Regulating Privatized Rail Transport

Abstract:     
With the rail industry transformed worldwide, regulation of the sector should remain simple and flexible to protect its share of transportation markets. Apart from providing a stable legal and institutional framework and fostering competition and market mechanisms, regulators should refrain from intervening in the market-unless the goal of economic efficiency (subject to the socially demanded level of equity) is in jeopardy.

Traditionally, transport regulation has been viewed as an exercise in second-best optimization, acknowledging the existence of huge information problems. Then the rail industry was deeply restructured worldwide to halt erosion of the sector's share of transportation markets. Restructuring took different forms in different countries, ranging from simple reorganization measures to extreme restructuring - with the private sector increasingly participating in the sector and with the provision of infrastructure separated from the provision of services.

Campos and Cantos argue that regulation of the rail industry cannot remain unaffected by these changes. New regulatory scenarios and issues have emerged. For example, contracts have to be defined for private participation and quality surveillance instruments must be defined. Traditional price controls have to be adapted to, and mechanisms designed to manage and plan infrastructure investments in, the new environment. Restructuring has brought new problems, too. Where licenses have been used, for example, several concessionaires have been unable to meet the objectives spelled out in the concession contract. Contracts should be flexible enough to take account of novel situations that may affect company performance. And yet, for the system to be credible, there cannot be systematic, unjustified deviations from the franchise objectives.

Regulation of the sector should be simple and flexible, with license contracts designed to include the private sector and with industry organization adapted to local circumstances. Regulation should be governed by principles that foster competition and market mechanisms, wherever possible. At the same time, it should provide a stable legal and institutional framework for economic activity. Otherwise, regulators should refrain from intervening in the market - unless the goal of economic efficiency (subject to the socially demanded level of equity) is in jeopardy.

This paper - a product of the Regulatory Reform and Private Enterprise Division, Economic Development Institute - is part of a larger effort in the institute to increase understanding of the implications of regulation for the success of infrastructure privatization.

Working Paper Series