Agency costs in public transport systems: Net-cost contracting between the transport authority and private operators - impact on passengers

Drawing on an agency theory approach, this paper examines conflict of interests and the resulting agency costs in the provision of urban public transport services in Istanbul's public transport system, particularly the private bus and minibus operators’ relationship with local government. The agency problem in Istanbul's urban mobility system shows itself most explicitly in private bus and minibus operators because of the net-cost (NC) contract model in place. The private bus and minibus operators’ relationship with local government is examined as a case study of agency relationships. Conceptually, government transport authorities and transport operators, together with the passengers, are the main actors of this urban public transport system. They all have distinct needs, interests and requirements and interact with each other, all embedded in a specific institutional environment. Service quality provided by public transport operators depends on the positive interactions between these actors. Whereas passengers demand reliable, affordable, safe and comfortable mobility services, private bus and minibus operators aim to increase their revenue and maximise their profits. In contrast to this, government bus operators provide in-house bus services without much concern for profitability. Regulators or local authorities, on the other hand, are expected to set up an institutional environment where passengers’ and operators’ expectations are met in a satisfactory manner. Empirical analyses and interviews with key agents demonstrate that agency costs are shown to be the result of misaligned interests between the government transport authority and private operators that lead to reduced service quality in terms of safety, comfort, reliability and affordability. We conclude that the agency costs of current NC contracting on passengers in Istanbul has deficiencies and propose instead a performance-based gross-cost (PrGC) contracting model. PrGC contracting can alleviate agency costs by changing the incentives of operators where regulatory and financing mechanisms are not enough to handle NC contracting. Istanbul represents some transferable lessons and implications, especially for developing cities around the world.