Introduction

This section provides an overview of the quasi-market characteristics. In the past, most of LPT has been provided through administrative in-house production in an integrated, hierarchical form of a service obligation. This currently out-dated model stands against three forms of quasi-markets. The main difference between hierarchical production and the quasi-market is the existence of a contract between the city administration and the company that runs the service. Chapter 2.2 suggests and Chapter 5 confirms that the implications and consequences of the contract are two-sided. Apart from a contract that unites all quasi-market forms, the two other key features are the decision of ownership and the competition. With theoretical knowledge regarding efficiency and new institutional economics, the first working question is RQ1: How is the quasi-market perceived from the institutional perspective?

One criterion in the distinction of quasi-markets is the difference between a monopoly and a competition. In-house production and contacting scenarios are monopolistic approaches, whereas competitive tendering is a non-monopolistic solution. The second main criterion for distinguishing quasi-markets is that of ownership: Generally, private companies are working for profit, while public enterprises do not. In a competition scenario, public and private companies can co- exist. Thus, there are three different forms of quasi-markets: A public monopoly, a private monopoly and a competition that can host both public and private operators (cf. Kähkönen, 2004). Understanding the consequence of these attributes is the first step in this research.

In order to understand the quasi-market, first the administrative hierarchical model is explained and provides an understanding of how services have been organised before the quasi-market was introduced. A hierarchy means that the central control unit has a strong influence on the executive level, whereas the unit manager and the worker have little impact. Direct influence from higher levels can be seen as ambivalent, though political issues can be applied directly, as there is a direct communication channel to exercise political control over the service.

Politicians can also have a negative influence, as they are not experts and might pursue their own particular goals that do not serve the public. An administrative hierarchy also violates the principle of subsidiarity. Subsidiarity means delegating

responsibilities to lower levels to improve efficiency because a unit manager more likely understands how to optimize work procedures on the lower level than a central manager.

According to Rees (1976), a hierarchy model indicates that all the work related to a service is done by civil servants and public employees. Civil servants enjoy a high degree of security on the job; a worker cannot lose his job unless he seriously violates regulations. Individual work performance (x-efficiency) is an important factor for the productive efficiency of an organisation. In an administrative unit, there is a rather strict line of command, and the worker has very little influence on working procedures. This lack of influence can cause frustration and individual underperformance with it, as Syvänen (2003) shows. Another problematic may also be that there is too little pressure on the employee, since there is a great deal of job security and little motivation to include incentives to work well. On the other hand, safe jobs with good working contracts generally lead to high work satisfaction and good performance. Work satisfaction also improves with mutual trust among the actors when a successful, long-time work relationship has been established (Ibid.).

Planning enjoys the distinct advantages of vertical integration, which makes work better and more efficient. For example, bus lines and timetables are adjusted to the working times of the bus drivers, thus reducing costs. Since there is only one operator, there is less trouble with coordinating the timetables, and the times can be optimized for the passengers. Thus, “holes” in the schedules are less likely to occur.

Planners also enjoy a high extent of strategic flexibility in case they need to make changes, since a detected change in demand can lead to an adjustment in service rather quickly without needing to consider the fulfilment of contracts. Finally, planning can rely on safe figures from the operator, as the operator has no reason to provide wrong data. The planning process does not require buying the data from the operator but instead obtains it automatically and directly as part of the same unit (cf.

Tyson, 1995; Nash, 1988; Lehmann, 2001; also see Chapter 5).

One typical criticism towards the administration related to a missing incentive on the management level is a lack of innovativeness, so that the same routines dominate and new alternatives are not tried out. Also, the bureaucracy has often been accused of inefficient working procedures, sometimes called “state failure” and analogous to

“market failure.” According to Public Choice Theory, it can be dealt with through the market by efficiency pressure (Baumol et al., 1988; McMaster, 1998).

Inflexible structures are features of vertically integrated public operators. In order to respond to unforeseen challenges, authorities establish “slack,” otherwise known as redundant structures (March, 1988) as a reserve. This slack is controversial

because it requires paying for the upkeep of components that are largely unproductive most of the time. Inflexible structures boost transaction costs in cases where one would want to react spontaneously to unforeseen challenges, and they can make it entirely impossible to react at all. Therefore, slack is needed as a reserve.

In-house production represents a form of monopoly; no other operator is allowed to enter the scene. Adam Smith’s economic theory suggests extensive pricing for monopolists. However, in this case, the monopoly is of public origin, which means any form of profit is returned to the city as income, in this case as a lower deficit. One could see this as a balance so that any income gain through a monopoly would be a reduction in subsidies and therefore simply a transfer from the user to the city (which reduces the transfer of subsidized tickets by the city to the users).

Monopoly theory, however, shows that a portion of the higher prices is directed to the workers in the form of better contracts, more favourable work conditions, and a smaller workload per employee. Still, a public monopolist does not maximise profit (in fact, it does not need any profit at all); therefore, exploitation of the monopoly has less purpose. Better working conditions in a public workplace as compared to a private job can be either a political question or a result of monopoly exploitation.

Evidence shows that as soon as the public operator is exposed to competition, the working conditions change, which indicates a monopoly influence on this issue (cf.

LeGrand & Bartlett, 1993; Milward & Parker, 1983; Walsh, 1995; Walsh et al., 1997).

Managers of public units have little incentive to improve their overall efficiency because the city automatically pays all deficits and a higher deficit does not lead to consequences for the unit. There is always the danger that the service needs more subsidies than predicted, so there is budget uncertainty and therefore low cost control. Regulations and standardized work procedures can prevent form-efficient productivity because of strict and inflexible administrative rules like budget restrictions, rigid acquisition rules, and long chains of command. On the other hand, procedures have been introduced in order to make administrative work more efficient (Laffont & Tirole, 1993; Lamothe & Lamothe, 2006; Milward & Parker, 1983).

When thinking of natural monopolies, both economics of scale and economics of scope can be utilized by one big company compared to numerous small units. A repairing unit can work on all vehicles used in the city administration and reduce marginal costs. Large operators may have a better position when bargaining for new buses, for example. Processes can be optimized within. Additionally, monopolistic services can be customer-friendly due to a corporate identity, which makes the network easier to use and coordinate. There will be only one ticket with the

possibility to change buses and one coordinated timetable. In case of complaints, there is just one organisation responsible, and it is impossible to escape from the responsibility. On the downside, meeting customers' expectations has no bearing on the company’s survival. Hence, there is less incentive to produce good-quality services (cf. Evans, 1991).