Implementing Performance-Based Quality Contracts in the Bus Sector: Growing Patronage and Post- Transitional Arrangements

In a recent paper Hensher and Houghton (2003) presented a formal economic framework for establishing an incentive-based performance contract regime to determine value for money in subsidy support for the provision of bus services. An important feature of the performance-based contract (PBC) regime is a passenger tripbased incentive payment scheme linked to user and environmental externality benefits, incorporating a subsidy per additional passenger trip above the patronage delivered under agreed minimum service and fare levels. Incentive -based rewards to operators linked to system-wide maximisation of social surplus are revealed through the fare box, through increased consumer surplus and through reductions in negative externalities associated with car use. The implementation of PBCs in Hensher and Houghton (2003) focussed on the transition phase of contract reform in which we established a performance-based solution under the existing subsidy support levels and operating environment. In this paper we relax a number of transitional constraints within acceptable limits (such as the cap on subsidy budget and a new requirement that the operator delivers services at benchmark best practice cost efficiency) and evaluate scenarios in markets in which an operator has opportunities to grow patronage to various degrees. We outline the practical steps in implementing a PBC regime when we move from conceptualisation to practice including a consideration of the link between PBC’s and cost-plus contracts. Paper prepared for the 8th International Conference on Competition and Ownership of Land Passenger Transport (Thredbo 8), Rio de Janeiro, September12-19, 2003