Competitive tendering versus subsidy schemes in public transport services : comparing efficiency in the provision of ferry services

Like in many countries, Norwegian transport authorities are constantly looking for ways to improve the efficiency in transport services. Some important changes in the incentive systems have been made during the last two decades, with increased attention towards achieving cost efficiency. The aim of this paper is to examine whether such changes have increased the efficiency in the Norwegian ferry sector. In particular, we compare two incentive structures: competitive tendering and subsidy schemeswith annual grants determined by ex ante negotiations between the operators and the authorities. Both these systems are currently in a parallel practice. While until 1996 only subsidies were practised, competitive tendering was introduced in 1996 and in only 6 ferry links. The aim with the partial implementation of competitive tendering was to gain experience and to explore its potential benefits in the ferry sector. With data for relevant ferry links both before and after the implementation ofcompetitive tendering, we have carried out a sound statistical assessment of the two aforementioned incentive regimes. Our results indicate that, although subsidies have increased somewhat, there have been significant improvements in the quality of services such as increased capacity, new ferries, increased frequencies andextended opening hours in those crossings where competitivetendering has been introduced. A rough estimate of the additional production costs associated with these improvements indicates that the competitive tendering process has produced significant cost savings. In addition, such improvements addbenefits to the users, albeit not being estimated in this paper. However, it has been a game with 'winners curse' tendencies, because some of the ferry links have run into deficiency. The tendering process has also provided a yardstick for the remaining parts of the ferry sector not yet being exposedto tender competition. This study was commissioned by the Norwegian Royal Ministry of Transport. The findings have beenreported. The authorities have decided to introduce competitive tendering as a regulatory regime in a larger number of ferry links.