CHAPTER 1 Introduction
1.4 Framework of the dissertation
The rest of the dissertation will be organized as follows:
Chapter 2 will introduce a brief background of Taiwanese bus transit sector. In section 2.1, the deregulation feature in Taiwan will be presented. Changes to the structure of the bus
industry after deregulation will be addressed in section 2.2. Market shares by ownership types of highway bus operator will be discussed in section 2.3. Section 2.4 will report the privatization of Taiwan Motor Transport Company.
Chapter 3 will review relevant literature in four respects: First, frontier studies of transit systems, these include those use either parametric approach (mainly stochastic frontier approach, SFA) or non-parametric approach (mainly DEA) or both, respectively. Frontier studies in Taiwan will also be briefly reviewed in contrast to the current study. Then, the wide variability in the use of input and output measures in transit will be presented. Second, related studies concerning transit performance which are applied in this study will be introduced.
Third, related studies of transit privatization will be outlined. And lastly, limitations of previous study will be discussed.
Chapter 4 will introduce the basic DEA model as a starting-point for the methodologies used in this dissertation. The introduction will center on comparing the DEA with SFA, both have been used widely in the measurement and estimation of efficiency. The chapter will present comparison results which led to the methodological choice of this study, the DEA approach. And this will be followed by a series of discussions concerning the concepts of basic DEA model, including distance function, efficiency measurement, technical efficiency and allocative efficiency, as well as environmental variables used in DEA analysis.
Case studies will be provided in each of Chapters 5 to 8 to illustrate the application of both the applied and proposed models and to demononstrate these model’s effectiveness.
Chapter 5 will use hyperbolic graph efficiency approach to measure “return to the dollar”
before and after TMTC’s privatization. The “return to the dollar” will be further decomposed into a technical efficiency index and an allocative efficiency index, and thereby estimating price distortions in the transportation market.
Chapter 6 employs a directional distance function which incorporates both desirable and undesirable outputs to investigate the effects of privatization experienced by the TMTC. By
treating transport risk as a joint but undesirable output, the overall risk-adjusted efficiency changes following privatization will be estimated.
Chapter 7 will focus most attention on the technical aspect of how to determine the efficiency of individual services within different but highly homogeneous multimode transit firms which engage in their services with non-identical technologies and use shared inputs.
Chapter 8 will expand the analysis of the last case to consider both the unstorable characteristics of transportation service and the technological differences within multimode transit firms in efficiency and effectiveness measurement. The proposed network DEA model will demonstrate its being more demanding than the conventional DEA model. The last chapter (Chapter 9) will outline the contribution to the literature, summary, policy implications of the dissertation, as well as area for further research.
CHAPTER 2
An Overview of Taiwanese Bus Transit Sector
The 1996 new legislation concerning the partial deregulation of bus industry re-organized the whole industry in Taiwan and provided a new framework for all bus operations. It symbolized the most radial change given that it represented a departure from a status quo of nearly 50 years standing. This chapter intends to report briefly deregulation feature first, followed by the new structure of the bus industry, and an overview of privatization of the Taiwan Motor Transport Company.
2.1 Deregulation feature
The term “regulation” concerning bus industry in Taiwan covers a number of aspects which are almost the same as those in Great Britain prior to 1980.
This first is entry and exit control, an operator is not at liberty to enter (or leave) the bus market at will. According to the Road Traffic Act 1984, a road service licence ratified by the relevant area licensing authority, such as the traffic commissioners, is required for a new entrant to enter the market to operate new services. The Act also contains an obligation upon operators to report the authority of the intention to cease operation in advance. The incumbent operator was not allowed to leave the market without the permission of the relevant authority due to “public benefits”.
Another form of regulation is that of routing licensing system which imposed a limitation that every single route was generally operated by only a single operator, except that the existing operator couldn’t afford to offer sufficient services to satisfy passengers’ need.
An operator would be awarded the public passenger transportation franchise for a period of 30 years, after a routing licence was issued by the authority.
A third form of regulation is that of price, that is, the authority specified periodically a detailed fare scale to be followed by operators.
The fourth is equipments and level of service controls, in which the physical supply of a service was controlled. This could take the form of directly limiting the size or number of vehicles operated, or more often specifying the route and timetable to be operated.
The primary aim of the new legislation, which came into effect in 1996, was to minimize government involvement by reducing the level of regulation.
