An application proposal of yardstick competition for the regional markets of the French railway system

Inherited from the mid-20th century, the European organization of national railways in state-owned, integrated and few regulated monopolies is not relevant anymore. Although this has been an interesting answer to the problems of externalities, investments and regulation, changes have occurred in technology, demand and economical analysis. In particular, economists have proposed many regulation schemes, which lead the regulators to increase the efficiency of the firms operating on the market. Because of the high costs of rail transportation, governments decide to liberalize the market; in particular, the European Commission and the European Parliament wish the passenger rail market opening. However, some countries, like France, still have not opened their passenger rail market, which is currently monopolized by the historic and national operator, the SNCF. In this paper, we assume that for social, political and economical (economies of density, network externalities) reasons, the regional passenger traffic will remain operated by the SNCF, in the coming years. However, we propose a regulation framework, based on yardstick competition (comparisons of performances), which could encourage the SNCF to improve the efficiency of its regional trains. Yardstick competition consists in estimating what should be the best prices and subsidies, by comparing the performance of several similar and regulated firms, operating on several monopoly markets. If an operator seems to be relatively efficient according to comparisons, it has to be rewarded. On the other hand, an inefficient operator has to be punished, so that the comparison mechanism promotes competition. The paper aims at analysing the introduction of yardstick competition on the French market of regional rail transport operation. We show that the implementation of yardstick competition permits the local regulators to preserve the monopoly of the SNCF and to develop a virtual competition between its local activities. This leads to improve the efficiency of the regional operators and to increase the expertise of the rail regulators. In the first part of the paper, we discuss the implementation of yardstick competition on the French market of regional rail transport operation. First we describe what is called yardstick competition and how it could be implemented on this market. Then, we show that paradoxically to the preservation of the SNCF monopoly, the new market structure of the regional passenger rail transport (regionalized in 2002) is suitable for such an implementation of yardstick competition. In the second part, we examine some theoretical, economical models. On the one hand, we explain why the use of comparisons benefits to the rail regulators (reduction of its capture by the operator, reduction of uncertainty...). On the other hand, we review and discuss some limits of the mechanism (external heterogeneity of the compared operators, investment incentives, and collusion...). In the third part, we present the results of an econometric treatment, estimating the efficiency scores of the regional operators. First, we describe the cost-data base used, before resolving the question of external heterogeneity between the operators. It appears that the only explanatory variable of the external inefficiency is the delinquency rate: in some regions, the operator has to employ more ticket inspectors due to the delinquency. Then we explain the followed methodology and discuss the outcomes of the model. Operators' efficiency scores vary from 0.8 (for the worst) to 1 (for the best). Those internal inefficiencies may be due to sub-optimal spatial organization or employee rotations, the operation of rural trains with two agents although one is sufficient, informational rent or local strikes. Hence, we conclude that yardstick competition could be an original and efficient way of introducing "intramodal" competition in the regional passenger rail market.