoted, with the gov- In the interurban bus sector, a worrisome ermnent, a system whereby all the cargo gener- aspect of the deregulation of bus services has ated in a particular locality could only be trans- been the tendency for the larger companies to ported by members of the local truckers associ- grow larger and for smaller companies to be ation. The result was a proliferation of such taken over or to disappear. Maintaining a associations as well as a highly inefficient dis- competitive market is a major challenge, and tribution of cargo among noncompeting local there are few neutral policy instruments avail- associations. able for this purpose. One such instrument is Highway freight rates were established cen- the policy applied toward bus terminals. trally by the Ministry of Transport. A decree in 1975 was the last issued for this purpose, Deregulation of the Transport Sector and it separated trucking services into various categories, for example, urban transport servic- Although the deregulation of the different es; carriage of construction materials such as means of transport in Chile was carried out sand, gravel, crushed rock, etc.; and less-than- consistently in the mid-1970s, the mechanisms truckload freight, or services which combine used and the speed with which they were ap- with railway transport. The freight rates for plied varied considerably from one transport this last category were established on the basis sector to another. For this reason, trucking and of the length of the trip. The rates were calcu- interurban bus transport will be dealt with lated according to distance. The freight rate for separately. voluminous cargo, such as hay, refrigerators, empty bottles, wool, etc., which utilized more Highway freight transport than 60 percent of the cubic capacity of the truck, was based on the tonnage capacity of the Trucking was the last means of transport to be truck. regulated in Chile, and it was the first to be The third element of the economic regulation deregulated. The basis for the regulation of of trucking which the military government access to this sector dates back to 1966 when encountered on taking office was a monopoly the government decided to permit trucks to be established by the Allende government in Au- imported (which had been halted following the gust 1973 in the form of a joint company- crisis of 1961-1962). The next government ENASA-between the government and Pegaso eliminated the requirement that truck importers of Spain for the production of trucks in Chile. had to consign a prior deposit in the Central This complex regulation of access to trucking Bank, and it lowered import duties to 50 per- and of freight rates, in addition to the Pegaso cent. In order to import a vehicle under these monopoly, began to disintegrate when the favorable conditions, truckers were required to Antimonopoly Commission resolved in 1975 94 The Political Framework of Regulatory Reform of hmsport Enterprisa: Bus & Tru1 Dereguk#ion in Cule that the National Register of Transport Profes- continue to be subject to general regulations, sionals was a monopoly and, hence, illegal. in particular those related to axle weights. Truck owners were therefore free to obtain their annual license plates and to solicit cargo After 1975 Chile's trucking sector soon ran without having to belong to any local truckers into serious problems, due primarily to the association. Freedom of access to highway impact of policies outside the transport sector. trucking was further consolidated by a decree The first problem was the massive elimination law, which stated that no one could be required of employees from the central government and to belong to any union or association in order state-owned enterprises, beginning with the to carry out an economic activity, thus wiping 1975 Economic Recovery Program and continu- out another guild aspect of the traditional Chil- ing well into the next decade. They were given ean economy. Finally, in 1982 a decree de- generous lay-off benefits as well as access to clared that persons who wished to carry out subsidized credit available under a program for trucking activities within Chile did not require new small entrepreneurs. Many decided to any authorization from the ministry. This invest their capital in a truck, thus contributing continues to be the law of the land today. to two of the more serious problems of the The elimination of all controls over trucking sector which already existed at that time: its freight rates was implemented at the end of "atomization" (an average of 1.5 trucks per 1975. Each trucking operator had complete operator) and its lack of professionalism. liberty to set his own rates, and it became Second, the government opened the borders illegal for any trucking association even to to the free inflow of foreign loan capital; and suggest minimum freight rates to its members. between 1978 and 1981, hundreds of millions With regard to the truck monopoly awarded of dollars were obtained by Chilean commercial to Pegaso, the military government agreed to banks and made easily available to borrowers, purchase 5,136 standard units in compensation including truck importers and those wishing to for the contract, which meant that only Pegaso buy trucks. trucks were imported until May 1978. Never- Third, the government froze the exchange theless, when 1,530 trucks were still to be rate at 39 pesos to the dollar in 1979, where it delivered, ENASA accepted the cancellation of remained until June 1982. Since relatively high the rest of the commitment, and from then on inflation continued during this period, imported importers could purchase any make of truck. goods became increasingly cheaper in pesos, Thus the regulation of access to the trucking and people-including those who bought sector and the setting of freight rates were trucks-were encouraged to go into debt in eliminated before 1976, well prior to the offi- dollars. cial transport policy enunciated in the National Another effect of the fixed exchange rate was strategy in 1977, which stated that: that trucking became more profitable, as the incidence of dollar-based costs, such as depreci- * Trucking freight rates will be freely deter- ation, spare parts and fuel, are high in trucking, mined by the market; and hence costs expressed in pesos remained * The state will ensure that cartels and regional relatively constant while freight rates in pesos monopolies are not created in trucking, that increased with increasing demand and inflation. safe operating conditions are complied with, Fourth, a customs tariff policy not only and that there is free access by new opera- favored the import of trucks, but large trucks in tors; particular. * There will be no special subsidies for the Fifth, trucking operators were taxed on the purchase of equipment, but all efforts will be basis of their presumed income, established by made to eliminate existing obstacles and law to be 10 percent of the assessed value of limitations on their purchase. At the same their vehicles. But as they were not required to time, there will be no restrictions on the type divulge their real income, this created an enor- of vehicles or their capacity, and they may be mous taxloophole. Because corporate income freely imported from any part of the world. taxes were high in Chile during the 1970s, it Their operation, on the other hand, will was advantageous for companies to establish a The Policoal Faeo,* of RegUdXory RefoPm of 7hw&pop Eneipriswe: Bw & Thrc* Deregulaion in dilk 95 subsidiary trucking company to handle their as thousands of borrowers were unable to repay own transport needs: the amount paid to the their loans. subsidiary was chargeable to the costs of the As a result, demand for trucking services fell parent company, thus reducing corporate taxes when the gross domestic product dropped 13 while the taxes of the subsidiary remained percent in 1982. There was already excess constant. In addition, as the subsidiary was capacity in the trucking sector in 1981, and it completely free to handle third-party freight as has been estimated that this increased in 1984 to well as the own-account freight of the parent 30 percent of the trucks of more than 11 tons company, income really earned by the parent capacity.3' The large consumers of freight company could be attributed to the trucking services, who constitute a major part of the subsidiary and thus laundered tax-free. This freight market, sought to reduce their transport tax policy led to a considerable expansion of costs and used competitive bidding open to the own-account trucking fleet: it is estimated truck operators anywhere in the country. that in 1983 own-account operators owned 61 In addition, truck operating costs increased percent of the national trucking fleet, with a as a result of the devaluation which immediately capacity between 1.75 and 9.5 tons and 32 affected the prices of fuel and spare parts. percent of that of more than 9.5 tons.2 Freight rates dropped precipitously. And thou- These five factors mutually reinforced each sands of truckers who had imported trucks were other and led to a dramatic increase in truck unable to meet the payments on their dollar- imports between 1977 and 1981. denominated debts, which were rapidly increas- While