Regulation, deregulation or re-regulation of transport?

Regulation, deregulation or
re-regulation of transport?

Prof. Peter Turnbull
(Cardiff Business School, Cardiff University)

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

Discussion Paper No. 4

Geneva, 1999

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

In the industrialized world transport provision has passed through at least three historical phases. Initially, transport providers were private companies whose activities were subject to various controls imposed by the public authorities. As the twentieth century progressed, transport provision was increasingly brought under public ownership and control (national and/or municipal, federal and/or state). Most recently, from the late 1970s onwards, many transport activities have been returned to private hands under the banner of privatization and deregulation. However, whether transport services are provided by public enterprises or private sector companies, their activities are invariably regulated by a codified set of rules and other restrictions, statutory and discretionary, which circumscribe the freedom of operators to engage as they see fit in economic activities. The purpose, nature, and scope of such regulation will of course differ markedly from one transport mode to the next and from one country to another. The dominant perspectives on (transport) regulation are therefore discussed in section II. The recent process of deregulation is analysed in section III, drawing on examples from civil aviation, rail and road transport. In particular, attention is focused on the impact of deregulation and privatisation on service provision, reliability, safety, costs (labour) and employment conditions as these outcomes lie at the heart of most recent calls for re-regulation. The latter is the subject of the final section IV.

There is no accepted, or at least straightforward, definition of regulation, as the term is used to denote, at one extreme, specific legal mechanisms to make good deficiencies or curb abuses on the part of particular producers or service providers and, at the other extreme, to denote regulatory regimes for an entire economy or particular "type" of capitalism (e.g. free-market or neo-liberal Anglo-Saxon capitalism, social market Rhineland capitalism, and organization- orientated Japanese capitalism).⁽¹⁾ As a result, it is not uncommon to find different interpretations of regulation depending on the level of aggregation (e.g. firm, industry, economy or international) and the country of origin. In Europe, for example, regulation typically refers to the whole realm of legislation, governance and social control whereas in the United States regulation has a more specific meaning, namely the sustained and focused control exercised by a public agency over activities that are generally regarded as desirable to society.⁽²⁾ Policy-makers in Europe have traditionally been more sceptical than their United States counterparts about the efficiency of markets, or at least the ability of markets to function in the absence of recurrent crises, and in many industries the preference was nationalization rather than regulation. Another difference is that while in both continents the principal purpose of regulation has been to protect and promote the "public interest", in the United States there is a preference for specialist, independent agencies that are bestowed with regulatory powers. In Europe, and even more so in developing countries, regulatory power typically resides with the relevant state department or government ministry.

In order to protect and promote public interests, regulation seeks to enhance the efficiency of markets and ensure the provision of social rights. The social basis of regulation, however, is often justified on the basis of an economic rationale. Put differently, social regulation is widely regarded as being secondary to economic regulation.⁽³⁾ The principal economic arguments for regulation are as follows:

The principal social arguments for regulation are to ensure employment security, safeguard workers' terms and conditions of employment, including health and safety, guarantee appropriate training to minimize accidents and maximize productivity and service quality, and provide effective representation of employee interests. In a nutshell, then, regulation seeks to promote both efficiency and equity.

These objectives can be pursued directly through public regulation, via self-regulation, or through self-regulation within a statutory framework.⁽⁴⁾ "Self-regulation" is the watchword of neo-liberals who regard free competition as sufficient to ensure the efficiency of markets. If prices are too high, for example, competitors will enter the market, thereby increasing output or providing alternative services, and prices will then fall. If service is poor, the firm's reputation will suffer, again encouraging competitors and/or the firm itself to improve performance. For neo-liberals, then, competition is always preferred to regulation. Moreover, the principal purpose of regulation is to ensure free competition. Thus, the neo-liberal position can be summarized by the maxim: "Competition where possible, regulation only where necessary".

