Transport services in the twenty-first century: Seamless market or choiceless churning?

Transport services in the twenty-first century: Seamless market or choiceless churning?

Christopher Willoughby
(Transportation, Water and Urban
Development Division, World Bank)

Symposium on the Social and Labour Consequences of Technological Developments, Deregulation and Privatization of Transport

Discussion Paper No. 3

Geneva, 1999

Discussion papers are preliminary documents circulated
to stimulate discussion and critical comment

1. The last quarter of the twentieth century has seen vast change in the transport sectors of many countries, imposing much dislocation on both people and companies engaged in the provision of transport services. Some of the problems have resulted from macroeconomic instabilities like the Asian financial crisis of 1997, but most have been the product of changes within our own industry. These sometimes harsh transformations have contributed much to broader social welfare by strengthening exporters' competitiveness significantly, by making possible improvements in the variety and price of goods available to local consumers, and by reducing the burden of transport on government budgets.

2. Transport has not of course been unique; many other economic sectors have faced the need for vast adaptation to new trends in the growth of the world economy. Three underlying forces have been dominant:

3. These forces show no sign of slackening. If the world economy can continue to adapt successfully to them, then traffic will continue to increase strongly -- and especially so in the developing and transition economies, reflecting both the huge poverty backlog to be overcome there and the higher GDP growth rates those countries are capable of. Indeed, just as falling relative costs of transport and communication have been a major cause of globalization and the growth it has generated, so the further service improvements that we in the transport sector are capable of could give a renewed boost to growth of incomes and employment more generally.

4. In light of the way those broader forces are affecting them, what our customers are demanding of us, as a service industry, is a "seamless transport market", in which national and modal boundaries neither delay movements nor hinder the choice of the most appropriate route/mode combination for the movement required. I believe the challenge of creating such a seamless market will continue to occupy us throughout the twenty-first century, but enormous progress can be made on it even in the first third, the period I have mainly in mind.

5. The main threat to that progress is what I call "choiceless churning": the inability of the concerned social and political forces to confront visible challenges and generate clear decisions, which in turn increase the choices available to operators and customers. Well-known examples are the 20-year delays in coming to grips with the railway problems so much discussed through the 1960s and 1970s in Japan and the United States. But choiceless churning is certainly not a monopoly of the railways sector, nor even of government. The prolonged underspending on road maintenance that so many countries have suffered from and the failure of the private sector in many cities to generate a reasonable, competitive system of public transit are equally widespread, if less dramatic, examples of the same phenomenon.

6. Despite the unfortunate delay in coming to grips with its railway problems, the United States has in many ways been the leader in introducing more market forces into transport services, with the major deregulation efforts of the late 1970s and early 1980s simultaneously in air, bus, rail and truck transport. Those reforms are generally considered to have been highly successful from the viewpoint of results for the consumer. The ultimate consequences for labour are also by now fairly clear. Overall employment in the transport service sector has increased about 40 per cent over the 17 years since deregulation, twice as fast as in the preceding 17 years and, despite significant drops in individual modes, some 60 per cent in the case of direct employment by the railways. Compared with economy-wide averages, wage and benefit levels have fallen in for-hire trucking, dropped slightly in airlines and remained steady in railways, but in all three cases offer seemingly appropriate premiums over the economy-wide averages for persons of comparable qualification.

7. Chile is the one other country that liberalized most modes around the same time as the United States. Employment in the transport and communications sector, which had stagnated between 1966 and 1981, grew 90 per cent in the following 15 years -- even though this period also witnessed cutbacks of 70 per cent or more in the staffing of prominent individual enterprises, such as the railways, ports and the national airline.

8. These historical experiences are important to our vision of the twenty-first century because the dominating thrust in the industry is going to be the extension and deepening of liberalization and market competition, greatly reinforced by the tools that emerge from the ongoing information revolution. Liberalizing initiatives were taken by various countries in all parts of the world in the 1980s and spread to a majority of countries in the 1990s. If the last 20 years have been mainly a period for liberalizing national transport markets, the coming generation will be the era for extending the open markets to the regional and international levels. Transport policies and investments have now always to be examined in the regional context.

