Kennedy, David
(1996)
The economics of London bus tendering.
PhD thesis, London School of Economics and Political Science.
Abstract
Following a period of rising costs, competitive tendering was introduced to the London bus industry in 1984. This thesis is an economic analysis of the impact of tendering on London bus services. Chapter 1 states the aims and objectives of the thesis in the context of the economics literature. The chapter is divided into two sections. In section 1 the literature is drawn upon to provide an economic interpretation of the state of the London bus industry prior to the introduction of tendering, and to provide an economic context for the introduction of tendering. In section 2 literature relating to the design of a tendering process is summarised. The focus is on the auction aspect of the tendering process and some important dimensions of contract specification. The impact of tendering on costs is analysed in chapter 2. Three questions are asked: What is the cost structure of the competitive London bus industry. Is there any evidence of strategic bidding behaviour as predicted by the auction theory literature. What level of cost saving can be attributed to tendering. The analysis is based on the full set of bid data from London bus tendering over the period 1985-1993 and is econometric in nature. The results are: there is no statistically significant difference in costs of operation between public and private sector operators under competition; bidding behaviour conforms to some features predicted by theoretical models; the estimated cost saving from tendering is 20%. Chapter 3 evaluates the impact of tendering on the demand for bus travel in London. The relationship between demand and service quality is estimated, gains to tendering are attributed in accordance with the increased service quality due to tendering. A statistically significant relationship between demand and service quality is found. The lowest estimate of revenue gained due to tendering is 9.6 million over the period 1987-1992 in 1992 prices. Chapter 4 estimates the welfare gain due to tendering, defined as the sum of changes in producer and consumer surplus due to tendering. The estimated welfare gain due to tendering is between 90 and 380 million over the period 1987-1992 in 1992 prices. An appendix to this chapter analyses the relationship between welfare and the type of contract upon which tendering is based. It is argued that a cost contract is preferable to a bottom line contract. Chapter 5 is based on an in depth series of interviews with key actors in the London bus industry. The aim here was to find out things that cannot be inferred from the data. Areas discussed include: the extent to which tendering as opposed to other factors led to change in the London bus industry; the source of cost savings; the impact of tendering on Labour; problems associated with tendering. Interviews suggested that: cost savings stemmed from wage reductions and productivity gains; there are some problems with the bidding process; there is a tension between bus planners and some bus company managers. In certain cases the tendering authority offered contract for tender in bundles. Chapter 6 analyses this policy from theoretical and empirical perspectives and asks was it optimal for the tendering authority. It is concluded that the policy should not be used by London Transport. Finally, in chapter 7, an overall assessment of the tendering process is presented. The focus is on results and policy implications for bus tendering in London and competitive tendering in general.
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