According to neo-liberals, regulation is only necessary in the event of market failure. Social regulation is not only secondary, justified principally in terms of health and safety or minimum training standards, but is typically regarded as inherently bureaucratic, placing unnecessary constraints and obligations on the firm. To correct market failures, two different modes of regulation are available: structure and conduct regulation. The former has to do with which firms are allowed to engage in economic activities, the latter with how firms behave in their chosen activities.⁽⁵⁾ In brief, structural regulation aims to create a situation in which the incentives or opportunities for undesirable behaviour are removed, whereas conduct regulation addresses not the undesirable underlying incentives but the behaviour that they would otherwise induce. As information on the structure of an industry is generally better than information on firms' behaviour in that industry, and as the latter involves intensive monitoring and enforcement, public agencies often prefer structural rather than behavioural regulation (e.g. restrictions on entry, statutory monopoly, single capacity rules and qualifications, rather than measures to guard against anti-competitive behaviour, price controls, rules against advertising or other restrictions on competitive activity). It can be extremely difficult, for example, to define predatory pricing behaviour, let alone detect and deter such behaviour.

In contrast to the neo-liberal approach, where competition is given precedence over regulation, many commentators of the "social-institutional" school regard free markets as neither natural nor desirable. In this view, markets are conceived as social institutions governed by a set of rules, many of which are framed by the public authorities: "Markets are created by governments, ordered by institutions, and sustained by regulations."⁽⁶⁾ The key question, therefore, is not whether to regulate markets, but precisely what and how to regulate. Regulation, in other words, is not about market failure but the very constitution and definition of the market.

According to the social-institutional perspective, as all markets are deeply embedded in society, regulation must embrace labour as well as product markets, especially as the former can strongly influence firms' behaviour in the latter. For example, if all firms in a particular industry are signatories to a collective agreement, which standardizes basic pay and other conditions of employment, then competition on the basis of labour costs is effectively precluded. Firms must therefore look to reduce costs by improving productivity (via training, flexibility and the like), and seek competitive advantage in the product market through service quality, reliability, punctuality, etc. Such action is widely regarded to be in the "public interest", demonstrating that social "constraints" can be highly productive by promoting efficiency through greater equality.⁽⁷⁾ Thus, regulation enables as well as constrains the activities of service providers. For the social-institutional school, therefore, competition and regulation are complements rather than alternatives. More importantly, the purpose of regulation is "fair competition", which by definition must be socially constructed, rather than "free competition", which typically denotes competition without regulation.

The so-called "holy trinity" of a regulatory framework for fair competition is compliance, legitimacy and trust. According to Wilks, compliance is the lifeblood of regulation: "All regulation relies on the willing cooperation of the regulatory targets who cooperate through respect for the legitimacy of the regulations, and trust in the procedures of the regulators."⁽⁸⁾ Again, the ideal regulatory system would be one enforced through information and guidance (i.e. self-regulation), rather than heavy-handed bureaucracy with threats and sanctions. But legitimacy can only be achieved through a democratic process; hence the importance of involving all potential stakeholders, especially employees, and there must be effective methods of accountability which are open and transparent. Most importantly, trust can only be generated through the creation of shared norms and repeated contacts. If trust is to become a valued resource in its own right, leading to high levels of productivity and lower transaction costs, then according to the social-institutional perspective there must be a commitment to job security and a strong institutional base which provides (statutory) rights for consultation, participation and employee representation. Once again, the explicit interaction, and mutual dependency, of product and labour market regulation is very much in evidence.

In summary, then, whereas the social-institutional school regards regulation as inherent in all markets, neo-liberals advance a more limited role for regulation in the event of market failure. Even in those markets where neo-liberals accept a positive role for regulation, as in many transport markets, in recent years they have proclaimed "regulatory capture" where the regulatory body established to protect consumer interests equates the "public good" with the interests of the industry it regulates. This argument was made very forcibly in the case of United States civil aviation⁽⁹⁾ in the 1970s, for example, and lies at the heart of recent deregulatory measures in many other transport sectors throughout the world. In the 1980s and 1990s the prevailing view of organizations such as the World Bank, IMF, OECD and many national governments was that markets are better at meeting needs than planning, and private companies are better at delivering goods and services than the public sector.