the numbers are not certain, it has ing in pesos as the national currency continued been estimated there were around 65,000 trucks to devaluate. in 1976 and 69,000 trucks in 1983. The small When trucks began to be auctioned off be- increase-despite the import of more than cause loan payments were not met (the auctions 20,000 trucks-reflects in part the gross errors were not suspended until June 1984), the gov- in Chile's official statistics, but it also shows ernment was forced to intervene. The only real that many of the imported trucks replaced solution would have been the temporary with- obsolete ones which had more than completed drawal of a large number of trucks from the their economic life during the many years when market, and in fact, perhaps some 2,500 trucks imports were severely restricted. were officially reexported.4 Nevertheless, the The increase of only six percent in the num- government chose to ignore the real problem ber of vehicles in Chile's trucking fleet hides and decided to restrict its intervention solely to the far more significant increase in the capacity rescheduling the debts of people who had pur- of the fleet, which may have increased from chased trucks and were unable to meet the some 510,000 tons to perhaps 680,000 tons payments. An agency purchased the nonrecov- between 1976 and 1983, that is, by 33 percent. erable loans from the dealers who had imported There was thus an important change in the trucks, at an average of 65 percent of the face quality of the trucking fleet during this period value, and then renegotiated the loan with the as a result of the import of much larger trucks debtor. The first formulas used were only than in the past. partially successful, as not more than 30 per- This increase in capacity would have been cent of the problem debtors reached an agree- excessive even if Chile's economic boom had ment. A second formula was established and it continued after 1981. But the boom did not, reduced the debt by 40 percent, the amortiza- and thence enters the sixth factor. In 1982 tion period was set at a maximum of twelve Chile (along with the rest of Latin America) years, and an interest rate of five percent was entered a severe financial crisis. The peso was applied."' devalued to 46 pesos to the dollar and contin- Despite the favorable terms of the resched- ued to fall thereafter. The inflow of foreign uled debts, there was still excess capacity in the capital halted abruptly, and the national banking sector, which kept freight rates below costs, system went into technical bankruptcy, leading and truck operators continued to operate at a to the liquidation of several banks and govern- loss in most markets. In addition, the critical mental intervention in others in January 1983, situation of the trucking sector made it politically 96 The Polical FTmework of Regulatory Refmm of 7hmpo, Enteipies: Bus & huck DeregulanOn in lluk impossible to assign highway infrastructure ment. Further, holders of concessions were costs to the users who generated them. The free to increase the frequency of service but general economic recovery in Chile after 1984 were restricted in the use of their vehicles other eased many of the problems of the trucking than for the authorized service. sector, although some truckers' indebtedness Maximum passenger fares were fixed at the has persisted until today. In addition, there are national level and were based on the class of several positive tendencies in the sector which the service and the number of kilometers of augur well for the future. First, truck operators service over paved and unpaved roads. and their vehicles are becoming more special- The Ministry of Transport and Telecommuni- ized and dedicated to specific transport markets, cations was thus able to set all maximum inter- such as fruit, forestry products, and mining. urban bus fares and readjust them when costs As a result, the efficiency of transport in the increased significantly: During 1976, when corresponding sectors has improved, and the inflation was 180 percent, there were seven fare specialized services are remunerative. Second, adjustments. In addition, the Ministry set larger, better organized, and more professional minimum fares so that interurban buses could trucking companies are emerging, frequently not undercut fares charged on short suburban associated with specific sectors such as those routes or rural routes which overlapped their mentioned. As a result of these positive ten- services. Special low fares for students were dencies, truck imports have resumed. also determined by the Ministry. The deregulation of interurban bus fares Interurban buses began cautiously in May 1977, authorizing bus operators to fix fares freely for pullman servic- Regulation of interurban and rural bus services es on vehicles with beds and restrooms. At the has a long tradition in Chile, as in most other same time, fares also were freed on nine routes countries, and the deregulation of the sector originating in Santiago and for which the gov- took longer than for the trucking sector. Until ermnent considered there was adequate compe- the mid-1970s, the government completely tition, but these operators were required to controlled the bus sector through three principal inform the Ministry of fare increases three days instruments: the granting of a specific conces- before they went into effect. After monitoring sion for a specific bus service, the setting of the deregulated fares for two months, the Min- passenger fares, and the rigid control of the istry decided that results were satisfactory and importation and distribution of buses. freed fares on another seventeen routes. Fares To obtain a concession, potential bus opera- on an additional twenty-seven interurban servic- tors were required to present applications indi- es were freed. In August of the same year all cating the route to be served, the characteristics fares were effectively freed for interurban and of the vehicles to be used, evidence that they rural bus services. In theory, bus operators complied with the established technical stan- were required to inform the Ministry of Econo- dards, and estimates of the minimum frequency my of any changes they made in bus fares, but of the service to be provided. this was not controlled. Since then, the govern- Theoretically, if an application to provide a ment has only set student fares. new service was presented correctly, it was Access to providing interurban bus services supposed to be approved. In other words, the was not significantly deregulated until 1979. governmental authority did not decide whether Nevertheless, a series of decrees, beginning in the new service was necessary. Nevertheless, 1977, simplified the process of obtaining con- the study of an application could take up to two cessions to operate bus routes. As a result, years. between March 1977 and April 1979, conces- Even when a group of bus operators present- sions granted increased from 84 to 282. Su- ed a single application to provide a new ser- preme Decree 320 required the Ministry of vice, a concession was given individually to Transport and Telecommunications to grant each operator. However, operators of the same concessions to any qualified applicants; they no service were required to form an association, longer needed to specify the service to be pro- which was the interlocutor with the govern- vided. Thus, the concept of concessions was The Poliical Fiaw* of Regulxtory Refonn of TRhspoii Enteiprises: Bus & TDr* Dereguladuon In Caik 97 eliminated since successful applicants could the south. To these should be added a third provide interurban service anywhere in the corridor: from Santiago to the coastal cities of country. Valparafso/Vifia del Mar and Cartagena, with The action to deregulate interurban bus ser- routes of less than 125 km in length. Although vices was of an administrative nature and, Concepci6n, Chile's third largest city, with a hence, could be reversed by rescinding decrees population of 550,000, is on the coast, it forms or issuing new ones. Thus, the freedom to part of the southern corridor because bus ser- provide any bus service was guaranteed by law vices to it use the corridor for 429 km before in 1988. branching off for the final 86 km. Government policy for the interurban bus When interurban bus service was deregulated sector was established in the National Strategy in 1979, the number of bus companies in- for Economic and Social Development in 1977, creased until the financial crisis, when the which determined that interurban bus transport number dropped, since the companies were would be provided by scheduled or regular unable to meet the payments on the loans used services, except in the case of interurban taxis to purchase their equipment. They either with- and tourist transport; also, that highway passen- drew from the market or merged with other ge7r fares would be set only when there was7 companies. The number offering services to insufficient competition. In addition, govern- Vifia del Mar was actually lower in 1984 than ment policy ensured free access to the highway in 1978, but the number of companies operating passenger transport market, with the sole condi- on the southern corridor increased significantly tion that minimum