This 1996 new legislation removed some regulations which had applied to highway bus services, involving intercity bus services and local bus services. The most important feature regarding the operation of a newly defined highway bus services was the increasing freedom of entry into the industry, and into the partially-deregulated sectors in particular. At the same time, the granted public passenger transportation franchise was shorten for a period of five years. However, this was not so in the case of urban bus services. Price control has also been removed from specifying a fare range to only limiting the maximum fare charged.
A significant range of quality control covering aspects such as the design, safety and fitness of vehicles, and licensing of drivers, however, has been retained and strengthened, especially with regard to adequacy of maintenance following partial deregulation.
2.2 Changes to the structure of the bus service industry
The 1996 new legislation of partial deregulation made two specific changes in the structure of the bus service industry:
1. The abolition of the limitation that every single route was operated by a single operator allowed new private operators to enter the market.
2. The break-up of the Taiwan Motor Transport Company (TMTC). This company was to be privatized by 2001.
Changes in number of operators, number of vehicles, vehicle-kilometer and passenger-kilometer by type of operators, i.e. urban bus services and highway bus services, between 1994 and 2002 are shown in Table 2.1. The number of urban bus operators remained constant due to the regulation policy. Regardless both the number of vehicles and vehicle-km increased, ridership fluctuated over the period. This may imply that the use made of resources in the attainment of outputs was neither efficient nor effective.
Table 2.1 Changes in Number of Operators and Vehicles, Vehicle-kilometer and Passenger-kilometer by Type of Operator in Taiwan
Urban Bus Services Highway Bus Services
Number of
Source: Statistical yearbook of Ministry of Transportation and Communications (MOTC) for 2003.
The number of companies operating highway bus services show a small increase at deregulation, followed by a peak, then sustained. Except in 2001, the number of vehicles had adversely increased followed deregulation, despite the decreasing trends of the number of vehicles were already in place before deregulation. Highway bus vehicle kilometers increased by 33% over the period 1997 to 2002, passenger kilometers also increased by 12% during the same period.
2.3 Market shares by ownership types of highway bus operator
The proportion of vehicle kilometer operated by different categories of enterprise, i.e., privately own enterprise (POE) and stately own enterprise (SOE), between 1994 and 2001 is shown in Table 2.2 for Taiwan as a whole.
Table 2.2 Market Shares by Owership types of Highway Bus Operator in Taiwan
Stately own enterprise (ex TMTC) Privately own enterprises Total Vehicle-km
(103 veh-km)
Passenger-km (106 pass-km)
Vehicle-km (103 veh-km)
Passenger-km (106 pass-km)
Vehicle-km (103 veh-km)
Passenger-km (106 pass-km) 1994 284,843 (0.45) 5,046 (0.42) 353,273 (0.55) 6,879 (0.58) 638,116 11,925 1995 268,013 (0.43) 4,513 (0.43) 350,038 (0.57) 6,028 (0.57) 618,051 10,541 1996 245,021 (0.40) 4,068 (0.42) 374,574 (0.60) 5,704 (0.58) 619,595 9,772 1997 169,549 (0.30) 3,197 (0.37) 401,135 (0.70) 5,414 (0.63) 570,684 8,611 1998 149,888 (0.26) 2,741 (0.33) 429,390 (0.74) 5,592 (0.67) 579,278 8,333 1999 135,270 (0.23) 2,355 (0.30) 457,989 (0.77) 5,570 (0.70) 593,259 7,925 2000 133,185 (0.20) 2,147 (0.25) 521,494 (0.80) 6,437 (0.75) 654,679 8,584 2001 64,169 (0.09) 1,066 (0.12) 613,733 (0.91) 7,882 (0.88) 677,902 8,948
Source: (1) Statistical yearbook of Ministry of Transportation and Communications (MOTC) for 2001.
(2) Statistical yearbook of Highway Bureau, MOTC for 2001.
Note: (1) TMTC was privatized in July 2001.
(2) The figure in parenthesis represents the percentage of the corresponding vehicle kilometers or passenger kilometers.
The structure of the industry has undergone fundamental change since deregulation, perhaps the most striking point from Table 2.2 is that the significant expansion of the POEs.
Specifically, the proportion of kilometer operated by this sector has risen nearly one-third compared with the immediate post-deregulation period (between 1997 to 2000). The SOE, on the contrary, has gone to opposite extremes and lost lots of its share. The POEs have experienced a 46% increase in passenger kilometers since deregulation, but the SOE, by contrast, has suffered a 33% decrease over the same period.