Strictly speaking, the term "deregulation" is a misnomer: deregulation does not signal the end of regulation, especially in crucial areas of transport such as safety, and deregulatory measures are invariably accompanied by new and often more explicit regulatory structures. In the United Kingdom, for example, following the privatization of public utilities the State established more effective control over some aspects of these industries than the previous indifference associated with nationalization.⁽¹⁰⁾ In many cases deregulation signals a change of emphasis between structure and conduct regulation, or a functional separation of ownership, operation and regulation. For example, the State may continue to own a particular transport service (as the principal shareholder) but a private company now runs the operation on a commercial basis. Alternatively, as illustrated in the table below, both ownership and operations may be transferred to the private sector but regulatory powers are retained under state control (either directly under a government department or ministry, or under an independent regulatory authority with statutory powers appointed by the government). Throughout the world there has been a shift from nationalization to commercialization and privatization in the provision of transport services, which implies a decline in state provision but continued (state) regulation. An industry without regulation, especially in the transport sector, is simply a mirage.

Table. Regulatory models in the transport sector


	Ownership	Operation	Regulation

Nationalization	Public	Public	Public
Commercialization	Public	Private	Public/Independent
Privatization	Private	Private	Public/Independent

The actual processes of deregulation are many and highly contingent on the transport mode and market in question. A local city bus service in a developing country will clearly adopt very different deregulatory measures from the international civil aviation industry. Even within the same transport mode, such as railways, deregulation has ranged from outright privatization with track and rolling stock sold to private companies (e.g. New Zealand and the United Kingdom), granting concessions to private companies on a long-term basis to operate rolling stock and/or maintain the track (which is still owned by the State) (e.g. Latin America and Africa), a "regionalization" of operations where control shifts from central to local government, and commercialization where the State retains ownership but commercial operating principles are adopted (e.g. precluding cross-subsidy between routes).

Under public ownership there were numerous examples of state transport operators who experienced rising costs and falling revenue. The consequent pressure on public finances often led to insufficient investment as public funds were used for revenue support rather than capital expenditure. Deregulation and privatization were anticipated to alleviate such problems, with competition and private ownership leading to lower costs and fares, higher productivity and service levels, service innovation and greater levels of investment. Whether such benefits have been delivered is a question fiercely contested by proponents and critics of deregulation, and conclusive empirical evidence is surprisingly difficult to come by. Take, for example, the United States civil aviation industry. Many accounts claim that liberalization of domestic air transport in 1978 "produced considerable net social benefits".⁽¹¹⁾ Critics, however, contend that:

What is clear is that airline deregulation in the United States led to a concentration of ownership and operations. By 1990 the eight largest United States carriers held 94 per cent of the domestic passenger market and controlled almost all the major hub airports.⁽¹³⁾ Rail deregulation in 1980 produced a similar outcome, with the seven major carriers handling well over 80 per cent of industry freight a decade later. Over the same period, railroads abandoned services to over 1,200 small towns, which adversely affected businesses and employment in these locations (especially as these towns were often also abandoned by road and air services).⁽¹⁴⁾

Whether consumers benefit from deregulation, then, often depends on the continued ability of public agencies to regulate the market effectively. The reality is that most transport services are not perfectly competitive, significant economies of scale and scope do exist, economic barriers to entry in most transport modes are significant, and monopoly or oligopoly has resulted directly from deregulation. Deregulators have often failed to appreciate the non-competitive structure of transport industries and some deregulatory measures have actually accentuated these market characteristics.⁽¹⁵⁾ Publicly-owned bus companies in the United Kingdom, for example, were fragmented in 1986 into 142 private companies as it was argued that there were no economies of scale in the industry, contrary to the evidence of economies of density, scope and network, as well as other advantages accruing to larger organizations (including marketing, ticketing, management and maintenance benefits). For all these reasons there is a natural tendency towards spatial monopoly and eventual control by a few large operators. A decade after deregulation the four largest bus operators controlled more than a third of the United Kingdom market and the nine largest almost 60 per cent. As a result, although operating costs have been reduced by over 25 per cent, fares have increased and the pattern of services has changed little as local monopolies have been maintained, albeit after a short period of intense competition. More importantly, competition has not led to market growth but to a further contraction of the market.⁽¹⁶⁾