requirements for different (from five to fourteen, over one southern services be complied with. This policy was stretch). fully imnplemented by the end of 1979, and As expected, the severe financial crisis which another revolutionary step had been taken in the began in 1982 reduced the number of interur- deregulation of Chile's transport sector. ban bus passengers severely, contributing to the Unlike trucking, the interurban bus sector in problems the bus operators encountered as a Chile in the mid-1970s was organized in com- result of the devaluation of the peso-which led panies, which contributed to its greater stability to a sharp increase in the peso value of their after deregulation during the bad times to come. debts incurred from purchasing vehicles and in Nevertheless, deregulation did generate signifi- increased operating costs. cant changes. Before examining these, it is Following the deregulation of interurban bus important to examine Chile's geography and fares in 1977, it was expected fares would population distribution, as bus services are increase. While the real increase between 1977 directly related to these factors. and 1979 was extremely large (nearly 80 per- Because of the country's peculiar geogra- cent), with the entry of new bus companies into phy-squeezed between the Andes Mountains the market in 1980, fares dropped abruptly to and the Pacific Ocean-most of the population not much above the 1977 level. In 1981, the centers from Arica in the north, on the border last year of a period of sustained economic with Peru, to Puerto Montt at the end of the growth, fares increased somewhat and then central valley in the south, are strung along the drifted downward during the financial crisis, north-south Pan-American Highway. Most falling noticeably in 1984, when traffic again interurban bus services therefore overlap and diminished. Although the data are notoriously are distinguished primarily by the city in the bad on the evolution of fares, it is probable that north or the south where the service terminates. the real level in 1984-1985 for the services Santiago, 2,062 km from Arica and 1,016 between Santiago and Talca, Temuco, and km from Puerto Montt, has a population of Puerto Montt on the southern corridor was a more than 4 million, 32 percent of the few percentage points above the 1977 level. country's total. Urban centers in the north are As Chile emerged from the financial crisis in few and widely distant from one another, 1985, some smaller companies were in financial whereas those in the south are far more numer- trouble, but bus companies in general were ous. Thus there are two natural bus corridors: covering their full costs, partially because of from Santiago to the north and from Santiago to the income derived from transporting express 98 lhe Political Pwhmor* ofReguladory Reforn qe ohnport Enteiprms: Bw & Dud* Deiwgon in alk packages on buses. Thus, the interurban bus gave larger companies a strong advantage over sector was able to avoid the catastrophe that smaller or potential competitors. affected the trucking sector. A worrisome aspect since deregulation has Prospects for the Future been the tendency for larger companies to grow larger and smaller companies to be taken over The net results of deregulation of trucking and or disappear-this happened both during and interurban passenger transport, as well as ports after the financial crisis. For deregulation to and maritime shipping, have been largely favor- continue, it is essential that the interurban bus able. This has not been true of urban passenger transport market be competitive; analysis shows transport in Santiago. that the number of companies operating over a With interurban bus transport, deregulation route has a significant impact on fare levels. brought new bus service, especially in the rural On the corridor to the coast, for example, only areas, and improved the frequency and quality a few companies operate. While the average of service on existing routes. Passenger fares fare per passenger-kilometer would be expected are reasonable by international standards, and to be somewhat higher on a route only slightly the profitability of the sector appears to be more than 100 km long, the difference in aver- sufficient to maintain reasonable stability. The age fares between this route and services from principal problem initially was the unwarranted Santiago along the southern corridor is greater and unnecessarily large increase in passenger than can be explained by route length alone. fares in 1978 and 1979, but this was soon Clearly the difference in the number of compa- corrected by normal market forces as new bus nies competing has significant impact. companies were created. The principal chal- Maintaining a competitive interurban bus lenge for the future will be maintaining compet- market is a major challenge, and few neutral itive markets and, as noted earlier, this chal- policy instruments are available. However, one lenge may not be adequately met at present. such policy is in regard to bus terminals. In Specific policies to achieve this are essential, in interurban bus transport, passengers can best particular a policy on bus terminals in the compare vehicles, schedules, and fares if buses major cities. If this challenge can be met, there are concentrated in a single terminal. In Chile, should be few pressures to return interurban bus operators are free to change each of these passenger transport to the messy and inefficient variables as they wish, so that written informa- regulatory system of the past. tion has extremely limited time validity. Un- The short-term results of deregulation of fortunately, the deregulation policy of the Chil- trucking were disastrous, but these were caused ean government extended even to bus terminals; principally by policies and events outside the thus, some of the larger operators constructed transport sector which led to massive over- their own. investment in unneeded trucks and a severe For example, in Santiago there are two mu- disruption of the freight transport market. The nicipal terminals, one for services to the south debt overhang, which continues to affect nearly and coast and the other to the north. Neverthe- 13,000 truckers,71 is still a political problem, less, the largest bus operator for the southern and the National Confederation of Truck Own- and coastal corridors, who owns more than 200 ers, one of several associations in the sector, buses6 , established his own terminal in 1983. continues to call for an official schedule of As a result, daily bus departures from the mu- freight rates which would "permit truckers with nicipal terminal dropped from 606 to 393 in the least resources to earn a profit."8' This two years. Another sizable company, which view is not shared by other truckers, particular- serves the north, south, and coast, also has its ly the large and efficient companies, which own terminal. In addition, seven companies direct their activities to specific markets and which operate over the northern corridor, in- utilize specialized equipment and which would cluding the largest, built a terminal for their not want government to re-regulate the sec- own use. This proliferation of terminals dam- tor-especially if the objective was to protect aged the transparency of the market, which is the least efficient operators. Since the financial needed to maintain competitiveness. It also health of the sector has been slowly improving The Polical Frmework of Regulatory Reform of 7lwAoni Enterpnes: Bus & Ihck Deregukaton in Cukile 99 since 1985, the political problem of the small try, whereby different bus services are in fact indebted operators should be manageable. offered over the same route, thus providing In addition, the new government of Chile is competition, which would not necessarily be passing legislation which eliminates taxes based the case in countries with transport networks. on presumed income rather than real income. * For deregulation to be sustainable, competi- This policy change, which is supported by the tiveness of transport markets must be a con- truckers associations, will discourage the artificial stant concern of government. Of particular use of own-account transport and will channel importance is the policy regarding passenger more cargo to legitimate trucking companies. terminals. In addition, adequate and en- It is to be hoped that the new policymakers forced antimonopoly legislation is required in will realize that if the government cannot recov- order to protect users from collusion among er infrastructure costs from truckers, it must operators and to prevent predatory action by subsidize the infrastructure costs of the railways existing financially-strong bus companies. in order to maintain an efficient freight trans- This legislation should ensure the speedy port market. consideration of complaints and corrective One of the major errors of the deregulation action before the monopolistic practice policy was to apply it selectively. The govern- achieves the objective of forcing a competitor ment wanted to ensure that all users of infra- from the market. Further, different branches structure paid the corresponding costs and that of the government, users of transport servic- no subsidies would be granted to the railways. es, and existing and potential transport opera- While the latter half of the policy was applied, tors must have access to timely information the first half was not (the railways got no subsi- about transport markets. dies after 1979)-truckers were not charged the * The unnecessarily sharp increase in fares full cost of using highway infrastructure. Be- when interurban bus transport was dereg- cause of their operating deficit, the railways ulated might have been avoided by a policy went heavily into debt (at one point $120 mil- which established maximum and minimum lion), primarily with the national financial fare bands during the transition period while system, in order to operate. Railways have not encouraging the entry of new companies. been able to carry out even minimum mainte- This would have been an alternative to the nance for more than a decade, with the result policy which was applied of progressively that rail transport is becoming increasingly increasing the number of routes on which insecure. fares were freed entirely. 