Cardiff University - Deregulation Regulation and Re-Regulation of Transports

8/8/2019 Cardiff University - Deregulation Regulation and Re-Regulation of Transports

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Regulation, deregulation orre-regulation of transport?

Prof. Peter Turnbull(Cardiff Business School, Cardiff University)

Symposium on the Social and Labour Consequences of Technological Developments,Deregulation and Privatization of Transport

Discussion Paper No. 4

Geneva, 1999

Discussion papers are preliminary documents circulatedto stimulate discussion and critical comment

ContentsI. Introduction

II. Regulation

III. Deregulation

IV. Re-regulation

I. Introduction

In the industrialized world transport provision has passed through at least three historical phases.Initially, transport providers were private companies whose activities were subject to variouscontrols imposed by the public authorities. As the twentieth century progressed, transportprovision was increasingly brought under public ownership and control (national and/or municipal,federal and/or state). Most recently, from the late 1970s onwards, many transport activities havebeen returned to private hands under the banner of privatization and deregulation. However,whether transport services are provided by public enterprises or private sector companies, their

activities are invariably regulated by a codified set of rules and other restrictions, statutory anddiscretionary, which circumscribe the freedom of operators to engage as they see fit in economicactivities. The purpose, nature, and scope of such regulation will of course differ markedly from

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Pgina 1 de 10Regulation, deregulation or re-regulation of transport? - Sectoral Activities

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one transport mode to the next and from one country to another. The dominant perspectives on(transport) regulation are therefore discussed in section II. The recent process of deregulation isanalysed in section III, drawing on examples from civil aviation, rail and road transport. Inparticular, attention is focused on the impact of deregulation and privatisation on service provision,reliability, safety, costs (labour) and employment conditions as these outcomes lie at the heart ofmost recent calls for re-regulation. The latter is the subject of the final section IV.

II. RegulationThere is no accepted, or at least straightforward, definition of regulation, as the term is used todenote, at one extreme, specific legal mechanisms to make good deficiencies or curb abuses on thepart of particular producers or service providers and, at the other extreme, to denote regulatoryregimes for an entire economy or particular "type" of capitalism (e.g. free-market or neo-liberalAnglo-Saxon capitalism, social market Rhineland capitalism, and organization- orientated

Japanese capitalism).(1) As a result, it is not uncommon to find different interpretations ofregulation depending on the level of aggregation (e.g. firm, industry, economy or international)and the country of origin. In Europe, for example, regulation typically refers to the whole realm oflegislation, governance and social control whereas in the United States regulation has a morespecific meaning, namely the sustained and focused control exercised by a public agency over

activities that are generally regarded as desirable to society.(2) Policy-makers in Europe havetraditionally been more sceptical than their United States counterparts about the efficiency ofmarkets, or at least the ability of markets to function in the absence of recurrent crises, and inmany industries the preference was nationalization rather than regulation. Another difference isthat while in both continents the principal purpose of regulation has been to protect and promotethe "public interest", in the United States there is a preference for specialist, independent agenciesthat are bestowed with regulatory powers. In Europe, and even more so in developing countries,regulatory power typically resides with the relevant state department or government ministry.

In order to protect and promote public interests, regulation seeks to enhance the efficiency ofmarkets and ensure the provision of social rights. The social basis of regulation, however, is often

justified on the basis of an economic rationale. Put differently, social regulation is widely regardedas being secondary to economic regulation.(3) The principal economic arguments for regulation areas follows:

guaranteed provision -- in many market situations providers may be unable or unwilling tooffer a service (e.g. rural bus or train services);

market power-- economies of scale or other features of a particular market can lead tomonopoly power where producers or providers restrict output/service and raise price(thereby realizing economic rents) and/or restrict competitive access to the market;

externalities -- the well-being of one economic agent can be directly, and adversely, affectedby the actions of another (e.g. as a result of pollution);

information deficiencies -- producers and providers typically possess more information onthe product/service than consumers;

excessive competition -- if there are too many producers or service providers in a marketthen prices will be too low, and revenue insufficient, to cover costs and ensure futureinvestment.