The benefits of deregulation to consumers are therefore open to question. There is certainly a good deal of variation across transport modes and markets. Likewise, the results for governments can be mixed. Public sector expenditure is generally reduced, but other costs may well increase post-deregulation. Most notably, externalities have often increased (e.g. pollution, congestion and accidents), as have the costs associated with a lack of integration between different transport modes and the opportunity costs of transport services making a less significant contribution to local economic development in specific towns or regions. This was precisely the conclusion reached by the United Kingdom Government in its recent review of almost 20 years of transport deregulation and privatization.⁽¹⁷⁾ The decline of bus passengers, for example, has frustrated government policy to reduce car use, urban congestion and pollution. Moreover, public support for the United Kingdom bus industry still amounts to over £1 billion per annum from fuel duty rebate, concessionary fares and tendered services contracts.⁽¹⁸⁾

Private operators, for their part, have often reaped considerable (financial) benefits from deregulation, but again there are significant differences between transport modes. In civil aviation, for example, major airlines are able to use hub-and-spoke networks and computer reservation systems to preclude competition and maximize revenue. Profitability among United Kingdom bus operators is now much higher following the consolidation of the industry, especially among the larger operators. As companies such as National Express diversify into rail, airports and other transport activities the cash-rich characteristics of bus operations can be fully exploited. In taxi services, in contrast, deregulation has typically resulted in a rush of new entrants, a fragmentation rather than a consolidation of the industry's structure, and widespread bankruptcy.⁽¹⁹⁾

Unlike other stakeholders, the impact of deregulation and privatization on transport workers is almost universally negative. A common characteristic of all deregulatory measures is a shift from external to internal regulation of the industry in question -- i.e. a diminution of the role and authority of public or third-party agencies and an increase in managerial prerogative (where the latter invariably involves the erosion of collective bargaining and trade union rights). As a result, compliance with industry regulations is more difficult to enforce on transport providers, legitimacy is questioned, and trust between management and labour is eroded if not completely destroyed. This is hardly surprising as job losses are commonplace and usually extensive as a result of deregulation; job security generally declines; work processes are invariably intensified, leading to stress and a greater risk of accidents; and wages and other terms and conditions of employment are eroded.⁽²⁰⁾ A recent international survey of taxi drivers, for example, reported a marked deterioration in workers' terms and conditions of employment following deregulation, especially as a result of longer hours.⁽²¹⁾ A recent study by the Transport & General Workers' Union found that United Kingdom bus drivers are often at the wheel for five hours without refreshments or even a toilet break. Many London bus drivers now earn just £140 per week and therefore qualify for state benefits; and there are now over 1,000 vacancies for bus drivers amongst the capital's 39 operators. Similar outcomes have been reported in railways⁽²²⁾ and civil aviation.⁽²³⁾

In virtually all transport sectors labour costs represent a significant -- and in a deregulated environment potentially variable -- cost of production. It is hardly surprising, therefore, that workers' terms and conditions of employment should become a principal target of cost-cutting initiatives. Among the world's airlines, for example, wage cuts, pay freezes, the withdrawal of cost of living agreements, two-tier wage levels, longer and more frequent shifts, and an overall increase in working hours are now commonplace as carriers "benchmark" their own costs against those of international rivals (or even alliance partners), low-cost new entrants, or specialist service providers. If the airline's own costs are above "market rates", then cost-cutting, franchising, outsourcing or subcontracting invariably follows. A particular concern for workers in the civil aviation industry is that as new global alliances are formed between major carriers, with decisions on investment, procurement, labour deployment, recruitment and the like now determined on an international basis, collective bargaining and other forms of employee representation are "localized" at the level of individual operators or even specific sub-units (e.g. strategic business units, regional subsidiaries, franchisees or contractors).⁽²⁴⁾

Throughout the transport industries of the world, product market regulation no longer complements or underwrites labour market regulation; deregulation of the product market has undermined labour market regulation and in many transport sectors eroded the basis of worker cooperation, motivation and high productivity.⁽²⁵⁾ The disjunction of product and labour market regulation is certainly to the detriment of employees, invariably to the disadvantage of consumers (for example, if accidents rise or if employees are less courteous to passengers), and possibly harmful to the long-term competitiveness and profitability of the private operator. There now appears to be a growing recognition on the part of many governments and international agencies, including the World Bank, of the need for a more careful and considered approach to deregulation, recognizing the interaction of product and labour markets and in some cases the propriety of re-regulation.

