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Research in Transportation Economics 22 (2008) 85–90

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Research in Transportation Economics

journal homepage: www.elsevier .com/locate/retrec

Public vs private management of public utilities – The case of urbanpublic transport in Europe

Miguel AmaralATOM, University Paris I Sorbonne, Paris, France

E-mail address: Miguel.Amaral@univ-paris1.fr1 In France, for example, the cost coverage ratio ha

34% in 2002 (GART, 2002).2 In most Member States, the service was provided

publicly owned companies holding a monopole.

0739-8859/$ – see front matter � 2008 Elsevier Ltd.doi:10.1016/j.retrec.2008.05.021

a b s t r a c t

This paper analyses the determinants of the performance differential between the private and publicmanagement of urban public transport in Europe. Our analysis supports the view that private manage-ment is associated with a lower operating cost. We show, however, that the size of the costs’ differentialcan depend on the interaction of the local authorities’ capacity for expertise and the private operators’autonomy margin. In particular, we show that, in certain situations, there might be little difference inoperating costs. Thus, in terms of total costs (production and transaction costs), no systematic advantagesshould be expected from private management.

� 2008 Elsevier Ltd. All rights reserved.

1. Introduction

For the last 20 years, the organisational framework of urbanpublic transport in Europe has experienced significant upheavals,which have recently formed the subject of empirical studies (Dalen& Gomez-Lobo, 2002; Gagnepain & Ivaldi, 2002; Roy & Yvrande-Billon, 2007) and dynamic policies from the European Institutions(European Commission, 2005). These evolutions result from theconjugate effects of constraints and both internal and externalpressures, progressively calling into question the national forms oforganization of this activity. Internally, the States are indeed facinga dual constraint: a budgetary tightening constraint and theappearance of an efficiency crisis1 of the traditional management2

of this service, with costly repercussions for the European MemberStates. Externally, the 1980s saw the beginning of a particularlydynamic policy of the European authorities, regarding the lack ofcompetition in the sector, calling into question the nationalorganisational and regulatory modes.

While the introduction of market mechanisms is undoubtedlythe keystone of the reforms implemented in Europe, MemberStates retain, however, a tight control over the activity, via the localauthorities in charge of the urban public transport network. Thisstrong position held by local authorities may initially be explainedby the need to reduce the external costs generated by private carssince, as pointed out in a recent study conducted by the INFRAS and

s fallen from 80% in 1975 to

by public administrations or

All rights reserved.

the IWW (INFRAS/IWW, 2004), these external costs amount to V

286 640 million and represent 87.3% of the total external roadtransport costs in Europe (Table 1).

Another reason that would explain why the Member States areso proactive in promoting urban public transport (UPT from nowon) is that this activity is considered a key element in the support ofeconomic and social activities. This justifies a public service ap-proach to the sector, which is revealed by the strict control overtariff policies and the fact that the European Commission,since1969,3 has authorized Member States to impose public serviceobligations, i.e. ‘‘obligations which the transport undertaking inquestion, if it were considering its own commercial interests, wouldnot assume or would not assume to the same extent or under the sameconditions’’ (art. 2, par. 1). Besides, these obligations encompass thetariff obligation, i.e. ‘‘obligation imposed upon transport undertakingsto apply, in particular for certain categories of passenger, for certaincategories of goods, or on certain routes, rates fixed or approved by anypublic authority which are contrary to the commercial interests of theundertaking and which result from the imposition of, or refusal tomodify, special tariff provisions’’ (art. 2, par. 5). These elements ex-plain why the sector has been structurally generating a loss and,thus, is subsidized in most European countries (Table 2).

For the past three decades, although efforts have been made toincrease the use of UPT, its modal share has fallen from 24.7% to 16%

3 Regulation (EEC) No. 1191/69 of the Council of June, 26 1969 on action byMember States concerning the obligations inherent in the concept of a publicservice in transport by rail, road and inland waterway (OJ L 156, 28.6.1969, p. 1), aslast amended by Regulation (EEC) No. 1893/91 (OJ L 169, 29.6.1991, p. 1).