The principal social arguments for regulation are to ensure employment security, safeguardworkers' terms and conditions of employment, including health and safety, guarantee appropriatetraining to minimize accidents and maximize productivity and service quality, and provideeffective representation of employee interests. In a nutshell, then, regulation seeks to promote bothefficiency and equity.

These objectives can be pursued directly through public regulation, via self-regulation, or throughself-regulation within a statutory framework.(4) "Self-regulation" is the watchword of neo-liberalswho regard free competition as sufficient to ensure the efficiency of markets. If prices are too high,




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for example, competitors will enter the market, thereby increasing output or providing alternativeservices, and prices will then fall. If service is poor, the firm's reputation will suffer, againencouraging competitors and/or the firm itself to improve performance. For neo-liberals, then,competition is always preferred to regulation. Moreover, the principal purpose of regulation is toensure free competition. Thus, the neo-liberal position can be summarized by the maxim:"Competition where possible, regulation only where necessary".

According to neo-liberals, regulation is only necessary in the event of market failure. Socialregulation is not only secondary, justified principally in terms of health and safety or minimumtraining standards, but is typically regarded as inherently bureaucratic, placing unnecessaryconstraints and obligations on the firm. To correct market failures, two different modes ofregulation are available: structure and conduct regulation. The former has to do with which firmsare allowed to engage in economic activities, the latter with how firms behave in their chosen

activities.(5) In brief, structural regulation aims to create a situation in which the incentives oropportunities for undesirable behaviour are removed, whereas conduct regulation addresses not theundesirable underlying incentives but the behaviour that they would otherwise induce. Asinformation on the structure of an industry is generally better than information on firms' behaviourin that industry, and as the latter involves intensive monitoring and enforcement, public agencies

often prefer structural rather than behavioural regulation (e.g. restrictions on entry, statutorymonopoly, single capacity rules and qualifications, rather than measures to guard against anti-competitive behaviour, price controls, rules against advertising or other restrictions on competitiveactivity). It can be extremely difficult, for example, to define predatory pricing behaviour, let alonedetect and deter such behaviour.

In contrast to the neo-liberal approach, where competition is given precedence over regulation,many commentators of the "social-institutional" school regard free markets as neither natural nordesirable. In this view, markets are conceived as social institutions governed by a set of rules,many of which are framed by the public authorities: "Markets are created by governments, ordered

by institutions, and sustained by regulations."(6) The key question, therefore, is not whethertoregulate markets, but precisely whatand how to regulate. Regulation, in other words, is not about

market failure but the very constitution and definition of the market.

According to the social-institutional perspective, as all markets are deeply embedded in society,regulation must embrace labour as well as product markets, especially as the former can stronglyinfluence firms' behaviour in the latter. For example, if all firms in a particular industry aresignatories to a collective agreement, which standardizes basic pay and other conditions ofemployment, then competition on the basis of labour costs is effectively precluded. Firms musttherefore look to reduce costs by improving productivity (via training, flexibility and the like), andseek competitive advantage in the product market through service quality, reliability, punctuality,etc. Such action is widely regarded to be in the "public interest", demonstrating that social

"constraints" can be highly productive by promoting efficiency through greater equality.(7) Thus,

regulation enables as well as constrains the activities of service providers. For the social-institutional school, therefore, competition and regulation are complements rather than alternatives.More importantly, the purpose of regulation is "fair competition", which by definition must besocially constructed, rather than "free competition", which typically denotes competition withoutregulation.

The so-called "holy trinity" of a regulatory framework for fair competition is compliance,legitimacy and trust. According to Wilks, compliance is the lifeblood of regulation: "All regulationrelies on the willing cooperation of the regulatory targets who cooperate through respect for the

legitimacy of the regulations, and trust in the procedures of the regulators."(8) Again, the idealregulatory system would be one enforced through information and guidance (i.e. self-regulation),rather than heavy-handed bureaucracy with threats and sanctions. But legitimacy can only be

achieved through a democratic process; hence the importance of involving all potentialstakeholders, especially employees, and there must be effective methods of accountability whichare open and transparent. Most importantly, trust can only be generated through the creation of




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shared norms and repeated contacts. If trust is to become a valued resource in its own right, leadingto high levels of productivity and lower transaction costs, then according to the social-institutionalperspective there must be a commitment to job security and a strong institutional base whichprovides (statutory) rights for consultation, participation and employee representation. Once again,the explicit interaction, and mutual dependency, of product and labour market regulation is verymuch in evidence.

