Make or buy urban public transport services: a rational choice?

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Make or Buy Urban Public Transport Services: A Rational Choice?
Miguel Amaral Anne Yvrande-Billon

CES, Université Paris 1

CES, Université Paris 1

May 5, 2009


x In this article, our aim is to study the determinants of the trade-o between inhouse and outsourced utilities provision. More precisely, we focus on the Frenchurban public transport sector. With regard to the issue we are interested in, this case is a particularly rich domain since, in France, the local authorities in charge of regulating the procurement of urban public transport services can choose between direct provision and outsourcing. In this latter case, they even have an additional option since they can contract out the operation of serviceeither to semi-public companies or to fully private rms. Using an original database covering 154 dierent French urban transport networks (out of 210), we estimate the impact on organisational choices of network complexity and of various interest groups' pressure. Our results allow shedding light on the economic rationale behind the choice of a mode of governance. Indeed, although most of theinterpretations of the organizational decisions made by local governments in utilities sectors concentrate on political factors, we show that there are rooms for economic explanations.

JEL Codes: Keywords:

H44, L24, L33, L92

Public and private provision; Contracting out; Urban public transport.


1 Introduction
Since the seminal article by Coase (1937), a large body of the literature inindustrial organization has tried to analyze the rationale behind the organizational choices made by rms. The so-called make-or-buy decision has been the subject of many theoretical developments and empirical works, especially in transaction cost economics and incomplete contract theory . The basic arguments are that the main drivers of vertical integration are the need to securerelationship-specic investments in a context of environmental uncertainty (Williamson1985) and the existence of veriability problems (Grossman and Hart 1986; Hart and Moore 1988). These propositions have originally been made to explain the behaviour of private rms operating in competitive markets. But, they can also be applied to the public sector, and more particularly to utilities (Crocker and Masten 1996).The make-or-buy decision then becomes a trade-o between in-house public provision (via a public bureau for instance) and delegation to a private operator (via a franchise agreement or a PPP contract). The two most common ways that governments can use to provide services are indeed in-house provision using salaried city employees and performance requirements contracts with private sector rms.

1With the waves of privatization experienced in utilities industries since the 1980's and the extensive use of Public-Private contractual agreements, a huge number of theoretical developments have been made in an incomplete contracting perspective to explain the make-or-buy decision in the context of utilities . In this account, the choice between public and private provision of services isdictated by eciency considerations and depends on the level of contracting diculties arising when it is hard to foresee and contract about the uncertain future. But although the question of


when public or private provision of public services is optimal has been extensively dealt with theoretically, few empirical tests have been done so that the ratio empirical tests/models is very low. Arst objective of the paper is to ll this gap by proposing a test of the determinants of local governments' organizational choices in the French urban public transport sector.

A second objective is to introduce political economy considerations in the analysis. Indeed, it is usually assumed that agents have a strong incentive to choose the most ecient mode of governance. Although this...
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