Deregulating the Norwegian railway: a survey of empirical experiences abroad

2015

Portraying implications of deregulation, this thesis presents an extensive review of

deregulation in the European railway. It targets various decision variables concerning the

introduction of competitive tendering in the rail industry. This thesis attempts to take a

pragmatic stand offering an improved understanding vis-à-vis on decisions that have yet to be

made, concentrating on possible competition forms, auction designs and contract designs. It

offers learning points and trade-offs that can help improve decision-making. One key learning

point is that the introduction of competitive tendering has typically increased efficiency.

However, this is made more problematic if the operating companies are obliged to take over

staff at current wages and conditions. Issues concerning opportunistic behaviour and the

winner’s curse appear to be present in many competitive tendering of rail franchises in Europe.

Government’s willingness to renegotiate contracts increases the propensity of opportunistic

behaviour. Furthermore, the risk of the winner’s curse is higher in initial rounds. Available

information empowers sound assumptions, which can reduce this risk. Auctions are commonly

used together with elements resembling Beauty Contests. As Beauty Contests are politically

controversial and can lead to a less efficient supplier winning the franchise, the criteria and

their weighting should be specified and made available to all potential bidders. A final key

finding in this thesis is that management contracts are harmful for efficiency. Certain decisions

represent trade-offs, where the regulator does best by evaluating the options based on the

primary objectives he want to accomplish. Competition in the market can be used

supplementary to competitive tendering, but it may come at the price of higher unit costs for

each operator. The chance of the winner’s curse is reduced by allowing firms to observe each

other’s behaviour; however, this increases the chances of collusion between the firms. The

number of criteria specified before an auction need to be evaluated against ensuring an

acceptable standard on the one hand, and on the other, avoid micro-management. Net contracts

encourage mostly improved commercial effort, whereas gross contracts result in improved

productive effort. Contract duration need to be balanced between desires to keep costs low,

competition high and encourage investment. Finally, contract size is determined by the want

to exploit scale economies on the one hand, and on the other to allow for more competition.

The various findings outlined imply that aligned decisions may enable fulfilment of the

government’s primary objectives of the deregulation.