9. With these large changes in prospect, crucial tasks for governments and societies are to ensure that they are designed in the most promising way for the given national and regional circumstances, and that the efficiency gains sought are not spoiled by seriously adverse distributional consequences of the transformations involved. There seem to me to be six key dimensions to the construction of the seamless market, each of which can be the cause of choiceless churning if these points are not well taken care of.

10. Entry and exit. While some markets are best organized through competitive tenders for exclusive service and others through open competition, world experience now provides very strong evidence of the merits of minimizing the requirements imposed on new entrants to the transport service industry (limiting them essentially to safety and environmental standards, professional competence and financial stamina) and facilitating easy exit in the case of failure. There remain many developing and transition economies where entry still needs to be simplified and where the exit of failing (generally large state-owned) operators has become a priority step in the creation of a competitive transport market. Done in a timely manner, "exit" can take the shape of reform and reorganization; delayed, it involves more disruptive restructuring or, ultimately, rebirth through bankruptcy.

11. Extending appropriate entry and exit approaches from national markets to the regional and international level will be a major issue for the coming years. European Union (EU) countries' air transport and road freight operators now have cabotage rights throughout the Union, and in 1998 Canadian road freight operators gained for the first time limited rights to handle shipments within the United States. A correct balance has to be found in an open regional market between assuring that countries with genuinely lower costs can benefit from that fact in competition and, on the other hand, avoiding erosion of agreed entry standards due to country variations in the rigour of their enforcement. The issue is even more difficult in the case of countries at more widely differing levels of economic and social development, such as Mexico within NAFTA and the EU Accession countries in Europe; entry of Mexican trucks into the United States remains much more restricted than it was expected to be. The European experience in establishing cabotage rights between countries will hopefully lead to a much wider exchange of such rights on an international level.

12. The belief has been rapidly spreading that transport services are best organized in the private sector, and that that contributes to the effectiveness of competition in the sector. Many countries are also highly interested in attracting private investors in these services and related infrastructure, in order to reduce the burden on the government budget. Even in the most state-dominated countries, road freight and inter-city bus services -- and even some urban bus services -- are more and more often provided by the private sector, as in China, India and the former Soviet Union. Almost all Latin American railways and national airlines will be run by the private sector by early in the next century, and the wave of privatization is spreading rapidly to Africa and gradually to Eastern Europe. Initial experience has been very positive, with large increases in efficiency and service quality, and sometimes in traffic, and substantial reduction in the budgetary burden. Major staff retrenchment is often involved, and this needs careful preparation and execution to avoid undue suffering and facilitate reabsorption into other jobs. The problem seems to have been handled particularly well by the Brazilian Federal Railways (RFFSA) largely because of extensive advance planning, in response to strong union concern, and transparency in the concessioning transactions.

13. The evidence from the United States since liberalization suggests that the overall structure that may emerge in the large competitive, open market areas that more and more world regions are aiming at would tend to consist of a few dominant carriers, with a large number of small niche operators of one sort and another. Vigilant anti-trust review, at the regional as well as the national level, must analyse proposed new structures pragmatically to ensure maintenance of "workable competition". An area that needs particular attention even in some of the middle-income countries is better inter-agency coordination of regulatory arrangements, to permit timely decisions on initiatives breaking traditional boundaries and combining several modes, and services within each, often along with specific telecommunication services in addition.

14. Pricing principles. A major aim of the liberalization of national transport markets over the last 20 years has been to replace government controls on prices for transport services with normal market controls, i.e. the pressures of competitors and substitutes. Direct regulation of prices could be limited to cases of genuine monopoly and those where society was prepared to pay from the exchequer for the provision of services at prices below cost. The notions that public service obligations have formally to be recognized and compensated (rather than covered out of vaguely sourced cross-subsidies), and that such compensation should only be provided when the service contracts have been won competitively, have gained increasing acceptance in principle. In most of the developing and transition economies, road freight prices are now largely free of effective regulatory controls, but many governments still need to reduce their role in setting prices for bus, rail and air transport. More flexible, yield-management types of pricing that deregulated airlines have used so effectively to increase their load factors are likely to be particularly important for public passenger operators as they develop services to respond to the more variable travel needs of people physically commuting to work less often and hence making other trips.

