Theme 5 Regulatory and contractual aspects

Across Latitudes and Countries Bus Rapid Transit

Center of Excellence

Regulatory and Contractual Aspects ´

Rosário Macário Instituto Superior Técnico

Lisboa, Portugal

Outline

Urban mobility system

Agents, relations, decision levels

Effects of introduction of a new mode/service - BRT

Institutions

Regulatory Frameworks

Contracts

Regulatory framework and contracts as performance drivers

URBAN MOBILITY SYSTEM

What is the urban mobility system?

• structured and coordinated set of modes, services and

infrastructure to ensure the displacement of persons and goods in the city.

• consisting of several elements, one physical and material character, others organizational, institutional, and finally, others of logical character.

• a vital element of the competitiveness of the city, because of that is a sub-system of the urban system and it is used to development of the city

DECISION LEVELS Three fundamental levels of decision-making:

Strategic: define the objectives to pursue and the resources to mobilize

Tactical: define the solutions types (technologies) and make the

planning (capacity, networks, schedules)

Operational: execute the planned production

Success of the process

At each level it is needed to have some idea of the implications of

decisions of lower levels

Nevertheless, it is necessary to assemble retro-action processes that

allow to adjust decisions to each superior levels which lower level

analysis reveals

In a democratic society, the strategic level should be policy

makers responsibility

The elements of UMS

• The infrastructures

• The mobility services

• The organization

• The regulation

• The information

• The elements of other sectors that affect our perception of the mobility system

• Etc

The agents of UMS

• Transport Authorities

• Mobility Operators

• Infrastructures Operators

• Policy Makers

• Representatives of the citizens

• Third and fourth party providers

• etc

Intra-system links

Infrastructure : Hierarchy of road network in accordance with service levels; Current and future roles of the main arteries Parking location, P&R, etc. Definition of zones or networks which can not be used by individual

traffic (protection zones)

Services Prioritization of services: primary and feeders; mass ("Transit") and

segmented. Pricing policies (various services and including parking)

System Linking land use and transport Linking transport of passengers and goods Linking motorized and non motorized transports Controlling externalities (emissions, accidents, noise)

Introduce a BRT = Changing the system

Roles of each mode/service change

Relations between the different agents change

Objectives for urban development are challenged

Relation between decision levels

Relation between agents

Difficulties of Urban Mobility Systems

S

Strategic

goals of the

system

Stakeholders

interestS

T T

OService

performance

Monitoring

criteria

Measuring

toolsO

Decis

ion

Levels

Decis

ion

Levels

consistency

gap

Relation between decision levels

Urban mobility system properties

Robustness, i.e. stability and long-term sustainability;

Adaptability, i.e. dynamic capability of adapting services to the requirements of developments in society and technology.

Efficiency, i.e. high productivity in the ability to change the basic resources into products and these consumer units, providing the best result at the lowest cost;

• Diversity, ability to meet the aspirations of different customer segments with different services in a continuous adjustment between supply and demand of the urban mobility system

INSTITUTIONS

What are institutions ? Institutions <> Organizations

The term “institution” is used with a variety of meanings in common language as well as in philosophy, but with a more precise meaning in sociology and generally in the social sciences:

An institution is any structure or mechanism of social order and cooperation governing the behavior of a set of individuals within a given human community.

Institutions are identified with a social purpose and permanence, transcending individual human lives and intentions, and with the making and enforcing of rules governing cooperative human behavior

Institutions create elements of order and predictability. Predictability in turn can enhance trust, which can enhance reciprocating loyalty, which can facilitate bargaining, compromise, and fiduciary relationships (Heclo, 2006)

How do Institutions Change?

There is nothing automatic, self-perpetuating, or self-reinforcing about institutional arrangements. Institutions represent compromises based on specific coalitional dynamics, they are always vulnerable to shifts.