0 When trucking and bus deregulation is under- Lessons to be Learned taken in a country with an over- extended and inefficient railroad, it is essential that a Regarding the experience with deregulation in parallel and compatible policy be applied to the trucking and bus sectors, the following the railway. observations can be made: * Results will depend heavily on the policies applied in other sectors, especially macroeco- * Interurban bus and trucking markets can be nomic policies regarding customs duties, access made more efficient by removing governmen- to credit and interest rates, and tax policies. tal regulation of access, services, and prices. Thus, global and sector policies must be coher- * With interurban bus transport, stronger com- ent, or experience will fbllow that of the truck- panies will tend to grow larger. ing sector. * With trucking services, the industry tends to move away from the one truck-one owner Notes configuration toward the creation of true trucking companies, often dedicated to specific 1. This paper is a shorter version of a larger markets. paper presented at the World Bank Seminar * It is likely that the successful deregulation of on Regulatory Reform in Transport held in interurban bus transport was partially ex- Baltimore, Maryland, on June 7-8, 1990. It plained by the unique geography of the coun- is the sole responsibility of the author and 1W The Polkical Framework of Regulatory Reform of 7aftsporl Enteiprdses.: Bus & Truck Dereguladon uis alk does not necessarily reflect the views of the Ministerio de Hacienda, Direccidn de Presu- United Nations. puestos. 1978. Somos realmente independ- 2. Bakovic and Balic. 1986. Estudio de la efici- ientes gracias al esfuerzo de todos los chilenos: encia institucional y econ6mica del sistema Documento de Polftica Econdmica. chileno de transoorte: Sector trans2orte terr- Oficina de Planiflcacidn del Ministerio de estre de oW A5-28. Transportes y Telecomunicaciones de Chile and 3. Bakovic and Balic 1-100. Economic Commission for Latin America and 4. Bakovic and Balic AS-18. the Caribbean (ECLAC). 11 December, 1987. 5. Bakovic and Balic A7-2 and 3. Sinopsis de problemas v opciones de Roiftica 6. 17 August, 1989. "Empresario sLmbolo," del transporte marftimo de comercio exterior en Revista Chilena de Trans=ortes 22. Chile LC/R.620. 7. 13 September, 1989. "Dijo nuevo presidente United Nations, Economic Commission for Latin de camioneros: Endeudamiento es tema priori- America and the Caribbean (ECLAC). 10 tario que enfrentamos," El Mercurio C-7. November, 1986. Andlisis de la eficiencia 8. 4 April, 1990. "De confederaci6n gremial: institucional v econ6mica del transporte aereo Camioneros propondran tarifado en el sector," en Chble LC/R.536. El Mercurio C-7. United Nations, Economic Commission for Latin America and the Caribbean (ECLAC). 31 References October 1986. AnAisis de la eficiencia insti- tucional y econ6mica del transporte interurbano Bakovic and Balic. 1986. Estudio de la eficiencia de pasajeros en Chile LC/R.533. institucional y econ6mica del sistema chileno de United Nations, Economic Commission for Latin transporte: Sector transoorte terrestre de cargO . America and the Caribbean (ECLAC). 2 Feb- Figueroa, Oscar. 12 March, 1990. Efectos de la ruary, 1987. El transoorte interurbano de subvenci6n. la regulaci6n y las formas de pasaieros en Chile LC/R.520/Rev. 1, 2. roiedad del transoorte colectivo urbano sobre United Nations, Economic Commission for Latin su eficiencia v calidad: El caso de Santiago de America and the Caribbean (ECLAC). 29 Chile LC/IN.84. December, 1989. La cadena de distribucidn y Fontaine Aldunate, Arturo. 1988. Los econom la competitividad de las exportaciones latino- istas y el Presidente Pinochet. Santiago: Zig- americanas: Racionalizaci6n oortuaria en Chile Zag. LC/G. 1597. Instituto de An;lisis y Sistemas Aplicados para el Yavar Martin, Coronel Enrique, Undersecretary Desarrollo (IASA). December 1985. Estudio d of Transport. 24 July, 1979. Speech delivered la eficiencia institucinal y econ6mica del sis- during the inauguration of the II Transport tema chileno de transporte: Transporte marf- Seminar, Bfo Bfo Region. mQ. 101 8 Trucking Deregulation in Mexico Arturo Fernandez Mexico has formulated a new policy that focuses tion process of the economy. The sector was on macroeconomic stabilization and international- regulated by a legal framework from the late ization and that recognizes the importance of both 1940s and provided a service that was unreliable, external trade and the private sector to achieve costly, of poor quality, uncompetitive, and inade- development. Introduced in 1985, it has two quate. By 1988 the trucking industry was identi- main macroeconomic strategies that include: fied as an important bottleneck to economic growth: it generated direct costs to the economy * improving and strengthening public finances through higher tariffs than would exist under through cuts in public spending, better and competition. Also, it generated costs through more efficient tax collection systems, and underutilized capacity, as well as having negative privatization of government-owned companies; effects on inventories and productive processes. * reforming trade practices through Mexico's In Mexico, it was almost impossible to enter entrance to GATT, reducing tariff and other the trucking industry. Trucking was considered commercial barriers, and promoting export a public service; and legislation established two strategies. Recently, Mexico has pursued a forms of service. The first was with regard to free trade policy with the U.S. and Canada. regular cargo, which allowed firms to transport any type of product, but only on nine routes At the microeconomic level, one of the most within the country. Established concessionaires important strategies is economic deregulation: legally had preference if any new concessions for Mexican firms to compete internationally, were granted. Although the law determined that Mexico has to provide conditions similar to those individuals could not hold franchises for more of its international competitors. Thus, economic than five trucks, in practice some concessionaires deregulation means setting long-term, clear rules controlled large fleets of 300-500 trucks under for greater competition and access to different various company names. The law also estab- economic activities and ending the economic lished that all truckers covering the same route privileges of various interest groups. and providing the same type of service had to Within this context, in which Mexico seeks to join a company: if a firm was lucky enough to open its economy, authorities were concerned get a concession, it still had to be accepted into with the quality of transport, since all sectors one of the established companies. This was depend heavily on freight transport, as in most enforced through the use of the cana de porte, countries. Therefore, any change in efficiency of the official transportation contract, which was transport directly affects all economic activities. given only by the Ministry of Transportation The main mode of freight transport is trucking, (SCT) to established companies. Altogether, which moves 80 percent of Mexico's production. regular cargo accounted for 1,495 companies Railroads move only 15 percent of cargo. Truck- operating 72,000 vehicles. ing services in Mexico lag behind the moderniza- The second form of service was defined as 102 7rucking Deregulation in Mexico specialized cargo, which was enforced through the established concessionaires. The process permits. These allowed firms to transport only was slow and, in general, not favorable to one type of good but on all federal highways. those not connected to the established group. Although there were sixteen categories of per- There was a well organized black market for mits, the principal one allowed transport of license plates (an indication of compliance), agricultural products, which represented 40 whose price was well above the official cost. percent of all freight. Permits were not easy to * Affiliate with a company. The costs of affilia- obtain since established interest groups within tion equaled to 10 percent of the freight. each category controlled the disbursements. How- * Restrict loading and unloading. ever, in practice, trucking fleets obtained tempo- * Use the cargo centers. rary permits that eventually were regarded as permanent and enabled the firns to grow. Barriers were also created to limit mobility Restrictions also applied to loading and unloading among markets. For example, routes were in certain cities: if a firm had a concession for the divided and distinctions were made between Mexico-Monterrey-Laredo route, it was generally regular cargo and specialized cargo. This limited allowed to unload in Laredo but not to load. competition by dividing the market by territory Specialized cargo accounted for 1,355 compa- and product. Further, routes were fixed, which nies with 78,000 vehicles. Table 1 and the figure led to underutilized capacity, since there are summarize the main characteristics of the regula- usually cargo imbalances (for example, there was tions. not the same amount of cargo at points A and B). In the mid-1970s, cargo centers were created, Also, with certain products, especially agricultur- largely in cities with ports and along the U.S.