Title: Productivity Commission Inquiry Progress in Rail Reform
Abstract:Executive SummaryOur submission focuses on changes to the institutional environment in which the railindustry operates which need to be addressed in order to enhance industryperformance. We begin by a...Executive SummaryOur submission focuses on changes to the institutional environment in which the railindustry operates which need to be addressed in order to enhance industryperformance. We begin by arguing that the technical and allocative efficiency ofexisting state rail systems is low. Despite reductions in rail costs in the 1980s and1990s, cross-country disparities in cost levels remain substantial.We argue that there are four areas in which the level of rail efficiency causesconcern:a. the adequacy and allocation of investment: we note evidence thatAustralian rail systems have tended both to under-invest and to choosepoorly between different investment projects. We note the importance ofincentives as a way of ensuring rational behaviour and argue that managersof state rail systems have not received the correct signals. We argue furtherthat profit maximizimg privately owned firms are more likely to investefficiently and effectively. We stress the problem of investment incentives forprice-regulated firms and conclude by stressing that careful thought must begiven as to the type of environment most suited to rational investmentdecisions.b. cost minimisation: we begin by citing evidence that Australian rail systemsincur markedly higher costs than those incurred by the most efficientoverseas rail systems. We argue that the strongest pressures for costminimisation exist in privately owned, profit maximizing firms operating incompetitive markets.c. pricing: getting prices right is an important aspect of allocative efficiency.We argue that state rail systems may in theory price efficiently, providingmanagers are given the appropriate incentives. In contrast, a private firm willtend to adopt an efficient price structure, but will use market power where itcan. Overall, we argue that while state rail systems may be indulging ininefficient pricing practices, these are unlikely to create major welfare losses.d. product coordination, diversity and quality: are the state rail systemsproviding services of a type(s) that users really want? We argue that staterail systems tend to provide services of a given quality and type irrespectiveof customer needs. In particular, we argue that state rail systems do not havestrong enough incentives to co-operate with each other to provide efficientand effective interstate services.Institutional and Structural OptionsWe suggest that four questions need to be addressed: how much privateownership? what industry structure (notably how much vertical and horizontalseparation)? how much competition? how much (and what type of) regulation?Read More
Publication Year: 1999
Publication Date: 1999-01-01
Language: en
Type: article
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