Table 1The external cost of road passenger transport in Europea,b

External costs(millions V)

Total externalcost (%)

Private car 286 640 87.3Motorcycle 25 491 7.9Bus 15114 4.7

a The study covers 17 countries: the 15 European Union Member States in 2000,plus Switzerland and Norway. Congestion costs are excluded from total costs.

b Source: INFRAS/IWW (2004).

M. Amaral / Research in Transportation Economics 22 (2008) 85–9086

between 1970 and 2001, while the private car share has risen from73.8% to 78.2%.4 As mentioned above, this situation of decline hasled some Member States to reconsider their traditional modes ofgovernance (i.e. the provision exclusively through public monop-olies). These reforms, in promoting private sector participation, relyon the implicit assumption that private service provision tends tooutperform public service provision. Nonetheless, no clear con-sensus in both the theoretical and the empirical literature emergesas to whether production is carried out more efficiently underprivate management. For instance, Boardman and Vining (1989:p. 1) point out that there is only a ‘‘weak support for [the] hypothesis’’that ‘‘public enterprises.perform less efficiently and less profitablythan private firms’’ while Megginson and Netter’s survey (2001:p. 380) states that ‘‘research now supports the proposition that pri-vately owned firms are more efficient and more profitable than oth-erwise-comparable state-owned firms’’. More precisely, whileempirical studies can provide some evidence that private firms aremore efficient in restricted contexts where firms are unregulated,there is very little indication of a robust relationship betweenownership and performance in regulated environments. Boardmanand Vining (1989) show, for example, that private ownershipclearly performs well in four of nine regulated industries consid-ered (e.g. health-related services) but empirical evidence appearsgreatly divided in the five other sectors (e.g. electric utilities, water,refuse). Shirley and Walsh’s survey (2000) reports the same am-biguous results in regulated industries.

Our aim in this paper is thus to contribute to this longstandingdebate by analysing the determinants of the performance differen-tial between the private and public management of UPT in Europe.We present a detailed comparative analysis of these two modes ofgovernance to shed light on the following question: Do the differentmodes translate into differences in performances? In other words,does one specific mode of governance systematically outperform?

In this paper, we focus on the impact of the mode of governanceon operating costs since, as underlined by De Borger et al. (2002:p. 18), ‘‘independent of the achievement of broader goals defined interms of passenger transit services actually consumed, supplying busservices in the least costly way may be considered a reasonable re-quirement for operators’’. Our theoretical analysis supports the viewthat in the UPT sector, private management is associated witha lower operating cost of service. We show, however, that the size ofthe performance differential can depend on the conjugate effect oftwo elements, namely the local authorities’ capacity for expertiseand the private operators’ autonomy margin. In particular, theremight be very little difference in operating costs between publicand private management in a context where the local authority hasa low capacity for expertise while the private operator has a highdegree of autonomy. Hence, given the level of transaction costsassociated with private management, there could be situationswhere private management shows higher total costs of service. Inour opinion, this theoretical result should temper previous

4 Source: European Commission-DG Energy and Transport (2003).

empirical studies showing that UPT services are more efficientlyprovided by private operators. Hence, the striking policy implica-tion of our analysis, in terms of total cost, is that no systematicadvantage should be expected from any one specific mode ofgovernance. Additionally, our theoretical analysis highlights thatthe ownership regime might be of little relevance per se to explainthe performance differences in UPT. It is worth noting that, despitethe existence of numerous studies on public vs private issues inEuropean UPT networks (see, for example, Jorgensen et al., 1997;Kerstens, 1996; Roy & Yvrande-Billon, 2007), little attention hasbeen devoted to the fact that the term ‘‘private management’’covers, in fact, important differences in the role of private opera-tors. One aim of this paper is therefore to extend previous researchby considering the impact of the allocation of responsibilities be-tween the organizing authority and the operator.

