Privatisation, regulation and productivity in the Italian motorway industry Luigi Benfratello...

Privatisation, regulation and productivity in the Italian motorway industry

Luigi Benfratello Alberto Iozzi Paola Valbonesi Università di Torino Univ. di Roma ‘Tor Vergata’ Università di Padova and Ceris/CNR and University of Leicester

Bergamo 26/11/2004 Benfratello, Iozzi, Valbonesi Motorways Regulation in Italy.

2

Aims of the analysis

Motorways experienced a change in regulatory regime (from ROR to PC) in the late 90s

The new PC mechanism has some peculiarities (quality index)

Hence, the issues we address in the paper are: How has the price cap mechanism been

implemented? What has been the effect of the quality

index?


3

Regulatory reform (1)

CIPE Directive, December 1996:

Introduction of a price cap mechanism for motorways tolls:

ΔRPI: (expected) change in the Retail Price Index X : offset productivity factor Q : composite quality index, in % variation : scaling positive factor.

QXRPIqp

qp

i

ti

ti

i

ti

ti

100 x 111

1


4

Regulatory reform (2)

CIPE Directive, December 1996:

Renegotiation of motorway franchise contracts

In summer 1997, Autostrade SpA, then privatized in 1999;

All other concessionaires followed suit.

Changes to the new regulatory regime:

Year 1998 2000 2001 2002 2003 totChanges in regime

1 15 1 2 1 20


5

Privatisation

Year 1992 1996 1999 2003 tot

Private I

Public I

8

12

9

11

9

11

16

420

Private II

Public II

2

18

4

16

6

14

12

820


6

Critical issues:Setting the X factor (1)

In principle, the “correct” setting of X requires (at least): demand forecast actual cost determination assessment of industry-wide (expected)

technological progress assessment of firm-specific (expected)

efficiency gains, possibly through benchmarking


7

Critical issues:Setting the X factor (2)

X factor chosen to ensure that, in the PF,TIR <= average ROI for past 5 years

In practice, X factor for 9 out of 20 concessionares was:

For other concessionares, different values chosen according to specific circumstances: new investments systematic previous unbalance between cost and

revenues

2000 1.09 2001 0.98

2002 0.90 2003 0.83

2004 0.77


8

Critical issues:quality regulation (1)

When there is a quality correction term in the PC: Composite quality index should

reasonably reflect service quality (as perceived by consumers)

Price increases (decreases) should be based on impact of quality changes on consumers’ welfare


9


The composite quality index Q has been based on: accidents roughness of the road surface

Choice lead by data availability, with a committment to a more comprehensive definition.

For Autostrade, β is equal to 0,5 if 65 <= Q 0,3 if 60 <= Q < 65 0 if Q < 60

For other concessionaires, …


10

Qi

β

60

if ΔQ < 0

if ΔQ > 0

65



11


Main features: Acceptable quality standard (Q=60) but reward

for any increase in quality above this level. The price increase allowed to the firm is higher

the higher is the quality of the service provided The quality correction term is cost- rather than

welfare-related It ensures the firm recovers the cost of quality-

related investments, very much in the spirit of cost-of-service regulation


12

Data

Balance sheet data of all 20 concessionaires over the 1992-2003 period (costs, revenues, employees)

Other variables recovered from Aiscat publications (stoneworks, accident rates)

Ownership and regulation information from concessionaires’ official reports

Unbalanced panel, 232 observations


13

Data

1000

1250

1500

mill

ion

kms

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003year

YEARLY MEDIAN, 1994-2003KMS TRAVELLED


14

10000

30000

50000

mill

ion

lira

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003year

real terms, 2000 prices

YEARLY MEDIAN, 1994-2003PROFITS BEFORE TAX

Data


15

Data

10000

20000

30000

40000

mill

ion li

ra

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003year

maintenance labour

other

real terms, 2000 prices

YEARLY MEDIAN, 1994-2003COSTS


16

Data


17

Model and econometric results

regownstoneworkstynp

pn

p

pnnn

p

py

p

py

yyp

p

p

p

p

p

p

p

p

p

p

p

p

TC

regnownswtnym

ono

m

lnlnnn

m

oyo

m

lyl

yyym

l

m

ool

m

lll

m

ooo

m

ll

m

oo

m

lnlnlnln

lnlnlnlnlnlnlnln

lnlnlnlnln2

1

ln2

1lnlnln

2

2

2

2

0

Total cost function (translog, three inputs)


18


yd

1

nys

1

t

TCt

ln

Three crucial measures:

Density economies

Scale economies

Yearly rate of technical progress


19



20

High density economies

Significant technical progress

Positive impact of privatisation on

productivity

No impact of PC regulation on

productivity



21

How should have been set the X factor (median firm, most favourable estimates)?

a) Technical progress: 0.5%b) Increase in margins due to density economies with a demand increase of 3%: 3%-[exp(y*3)-1]=3%-0.8%=2.2%

c) total: 2.7%



22

Final comment

PC implementation has not followed

theoretical suggestions

Possible improvements in the

implementation through:

a) a more accurate determination of the X

factor

b) a revision of the quality index

adjustment in the price-cap formula


23

Concessionaire Network 1994 Kms 1994 Kms 2003Ativa 152.7 1208.7 1662.2Autostrade 2816.2 34175.8 45858.6Autovie 175.5 1874.5 2368.0Brennero 314.0 3124.6 4264.6Bs-pd 182.5 3457.9 4857.2Cisa 101.0 634.7 837.3Fiori 113.2 897.8 1270.0Padane 88.6 539.0 847.5Rav 20.0 41.3 80.6Salt 154.9 1428.6 1978.4Sam 51.6 1495.8 1530.0Sat 36.6 159.0 239.1Satap 164.9 1448.8 2017.9Sav 48.6 334.4 399.5Serravalle 166.1 1856.6 2874.3Sitaf 68.9 224.1 352.4TangenzialeNa 20.2 1032.5 1021.4Tomilano 127.0 1680.1 2172.0Tosavona 132.3 581.1 886.5Venepadova 41.8 768.7 976.5

Network and kms travelled


24

93 94 95 96 97 98 99 00 01 02

BT 7.5 7.5 7.5 4.5 4.5 4.5 4.5 4.5 TBD TBD

British Airport Authority Stansted

8 4 1 1 3(+1

)

3(+1

)

3(+1

)

3(+1

)

3(+1

)

3(+1

)

British Airport Authority Manchester

3 3 3 3 3 5 5 5 5 5

British Gas 5 4 4 4 4 4 4 4.5 TBD TBD

National Grid Company(electricity transmission)

3 3 3 3 4 4 4 4 TBD TBD

Regional Electricity Comp.(electricity supply)

0 2 2 2 2 5.9 3 5.8 0 TBD

Source: Sibley, 2003

X factor set for various regulated british industries

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Privatisation, regulation and productivity in the Italian motorway industry Luigi Benfratello...

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