15. A seamless transport market requires more than merely through tickets, covering stages on different modes, or single bills of lading. It also requires that prices for the use of a publicly provided infrastructure properly reflect costs (including those of externalities, mainly pollution, congestion and accidents caused) -- and demand elasticities in the case of congested facilities -- if competition is to be effective in guiding the user to the most efficient mode for a particular movement. And the principles have to be applied in a comparable way throughout the market. Faced with the emergence of a 15-nation Single European Market in transport and concerned about stimulating more effective intermodal competition, the EU Commission has done path- breaking work towards the achievement of a sound set of pricing principles, especially for the use of infrastructure.

16. The coming years are likely to see much more practical application of these long-discussed, but hitherto little used, ideas, for a variety of reasons including two very important technological ones. First, the information revolution has generated the electronic means which make it possible to reflect costs much more precisely in prices charged for transport. Second, consumers and users are going to become so accustomed, through e-commerce, to flexible, auction-type prices for goods and services generally that they will accept more readily than hitherto the idea, for instance, of paying a premium to avoid traffic congestion. Significant progress will be made in bringing taxes on heavy road vehicles and their operation up to the level of the costs (including externalities) attributable to them. Experiments with auctioning of landing slots and train access paths will also spread. It is highly likely that well before the end of the coming generation preferred approaches will have emerged and will be widely applied.

17. Accessibility. Hundreds of millions of people, especially in the developing countries but some also in the wealthier countries, remain largely excluded from the modern economy, whether as the result of neglected maintenance of publicly owned infrastructure, location in distant peri-urban slums, or still, in some cases, absence of basic transport infrastructure. Outdated local tax systems and deteriorating law and order mean that travellers in many developing and transition economies suffer a fearsome array of legal, semi-legal and illegal inspections and stops. Some landlocked countries still suffer from serious, monopolistic discrimination on the part of their neighbours.

18. While "seamless transport" for people in more isolated areas is obviously not usually going to attain the tight time standards that are feasible and required in denser corridors, the relative improvements that they could experience over the existing situation may often be greater. Many people and areas could benefit substantially from a more rational distribution of the budgetary funds already directed to transport. To help achieve real progress in this area, more governments should follow the example already set by some of setting firm "accessibility targets". Inter-country cooperation on transport in relatively isolated regions -- such as Central Asia, North-East Asia, parts of Africa -- is improving, assisted by UNCTAD and regional bodies. The fact that, at relatively low cost due to the Internet, even the most isolated areas of the world can now for the first time participate directly in bidding for contracts originating anywhere will gradually generate significant effective pressure to improve facilities for physical movements.

19. Logistics. Logistics (integrated analysis and active management of an enterprise's overall supply chain, from sources of inputs to delivery of finished product) and just-in-time (JIT) practices for managing inventories have already had a huge effect on goods transport services in the more advanced parts of the world. They have further empowered the shipper within a liberalized transport market. The combined result for the average United States enterprise is generally considered to have been a reduction in total logistics costs (warehousing and transport) of some 40 per cent. Many specialists, in Europe as well as North America, see the potential for saving up to a further 40 per cent, aided here too by the entirely new possibilities that the Internet has created for open access, at very low cost, to information previously available only on paper or in expensive electronic data interchange systems. Internet in a sense therefore establishes new standards, as well as many new possibilities, for the seamless transport market. The potentials for savings from logistics are obviously at least as great, or greater, in the many developing and transition economies where modern logistics have barely yet been applied.

20. Logistical optimization will become increasingly sophisticated. It tends to increase the premium on reliability and flexibility of the transport services provided. Road freight and air transport have been the main beneficiaries to date. How much railways may ultimately benefit (directly or through multimodal movement) will depend above all on their capacity to offer levels of shipper responsiveness that are competitive with those achieved by transporters long operating in a competitive private sector. Other significant effects in the coming years of customers' logistics concerns are likely to be greater effort around the world to modernize customs and reduce border-crossing delays, and gradual negotiation of a full International Convention on Multimodal Transport, clarifying liabilities.