In summary, then, whereas the social-institutional school regards regulation as inherent in allmarkets, neo-liberals advance a more limited role for regulation in the event of market failure.Even in those markets where neo-liberals accept a positive role for regulation, as in many transportmarkets, in recent years they have proclaimed "regulatory capture" where the regulatory bodyestablished to protect consumer interests equates the "public good" with the interests of theindustry it regulates. This argument was made very forcibly in the case of United States civil

aviation(9) in the 1970s, for example, and lies at the heart of recent deregulatory measures in manyother transport sectors throughout the world. In the 1980s and 1990s the prevailing view oforganizations such as the World Bank, IMF, OECD and many national governments was thatmarkets are better at meeting needs than planning, and private companies are better at deliveringgoods and services than the public sector.

III. Deregulation

Strictly speaking, the term "deregulation" is a misnomer: deregulation does not signal the end ofregulation, especially in crucial areas of transport such as safety, and deregulatory measures areinvariably accompanied by new and often more explicit regulatory structures. In the UnitedKingdom, for example, following the privatization of public utilities the State established moreeffective control over some aspects of these industries than the previous indifference associated

with nationalization.(10) In many cases deregulation signals a change of emphasis betweenstructure and conduct regulation, or a functional separation of ownership, operation and regulation.For example, the State may continue to own a particular transport service (as the principalshareholder) but a private company now runs the operation on a commercial basis. Alternatively,

as illustrated in the table below, both ownership and operations may be transferred to the privatesector but regulatory powers are retained under state control (either directly under a governmentdepartment or ministry, or under an independent regulatory authority with statutory powersappointed by the government). Throughout the world there has been a shift from nationalization tocommercialization and privatization in the provision of transport services, which implies a declinein state provision but continued (state) regulation. An industry without regulation, especially in thetransport sector, is simply a mirage.

Table. Regulatory models in the transport sector

The actual processes of deregulation are many and highly contingent on the transport mode andmarket in question. A local city bus service in a developing country will clearly adopt verydifferent deregulatory measures from the international civil aviation industry. Even within thesame transport mode, such as railways, deregulation has ranged from outright privatization withtrack and rolling stock sold to private companies (e.g. New Zealand and the United Kingdom),

Ownership Operation Regulation

Nationalization Public Public Public

Commercialization Public Private Public/Independent

Privatization Private Private Public/Independent




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granting concessions to private companies on a long-term basis to operate rolling stock and/ormaintain the track (which is still owned by the State) (e.g. Latin America and Africa), a"regionalization" of operations where control shifts from central to local government, andcommercialization where the State retains ownership but commercial operating principles areadopted (e.g. precluding cross-subsidy between routes).

Under public ownership there were numerous examples of state transport operators who

experienced rising costs and falling revenue. The consequent pressure on public finances often ledto insufficient investment as public funds were used for revenue support rather than capitalexpenditure. Deregulation and privatization were anticipated to alleviate such problems, withcompetition and private ownership leading to lower costs and fares, higher productivity andservice levels, service innovation and greater levels of investment. Whether such benefits havebeen delivered is a question fiercely contested by proponents and critics of deregulation, andconclusive empirical evidence is surprisingly difficult to come by. Take, for example, the UnitedStates civil aviation industry. Many accounts claim that liberalization of domestic air transport in

1978 "produced considerable net social benefits".(11) Critics, however, contend that:

Airline service has gone to hell We are herded aboard aerial slums, served cardboard

food, overbooked, bumped, and misconnected. Our luggage is routed through the TwilightZone, never again to be seen during our natural lives. Business and small town travellers payseveral hundred dollars more than the vacation travellers seated next to them. The marketgives us a choice, of course. We can either spend an arm and a leg or sleep in a strange city

on a Saturday night.(12)