- al products, demand changes seasonally. Fixed Mexican border. These evolved as controllers of routes did not allow trucking to respond to re- cargo and the means to sustain the power of the gional changes in demand, which translated to a concessionaires who owned them. Truckers were lack of service. required to use them and pay fees that ranged In addition, private carriers were forbidden to from 5-25 percent of the fee paid by the shipper, transport other parties' cargo. This generated depending on whether firms were members. costs through empty backhaulages and under- Some cargo centers applied a system for both utilized capacity, as private companies usually users and truckers that did not allow for direct had one-way transportation needs. negotiation between the two parties. In certain There were also barriers to competition in each cities, if truckers were not affiliated with the market. These were created through limitations cargo center, they could not load (for example, in to load and unload on a route, specified in the Monterrey). This restriction was enforced by the franchises. Thus, although some truckers had Highway Patrol, which was responsible for franchises on high-priced routes, they were checking that the carta deporte was sealed by the restricted from loading in certain cities. cargo center. In fact, some cities had mandatory Cargo centers also played a role. The alloca- checkpoints outside the urban area that did not tion of cargo by queuing did not permit users to allow trucks to enter if the carta deporte was not negotiate directly with truckers. This removed sealed. incentives for providing higher quality service In summary, the legal framework defined a and made it impossible to establish long-term sector characterized by two segmented oligopo- relationships between users and truckers. If users lies: one by routes for regular cargo and another had bad experiences because of a damaged or lost by products for specialized cargo. load, no assurances existed that the same trucker would not transport subsequent loads. Moreover, Barriers to Entry in some cities there was a certain code of honor among the affiliates of a cargo center not to Entry restrictions required trucking firms to: respond to the requests of another trucking firm's clients. This structure had the following effects * Obtain a permit or concession from the Minis- on the economy: try of Transportation. The process included consulting the route committees, composed of * Trucking services were unreliable, inflexible, ftdi*ng Deregulmion in Mezdco 103 Table 1: Tr7kfinnditry: Sam. Dtai mdMUs Regu dons Regular Specalized Ovw-axount Regulaion Cargo CQA.o Sermice Specific route Yes No No Specific cargo No Yes Only own-cargo Entry requirements Franchise Permit Permit Cargo centers Compulsory use No No Company affiliation Compulsory No No Tariffs Fixed by SCPs Fixed by SCT Number of companies 1,512 1,456 Number of vehicles 50,267 64,825 Tons moved (1987) (millions) 138 157 Tons-kn moved (1987) (billions) 34.7 45.7 *SCT is the Ministry of Transport Trucking Regulation in Mezico: A Textbook Cae of a Cartel Reglar Cago Feea Aec Unique rc I IaST) Tarii - Faingt I Specii | etrial F Rot Distribution Public Franchised for Individual Barriers to I App lications C New Ttucker m Entra FranchisesC i Committees C Idfatber~~~~~~~~~~~~opusr Csrgo Rights | Carr er o Distribution and Companies 1 Affiliation Among Each Veto Power CompDanv Member l I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Issuance of Companies "Carta de Porte" Enforcement _istheMnotpuoforanfor Distribution L -3-~~ener usen and truckcers Among l ~~~~~~~~Companies I . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I Scaling of Cartel 'Carta de Porte' Enforc ement i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ |Highway Patrol || Polkic Chedck Point Enforcement | a SCr is the Ministry of Transport 104 Trdng Deregulation in Mexico inadequate, and of low quality. In addition, service. Those on high-traffic routes were not fees were 20-40 percent higher (depending on obliged to service low-traffic routes. the route) than what they would have been in On the cost side, the structure of the trucking a competitive market. Although official tariffs industry allows it to function well in a competi- applied nationwide, truckers had many ways to tive environment. Therefore, the goal was to extract higher fees; they could charge for full promote a more competitive structure, with small truckloads instead of less-than-truckloads, and large companies co-existing, with grear claim higher tonnage, or delay the arrival. diversity of tariffs and quality of service. The Thus, effective rates were higher than official challenge was to establish a legal framework that rates. For example, to move cargo 30 kIm, set clear rules for a competitive structure and to clients had to pay US$4.50-6.00 per ton, while convince all the participants that the change in the U.S., this same movement cost would be good. This was important because they US$3.00-3.50 per ton. had lived under the system for fifty years. * Companies had to keep larger inventories in After long negotiations, new regulations were case their inputs did not arrive on time-some issued in July 1989. The main points were the had to close whole production lines because following: inputs did not arrive on schedule. In periods of high inflation, large inventories are particu- * freedom of transit through all federal high- larly costly. ways; e Private companies were motivated to buy their * freedom to transport any load (except highly own trucks, which resulted in empty back- toxic and explosive products); haulage and underutilized capacity. * elimination of all restrictions to load and 3 Maquiladora plants preferred to rely on inputs unload; from just across the border and to locate close * substitution of fixed tariffs by maximum tariffs to them because if they were further south they that allow free negotiation between users and could not maintain zero inventories. truckers. This allowed for a tariff structure 3 As the demand for trucking increased, the differentiated according to quality and type of informal sector expanded greatly-perhaps service. Also, tariffs were liberalized. even to a total of 40,000-60,000 truckers. * elimination of the queuing system in cargo These operators included those with one type centers, and freedom for both users and truck- of permit who supplied a different service, ers to use the centers; such as renting license plates. * permission for private carriers to transport other parties' cargo under predetermined The regulatory framework generated a monop- contracts authorized by SCT; olistic sector that imposed huge welfare costs to * opening, simplification, and decentralization of the economy. Concessionaires that controlled the granting of permits; companies and cargo centers obtained an average * elimination of the 25 percent surcharge on annual rate of return of 37 percent on their empty backhaulage, except in the case of investment plus fees from small truckers for exclusive hiring, and elimination of the 15 affiliating with the company and the cargo cen- percent surcharge for imports; ters. (Some even said they recovered the full * regularization of all informal truckers; value of the truck in a couple years.) Those with * elimination of the previous procedure with the regular cargo concessions had annual monopoly carta de porte. rents of US$450 million, and those with special- * agreement by all sides-the federal government ized cargo permits earned US$82 million, that is, (represented by the Ministry of Transportation a total of US$532 million. and Communication and the Ministry of Com- merce and Industry) and the Truckers' Associ- Deregulation Philosophy ation-to improve the sector. This review found no evidence of cross subsidies. By the beginning of 1990, some changes could In fact, on low-traffic routes, truckers applied be observed in the sector. First, the tax system higher effective tariffs and provided less frequent applicable to trucking changed from a fixed tax to Trucking Deregulation in Mexico 105 the normal system. Second, trucking tariffs were senator and four congressmen. As such, compa- liberated. The results are as follows: nies avoided paying income and value-added taxes and for many years paid only 40 percent of * a transfer to the rest of the economy on the the international price of diesel. order of US$1 billion a year from increased About fifteen families controlled the whole competition, a reduction in underutilized capac- trucking industry, even when it contained several ity, and elimination of monopoly rents; thousand individual truckers. Some of the most * greater competition and specialization. The prominent truckers did not own a truck, but their number of permits issued after deregulation power came from the control and ownership of the reached 32,000-a 21 percent increase in the cargo centers. These families were able to orga- (formal) trucking industry. nize a textbook cartel enforced by law and gov- * a reduction of the average effective tariff by 25 ermnent officials. As a result, most drivers had percent. Tariffs were frozen as of December not been able to join unions. 