Institutional change often occurs when problems of rule interpretation and enforcement open up space for actors to implement existing rules in new ways. – In fact, institutions have implications on distribution of resources, which

creates tensions that eventually lead to dissenting actions

Quite often, changes reflect adaptation to local experience, making them relatively myopic and meandering, rather than optimizing – So, they will most times be ‘‘inefficient,’’ in the sense of not reaching a

uniquely optimal arrangement

Why are specialized organizations necessary? (I)

In general, organizations are necessary as an instrument of effectiveness better performance thanks to a hierarchy of command in particular tasks

– This is valid both in the private and in the public domains

In both domains the dimension and mission of each organization cannot grow indefinitely

– Loss of focus for the institution and of effectiveness of the chain of command subdivision in smaller organizations (departments / divisions / units / etc.) is necessary

Making Institutions Work

Institutional design affects the degrees of freedom and incentives (penalties and rewards) of individual and collective agents, so it influences their behavior

Institutional design may also include filters or screens, restricting – Who is allowed to participate in some decisions – What options are available in certain decisions

Penalties and Rewards to individual agents in the institutions must be stimulating of the desired behavior and proportional – In their conception, they should be complier-centered, not

deviant-centered

REGULATORY AND ORGANIZATIONAL SETTING

Common Pathologies in Organizations

From Focus to loss of coherence

– Need for coordination – Method of Open Coordination (introduced by EU in the Lisbon

Strategy, 2000)

Organizations (like all organisms) have a priority goal of qualified survival – From focus on a problem to the need of keeping the problem

alive as a justification for survival

Organizations are agents at the service of a principal – The principal in this case is the set of institutions they embody – But like all agents they tend to align their behavior with their

own interest and not so much with the interest of the principal need for contract (statute) with constraints and incentives

Main types of Organizations in the Transport Sector

• In all countries, there are multiple types of organizations in the Transport Sector – Because it is vital for the organization of peoples lives and activities

of companies, and so it is expected to function predictably

• The main types of organizations in the Transport Sector are: – Government to decide on Transport Policy

– Agencies for planning of infrastructure and service networks

– Organizacional Agencies

– (Direct and added-value) Service operators

– Protective Regulators, establishing technical, safety and environmental rules

– Police and similar for enforcement of rules

– Economic Regulators, to ensure efficient economic performance

What is the Regulatory Framework

Who does what and when

Right of initiative: market initiative versus authority initiative

Spectrum of competition

Pitfalls of competitive tendering

Authorities tend to over-specify the product, and then look for the cheapest supplier

Administrative setting of tariffs and subsidy levels leads to slow and superficial changes in supply • Customer surveys may show satisfaction but they only represent the opinion

of those that have not left

A commercially tuned attitude is needed, more easily found in operators than in authorities. But there is no incentive for large gambles:

• Short duration contracts, no incentives beyond “doing it right”

• Excessive success would entice interest of other competitors

Economic Regulators and their role

Economic Regulators are special organizations created to keep

watch against abuse from market failure, occurring in the

(mostly private) provision of goods and services in network

industries

Difficult roles of regulators: preserve efficiency under limited or

no direct competition, administer tariff adjustments, push for

innovation (X-efficiency), keep companies healthy

– Inclusion companies’ health in the regulators’ agendas was a

central element in the process of attracting private equity into

these sectors (risk management)

CONTRACTUAL RELATIONS

Contractual relationships

Contractual models can be distinguished along several parameters:

– Whether they are static or dynamic,

– Whether they involve complete or incomplete contracts,

– Whether they describe bilateral or multilateral

situations;

– Whether the private information bears on:

• What the agent does (hidden action)

• What the agent is (hidden information)

Pure contractual forms in PT Management contract

– represents a form of delegation from the authority to the operator who is confined to the professional management of the operations on behalf of the authority. The degree of delegation and of engagement of the contracted manager in any risk taking is decided on a case by case basis, but in all circumstances the contract is negotiated for a fixed period of time and agreed price

Gross cost contract – the authority releases the control of the productive means – vehicles / rolling

stock, depots/other infrastructure, etc - to the operator, often setting also certain specific standard for quality of service, required fleets, etc., together with the agreed price for the production of the service. Very often contract length as to be associated to the lifecycle duration of material assets involved in production, this is a common situation with railways companies. However, more recent evolutions enable to have contract length almost independent from lifecycle of material assets through operational leasing

Net cost contract – In Net Cost contracts both the productive and commercial risk are born by the

operators. In these contracts the operator is normally entitled to retain all fare revenue and bears all the risks (productive and commercial)

Quality and incentives in contracts

Quality Measurements (Incentive/Penalty)

Internal: focus on service production

External: focus on customer’s perception/reaction

Traditional Incentives

Gross cost contracts: Revenue incentives based on

perceived customer satisfaction or patronage

Net cost contracts: Shared revenue risk and minimum

quality standards monitored through perceived customer

satisfaction or patronage

The risks involved in the provision of UPT services

Production risks - related with productive factors

Commercial risks - related with demand levels and pricing

policies

Urban planning risks : land -use; traffic management;

transport system planning (encompasses political risks)

The risks involved in the provision of UPT services

Risks of classic contracts

When Authority defines all beforehand

Risk of initial misfit between requirements and supply

Market requirements evolve and supply is “tied up” by

contractual obligations

When Operator has more right of initiative

More difficult to assure integration with other sectors

Contracts must be longer to allow development of new services,

market reaction and payback of investments.