If the history of transport provision in different markets, modes and countries teaches us anything, it is that both competition and regulation are imperfect mechanisms to mediate the interests of providers, passengers, employees and other stakeholders. Deregulation and competition, as previously demonstrated, can create significant problems that subsequently demand re-regulation. All but four of the 22 United States cities that deregulated taxi services in 1985, for example, have since introduced some form of re-regulation (usually on market entry and fare ceilings).⁽²⁶⁾ In the United Kingdom, Regional Development Agencies and a new Strategic Rail Authority are to be charged with maximizing the contribution of transport services to local economies, ensuring the more effective integration of different transport modes, bringing greater vision to privatized railway companies, and securing better value for public subsidy.

Clearly, regulatory change should not be determined by any simple "blueprint" but must consider the specific geographical, institutional, economic and social conditions of the country, mode and transport market in question. For example, the organic separation of operations from the management of transport infrastructure might be effective in road or port transport, and given information problems there may be strong economic or transaction cost arguments in favour of this form of structural regulation.⁽²⁷⁾ But the experience of railways operating under such a regulatory framework has been widely criticized, both in terms of day-to-day efficiency and the long-term ability of rail to compete with other transport modes.

Given the detrimental impact of deregulation and privatization on workers' terms and conditions of employment, the basic principles that guide regulatory policy should reflect the contribution of transport to both social and economic needs. Access to safe, reliable and affordable passenger transport is a basic need for every citizen. Efficient, reliable and reasonably priced goods transport is vital to economic development -- transportation improvements stimulate economic growth, just as economic growth increases the demand for transport services. To secure both economic and social benefits from the provision of transport services requires regulatory policy to be guided by fair pricing for each mode and the integration of different transport services. Within the European Union, for example, there are nine different charging systems for railway infrastructure and cost recovery ratios vary from zero to 100 per cent. When combined with the huge variations that exist with respect to road tax/tolls, the result is a significant distortion of competition within and between transport modes.⁽²⁸⁾

Fair pricing is increasingly defined in terms of the internalization of external costs where transport users cover the total costs of transport, including congestion, pollution and accidents which are currently paid by society as a whole, and full recovery of infrastructure costs. While such a system is not without problems⁽²⁹⁾ it does highlight the importance of ensuring safe, modern and environmentally friendly transport services. These criteria should also guide regulatory policy as part of a commitment to public service and wider public interests. "Sustainable development" is the new watchword for policy-makers in Europe and many other regions of the world, and regulation, rather than competition, is widely regarded as the guarantor of such development.

Whether public or private companies best meet social and economic needs is still a contentious issue. In a recent publication, for example, the ITF stated that:

In particular transport sectors such as ports and civil aviation, however, private companies have operated successfully for many years and provided acceptable terms and conditions of employment. The Dockers' Section of the ITF recently abandoned its principled opposition to privatization in port transport⁽³¹⁾ while in civil aviation many trade unions regard ownership as "secondary" to union recognition and effective collective bargaining rights.⁽³²⁾ In some cases there is a recognition that private ownership might actually help protect jobs and preserve existing terms and conditions of employment (e.g. Philippine Airlines). In railways, in contrast, there are much stronger arguments for public ownership to secure integration, investment, and environmental objectives.

If labour market regulation is to act as "substitute" for public ownership, then "social clauses" must be embraced by all service providers with statutory enforcement to ensure compliance.

Core labour standards for transport and other workers, as enshrined in various ILO Conventions, would not only protect employee interests but ameliorate some of the problems associated with product market deregulation. The European Union actively promotes the interests of transport workers in its Common Transport Policy via the establishment of social dialogue and collective bargaining, access to the professions and training, the improvement of living and working conditions, and the protection of employment.⁽³³⁾ Within a single market, and in the context of increasingly global transport operations, labour market regulation is vital to prevent "social dumping" and "regime competition" (where private companies "bid down" terms and conditions of employment and governments erode workers' statutory employment rights). Rather than create a regulatory environment in which operators seek competitive advantage at the expense of employees, labour market regulation should be directed towards job security and the standardization of basic terms and conditions of employment in order to create a "floor" under (labour) cost competition. It must be recognized, however, that without product market regulation directed towards minimum standards for safety and service quality (e.g. frequency, comfort, reliability, punctuality, passenger information, etc.) and measures to prevent excessive competition or the abuse of market power, then service providers will face strong incentives to cut labour costs. The objective for public policy-makers in the future should be to create complementary systems of product and labour market regulation, and in doing so lay the foundation for both greater equity and efficiency in the transport sector.

