Performance-based contracting of urban transport operation services: evidence from Porto's light-rail

This paper develops a bonus/malus incentive model for contracting out the provision of urban railroad operation services, and testing parts of its performance using Monte Carlo methods. We also provide evidence on the performance measures of Metro do Porto's (MdP) light-rail network operation, during the 2010–2016 term of a bonus/malus-based contract, incorporating some features of our model. Results document that the implementation of a performance-based contract with an embedded incentive bonus/malus mechanism may contribute to promoting ridership patronage, increasing the average ride, and ultimately promoting the overall economic operating efficiency of the system. The comparative operating performance analysis of MdP versus Metropolitano de Lisboa, a vertically integrated, governmentally-owned metro network, shows that MdP exhibits higher revenue, cost, and operating efficiency in the 2010–2016 period, and that the bonus/malus mechanism induces the private sub-concessionaire to respond more efficiently to changes in demand.