The influence of ownership on the cost of bus service provision in Switzerland - an empirical illustration
Summary (2 min read)
1. Introduction
- In recent decades the public transport policy of most industrialized countries has been characterized by deregulation and/or privatization policies1.
- Following the changes in the transport policy of the EC and the increasing subsidies for operations and infrastructures, the Swiss public transport policy has experienced several 1 See Berechman (1993) for an exhaustive overview on the deregulation policies pursued in different industrialized countries.
- The majority of these companies are stock companies created by private investors or by municipalities.
- This mixed economy within the regional public transport market raises the interesting issue of the effects on costs of the different ownership structures and institutional organization form.
- Section 3 discusses the cost model; section 4 presents the data, while section 5 illustrates the empirical results.
2. The influence of ownership on the cost of bus service provision
- In comparing the relative efficiency between public ownership and private ownership, property rights theory has been often employed.
- Following Alchian (1965) and Demsetz (1967), property rights theory analyses how the different incentives created by the system of property rights affect organizational behavior and company performance.
- In reality, these agents probably acquire some independence and have the opportunity to act as imperfect agents.
- Public representatives in turn delegate control to a commission, which oversees the management of the company.
3. Specification of the Total Cost Function
- Cost functions in the bus industry are well documented in empirical research (see Berechman, 1993 for a good overview).
- Obviously such variables will be considered in the cost function specification provided that they respond to the research interest, that they are measurable and finally that a certain variability among the observations exists.
- Economies of density are defined as the increase in total cost resulting from an increase in output, holding all input prices and the network size fixed (Caves, Christensen and Tretheway, 1984).
4. Data and variable specification
- To estimate the cost model described in (2), financial and operating data from sampled operators was required.
- The authors asked for the shareholders’ composition because many bus companies, although corporations, are more than 50% held by public bodies.
- In order to increase the sample size, the 34 bus transit companies were observed over 5 years (1991-1995), which gave us a sample of 170 observations.
- The output (y) is measured in bus kilometers and seat kilometers alternatively.
- Following Friedlaender et al (1983), the capital price (pC) is calculated as residual cost (where residual cost is total cost minus labor and energy cost) divided by the number of vehicles in the operator’s fleet.
5. Estimation Results
- The system of equations consisting of the cost function in (2) and the 2 factor share equations (3a+3b) was estimated using maximum-likelihood.
- Most of the parameter estimates are statistically significant and carry the expected sign.
- Similar results were obtained by Filippini et al. (1992) and Filippini, Prioni (1994) for a sample of bus companies in Switzerland, and Windle (1988) for the U.S. bus industry.
- These results suggest that first, empirical findings are highly sensitive to the variable specification and second, that ownership can be of limited relevance in highly regulated markets.
- In a previous study, Filippini, Prioni (1993) found a higher cost elasticity with respect to output (measured in seat-kilometers).
Economies of Scale and Density
- The following table presents the estimated economies of scale and economies of density for the median bus operator calculated according to the formula specified in (4) and (6).
- Note that factor prices are held constant equal to the median values.
- According to Model 1, bus companies manage to operate at an optimal scale level, suggesting an efficient network length and level of physical output, which should ensure all the rest remaining constant a continued existence.
- Slightly higher is the estimated value for the economies of scale in model 2 (1.17), indicating that the model specification influences results and policy implications.
- The difference in the result is relatively 14 See Filippini et al. and Filippini, Prioni (1994) for previous results.
Elasticities
- Energy and labor, and capital and labor.the authors.
- The incremental costs associated with operating alternative fuel buses are mainly increased capital outlays.
- The reason could lie in the relatively long average vehicle life, which ranges from 12 to 25 years depending on the quality of maintenance and intensity of vehicle utilization (Williams, Dalal, 1981).
- The estimated elasticity between labor and energy is 0.007 in both model specifications, suggesting very limited substitution possibilities.
- For example the introduction of modern customer information systems and Britain were found by Button O’Donnel (1985).
6. Conclusions
- Public and mixed regional bus companies in Switzerland.the authors.
- The ownership variable enters the translog cost models as a dummy variable P.
- The results only partially confirm the expectations that private firms should operate more efficiently than public ones.
- Similar ambiguous results are common in the literature, suggesting that the ownership hypothesis needs to be tested and discussed within the particular regulatory setting and the market structure.
- The explanatory power of the model gives us an insight into the nature of the production technology of the regional bus system in terms of economies of scale and density.
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Frequently Asked Questions (10)
Q2. What is the effect of the commercialization of new vehicle and fuel options?
The increasing commercialization of new vehicle and fuel options, due to a shift inpriorities towards a sustainable public transport system, aim to reduce pollution and minimize petroleum fuel use in the bus transit industry.
Q3. What is the main function of the mixed firms in the Swiss public transport system?
The main function of these companies is to link mainly rural areas to an urban transport network or to the intercity railway line.
Q4. What is the explanatory power of the model?
The explanatory power of the model gives us an insight into the nature of theproduction technology of the regional bus system in terms of economies of scale and density.
Q5. What are the other forms of companies in the sample?
although corporations dominate (29), other institutional forms are represented in the sample (for example cooperatives).
Q6. What is the estimated elasticity between labor and energy?
The estimated elasticity between labor and energy is 0.007 in both modelspecifications, suggesting very limited substitution possibilities.
Q7. What is the chain of command from the electorate to the management of a public firm?
Within the public sector, the chain of command from the electorate to the management go through the parliament, the government and the commission.
Q8. What is the reason for the increase in output measured in bus kilometres?
One reason for this may be the fact that the increase in output measured in bus kilometres implies higher costs that an increase in the seat capacity of the bus.
Q9. Why is the average vehicle life so long?
The reason could lie in the relatively long average vehicle life, which ranges from 12 to 25 years depending on thequality of maintenance and intensity of vehicle utilization (Williams, Dalal, 1981).
Q10. What is the general expression for elasticity of substitution between two inputs?
The general expression for Allen elasticity of substitution between two inputs m and n (m≠n) (see for example Williams, Dalal, 1981) is given by: ∂ ∂ ∂ ∂ ∂∂ ∂ ⋅ = nm nm mn p C p C pp C C 2 ϑ (7)