Transaction cost economics of procurement models in public transport: An institutional perspective

Abstract

Abstract In recent years, concern has grown over good practices in the procurement processes in public transport. Although promoting competition by competitive tendering to gain efficiency and increase service quality has gradually become common around the world, the applicability of this model in weak institutional environments has some uncertainties. Drawing from new institutional economics (NIE) literature, transaction cost economics (TCE) approach presents important theoretical insights to comprehend the nature of authority and operator relations by underlining the institutional factors that make such procurements effective or not. We argue in this paper that the extent to which transaction structures are embedded in the institutional framework has a substantial impact on the long-run performance of the public transport contracts. A case study of the experience of Istanbul’s public bus transport system, a hybrid regime combining the elements of direct award and tendering and composed of both formal and paratransit transport modes, is proposed to support our theoretical arguments. Our study reveals that all-encompassing contractual solutions which do not take into account the broader institutional environment (culture, norms, policy preferences, property rights etc.) may not work as intended, calling for more hybrid solutions, particularly in weak or developing institutional settings.