1987 because of the stabilization program, and The cartel's unity and consensus were attained those in the northern part of Mexico did not by maintaining territorial and cargo distribution increase. Some companies are receiving dis- of the market. This peaceful and profitable cartel counts of up to 10 percent. In the southern was disturbed by the government decision to open part of the country, where infrastructure is the economy to foreign trade and join GATT. worse, increases have been 10 - 20 percent. Why? Until now, the distribution of markets Nevertheless, real rates have decreased. responded to transportation flows generated under * elimination of monopoly rents; the import substitution strategies followed for * greater flexibility to respond faster and better over thirty-five years. However, the opening of to changes in demand; the economy to trade brought a dramatic change 3 higher quality; in trade flows (exports increased three times in * private companies subcontracting trucking five years) and substantial changes in the struc- services instead of providing these themselves; ture of cargo movements: cargo increased sub- * better service to small communities and small stantially in the routes connected with intemnation- users (those hauling less than a truckload); al trade (Mexico-Monterrey-Laredo, Mexico- ; net efficiency gains for the economy of Veracruz, and Manzanillo-Guadalajara) but US$600 million annually; decreased relatively in internal routes (Mexico- * change in the role of the cargo centers. Guadalajara and Guadalajara-Monterrey). Because these changes introduced conflict Some implementation problems surfaced. For among the members of the trucking chamber, example, in cities such as Monterrey and some were open to the concept of deregulation: Veracruz, truckers colluded and, at the begin- truckers in loosing routes, individual truckers ning, did not allow for new entrants. They also exploited by cargo centers, all users, and truckers established an across-the-board tariff increase of constrained to move agricultural products sup- 25 percent. However, these problems were ported the new regulations. In addition, the solved through joint action of the Trucking political commitment, specifically on the part of Chamber and the Ministry of Transportation. the president and Ministries of Trade and Indus- Other important problems remain, especially at try and Communications and Transport, was the state and local level, where monopolies critical. control local distribution. At present there is an The new regulatory framework has provided effort at the federal level to promote trucking greater confidence in the country's new economic deregulation at the state and local level. policy and the government commitment to it. It Finally, it is necessary to review the political has been widely approved by all sectors and, until context of trucking deregulation. The trucking now, has worked well. In conclusion, it is industry's political clout had been significant important to note that all these changes were since the late 1950s. Trucking and passenger attained in a peaceful and conciliatory environ- companies joined the Mexican Chamber of Feder- ment. In all other countries where trucking was al Transportation Services; also, they are well deregulated, it was followed by some violence. represented in the Congress-at present, with one In Mexico this has not occurred. 106 9 Trucking in Sub-Saharan Africa: What Deregulation? Alain Bonnafous This paper is based on the findings of a study on Fmdings trucking costs that was conducted in 1988 and 1989 in Cameroon, Cote d'Ivoire, and Mali, as First, the price survey confirmed that freight part of the effort of the Sub-Saharian Africa transportation rates in Africa are particularly Transport Program (SSATP)." The study in- high. Assuming for the moment only that inter- cluded two surveys.21 The first was a statistical national road transportation is the least costly survey on prices, which involved 500 shipments mode, the survey reveals an average cost per in each of the three countries. The second was kilometer-ton (kt) expressed in CFAF, which an in-depth survey of transporters and several ranges from CFAF 23.3 in Mali to CFAF 26.3 in other agents in the system (about sixty interviews Cameroon, with Cote d'Ivoire in the middle. per country), which was used to construct the Over a comparable stretch, that figure is CFAF cost components and led to a better understanding 5 in Pakistan, according to work done by John L. of how the market operated. Because of scaling Hine (Transport and Road Research Laboratory). back the surveys, the in-depth interviews could Although the parity of the Pakistan rupee (PR I not focus on specific areas designated by the = CFAF 21) is difficult to compare, there is still statistical analysis of prices and may have, as a a very marked difference, which seems to con- result, lost some of their explanatory power. firm that African transportation is the most costly Likewise, limiting the survey to three French- in the world. speaking countries weakened its representa- This observation is corroborated by a simple tiveness. However, working in three franc-zone comparison with France, for which the problem countries made it possible to measure prices and of parity does not exist. For long-distance trans- costs using comparable currency units, including portation provided by the same type of vehicle, those with prices and costs in France. prices in France are about half (CFAF 12-13/kt), In addition to the statistical survey on prices despite much higher wages and related costs. and the in-depth survey of costs, this paper draws This paper will use the French case on several from discussions at a 1989 seminar in Yamous- occasions as a reference in interpreting certain soukro, C6te d'Ivoire. This seminar provided an statistics. opportunity to present the survey findings to the Further, a major finding concerns what could agents in the transportation system: shippers, be called the hierarchy effect of the system. This transporters, and government officials. Thirteen was a basic working hypothesis of the research; Sub-Saharan countries were represented, and the the statistical methodology and, in particular, the reactions of the participants was a useful guide to sample of the shipments surveyed were defined so how to proceed. that the various levels in the hierarchy would Trucking in Sub-Saharan Mfica: Wlat Deregulition? 107 emerge as clearly as possible, with a distinction which the system operates; it is the product of the thus being made: combined effects of vehicle type and the quality of the infrastructure used, as shown in Table 2. * local trips (farm to local market) provided The theoretical costs were calculated from primarily by utilitarian vehicles (pickups); few simulations based on data collected by the in- trips, if any, are made over paved roads, and depth cost surveys. The unpaved-road factor was the journeys rarely exceed 300 kt. derived from a model based on price statistics, * regional trips (regional capital to interior of the which adjusts for the vehicle used. country) provided primarily by rigid trucks The conclusions reached in John L. Hine's (camions porteurs); infrastructure varies and study on Pakistan are comparable, although his the journeys range from 300 to 3,500 kt. hierarchy does not go beyond what this paper * national trips (regional capital to regional would call long-distance regional transportation. capital) provided by rigid trucks and semitrail- The hierarchy effect is thus highly correlated with ers which share the market; roads are frequent- the physical conditions of the infrastructure and ly paved and journeys range from 1,000 to the type of vehicles used. Overall price differ- 35,000 kt. ences must still be explained. * international trips provided almost exclusively by semitrailers on roads that are generally Vehicle Utilization Rates paved; journeys are longer than 3,500 kt. Freight rates, which are very high in Africa in For these different levels in the hierarchy, relation to other continents, are considered in the average costs were as follows: three countries studied