Rail Concessions and Getting Expost Economic Governance Right

Case Studies

Dec 4, 2009 — Neil Boyle

Eight public private partnership concessions in four countries were analyzed by a sector specialist and then reviewed by the author using [A]TCE as framework. These railway concessions consisted of specialized interfirm intermediate product transactions occurring in an environment of recurrent bargaining and changing market circumstances. Under these circumstances, we would expect to find high implementation costs and risks. While these, in general, are the findings we encountered, resource constraints limited the opportunity to probe consultant’s studies in depth. 

  1. Comparative governance costs correlate with independent report of success and failure;
  2. Scopes of concession agreements focused mainly on ex-ante promises and incentives and less on expost governance ;
  3. Concessions did not acknowledge that contracts were incomplete nor made provision for dealing with residual rights; 
  4. Maladaptation risks or their financial costs were not accounted for contractually nor was there evidence that preventive institutions or mechanisms were inserted into contracts; 
  5. Most analyses were focused at the polity level and excluded microanalytical observations;
  6. The higher the cost of governance, the more complete the failure of the concession;
  7. We know from [A]TCE that railway transactions (investments involving rail infrastructure, rolling stock, switching and maintenance yards and operations and maintenance assets) are site specific and specialized investments, which in an uncertain environment, create “bilateral dependencies” among the contract parties.  This is a condition that creates unrelieved contract hazards that require cooperative adaptation by both parties to mitigate risks. We found little evidence of cooperative adaptation specific to the concessions;
  8. Governance costs were significant in all concessions, except one. The exception was the vertically integrated concession.  Under these conditions we would expect to find higher managerial capacities in the vertically integrated concession than in the interfirm contracted concessions.  There was insufficient time to further probe this assertion.
  9. International competitive bidding prevailed in all concessions except the one concession that was vertically integrated. This raises a question about maladapted institutional environments. Could it be that alignments of the incentives of the various parties were better and more consistent under vertical integration and hierarchy control?
  10. Scope for private ordering was minimal. Many problems facing concessionaires were beyond the scope of the parties to do anything about because of distorted rules of the game and a maladapted institutional environment;
  11. Principal thrust of railway concessions was privatization within a growing and changing competitive transport markets with little effective regulation;
  12. Rail concessions were promises of future economic and institutional performance in exchange for immediate physical and financial investments, whose expected supply values were not forthcoming due to contract hazards, semi-credible commitments, and asymmetrical capacities of the parties.  Under these conditions we would expect to find hazards of the autonomous bilateral trading kind.  We found this was the case in more than half of the concessions. 

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