21. Externalities. A seamless market has obviously also to be an environmentally sustainable one. Yet this presentation has barely referred to what most people would consider the prime transport problem of the twenty-first century -- rapidly rising road congestion in many cities of the OECD countries, and even more seriously in leading cities of the developing world. It is a problem of private cars, rather than of transport services, and can be solved only by measures focusing on car usage. Indeed, to the extent that people can be convinced to leave their cars at home for weekday trips within a metropolitan area, public transport will clearly be the gainer, as has been the case to some extent in London and some other major cities in recent years.

22. Largely as a result of improvements in vehicle and fuel technology, the OECD countries have generally succeeded in reaching the targets they had established earlier for reduction of unit pollution emissions from motor vehicles, and can be expected to continue to do so. The older vehicle parks of the developing and transition economies, and the ineffective enforcement of standards adopted, continue to present a significant problem. Pollution by commercial vehicles -- mainly particulates from diesel fuel and, still in some countries, lead from petrol -- can be reduced to some extent by better maintenance and inspection, and improved quality control on fuel distribution, but the main solution will need to come with fleet renewal.

23. With regard to the reduction of carbon dioxide (CO₂) emissions, the principal contributions currently sought from the transport service sectors are improvements in logistical efficiency (to minimize unnecessary transport) and in service quality (especially on the part of rail and intermodal links) that are sufficient to attract traffic from other more energy-intensive modes. More restrictive measures may become necessary if transport's large and rising share of carbon dioxide emissions is not brought down early in the coming century by advances in vehicle propulsion systems.

24. Infrastructure management. Privatization and concessioning of port landside infrastructures has already proceeded apace around the world, and a similar process is gathering force for airports; specialists predict that already by 2010 most large airports, at least in Europe, will be in the hands of large international companies. Government will nonetheless continue to have a major regulatory responsibility for such public facilities and a direct responsibility for most road infrastructure, much railway infrastructure and many intermodal facilities. There is, however, much optimism in Europe and the United States that, in a context of anyway relatively limited need for expansion of existing networks, the introduction of better charging mechanisms, as referred to above (paragraphs 15-16), will not only generate substantial funds for further investment but will also attract strong private participations in public-private partnerships for construction of major new facilities.

25. In the developing and transition economies, on the other hand, key steps towards the creation of seamless transport markets remain customer-oriented management of infrastructure and finding the capital needed for expansion. Not only is there much more new building and modernization yet to be done, but many countries are coming from a past of prolonged underfunding of maintenance, due to changing priorities for use of national budgets and delays in restructuring their transport sectors. Moreover, experience in liberalizing transport services over the past 20 years has shown that one of the most severe threats to securing the best results from the new competition has been inadequate infrastructure capacity at key points.

26. The most promising solution to these problems, which is attracting an increasing following around the world, is to recognize explicitly the essentially commercial nature of transport infrastructure, to pool the revenues from specifically user charges (i.e. the part of the fuel tax representing charge for use of the road, as opposed to general budgetary contribution or compensation for pollution) in a central fund (road fund or transport fund), and to associate user communities in the management and supervision of the fund and its applications. Such arrangements have had a dramatic effect on the quality of maintenance in a number of developing countries, have helped to bring longstanding problems of vehicle overloading under control, and have made acceptable much-needed increases in user charges. It does not fully resolve the huge problem of capital funding, but it lays a far more promising base for finding a way out.

27. Conclusions. Transport services have demonstrated a good capacity to adapt to the changing needs of the economy when the many people involved in their provision are all stimulated to think of new and better ways of serving customers. The major challenge of the coming century is to create a seamless transport market, for freight and for passengers, on regional and international bases, taking full advantage of the fruits of the continuing information revolution. The major adjustments involved are likely to be no less than those carried through in the last 20 years, but the range of emerging opportunities is expanding rather than receding.

28. The largest threat to the transport community's benefiting fully from these opportunities is choiceless churning of issues, whether within the community itself as a result of modal jealousies or uncertainties about future employment or, as so often, in parliaments and society, reflecting understandable reluctance of people to give up past privileges, however unjustified they may have been. But we of the transport community itself have the greatest interest in being able to discover, exploit, and bring to the benefit of society generally the new opportunities. Hence some suggestions:

Updated by BR. Approved by OdVR. Last update: 28 September 2000.