2.4 Privatization of the Taiwan Motor Transport Company
The TMTC was set up in 1980, since then, the Taiwanese intercity bus services have been provided by the nationwide TMTC in monopoly. However, a long-term trend decline about 10% per annum in intercity passenger journeys from 1980s has been seen, mainly due to the increasing use of private cars and illegal bus services following the opening of the first national highway in 1979. Subsequently, during 1990s, both endogeneous and exogeneous factors led to a major structural change in the Taiwanese intercity bus industry. Several
influences occurred within TMTC itself. First, public management was exceeding inefficient.
Under the operations of TMTC's 50 subsidiaries (stations) in 1990, there were 105 national highway lines and 102 provincial highway lines with a total of 3,070 vehicles. The number of TMTC employees was 13,000 by 1990. The number of employees per vehicle was more than four, approximately double the average of privately owned local bus operators. Secondly, the TMTC's quality of service severely deteriorated. Its fleet, where more than half the number of vehicles were more than 10 years old, was the least-maintained part of the system. Complaints about its poor services began to increase. Part of its operational inefficiency should attribute to both TMTC's management and its employees, and the rest of it was directly caused by governmental and politicians’ intervention in controlling the transportation industry. For example, without governmental approval (usually time consuming), TMTC could not determine its budget, fare, staff salaries and authority for new services (such as renew rolling stock). In addition, it was always required to serve cost-inefficient social goals and operate unprofitable lines. These aforementioned factors, not only combined to either increase the cost or reduce the productive efficiency but also resulted in a deficit of a million U.S. dollars accumulated in 1999. TMTC was unable to pay the debt service of its bonds and became a grant and subsidy soaking company, which allowed it to be relatively more irresponsible and inefficient.
Besides these pressures mentioned above for TMTC's privatization, there were three major exogeneous factors from the government's decision-making. First, intercity bus service provision within Taiwan has undergone fundamental change over the last decade, moving from a publicly owned and heavily regulated industry to a privately owned and partially deregulated market. Specifically, the intercity bus was still subject to quality control and price cap regulation because of its fare; however, restriction of entry was removed to a great extent.
The first POE was allowed to enter the national highway bus market running on 26 lines in 1990 and was able to provide alternative intercity service other than TMTC. Following the
partial deregulation of bus industry in 1995, many POEs successively set up entirely new services but almost parallel to the national highway lines, altogether 22 POEs with 32 lines, with those of TMTC's by 1999. TMTC continued to operate, lacking innovation in competition with these increasing new entrants, eroding its revenues, and making achievement out of sound financial condition impossible.
Secondly, in respond to a request from the government, TMTC began to implement an organization reform, mainly to both downsize its personnel and pass (to POEs) or close its less-attractive lines to reduce its increasing cost from 1995. However, the deficit was still increasing until 1998. The then government decided to privatize TMTC by 2001. Thirdly, in 2000, there was political enthusiasm for proceeding to reform public organizations under the newly-elected DPP (Democratic Progressive Party) government. Excessive cost due to inefficient management and thus suffering the problems of long-period loss making was another driving force for reexamining the performance of the TMTC. And lastly, the TMTC's financial crisis on the verge of bankrupt at the end of 1999 served as a further impetus for accelerating the privatization of TMTC.
All these factors led to the TMTC's privatization. The privatization has produced major structural changes in the intercity bus industry. Some of these important changes, characterizing its privatization, can be summarized into two points: First, the TMTC was fully privatized by transferring hundreds of vehicles, 53 of 62 national highway lines and 43 of 83 provincial lines, together with all the 15 stations and depots to some 1,100 employees (out of 3,100 employees), the resultant private enterprise became organized as Guo Guang Motor Transport Company (KKTC). The rest of national and provincial lines as well as remaining old vehicles were passed to existing local bus companies by means of tendering. Second, KKTC was awarded a public passenger transportation franchise for a period of five years.
Today, the KKTC is a good example of a POE operating in a similarly partially deregulated transportation market but almost entirely free from the government's restriction as a SOE.
Thirdly, subsequent to TMTC’s privatization, other three nationalized enterprises, including Taipei Municipal Bus Company, have followed this successful case to impletement their programme of privatization.
CHAPTER 3 Literature Review
It’s only quite recently that frontier studies have been developed as an appropriate methodologies to the transport sector, and the majority of studies have been published during the 1990s. A comprehensive survey of frontier methodologies and empirical results for public transit has been presented by De Borger et al. (2002). The existing frontier studies measuring urban transit performance have also been systematically summarized and critically assessed by them. In this chapter, frontier studies of transit systems are first reviewed, then the relevant researches concerning transit efficiency measurement, including frontier studies in Taiwan, input and output measures in transit, related studies of transit performance, as well as related studies of transit privatization are briefly reviewed.