1. I. Begg: "Introduction: Regulation in the European Union", in Journal of European Public Policy (London), No. 3(4), 1996, p. 528.

2. P. Selznick: "Focusing organizational research on regulation", in R.G. Noll (ed.): Regulatory policy and the social sciences (Berkeley, University of California Press, 1985, pp. 363-7. See also G. Majone (ed.): Deregulation or re-regulation? Regulatory reform in Europe and the United States (New York, Pinter, 1990, pp. 1-6.

3. See S. Wilks: "Regulatory compliance and capitalist diversity in Europe", in Journal of European Public Policy, op. cit., p. 538.

4. J. Kay and J. Vickers: "Regulatory reform: An appraisal", in Majone, op. cit., p. 223.

7. W. Streeck: Social institutions and economic performance (London, Sage, 1992).

9. Kay and Vickers, op. cit., p. 232. Between 1950 and 1975 the Civil Aeronautics Board (CAB) received 79 applications from firms wishing to enter the United States domestic market, but granted none. Between 1964 and 1974 the CAB granted less than 10 per cent of applications by existing carriers to serve new routes.

10. M. Bishop, J. Kay and C. Mayer (eds.): Privatization and economic performance (Oxford, Oxford University Press, 1994).

11. K. Button, K. Haynes and R. Stough: Flying into the future: Air transport policy in the European Union (Cheltenham, Edward Elgar, 1998), p. 59.

12. P.S. Dempsey: The social and economic consequences of deregulation: The transportation industry in transition (New York, Quorum Books, 1989), p. 251.

13. P. Lyth: "Experiencing turbulence: Regulation and deregulation in the international air transport industry 1930-1990", in J. McConville (ed.): Transport regulation matters (London, Pinter, 1997), p. 168.

15. Alfred Kahn, architect of United States domestic airline deregulation, clearly failed to anticipate the market power of major carriers or the impact of hub-and-spoke networks and computer reservation systems. He later admitted that "we thought an airline was nothing but a marginal cost with wings" (Independent on Sunday, 13 Jan. 1991).

16. D. Bannister: "Bus deregulation in the UK: The first decade", in J. McConville (ed.), op. cit., pp. 31-51.

17. Department of the Environment, Transport and the Regions: A New Deal transport: Better for everyone (London, The Stationery Office, 1998).

19. In Sweden, for example, more than 1,000 taxi companies went out of business between 1991and 1995 following deregulation in 1990.

20. ILO: Symposium on the Social and Labour Consequences of Technological Developments, Deregulation and Privatization of Transport, background document (Geneva, International Labour Office, 1999).

21. Choong-Ho Kang: Taxi deregulation: An international comparison (London, ITF, 1998), pp. 20-5.

22. ITF: ITF Railway Bulletin Number 1 (London, International Transport Workers' Federation, 1998).

23. P. Blyton, M. Martinez Lucio, J. McGurk and P. Turnbull: Contesting globalization: Airline restructuring, labour flexibility and trade union strategies (London, International Transport Workers' Federation, 1998).

25. ibid; see also R. Saundry and P. Turnbull: "Contractual (in)security, labour regulation and competitive performance in the port transport industry", in British Journal of Industrial Relations, No. 37(2), 1999, pp. 273-96.

28. Commission of the European Communities: Fair payment for infrastructure use, 446 Final (Brussels, European Commission, 1998), pp. 3-4.

29. C.A. Nash, J.P. Toner, H. Beaumont, J.O. Jansson and G. Lindberg: Towards fair and efficient pricing in transport -- Issues and prospects (Centre for Transport Studies, University of Leeds, United Kingdom, 1997).

30. ITF: Transport workers and the global economy (London, International Transport Workers' Federation, 1998) (emphasis added).

31. ITF: Privatisation and other port reforms: The demand for a national and international trade union response (London, International Transport Workers' Federation, 1997).

33. Commission of the European Communities: The future development of the Common Transport Policy (Brussels, European Commission, 1992), pp. 82-9.