Dealing with incumbent operators

6

Risks That Merit Special Attention

DEALING WITH INCUMBENT OPERATORS

A proper assessment of incumbent operators is a critical part of the planning process, necessary to define a conceptual project structure properly and also to allocate functions and risk properly. For instance, planners should assess incumbent operators’ assets and consider whether they might be incorporated in the project. Similarly, incumbent operators’ access to finance or any existing deals they might have with bus manufacturers are important factors to understand when considering whether to assign the functions of fleet renovation or provision to them. Their ability to plan, operate, and organize internally as well as their internal organizational structure are also critical to assess before assigning them responsibility for planning or organizing a joint operation.

Planners should balance (a) efforts to foster competition by removing barriers to entry and (b) efforts to maximize value for money by taking advantage of incumbent operators’ assets. Incumbent operators themselves are the main barriers to competitors’ entry. For example, consider a bus project that brings in new operators. Their financial viability could be threatened by the ongoing activities of incumbent operators if, for example, planners fail to finalize a restructuring of the incumbents’ routes. Even if planners are careful to separate out the routes, incumbent operators could still continue operating on informal terms. In addition, incumbent operators hold critical assets that may be valuable to the project. These assets may be tangible (buses, depots, sometimes even fuel stations) or intangible (knowledge about demand, operational conditions, costs, political relations). Depending on the context, it might make most sense for incumbent operators to continue operating with key assets or to compensate them so that these assets can be put at the disposal of various bidders. Competition is a tool to a goal, not the goal itself, and efficiency should not be sacrificed in the name of fostering competition. In the case of Medellín, Colombia, for example, continuing to work with incumbent operators was found to be the most efficient solution.1 Even if new competitors are not introduced at the outset of a project, there is always an opportunity to improve the market’s efficiency (which will always involve increased competition) gradually over the long term.