Ceris-Cnr, W.P. N° 2/2002

while Section 3.2 deals with the modeling of x-inefficiency effects. The database is
described in Section 4. Section 5 comments on the empirical results, discussing both the
technology properties (Section 5.1) and the evidence on cost inefficiency (Section 5.2).
Section 6 summarizes the major findings and provides some policy indications.

2.

Subsidization mechanisms and incentives

A common feature of the regulatory framework of public transit systems in most
countries is the provision for transfers from the local authority to the LPT firm. Since
the latter face universal service obligations, commercial revenues are generally not high
enough to cover operating costs. The payment of a subsidy is then required to ensure the
balance of the budget. In 1995 the share of public subsidies over operating costs for the
Italian bus-line companies amounted to about 71%. The LPT industry in Italy has been
interested by several important regulatory interventions during the last seven years, in
the effort to reduce the waste of public funds spent on collective transport.2 In 1995,
Law 549 implied the abolition of the old system of redressing deficits of LPT firms
through resources drawn on the National Transport Fund, a central government grant
system properly created for this purpose. The opportunity cost of public funds was
thereby transferred to the Regions, who are nowadays in charge of the programming of
services. Subsequently the Reform has been implemented by the Decreti Legislativi
422/1997 and 400/1999.
An important innovation that the legislator tried to introduce in the organization of
local public transport is the increase of the financial responsibility of all the subjects
operating in the sector, i.e., local authorities and LPT firms. The purpose is to better
select which public service deserves to receive subsidies3 and to stimulate the recovery
of productive efficiency by transportation companies. Here the necessity comes to
eliminate the transfers from the central government and to replace them with forms of
taxation at regional level, in order to make binding for local authorities any measure for
an efficient use of public resources. In parallel, the reform dictates that the relations
between the regulatory subject and the transit service provider are governed through the
so-called service contract, a formal agreement which defines the rules that the LPT

2

3

The Italian regulatory framework is analyzed in detail in Piacenza (2000b) and Boitani and Cambini
(2001a).
Decreto Legislativo 422/1997 names these categories “minimum services”. In practice, the definition
of minimum service should correspond to the level of service that a community wants to make
universally and actually affordable to each of its member, normally at non-market special tariff
conditions.

8