The paper is organised as follows. In Section 2, we discuss thetheoretical reasons explaining why private management should beassociated with lower operating costs of service. Section 3 focuses onthe determinants of the size of the performance differential betweenthe two modes of governance. Section 4 draws some conclusions.

2. Why is private management expected to outperform publicmanagement of urban public transport services?

According to the theoretical literature on corporate governance,the main argument supporting the view that the production iscarried out less efficiently in public companies is related to theweakness of the internal and external control mechanisms of thefirm manager, designed to align the interests of managers andowners. Indeed, modern firms, either public or private, separateownership and management of the day-to-day operations (Berle &Means, 1932). Since managers’ interests can significantly differfrom those of the owners and efforts may be hardly observable, anagency problem emerges between the two groups.

2.1. Internal control mechanisms

The main internal control mechanism is the monitoring by theboard of directors, exercised via two broad types of instruments:the definition of the incentive scheme and the selection/dismissalof the manager. More precisely, since the actions of the managermight be hard to observe for the board, it might offer a perfor-mance-related contract, specifically designed to create managerialincentives to undertake actions consistent with the owners’ ob-jectives. For this purpose, managers’ compensation may includebenefits from shares or stock options, for example. In addition, theincentive contract might also include a threat of dismissal if per-formance is perceived as unsatisfactory.

The board of directors undoubtedly serves an essential role inpromoting efficient management, but both theoretical and em-pirical studies have highlighted that there are reasons to doubt itseffectiveness. For example, Shleifer and Vishny (1997) argue thatperformance-related contracts may create important self-dealingopportunities for the managers, resulting in important mis-allocations of owners’ funds.5 This argument might be related tothe ‘skimming view’ (Crystal, 1991), according to which thegreater the manager’s discretion (i.e. the weaker the governancemechanisms), the greater the probability that the separation ofownership and control will allow him to influence the pay-settingprocess. Bertrand and Mullainathan (2001), focusing on 51

5 An important point to mention is that this monitoring problem will be moreserious if ownership is diffused. Indeed, given that monitoring efforts are costly, themore dispersed the ownership, the higher the probability that each member of theboard will have an incentive to free-ride.

Table 2Cost coverage ratio of 28 European networks in 2001a

25

0

50

75

100

Bru

ssel

s

Rom

e

Tur

in

Am

ster

dam

Nan

tes

Lyo

n

Rot

terd

am

Mila

n

Ber

lin

Cle

rmon

t Fer

rand

Lill

e

Vie

nna

Mar

s ei

lle

Stoc

khol

m

ME

AN

Ham

burg

Hel

sink

i

Lis

bon

Val

enci

a

Stut

tgar

t

Mad

rid

Osl

o

Mun

ich

Ath

ens

Cop

enha

gen

Bar

celo

na

Sevi

lle

Lon

don

Dub

lin

a Source: International Association of Public Transport (2005).

6 Gabaix and Landier (2006: p. 19) underlined that ‘‘poor governance does increaseCEO pay, but the effect seems small’’.

7 See Berechman (1987); Berechman and Giuliano (1984); De Rus and Nombela(1997); Dalen and Gomez-Lobo (2002); Fillipini and Prioni (2003); Gagnepain(1998), Karlaftis and McCarthy (2002); Karlaftis, McCarthy, and Sinha (1999a,1999b); Matas and Raymond (1998).

M. Amaral / Research in Transportation Economics 22 (2008) 85–90 87

American oil companies between 1977 and 1994, provide em-pirical support for this view. They show that, in certain circum-stances, managers are partly rewarded for luck, i.e. for ‘‘[positive]changes in firm performance that are beyond the CEO’s control’’ (p.901). Additionally, they find that ‘‘the better governed firms pay lessfor luck’’ (p. 903); that is, that the governance structure affects themanager’s compensation sensitivity to perform. In particular, theyprovide evidence that the relationship between the pay and themanager’s performance depends on several factors: the size of theboard, the proportion of insiders on the board and the number oflarge shareholders on the board. These results are consistent withprevious empirical studies on corporate governance issues(Chance, Kumar, & Todd, 2000; Harvey & Shrieves, 2001; Newman& Mozes, 1999).

