Trade-offs between transaction cost, operation cost and innovation in the context of procurement and asset specificity – The example of the bus industry

Abstract

Public transport procurement governance structures have recently moved to more pre-specification/regulation of bus contracts in terms of asset procurement and sometimes public ownership of buses. As this may involve important cost trade-offs, this paper analyses bus rapid transit (BRT) and conventional bus procurement in competitive environments through the lens of transaction cost economics. A survey of bus operator managers was performed to measure transaction cost of bus operating firms. Our results show that while asset specificity is significantly higher for BRT compared to conventional bus operations, the level of asset specificity is overall much lower than anticipated. In particular it is human and brand asset specificity (intangible assets) more than physical asset specificity (i.e. buses) that is reported as a source of transaction cost by management. We find that government bus procurement and/or contract pre-specification related to bus procurement may improve economies of scale in service triads but does not aid to overcome hold-up contract problems and transaction costs which are common in incomplete contracts involving uncertainty and relationship-specific investments. In that sense, while the government intervention in bus procurement may be well intended it could in practice do more harm than good to the industry and the wider public.