to reflect a particularly sluggish market. To give but one example, in Table 1: Average Cost by Country and Cote d'lvoire, only shippers working for the state Leve (CFAFper t) comply with the mandatory rates (Stabilization and Equalization Funds). In all other cases they M6te are negotiated at 15 percent below official rates, Level Cameroon d'Ivoire Mal which have not been revised since 19821 In other words, although high, transportation rates adjust- Local 200.2 164.4 141.6 ed for inflation are declining steadily and marked- ly, evidently in the wake of a decrease in demand Regional 64.3 72.9 52.5 and the resulting surplus capacity. As this situa- tion did not change in exactly the same manner in the three countries, the differences in rates given National 32.9 29.4 31.5 in Table 1 must be interpreted cautiously. In fact, rates seem highest in Cameroon (ex- international 26.3 24.2 23.3 cept at the regional level, which in that country involves longer journeys than in C6te d'Ivoire). The economic crisis hit Cameroon much later than Cote d'Ivoire. Conversely, overall transpor- Ratios of 1 to 6 in Mali, 1 to 7 in C6te tation rates are lowest in Mali, which may be d'Ivoire, and I to 8 in Cameroon show the strong surprising since the freight market contracted hierarchy in the system, particularly the extreme- more there than elsewhere, especially after thefat ly high rates for the local traffic, which affect the period associated with food aid during the severe cost of foodstuffs and considerably reduce the droughts. Thus, rates cannot be expanded solely areas in which they can be marketed. on the basis of direct international comparisons. They can be derived only from cost analyses Explanation of the Hierarchy Effect following the methodology used in the studies. The key determinant of trucking costs is un- This hierarchy fully (one can even say arithmeti- questionably the annual distance traveled by the cally) depends on the physical conditions under vehicles. The cost function that reflects this rela- 108 Trucking in Sub-Saharan rica: What Deregulation? Table 2: Breakdown of the Hierarchy Effect Cameroon Cote d'Ivoire Mali Theoretical cost per kt transported by 100 100 a semitrailer 100 (base 100) Theoretical cost per kt transported by 490 448 445 a pickup (1) (vehicle effect) Unpaved road factor (2) 1.7 1.6 1.4 (infrastructure effect) Theoretical cost of local transportation 831 717 623 = (I)x(2) (international base 100) Price for local transportation 760 680 610 (international base 100) tionship is relatively easy to establish statisti- For the first three countries, the orders of cally, provided the fixed and variable costs can magnitude are quite consistent with the price be estimated. The findings of the cost survey for ratios for the upper part of the hierarchy, al- the three countries can be used to establish the though the cost and price estimates are taken cost functions of a semitrailer as shown in the from completely independent surveys. The gaps figure here, supplemented by the curve for the are somewhat larger for prices, but this is due to case of France. For the specific situations in the the fact that the freight crisis is more recent in countries studied, the annual distance is an esti- Cameroon and most acute in Mali. mated 109,000 km in France and about 50,000 However, the cost ratios did not reflect the km in the three African countries. Given these ratio of 1 to 2 for prices between France and the conditions, the vehicle cost/km is CFAF 508 for African countries. Probably, this difference is Cameroon, CFAF 456 for C6te d'Ivoire, CFAF due to the fact that the cost functions for the 450 for Mali, and CFAF 290 for France. African countries assume only a 4 percent return on capital (net of inflation). The financial costs Cost per km of a Semitrailer by Annual Dis- associated with borrowing money were not tance reflected because situations differ greatly. How- F- .c. ever, costs are very high when the loan is provid- F. CFA ed by a finance agency, and interest rates are camirOOn frequently over 20 percent. This means that 600 ...... d6tid'Wre costs, which were reconstructed for a self-fl- ...... mall nanced investment, are substantially higher in the general case (at least an additional CFAF 100 per 600 _ _ v . \\\ vehicle kin). There is thus full consistency between price and cost ratios. The most important aspect of these cost func- ..0 . <>__ tions is undoubtedly that if the vehicle utilization 400 R;|-2-~~-rr- ~~ rate increased substantially on the African mar- kets, costs would certainly fall-but would still be !UU (1.N eb ,) much higher than in France. This phenomenon 200 _can be understood by looking at the determinants 0 50 100 of those costs. Source: Cost Survey Data lrucking in Sub-Saharan 4frica: What Deregulation? 109 Cost Structure sum amount to cover their wages and miscel- laneous expenses, including the tolls. Not surprisingly, very few transporters in the formal sector keep vehicle operating accounts. State and Additional Charges Consequently, these had to be reconstructed from the in-depth interviews. Table 3 gives a break- For several izems, state action has had a dire down of the costs and illustrates which cost items effect through taxes of various types, such as on are particularly high, relative to those in France. imports, licenses, and fuel (see Table 4). One factor is the return on capital (excluding the Road transportation clearly brings in substantial financial costs mentioned above), the magnitude revenue for the government, but this practice has of which is associated with both the cost of the the effect of artificially extending the distances vehicles and high taxation rates. Insurance costs expressed in transportation costs. In addition, are also high, particularly in C6te d'Ivoire and overall taxation rates are much higher for smaller Cameroon, due to very unsafe roads. Others vehicles, which is an important factor in the include depreciation, which is highly linked to the hierarchy effect. Last, to take full account of cost of capital; fuel, due to especially high con- government levies, costs associated with the clan- sumption levels; maintenance, primarily due to destine tolls must be added because they are, the cost of spare parts; tires, which have a life after all, received by government employees. expectancy three to four times shorter than in In view of the market situation, import duties France and which are heavily taxed; and road on vehicles should not be lowered at this junc- expenses, which are abnormally high for the devel- ture, as this could only heighten the imbalances. oping countries but which include the clandestine However, it is expected that lowering duties on tolls that drivers must pay at each control point. imported spare parts would have a positive effect. On this last point, the direct cost of 'clandes- In Cameroon, for example, such a charge would tine" tolls is much lower than their real cost. It be particularly significant in the northern region, does not include, for example, the loss of time which "benefits' from intense contraband trade with this practice can incur. It is also underestimated Nigeria. However, lowering tire taxes may not be since it is partially covered by the cost of road as well-advised since import duties can promote the personnel, with drivers sometimes receiving a lump- development of local retreading workshops. Table 3: Breakdown of the Cost/km for a Semitrailer (in CFAF/km) Cameroon COte d'lvoire Mali France Fixed costs 154.5 126.6 107.4 145.6 Return on capital 39.0 29.9 36.8 10.6 Insurance 21.2 18.2 8.1 10.6 Road personnel 39.2 31.9 12.6 71.9 Other costs 55.1 46.6 49.9 52.5 Variable costs 353.1 329.6 342.3 144.8 Depreciation 69.6 53.4 76.7 33.9 Fuel 199.6 108.0 126.0 50.4 Maintenance 97.2 107.1 68.1 24.9 Tires 61.7 50.0 55.5 9.5 Road expenses 25.0 11.0 16.0 26.6 Total cost 507.6 456.2 449.7 290.4 110 Trucking in Sub-Saharan Africa: What Deregulation? changes in the structure of the fleet, and to provide a minimum of technical control. PTale:Wi of taxes Mandatory road charges were also inefficient in industrial countries when market forces pushed Cameroon Cze d'lvoire Mali France prices out of their brackets, particularly in crisis situations. The more the countries in question Percentage 30 25 29 15 are unrealistic about these charges, when they do exist, the poorer is compliance, especially for services at the bottom of the hierarchy. In any event, compliance with mandatory rates is uncon- Within operating costs, items such as mainte- trollable. It would certainly be useful for a nance and tires are especially important because reference rate to be established in principle. In of the condition of infrastructure. For each order for it to play its full role in providing country, it may be advisable to study the ratio information to transporters and shippers, it must between customs and tax revenue earned from the be based on actual costs, which means reflecting transportation sector and the share allocated to the weight and distance variables (which our road maintenance. However, that would have study shows account for at least 70 percent of the been covered by any studies done on the setting price variance) much more accurately, along with of road charges, in the