Incumbent gains market information advantages that may be

decisive for winning successive tenders and exclude new comers.

Net Cost Contracts are hard to manage

Apparently, Net Cost contracts would be the answer

operator bears commercial risks

Net Cost Contracts are harder for both sides:

For Operators, much harder preparation of bids, higher risks, permanent costs of reading markets, short-term contracts create risk of baking the cake and have someone else eat it

For Authorities, lower number of contestants in tender, market contestability possibly virtual after first cycle

Biggest difficulties come during contract life

All changes of transport policy or traffic regulation may affect the commercial side of PT operations, thus imposing compensation

So, net cost contracts become a barrier to innovation and adaptation in urban management

Material Assets and Contract Length

Traditionally, contract length connected to lifecycle duration of material assets

More flexible solutions are now available – Fixed assets can belong to the Authority and be managed

directly or through management contracts w/ private parties

– Mobile assets may be acquired through operational leasing • heavy maintenance performed by the suppliers (or subcontracted under

their responsibility)

• disposal at the end of contract ensured by supplier

– Contract for material assets may be done by the authority of by the operator

So, contract length may become (almost) independent of lifecycle of material assets

REGULATION AND CONTRACTS AS PERFORMANCE DRIVERS

Performance monitoring of UMS

Industrial Performance - processing of basic resources in production of transport

Network organization - transformation between transport units and levels of accessibility strategically defined

Commercial performance- consumption potential represented by these levels of accessibility, which is generally the level of customer satisfaction

Production of Externalities - potential of each configuration to generate a negative impact in terms of economic and social view

Assessing industrial performance

Factors affecting industrial performance : – The regulatory and organisational framework (e.g.

structure-conduct-paradigm)

– Other factors : • Dimensions of urban area (e.g. economies of scale)

• Diversity of modes and level of integration (e.g. network economies, density and scope)

• Complexity of the network (e.g. fleet capacity in feeder routes)

Industrial performance indicators should cover: – Productive efficiency:

– Resource Management;

– Environmental protective Management

Assessing network organisation

Four main dimensions of integration to be considered: Visible – Physical: In space, time and technology:

– Logical: Involving global system information, focused information and reliability of connections provided by real time information:

– Tariff: Entailing tariff integration and revenue sharing: Invisible – Organizational (Institutional and Contractual): Entailing allocation of responsibilities

between authorities and operators, and between operators from different modes;

Indicators to assess network organization should depart from the accessibility concept. i.e.:

– Availability of transport, meaning network coverage in time and space;

– Commercial accessibility, concerning availability of selling points;

– Logical accessibility, concerning availability of information;

– Financial accessibility, addressing tariff regimes and levels (e.g. affordability)

Assessing commercial performance Commercial performance is directly related with clients

satisfaction and requires close identification with clusters of clients, which form specific market segments with differentiated expectations

Factors influencing the customers quality perception: – Previous experience; – Level of information; – Social statute – Price paid that either meets or not their expectation

Aspects to be considered in the assessment are: regularity,

continuity of service, comfort, convenience and security

Impacts of commercial performance

• First, the impact on citizens’ use of public transport measured by passenger.kms in public transport;

• Second, the impact on traffic congestion, measured through market share of public transport;

• Third, the impact on the financial situation of the Operators and authorities (reduction of subsidyneeds), measured through the revenue obtained.

Some pitfalls of UPT performance assessment

To truly assess the performance of UPT systems longitudinal comparisons are important but misrepresentative. We must assess transversal comparisons between system in different cities or urban areas

Careful thought should be given to the factors influencing transversal comparisons, since they can potentially biases the interpretation of indicators, such as: organizational settings, geographical characteristics, land-use patterns, intermodality and diversity of modes

The separate analyze of performance dimensions should be complementary to the preliminary analysis of market structure to enable the full understanding of the dynamics of the system.

Across Latitudes and Countries Bus Rapid Transit

Center of Excellence

Regulatory Organization and Contractual Relations Between Agents

´

Rosário Macário [email protected]

Instituto Superior Técnico

Lisboa, Portugal

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