Economic Efficiency of Railways and Implications for Public Policy

This paper analyzes the efficiency of passenger railway systems in 19 OECD countries to identify the effects of both public subsidies and degree of managerial autonomy on productive efficiency. A two-step process was used. First, the data envelopment analysis method was used to measure the gross efficiency index from the panel data of the railways over the 1978-1989 period. A Tobit regression then was used to identify the effects of the public subsidies and the extent of managerial autonomy while controlling for the effects of various operating characteristics and market environments that are largely out of managerial control. Empirical results show that railway systems with high dependence on public subsidies are much less efficient than similar railways with less dependence on subsidies. Further, railways with a high degree of managerial autonomy from regulatory authority tend to achieve higher efficiency. These findings imply that productive efficiency of railway systems may be significantly enhanced by an institutional and regulatory framework that provides a greater degree of freedom for managerial decision-making. Subsidy policies should encourage railways to use normal market mechanisms to improve their cost recovery while using the subsidies for improving services. The findings also indicate that the effects of the differences in operating and market environments must be controlled for when comparing efficiency measures across railways.