Despite the problems associated with internal control mecha-nisms in private firms, one could argue that the limits of thesedisciplinary mechanisms are more serious in public firms, leadingto higher management discretion and poorer performances. Twomain reasons may explain this relative weakness. First, politicianscould use public firms to meet political objectives, at the cost ofinefficient operations of the public firm. For this reason, the nom-ination process of the public firm’s manager could, for example,depend on political pressures rather than the assessment of his pastperformances. Second, one could consider that, in public firms,ownership is highly diffused since all citizens are owners resultingin more significant corporate governance problems. These prob-lems, coupled with the fact that information on performance can behard to collect in the public firm, explain why public firm ownershave very little incentive to monitor the managers.

2.2. External control mechanisms

Three main external control mechanisms have been identifiedby theoretical literature on corporate governance (Charreaux,1997). The first external source of discipline is the product market(Hart, 1983). The underlying argument is that, in a competitiveproduct market, inefficient firms will experience shrinking profitsor losses. As a consequence, a competitive market reduces theopportunity for managers to engage in managerial slack and pro-vides managers with incentives to maximise shareholder value.A second external mechanism is the financial market (Hart, 1995). Itmight indeed be considered as a powerful mechanism for disci-plining managers, via the resulting threat of takeovers and bank-ruptcy weighting on the managers and the quality of information

provided on performance. At last, a final external constraint arisesfrom the market for corporate control, which could be defined as ‘‘amarket in which alternative managerial teams compete for the rightsto manage corporate resources’’ (Jensen & Ruback, 1983: p. 6). Arecent paper by Gabaix and Landier (2006) provides an interestingcontribution on this issue, showing that the market for corporatecontrol could impose tight constraints on manager behaviour andthat high CEO compensation might not be a reflection of manage-rial rent-extraction and poor corporate governance mechanisms.6

According to the authors, the level of the chief executives’ com-pensations is rather the result of competitive pressures on themarket for corporate control.

In public firms, managers could have fewer incentives to pro-mote efficiency since they are usually faced with softer budgetconstraints (Kornai, Maskin, & Roland, 2003). Besides, public firmsdo not issue shares to the public and, thus, are not exposed topressure from the financial market (i.e. to the risk of takeover).Finally, financial information on public firms is usually scarce andincomplete, thus making the proper evaluation of the manager’sperformance difficult.

Given the relative weakness of the internal and external controlmechanisms in public firms, private firm’s managers are supposedto have fewer incentives to deviate from profit maximisation thantheir public sector counterparts. Furthermore, beyond this firstargument, two other elements may explain the performance dif-ferential between the public and private management of UPT. First,private management allows local authorities to benefit fromeconomies of scale made by private operators whereas in the UPTsector, public firms are usually confined in the perimeter of theirlocal authority’s urban area. Numerous studies provide empiricalsupport for this argument in showing the existence of such econ-omies in UPT.7 Besides, cost economies could accrue due toa broader range of services provided by private firms. Indeed, mostUPT private firms in Europe are providers of several public serviceactivities. For example, First Group (UK), National Express (UK),Stagecoach Group (UK), Keolis (France) combine regional rail and

M. Amaral / Research in Transportation Economics 22 (2008) 85–9088

urban bus transport. Veolia Environnement (France), in addition toits transport division, provides water, energy and waste manage-ment services. Second, several empirical studies on UPT havehighlighted that the bus drivers of private contractors receive lowerwages and/or fewer benefits than those of public firms. De Rus andNombela (1997: p. 119) underlined, for example, that in the urbanbus industry in Spain, wages paid by public firms were 18.3% higherthan in private firms. Moreover, private operators are expected tobenefit from more flexible working rules: since, for instance, thedemand for public transit presents high variations during a day, thepossibility of splitting work hours can avoid high costs of overtime.This is a crucial point, as transit is labor intensive and personnelcost accounts for more than half of a transit operator’s costs.

