Cost, quality and scope of service: The case of the Israeli public bus sector

In recent decades, competitive tendering has become a common method for procuring public bus services. As part of the tendering process, the transport authority decides on the type of contract to be signed with the operators, including terms of operation, financial terms, and duration. Among the many variations of such contracts, the main ones are the “net-cost” and “gross-cost” types. Under a net-cost contract, the operator pays the capital and operating costs and receives the fare-box revenues and, in some cases, a fixed subsidy. Under a gross-cost contract, the transport authority receives the fare-box revenues and the operator pays the costs and receives payment for supplying a pre-determined level of service. Which of these best meets the objective of improving service and increasing the use of public transportation, while also maintaining cost efficiency? In this paper, we use data on the Israeli bus transit sector to examine this question.