In the past decades, several countries have introduced reverse auctions for allocating universal service or public mission subsidies in various industries. Examples include urban transport, air transport and telecommunications. Recently, such mechanisms have also been envisioned in liberalized postal markets. Issuing an invitation to tender for obligations in otherwise liberalized markets significantly differs from auctioning off a monopolistic provision of services or goods ("competition for the market"), as is e.g. the case with spectrum auctions in the telecommunications sector. We discuss the rationale for introducing such a regulatory regime as well as conceptual and practical issues concerning its implementation. <br>It turns out that designing an efficient tender for universal service subsidies in liberalized markets is considerably more difficult than tendering e.g. a monopoly franchise. A first reason is that the cost assessment is more complex in the former case as future competitive market outcomes have to be anticipated; in the case of franchise bidding, at least the number of competitors is given by the tender itself. Hence, revenue effects caused by competitors are easier to calculate. Second, the threat of a winner's moral hazard requires more detailed ex ante regulations. These raise the social cost of universal service provision. Compared to direct designation of universal services with ex post compensation, tendering causes a series of fundamental concerns and trade-offs that make the application of auctions less attractive than in other sectors.
In this paper we discuss the regulatory risk associated with tendering regional public transport lines from the regulator's and the operators' perspective.
The various actors in the regulated industries relate to each other within a broader
institutionalf ramework, i.e., by way off ormal and informal rules. An important
role in the implementationo f liberalizationp rocesses is given to regulation and thus
to regulatory institutions. The rationale for regulation is its positive effect on society
by correcting market failures. But regulatory intervention also causes costs which
we call "costs ofregulatory governance". These costs resultfrom negative consequences caused by regulatory requirements and from the implementation of regulatory instruments. These costs will depend upon the formal and informal rules among the involved actors, upon the allocation of property rights among these actors, as well as upon the various principal-agent or more generally contractual relationships
among these actors. We distinguish between direct and indirect costs of regulation:
Direct costs occur in relation with the institutional design of the regulatory framework and the behaviour of actors. Indirect costs resultfrom distorted incentives and finally turn out in an inefficient supply ofgoods and services. Using the example of the Swiss postal market we offer a first outline of a possible application of the framework. In this article we neither intend to quantify regulatory costs nor do we
question regulation per se. We rather present a qualitative framework which helps
to structure a discussion about regulatory challenges in network industries.
Mandating universal service requires the public to decide what services people should have and what prices they should pay. Postal services have traditionally been financed by charging the senders only, while recent steps in the liberalization of the postal sector forced policymakers to find a broader financial basis for postal services. The existence of a receiver externality, the benefits enjoyed by the receiver of a postal item, implies that also they should contribute to the financing of delivery costs. Moreover, since it is rather the operation of a delivery network than an individual sending that contributes to the costs of the postal operator, it is optimal that also the publicwho profits from its existence bears part of the cost.
We discuss the revenue effects of alternative financing regimes, arguing that introducing the possibility of new levies from the receivers' side may yield adverse effects in terms of operator revenue: Receivers opting for free P.O. box delivery instead of costly doorstep delivery destroy the positive welfare attribute of non-rivalry in last-mile delivery. This lowers the total social value of the postal network (and the services provided by it) to the public and therefore also its willingness to contribute to its financing.
