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Private and public ownership and urban transport

John Quiggin

Department of Economics

James Cook University

Published as: Quiggin, J. (1997), 'Private and public ownership and urban transport ', Urban Policy and Research 15(1), 56-58.

Private and public ownership and urban transport

At one time or another, governments in Australia have provided almost every imaginable good or service. The first farm in Australia was the Government Farm on the site of the present Botanic Gardens in Sydney. It was not a success. Another unsuccessful venture was the Queensland governments establishment of publicly owned butcher shops in the 1920s. On the other hand, enterprises such as Telecom have been highly profitable.

On the other hand, almost any task undertaken by government can be and has been undertaken by private enterprises. This is obviously true of telecommunications, transport, health, education and so on. Even the core activities of the state, such as police and military services can be and have been privately provided. Until the 19th Century, reliance on mercenary troops was the rule rather than the exception in European wars. Private contractors transported many convicts to Australia, and this practice has recently been revived with the establishment of a privately-run prison in Australia.

The ebb and flow of private and public sector provision is particularly evident in the transport sector. Governments have always been intimately involved in transport industries, both as regulators and as providers of transport infrastructure and transport services. Even in 'night-watchman' states, the provision and maintenance of 'the King's Highway' has been a core function of the state. In modern societies, public provision of roads has been, until recently almost universal.

The public sector has also been involved in other forms of transport, and particularly in the railway industry. In most European countries, railways were publicly owned from the outset. In Australia, private railways lasted only a few years before selling out to the colonial governments In the UK, railways were nationalised in 1948. . Ports and airports have generally been publicly owned and there has also been extensive public ownership of airlines and, to a lesser extent, shipping lines.

On the other hand, transport has been important in the development of the market alternatives to state provision. The first successful corporate firms were railways. The size and complexity of the undertaking of running a railway is such that small-scale organisations, such as firms managed by a single entrepreneur, cannot be viable for long. Hence, the development of a corporate structure was the only real alternative to public ownership..In his monumental work, Scale and Scope, Alfred Chandler showed how the huge capital costs of railway construction and the complexities of railway management necessitated the development of large hierarchical corporations on modern lines, with the emergence of a separation between the shareholders who owned the firm and the managers who operated it.

It is rarely possible to draw a neat boundary between the public and private contributions to transport. Privately owned cars and trucks are the main users of publicly owned roads. Publicly owned railways carry privately owned goods, frequently using privately owned containers and sometimes privately owned rolling stock.

Conversely private sector provision of transport infrastructure has relied heavily on state backing. In particular, without exercising the power of eminent domain to compulsorily acquire land, it is virtually impossibly to buy enough land for a continuous road or rail line. Apart from the general problem of persuading many owners to sell, there is the problem that the last few holdouts could, in the absence of compulsory acquisition, demand huge prices for their land -- in fact, sufficient to wipe out all the profits of the firm constructing the line. Thus, railroads relied heavily on state backing to establish themselves. More recently, apparently private road projects, such as the M2, M4 and M5 freeways in Sydney, and the CityLink project in Melbourne have relied both on the coercive power of government and on financial guarantees provided by government. Attempts to determine the allocation of risk and responsibility between the private and public sectors in projects of this kind have encountered great difficulties.

The boom in private infrastructure

Private involvement in the provision of transport infrastructure and transport services has increased rapidly in recent years. Existing public enterprises have been sold, the operation of public services has been contracted out to private fimrs and projects that would once have been undertaken by government have been undertaken by the private sector. The privately owned toll roads mentioned above are the most prominent single example of this process.

The motives for governments seeking private involvement in infrastructure provision have varied. The main motives that have been suggested have been a belief in the superior efficiency of the private sector, the possibility of shifting tax liabilities between levels of government and concerns over the measured level of public debt and expenditure. Examination of the financial structure of projects, and particularly the frequency with they involve either leaseback by the public sector or eventual transfer of ownership to the public sector suggests that concerns about measured debt levels are the most important factor. This is disturbing, in view of the general agreement among economists that the apparent reduction in net public debt associated with sale of existing assets or with forgoing investment opportunities is of no significance, being entirely offset by the corresponding reduction in total assets. The prevalence of tax-driven projects, particularly leasebacks, is also disturbing.

Economic analysis of private infrastructure

There has been little systematic discussion of the issues associated with private involvement in the provision of transport infrastructure. However, the basic economic principle governing the optimal allocation of ownership is stated very simply by the NSW Auditor General. The definitional characteristic of ownership is the acceptance of residual risk. Optimal allocation of risk requires that the

party best able to manage the risks should assume those risks and their attendant costs and benefits

This definition makes no reference to levels of public debt, because public debt per se is entirely irrelevant to social welfare.

The risk allocation criterion also makes no direct reference to the social objectives served by transport infrastructure. However, these objectives are relevant to ownership and the allocation of risk. If social objectives can be defined in the contractual form of community service obligations, they can be met by a private owner. The primary risk is that the cost of meeting the obligations will vary, but private owners are able to manage risks associated with costs. If, on the other hand, social objectives are more diffuse and can be met only be continuous regualtory oversight, a private owner will be faced with continuous risk regarding regulatory outcomes. In such cases, public ownership will be preferable.

Similar arguments apply in relation to road networks. The traffic flow on a toll road will be affected by decisions on housing policy, public transport and other road projects. However, it is costly and inefficient for governments to give advance guarantees concerning policy on the future management of transport networks, though precisely such guarantees appear to have been offered in the resolution of the dispute over risk-sharing for the CityLink road project in Melbourne. If such guarantees are not given, the private operator must either demand a large risk premium. As EPAC (1995a) and London Economics (1995) observe, the optimal solution, other things being equal, is for the risk associated with network management to be internalised through public ownership. That is, if the government is the main source of risk, the most efficient contract is one in which the government bears the risk.

Concluding comments

The boom in private involvement in urban transport infrastructure has often been presented as if it is driven by economic necessity. In fact, private involvement has grown most rapidly in areas where economic analysis shows that it is least desirable, most notably in the provision of toll roads. The current boom in private infrastructure is driven by ideology and politics, not economics.

Over the two centuries of European settlement in Australia, public involvement in the provision of urban transport services has waxed and waned. It is likely that this pattern will continue in the future. Some of the current innovations in private sector provision will yield long run improvements in the efficiency and effectiveness with which urban transport services operate. Others will be valuable only as lessons in what not to do.

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