LOCAL URBAN BUS SERVICES: Natural Monopoly and Benchmark Contestability

This paper has been prepared to document the arguments and any available evidence to establish the extent to which local bus services operating in a pre-defined territory are a natural monopoly and/or are contestable. This issue is critical to the debate on the extent to which territorial monopolies in the market are sufficiently exposed to potential competition under the NSW 1990 Passenger Transport Act to provide the equivalent of the competitive effect of economic deregulation of price, quality and quantity controls. Importantly, we consider the argument that local bus services are a natural monopoly and that the threat of competitive tendering if non-compliance will achieve an outcome which is at least as desirable as the positive outcomes of economic deregulation without the negative outcomes. We cite a number of studies which have monitored competition or the absence of it in deregulated bus markets. We conclude with the view that the local bus market is not contestable under the very precise definition of contestability promoted by economists. But the idea of 'benchmark contestability' whereby operators through improved performance contribute to adjusting the price (i.e. maximum fare), and quality controls (i.e. minimum levels of service and average age of the fleet) is an appealing surrogate for the role of market forces in an imperfect market in maximising the efficiency of operations in accordance with the ideals of social welfare maximisation without subsidy