3.1 Frontier studies of transit systems
Methods of measuring efficiency can be broadly classified into non-parametric and parametric. Non-parametric methods include indexes of partial and total factor productivity (TFP), and data envelopment analysis. The latter is essentially a linear programming based method. Parametric methods involve the estimation of neoclassical and stochastic cost and/or production functions (Gillen and Lall, 1997).
An overview of non-parametric and parametric frontier studies concerning bus transit systems is presented below.
3.1.1 Non-parametric approach
Regarding applications to transit efficiency studies, non-parametric approach have been used in the following cases.
Chu et al. (1992) used DEA to develop a single measure for the efficiency and a single measure for the effectiveness of a transit agency relative to other agencies within the same peer group. By using a single measure for each of these criteria, the paper provided a more robust indicator or transit performance than the widely used multiple ratio analysis performed in the Irvine Performance Evaluation Method (IPEM). Their analysis reinforced the notion that, for a public agency, measures of efficiency should be kept distinct from measures of effectiveness.
Obeng (1994) studied subsidy-induced technical inefficiencies in public transit systems using DEA in the United States. He found that subsidies improved technical efficiency in approximately 75% of the transit system studied. These efficiency improvement resulted in total cost savings of $13.66 million or $0.187 million per transit system. He argued that the type of subsidy given to the transit systems may determine its impact on technical efficiency.
He notes that an output-based subsidy and capital subsidy are important in determining transit efficiency.
Nolan (1996) used the DEA approach with a second stage regression analysis to study technical efficiency determinants in the United States transit sector. Among other things, he concluded that operating subsidies created significant and negative impacts on efficiency.
Agencies that received larger subsidies from state (but not federal) government had less incentive to produce efficient levels of output.
Kerstens (1996) evaluated the performance of a sample of French urban transit companies using a broad selection of nonparametric reference technologies for two specifications of the production process. In particular, the variable returns to scale DEA models with either strong or weak disposability in both inputs and outputs, and the Free Disposal Hull (FDH) are applied. An extensive comparison of the resulting radial output efficiency measures yields the following major methodological conclusions. First, the location of the efficiency distributions differs substantially depending on the methodology and
especially on the output specification considered. The latter differences vanish if the impact of outliers is eliminated. Second,, convexity has a stronger influence on the efficient-inefficient dichotomy than allowing for congestion by means of a weakly disposable DEA model. For policy purposes, these efficiency distributions are explained using a Tobit model. The findings corroborate results reported elsewhere: the harmful impact of subsidies, etc.
Furthermore, the network structure seems to account for some differences in performance.
Finally, a novelty in the urban transit context is the indirect monitoring effect of the French earmarked transportation tax.
Roy (1996) studied the productivity of the transport sector in Canada using the total factor productivity (TFP) index at the aggregate level. He found that total productivity of Canada’s transport sector grew by 15 per cent over the 1981 to 1993 period (1.1% per annum).
He also found that since the mid-eighties, productivity had been trending downwards in passenger carriers, while the gains of freight carriers had been accelerating since 1986.
However, he excluded urban carriers such as transit systems, taxicab operations, and special services such as school bus operators from the analysis.
Lyons (1997) indicated that there are many ways to look at productivity in the transit industry. The most commonly used indicators of performance are partial measures of efficiency. Recent studies have focused on developing a single measure of overall transit performance based on TFP and/or DEA models. However, these studies use different theoretical concepts, measures of output and input, and data sets to measure productivity. The objectives of this dissertation are: to determine whether the use of different single measure performance indicators yields consistent results; to determine whether there are significant differences in performance as measured by total and/or partial indicators; to explore which set of partial measures can best be used to predict overall performance; and to examine the influence of operating environments on overall performance. The overall measures used are TFP and DEA. Cross-sectional panel data are used for 93 urban transit firms which had 50
more buses in 1986, 1988, and 1990. Analysis revealed that the overall measures of productivity yield consistent results when the output variable remains fixed. However, the designation of firms as “best” or “worst” performers is substantially influended by the choice of the output variable. There are significant differences in performance as measured by
more buses in 1986, 1988, and 1990. Analysis revealed that the overall measures of productivity yield consistent results when the output variable remains fixed. However, the designation of firms as “best” or “worst” performers is substantially influended by the choice of the output variable. There are significant differences in performance as measured by