broad sense. the nature of infrastructure used. Under these conditions, the reference rate could have the dual The Correct Level of Regulation merit of informing transporters about price levels under which they run economic risks and lead the As seen above, the phenomenon of clandestine government to keep a close eye on changes in the tolls directly affects variable costs and, indirectly, cost factors. the associated loss of time. This practice cannot The major problem of technical regulation is be wiped out if only because of the social pres- not one of substance but of control. This is all sure of the beneficiaries. To eliminate such the more delicate given the general practice of practices, Mali successfully established a free structural violations, in which the police authori- border-crossing system for major roads. Howev- ties are clearly involved. Only a long-term er, the creation of customs escorts, between the strategy to improve the situation would be effec- border and Abidjan (to help Malian transporters), tive. This would probably require targeting control did not work. over specific safety aspects and providing special- It is very important to note the strange contrast ization of oversight agents in these areas. Of all between the extensive regulations that legitimize measures mentioned earlier, this is certainly not a multitude of controls and the reality which may the easiest to implement. However, very local- actually encourage violations. An over-regulated ized technical controls, involving the introduction de jure and virtually totally liberalized de facto of free border crossings and controls for over- system can generate only perverse effects, of loaded vehicles, would undoubtedly be effective which clandestine tolls are not the least. We will in protecting vehicles and infrastructure. now look at the three main components of regula- Nevertheless, to the extent that this would tion Oicenses, mandatory rates, and technical mean some liberalization in state action, it does regulations) to examine their substance and the not necessarily imply a shift to a system that desirable direction of change. would spontaneously rely entirely on market A system of licenses and authorizations, wheth- mechanisms. Such mechanisms are in fact lack- er or not based on quotas. has rarely regulated ing in Sub-Saharan Africa, as demonstrated by the supply of transport properly in the industrial low vehicle utilization, despite considerable countries. The same is true of the developing evidence that the freight exists, but its transporta- world. As the system operates in the three tion to market is poor and occasionally nonexis- countries studied, it no longer is intended for that tent. purpose and can thus be maintained as is without The example has been used in C6te d'Ivoire of any problem; such a system makes it possible to a transporter who, after having worked through charge specific taxes, to more or less track the high season in his region, goes to other Trucking in Sub-Saharan Africa: What Deregulation? 111 regions in the country that do not experience a Conclusion slowdown at the same time. This case seems exceptional but demonstrates the potential for cre- From the standpoint of state intervention (which ating more flexible freight markets. Currently, was our topic), the problem of more efficient markets are flexible, not only in terms of practice road transportation of goods in Sub-Saharan and the commercial relationships of the operators, Africa can be treated by measures clearly de- as in all freight markets, but also with regard to signed by the study on the sector and its deficien- the internal workshops of many African markets. cies. However, these measures are running into The partial or total monopoly of local transport cultural difficulties; they pit the family-oriented cooperatives not only has the effect of making mindset against market-oriented considerations, return loads impossible to find but also increases the short versus the long term, and the potential the effects of seasonal peaks by thwarting the financial gain from keeping information secret interregional mobility of resources. An in-depth versus a recognition of the economic efficiency of comparison should be made between ountries and disseminating it. However, the most important regions, of the degree of social control exercised measure is to improve training and the informa- by the local transport ccoperatives and the rela- tion available. In addition, consistent actions by tive efficiency of the markets assessed. A classic governments can gradually ensure that a de jure phenomenon is at work here, of transport cooper- situation is replaced by a defacto situation. This atives taking monopoly rents and restructuring means establishing regulatory systems that en- entry into the system. The result is always an compass only those provisions that can be truly improvement in short-term security but at the price controlled, along with an enforcement system that of a loss in overall productivity over the long run. is less costly for transporters but which guaran- This effect seems particularly marked for the cases tees better transport safety. Last, governments must in question, and it is one which is ultimately not promote the collection of information on trucking, beneficial for either operators or shippers. either by making markets more transparent or by From this standpoint, the role of the informal providing the means for tracking changes in shipping agents (cocksers) may not be as negative prices and costs, even if it is only to evaluate the as conventional wisdom would have it; the share efficiency of revised regulations. they receive from the transactions must be com- pared to the benefits gained from the competitive Notes environment they create. Currently, the image of the cockser is particularly negative in the mind of 1. The two surveys, which were to be carried the operators. In fact, they seem to act frequent- out consecutively, were scaled back and ly as intermediaries in various forms of infrac- conducted simultaneously, instead. tions or even corruption. Nevertheless, it is not 2. Originally, three other East African countries clear that if they were removed the system would were to be incli" d, but funding was limited be more efficient. to that pr, :icled by the French Ministry of Still, two conditions seem vital if such interme- Cor'->ration and the two agencies that con- diaries are to provide better market transparency. 4iucted the study, the Institute for Research First, market transparency must be recognized by and Study on Transportation and Transporta- all players as a desirable situation in which each tion Safety (Institut de Recherche et d'Etude player has his own advantage; shipro-- ,enefit sur Les Transpors et Leur S&curite-INRETS) from more competitive prices. -2,r transporters and the Transportation Economics Laboratory increase their business (ret. n freight in particu- (Laboratoire d'Economie des Transports- lar). Second, interr-cxies can provide efficient LET). As a result, they could not be brought services; ho . .r, this may not be possible into the study. where th~ie is a shortage of telephones. __7w ~ ~ ~ ~~~~~~~~7 H OTHE WDORLD BANK Worldwide, the markets for transport services have traditionally been under public control. Some examples of regulatory control in transport include rate regulation in the railways, entry restrictions in the trucking industry, service restrictions and fare setting for urban buses, and cargo reservation in shipping. These measures have been promoted in the name of the public interest because private markets are thought to be incapable of providing goods and services efficiently. Thus, market failure has been the economic rationale for regulation. . The contributions in this volume, from both scholars and practitioners, describe the tradeoff between the social costs of market failure and the costs of correcting for market failure through regulation. The volume provides an analysis of the evolution and reform of regulation, not only in industries that have been examined often, such as U.S. railways and trucking, but also in less researched industries, such as Chilean shipping. The contributions also compare the different types of regulation that are applied to the same kind of transport, as in the case of the urban bus sector in the United Kingdom and in several developing countries. The volume includes complementary case studies of trucking in Mexico and in Sub-Saharan Africa, intercity bus and trucking deregulation in Chile, and railway restructuring in Uruguay. Jos6 Carbajo is an economist with the Transport Division in the Transport, Water, and Urban Development Department of the World Bank. Previously he was a lecturer on microeconomics at the University of London. WORLD BANK PUBLICATIONS OF RELATED INTEREST Prii'atiZation Problems at Industry Level: Road Haulage in Centrfal Europe Esra Bennathan and Louis S. Thompson Desigqning Major Policy Reform: Lessons from the Transport Sector Ian C. Heggie Transport Policy and Planning: An Integrated Approach Brian T. Bayliss Priv atization: The Lessons of Erperience Sunita Kikeri, John Nellis, and Mary Shirley 1 .) E U' LATORY REFa1 1.N' Ti :SB l l l ;! I I W'1! 10 .i 95 ISBN 0-8213-2331-8