Therefore, our first proposition is the following:

Proposition 1. Private management shows lower operating coststhan public management.

To go a step further, the next sections analyse the de-terminants of the size of the performance differential betweenthe private and public management of UPT. For this purpose, wepropose a theoretical examination of the conjugate impact of twokey elements: the capacity for control and expertise of local au-thorities in charge of an UPT network and the degree of autonomyof private operators.

3. The size of the performance differential between thepublic and private management of urban public transport

3.1. Local authorities’ capacity for expertise and control

In most European countries, when local authorities turn toprivate sector participation, they select the contractors througha tendering process. More precisely, this procedure aims to assignthe exclusive right to offer public transport services for a limitedperiod of time, through competitive procurement.

The efficiency of the ‘‘franchise bidding’’ solution initially pro-posed by Chadwick (1859) and popularized by Demsetz (1968) hasbeen largely criticised by many studies, and particularly in trans-action cost economics (Goldberg, 1976; Williamson,1976). What weemphasize in this section is that the central issue underlying thedifficulties associated with the ‘‘franchise bidding’’ solution is thelocal authorities’ capacity for expertise and control.8 We emphasizethat it is a fundamental condition for the efficiency of the com-petitive tendering mechanism. As highlighted by a report by theFrench revenue court (Cour des Comptes, 2005) and a recent paperby Yvrande-Billon (2006), this issue is revealed to be particularlysignificant in the UPT sector.

The first problem identified by the transaction cost economicsframework (Goldberg, 1976; Williamson, 1976) is related to theeffectiveness of the ex ante competition between the bidders. In-deed, local authorities in charge of the organization of public ser-vice must choose between bids that incorporate not only the pricebut also a qualitative dimension and consequently, the awardingcriteria may be difficult to set out. Local authorities may, for ex-ample, care about some aspects of the service quality that cannot befully specified (e.g. comfort, security, cleanliness) and, as a conse-quence, the award criterion may be ‘‘artificial or obscure’’ (Wil-liamson, 1976: p. 80). In such a case, the attribution process is likelyto induce a low degree of ex ante competition because of the un-certainty surrounding the attribution process. In addition, if the

8 The capacity for expertise and control may, for instance, be proxied by the rationumber of employees of the organizing authority over the size of the network, thelocal authority’s staff qualifications, the ratio of financial resources over the net-work size and, to a less extent, the date of creation of the public transport authority.

local authority fails to precisely characterise the service put totender, competitive procurement may lead to situations of adverseselection, since bidders may have strong incentives to submit un-realistic bids, anticipating that the misspecification of the servicewill allow them to renegotiate the contract (Bajari, McMillan, &Tadelis, 2003). Also, inadequate service specification may createsignificant selection bias in favour of optimistic candidates, leadingto winner’s curse problems. Rational bidders might thus submitmore conservative bids, resulting in a higher level of subsidy. Fi-nally, a lack of technical expertise will prevent the franchisor fromproviding incumbents with accurate and reliable informationconcerning the network (e.g. quality of the infrastructure and therolling stock) and this may create strong uncertainties with regardto future operating conditions. These uncertainties are likely toincrease the final level of compensation since private contractorsmay incorporate the resulting potential adaptation costs into thebids (Bajari, Houghton, & Tadelis, 2007).