What is clear is that airline deregulation in the United States led to a concentration of ownershipand operations. By 1990 the eight largest United States carriers held 94 per cent of the domestic

passenger market and controlled almost all the major hub airports.(13) Rail deregulation in 1980produced a similar outcome, with the seven major carriers handling well over 80 per cent ofindustry freight a decade later. Over the same period, railroads abandoned services to over 1,200

small towns, which adversely affected businesses and employment in these locations (especially as

these towns were often also abandoned by road and air services).(14)

Whether consumers benefit from deregulation, then, often depends on the continued ability ofpublic agencies to regulate the market effectively. The reality is that most transport services are notperfectly competitive, significant economies of scale and scope do exist, economic barriers to entryin most transport modes are significant, and monopoly or oligopoly has resulted directly fromderegulation. Deregulators have often failed to appreciate the non-competitive structure oftransport industries and some deregulatory measures have actually accentuated these market

characteristics.(15) Publicly-owned bus companies in the United Kingdom, for example, werefragmented in 1986 into 142 private companies as it was argued that there were no economies of

scale in the industry, contrary to the evidence of economies of density, scope and network, as wellas other advantages accruing to larger organizations (including marketing, ticketing, managementand maintenance benefits). For all these reasons there is a natural tendency towards spatialmonopoly and eventual control by a few large operators. A decade after deregulation the fourlargest bus operators controlled more than a third of the United Kingdom market and the ninelargest almost 60 per cent. As a result, although operating costs have been reduced by over 25 percent, fares have increased and the pattern of services has changed little as local monopolies havebeen maintained, albeit after a short period of intense competition. More importantly, competition

has not led to market growth but to a further contraction of the market.(16)

The benefits of deregulation to consumers are therefore open to question. There is certainly a gooddeal of variation across transport modes and markets. Likewise, the results for governments can be

mixed. Public sector expenditure is generally reduced, but other costs may well increase post-deregulation. Most notably, externalities have often increased (e.g. pollution, congestion andaccidents), as have the costs associated with a lack of integration between different transport




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modes and the opportunity costs of transport services making a less significant contribution tolocal economic development in specific towns or regions. This was precisely the conclusionreached by the United Kingdom Government in its recent review of almost 20 years of transport

deregulation and privatization.(17) The decline of bus passengers, for example, has frustratedgovernment policy to reduce car use, urban congestion and pollution. Moreover, public support forthe United Kingdom bus industry still amounts to over 1 billion per annum from fuel duty rebate,

concessionary fares and tendered services contracts.(18)

Private operators, for their part, have often reaped considerable (financial) benefits fromderegulation, but again there are significant differences between transport modes. In civil aviation,for example, major airlines are able to use hub-and-spoke networks and computer reservationsystems to preclude competition and maximize revenue. Profitability among United Kingdom busoperators is now much higher following the consolidation of the industry, especially among thelarger operators. As companies such as National Express diversify into rail, airports and othertransport activities the cash-rich characteristics of bus operations can be fully exploited. In taxiservices, in contrast, deregulation has typically resulted in a rush of new entrants, a fragmentation

rather than a consolidation of the industry's structure, and widespread bankruptcy.(19)

Unlike other stakeholders, the impact of deregulation and privatization on transport workers isalmost universally negative. A common characteristic ofall deregulatory measures is a shift fromexternal to internal regulation of the industry in question -- i.e. a diminution of the role andauthority of public or third-party agencies and an increase in managerial prerogative (where thelatter invariably involves the erosion of collective bargaining and trade union rights). As a result,compliance with industry regulations is more difficult to enforce on transport providers, legitimacyis questioned, and trust between management and labour is eroded if not completely destroyed.This is hardly surprising as job losses are commonplace and usually extensive as a result ofderegulation; job security generally declines; work processes are invariably intensified, leading tostress and a greater risk of accidents; and wages and other terms and conditions of employment are

eroded.(20) A recent international survey of taxi drivers, for example, reported a marked

deterioration in workers' terms and conditions of employment following deregulation, especially asa result of longer hours.(21) A recent study by the Transport & General Workers' Union found thatUnited Kingdom bus drivers are often at the wheel for five hours without refreshments or even atoilet break. Many London bus drivers now earn just 140 per week and therefore qualify for statebenefits; and there are now over 1,000 vacancies for bus drivers amongst the capital's 39 operators.

