Urban public transport during recent years has been under considerable economic pressure, both to improve market efficiency and production efficiency. This might lead to a conflict or imbalance between the objectives of the company and the authorities. The "level of conflict" will depend on the contractual framework and economic environment for the public transport company, for instance the difference between a gross or net contract system and the level of freedom for design of the fare system and service level. The Institute of Transport Economics (TOI) have studied the public transport market in Oslo, Bergen and Kristiansand, and investigated the optimisation procedures under different financial constraints and objectives for the company. The main conclusions from these studies and practical implementations used on output-based/performance contracts in Norway are presented. Analyses of the public transport markets indicate a need for increased frequencies and a more differentiated bus fleet. There is a need to develop a wide range of public transport services, from taxis and dial-a-ride services, mini/midi buses, to ordinary and articulated buses. This promotes good use of resources, and it provides operators with possibilities to increase service frequencies within their budgetary constraints. It is suggested that the present size of the bus fleets ideally should be halved. That is, a larger share of the bus fleets should consist of smaller vehicles in order to adjust to local demand. At the same time service frequencies should increase so as to increase total capacity. An exception is Kristiansand, whose off peak capacity could be reduced by 26%, but the peak capacity should be increased by 14%. The other urban areas should ideally increase capacities by 6% to 23%. The analyses indicate that there is a good potential for passenger growth in these urban areas. An optimal service level may increase passenger numbers by 16-32%, with the highest potential in Kristiansand. The marginal cost benefit ratio of increased subsidies in Bergen and Kristiansand was between 1.30 and 1.60, provided that the subsidies will finance an optimal service. If subsidies were increased to an optimal level then the average cost benefit ratio would be 0.70. This paper presents the estimated incentives of output-based subsidy that is needed in order to achieve welfare optimal services. This is a funding system based on net contracts and in addition output-based subsidies depending on mileage and the number of passengers. A funding model like this implies that operators will aim at maximising their revenues through more cost efficient operations and increased numbers of passengers. In other words, the funding model combines internal and external targets for efficiency improvements, i.e., productive efficiency and market efficiency. For the covering abstract see ITRD E124693.
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