The second type of problem associated with competitive pro-curement is related to the crucial questions of contract adaptationand execution. As underlined by Williamson (2002: p. 5), since ‘‘allcomplex contracts are unavoidably incomplete, the parties will beconfronted with the need to adapt to unanticipated disturbances thatarise by reason of gaps, errors, and omissions in the original contract’’and this may create a latitude for opportunistic behaviours andcostly ex post renegotiations (Prager, 1990). The level of the tech-nical expertise of local authorities is an essential point, since it canplay a key role in ‘‘completing’’ the formal mechanisms of gover-nance and, thus, in limiting the problems arising at the executionstage. In other words, a high capacity of expertise could prevent thelocal authorities’ franchisee from exploiting the ‘‘blanks’’ left in thecontracts. In addition, when there is a lack of capacity in expertise,the local authority will have a difficult time to collect accurate datato properly supervise the private operators and set up crediblethreats of sanction. In other words, if the data collected is not ac-curate enough, local authorities will be in a weak position withprivate operators and, as a consequence, sanctions and penaltyclauses included in the contractual arrangement may not be cred-ible. Moreover, the lower the local authority’s capacity for expertisethe higher the probability that ex post renegotiations will turn tothe private operator’s advantage. Indeed, in such a case, in-formational asymmetries could prevent local authorities fromdetecting opportunistic behaviour during renegotiation and,therefore, from achieving an efficient adaptation of the contractualagreement. Hence, one could assume that as long as the local au-thorities’ capacity for expertise and control is weak, there would beno incentives for private operators to improve performance andthey may engage in ex post opportunistic behaviour.

A third type of issue in the competitive tendering mechanismemerges at the contract renewal stage. Indeed, as underlined byWilliamson (1976), if the winner of the first competition gainedreal information advantages from incumbency, it is likely thatintensity competition for the field might be weak at the contractrenewal stage. In the UPT sector, incumbents may benefit fromsuch advantages since they have, for example, a better knowledgeof the operating costs of the service provision, the characteristicson demand and the amount of investments in physical assetsrealised. However, this lack of parity could be attenuated if localauthority had, for example, the capacity to set up a precise rulegoverning the way assets must be transferred and to providenon-incumbent bidders with accurate information on the char-acteristics of the service to be provided.

Hence, our second proposition is the following:

Proposition 2. The higher the local authority’s capacity for ex-pertise and control the lower the operating costs of privatemanagement.

Larger competence area of privateoperator

Higher probability of opportunistic behavior

Increase in degree ofautonomy

Positive effecton performances

Negative effecton performances

Fig. 1. Effects of an increase in the degree of autonomy of private operators onperformances.

Private operators degree of autonomyoperators ( )

Low High

Low

High

+++

-

++

+

Local authorities' capacityfor expertise and control( )

Fig. 2. The conjugate effect of private operators’ degree of autonomy and the localauthorities’ capacity for expertise on performances.

M. Amaral / Research in Transportation Economics 22 (2008) 85–90 89

3.2. Degree of vertical integration

European urban transport networks are characterized by thediversity in their degree of vertical integration, i.e. in the number ofactivities delegated to private operators. For example, dependingon the network, private operators may be involved in activitiesrelated to marketing, information to passengers, promotion andinvestments in rolling stock. In addition, they can also play a keyrole in suggesting and bringing solutions to the defined serviceproblem (routes, schedule, travel time, fares, etc.). For several rea-sons, differences in the allocation of responsibilities between localauthorities and private operators may explain the observed differ-ences in performances between the European networks.

Indeed, on the one hand, one could assume that an increase inthe autonomy margin (that is, a decrease in the degree of verticalintegration) allows local authorities to benefit from managerialskills and technical expertise of private operators, thus potentiallyimproving performances. Consider, as an example, the investmentsin physical assets. When these investments are made by local au-thorities, bidders face an uncertainty regarding the quality of thesephysical assets, which could translate into higher levels of selectedbids and/or a decrease in the number of bidders. In addition, theholding of property rights by local authorities creates a strongconstraint both on the production factor combination, and on thesubstitution possibilities between maintenance and the acquisitionof new vehicles.9 Finally, it reduces the incentives for technologicalinnovation while it could contribute to the improvement of eco-nomic performances.