Similar outcomes have been reported in railways(22) and civil aviation.(23)

In virtually all transport sectors labour costs represent a significant -- and in a deregulatedenvironment potentially variable -- cost of production. It is hardly surprising, therefore, thatworkers' terms and conditions of employment should become a principal target of cost-cuttinginitiatives. Among the world's airlines, for example, wage cuts, pay freezes, the withdrawal of costof living agreements, two-tier wage levels, longer and more frequent shifts, and an overall increase

in working hours are now commonplace as carriers "benchmark" their own costs against those ofinternational rivals (or even alliance partners), low-cost new entrants, or specialist serviceproviders. If the airline's own costs are above "market rates", then cost-cutting, franchising,outsourcing or subcontracting invariably follows. A particular concern for workers in the civilaviation industry is that as new global alliances are formed between major carriers, with decisionson investment, procurement, labour deployment, recruitment and the like now determined on aninternational basis, collective bargaining and other forms of employee representation are"localized" at the level of individual operators or even specific sub-units (e.g. strategic business

units, regional subsidiaries, franchisees or contractors).(24)

Throughout the transport industries of the world, product market regulation no longer

complements or underwrites labour market regulation; deregulation of the product market hasundermined labour market regulation and in many transport sectors eroded the basis of worker

cooperation, motivation and high productivity.(25) The disjunction of product and labour marketregulation is certainly to the detriment of employees, invariably to the disadvantage of consumers




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In particular transport sectors such as ports and civil aviation, however, private companies haveoperated successfully for many years and provided acceptable terms and conditions ofemployment. The Dockers' Section of the ITF recently abandoned its principled opposition to

privatization in port transport(31) while in civil aviation many trade unions regard ownership as

"secondary" to union recognition and effective collective bargaining rights.(32) In some cases thereis a recognition that private ownership might actually help protect jobs and preserve existing terms

and conditions of employment (e.g. Philippine Airlines). In railways, in contrast, there are muchstronger arguments for public ownership to secure integration, investment, and environmentalobjectives.

If labour market regulation is to act as "substitute" for public ownership, then "social clauses" mustbe embraced by all service providers with statutory enforcement to ensure compliance.

Core labour standards for transport and other workers, as enshrined in various ILO Conventions,would not only protect employee interests but ameliorate some of the problems associated withproduct market deregulation. The European Union actively promotes the interests of transportworkers in its Common Transport Policy via the establishment of social dialogue and collectivebargaining, access to the professions and training, the improvement of living and working

conditions, and the protection of employment.(33) Within a single market, and in the context ofincreasingly global transport operations, labour market regulation is vital to prevent "socialdumping" and "regime competition" (where private companies "bid down" terms and conditions ofemployment and governments erode workers' statutory employment rights). Rather than create aregulatory environment in which operators seek competitive advantage at the expense ofemployees, labour market regulation should be directed towards job security and thestandardization of basic terms and conditions of employment in order to create a "floor" under(labour) cost competition. It must be recognized, however, that without product market regulationdirected towards minimum standards for safety and service quality (e.g. frequency, comfort,reliability, punctuality, passenger information, etc.) and measures to prevent excessive competitionor the abuse of market power, then service providers will face strong incentives to cut labour costs.

The objective for public policy-makers in the future should be to create complementary systems ofproduct and labour market regulation, and in doing so lay the foundation for both greater equityand efficiency in the transport sector.

1. I. Begg: "Introduction: Regulation in the European Union", inJournal of European PublicPolicy (London), No. 3(4), 1996, p. 528.

2. P. Selznick: "Focusing organizational research on regulation", in R.G. Noll (ed.):Regulatorypolicy and the social sciences (Berkeley, University of California Press, 1985, pp. 363-7. See alsoG. Majone (ed.):Deregulation or re-regulation? Regulatory reform in Europe and the UnitedStates (New York, Pinter, 1990, pp. 1-6.

