The Department of Business Administration from the University Complutense of Madrid together with the University has conducted a study that provides the keys to promoting quality in public transport. The study sets out to mimic market-oriented solutions from the private franchise chains to increase the quality of service provided by operators of transport solutions including, for example, the threat of loss of income or quasi-rents to stop opportunism franchisee. The study based its arguments on the complementarities between different control mechanisms and the similarities between franchise agreements and concessions.
The authors of this study recommend the inclusion of incentive schemes in contracts with transport operators as the best way to ensure a high quality service from them. The inclusion in contracts such incentive systems add value by reducing the chances that operators act opportunistically, particularly as regards the quality of the service. The formula proposed by this study is based on that used in the franchise agreements, and popularity of the franchise model in recent decades is sufficient evidence of its effectiveness. This formula rewards those operators providing the best service – estimated by inspection and feedback from passengers – with contract renewals and offers new concessions.
Moreover, the formal duration of contracts should be reduced to five years, which would increase the frequency of renewals, and therefore the assessments. This will promote the need to strengthen management of the operator’s reputation and make more effective the incentive system. In addition, transit authorities develop a system of inspection and monitoring to provide information on the views of passengers about prices, schedules, and service within and outside the vehicle. This information is crucial to measure the reputation management of the various operators and it would decide on the renewal or otherwise of the various contracts. On the other hand, transport authorities would reserve the right to terminate contracts with immediate effect in cases in which service inspections reveal serious violations. Finally, it should be limited to three the maximum number of automatic renewals to keep the market open to competition.
For this system to function properly fulfill two critical conditions. First, it must develop a monitoring and evaluation system effective. The authorities should invest the necessary resources to ensure that the system works correctly. Second, operators must be sufficiently motivated to maintain the concessions. To do this, you must ensure adequate benefit level – one that make it attractive both to remain in the current lease as the search for new concessions. Also one must remember that in this case at least, direct supervision and incentive systems are complementary: a good and reliable monitoring will enhance the effectiveness of the incentive system.
Although this proposal is based on private contracting, is in line with those who see the need for alternatives to the inefficient solution of competitive bidding in contexts where contracts are complex and generate high transaction costs. Promote the inclusion in contracts of factors in service quality is clearly one of these contexts, and franchise agreements provide an example of how this can be done.