However, on the other hand, an increase of the autonomymargin may have a negative effect on performance, since itmechanically creates a latitude for opportunistic behaviours. Thesetwo counteracting effects are illustrated in Fig. 1.

We assume that the prevailing effect will depend on the localauthority’s capacity for expertise. Indeed, an increase in the degreeof autonomy of the private operators may have a positive impact onperformance only if the local authority has the capacity to ensurethe effectiveness of the competition, the ability to supervise thefranchisee and to set up credible sanction threats. On the contrary,if the local authority fails to precisely specify the service to besupplied and is unable to carry out an efficient monitoring of theprivate operators, an increase in the autonomy margin may resultin poorer performances. Hence, we conjecture that:

Proposition 3. The effect of an increase in the private operators’degree of autonomy on performance is positive only when the localauthorities’ capacity for expertise is high.

Propositions 2 and 3 can be formalized as follows: the localauthorities’ capacity for expertise is noted a and the private oper-ators’ degree of autonomy b. For simplicity, we assume that thelocal authorities’ capacity for expertise can only take two values:

9 In the UPT sector, input substitution is possible since, for example, buses ofmore recent vintage generate lower costs of maintenance and less fuelconsumption.

high ðaÞ or low ða Þ. Similarly, we assume that the private operators’degree of autonomy can only take two values: high ðbÞ or low ðb Þ.Hence, there are four possible couples (a, b). Performance (Y) ofprivate management is then given by:

Y ¼ f ða;bÞ (1)

From proposition 2 we have

f ða; b Þ3f ða; bÞ and f ða; bÞ3f ða;bÞ (2)

Moreover, according to our third proposition, we have

f ða; bÞ3f ða; b Þ and f ða; bÞ3f ða;bÞ (3)

Hence from Eqs. (2) and (3) we have

f ða; bÞ3f ða; b Þ3f ða; bÞ3f ða;bÞ (4)

Thus, according to our theoretical analysis, the performance dif-ferential between public and private management should begreater when both the local authorities’ capacity for expertise andcontrol and the private operators’ degree of independence are high.On the contrary, very small operating costs’ differences should beobserved between the two modes of governance when the fran-chisors’ capacity for expertise is low while the autonomy margin oftheir franchisees is high. These results may be illustrated by thefollowing figure, which contains four regions indicating the per-formance associated with each couple (a, b) (Fig. 2).

4. Conclusion

Our objective in this paper was to contribute to the analysis ofthe relative efficiency of the public and private management of theurban public transport sector in Europe. Our theoretical analysishighlights that, in certain circumstances, the transaction cost dis-advantages of private management could outweigh its productioncost advantages. Hence, the main policy implication of our analysisis that, in terms of total costs, there is no absolute advantage of anyspecific mode of management. We show that comparative perfor-mances of public and private management can strongly depend onthe interaction between two elements: the local authorities’ ca-pacity for expertise and the franchisees’ degree of independence.We created an original dataset gathering information on large Eu-ropean UPT networks in order to test this theoretical proposition.

M. Amaral / Research in Transportation Economics 22 (2008) 85–9090

It is worth underlining that, beyond the ownership structure,other organisational variables can also play a key role in explainingthe performance differential between the private operators. Indeed,several recent empirical studies have, as an example, highlightedthe positive effects of high-powered incentive regulatory schemeson the transport operator’s performance (Gagnepain & Ivaldi, 2002;Buzzo Margari, 2007; Roy & Yvrande-Billon, 2007).

One of the main drawbacks of our analysis is that the perfor-mance of urban public transport cannot be reduced to its operatingcost dimension. In particular, the impact of the mode of governanceon quality still remains an open question. This crucial issue must beexamined, since numerous theoretical studies have highlightedthat efforts to reduce operating costs may have an adverse effect onquality (Hart, Shleifer, & Vishny, 1997). Further analysis is thereforerequired to refine the analysis of the trade-off among modes ofgovernance in the UPT sector.

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