3. See S. Wilks: "Regulatory compliance and capitalist diversity in Europe", inJournal ofEuropean Public Policy, op. cit., p. 538.

4. J. Kay and J. Vickers: "Regulatory reform: An appraisal", in Majone, op. cit., p. 223.

5. ibid.

6. Wilks, op. cit., p. 538.

7. W. Streeck: Social institutions and economic performance (London, Sage, 1992).

8. Wilks, op. cit., p. 542.

9. Kay and Vickers, op. cit., p. 232. Between 1950 and 1975 the Civil Aeronautics Board (CAB)received 79 applications from firms wishing to enter the United States domestic market, but

granted none. Between 1964 and 1974 the CAB granted less than 10 per cent of applications byexisting carriers to serve new routes.

10. M. Bishop, J. Kay and C. Mayer (eds.): Privatization and economic performance (Oxford,




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Oxford University Press, 1994).

11. K. Button, K. Haynes and R. Stough: Flying into the future: Air transport policy in theEuropean Union (Cheltenham, Edward Elgar, 1998), p. 59.

12. P.S. Dempsey: The social and economic consequences of deregulation: The transportationindustry in transition (New York, Quorum Books, 1989), p. 251.

13. P. Lyth: "Experiencing turbulence: Regulation and deregulation in the international airtransport industry 1930-1990", in J. McConville (ed.): Transport regulation matters (London,Pinter, 1997), p. 168.

14. Dempsey, op. cit., p. 252.

15. Alfred Kahn, architect of United States domestic airline deregulation, clearly failed toanticipate the market power of major carriers or the impact of hub-and-spoke networks andcomputer reservation systems. He later admitted that "we thought an airline was nothing but amarginal cost with wings" (Independent on Sunday, 13 Jan. 1991).

16. D. Bannister: "Bus deregulation in the UK: The first decade", in J. McConville (ed.), op. cit.,pp. 31-51.

17. Department of the Environment, Transport and the Regions:A New Deal transport: Better foreveryone (London, The Stationery Office, 1998).

18. Bannister, op. cit., p. 49.

19. In Sweden, for example, more than 1,000 taxi companies went out of business between1991and 1995 following deregulation in 1990.

20. ILO: Symposium on the Social and Labour Consequences of Technological Developments,Deregulation and Privatization of Transport, background document (Geneva, International LabourOffice, 1999).

21. Choong-Ho Kang: Taxi deregulation: An international comparison (London, ITF, 1998), pp.20-5.

22. ITF:ITF Railway Bulletin Number 1 (London, International Transport Workers' Federation,1998).

23. P. Blyton, M. Martinez Lucio, J. McGurk and P. Turnbull: Contesting globalization: Airlinerestructuring, labour flexibility and trade union strategies (London, International TransportWorkers' Federation, 1998).

24. ibid.

25. ibid; see also R. Saundry and P. Turnbull: "Contractual (in)security, labour regulation andcompetitive performance in the port transport industry", inBritish Journal of Industrial Relations,No. 37(2), 1999, pp. 273-96.

26. Choong-Ho Kang, op. cit.27. Kay and Vickers, op. cit., pp. 234-5.

28. Commission of the European Communities: Fair payment for infrastructure use, 446 Final(Brussels, European Commission, 1998), pp. 3-4.

29. C.A. Nash, J.P. Toner, H. Beaumont, J.O. Jansson and G. Lindberg: Towards fair and efficientpricing in transport -- Issues and prospects (Centre for Transport Studies, University of Leeds,United Kingdom, 1997).

30. ITF: Transport workers and the global economy (London, International Transport Workers'Federation, 1998) (emphasis added).

31. ITF: Privatisation and other port reforms: The demand for a national and international tradeunion response (London, International Transport Workers' Federation, 1997).

32. Blyton et al., op. cit.




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33. Commission of the European Communities: The future development of the Common TransportPolicy (Brussels, European Commission, 1992), pp. 82-9.

Updated by BR. Approved by OdVR. Last update: 28 September 2000.

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Cardiff University - Deregulation Regulation and Re-Regulation of Transports