The Economics of TransMilenio, a Mass Transit System for Bogota

The provision of urban public mass transportation in Latin America has exhibited marked swings during the last century. Various cities have experimented with public and private provision, as well as different types of market regulation ranging from almost total liberalization to intervention in fares, route allocations, bus size, service quality, and exclusive road lanes. Despite the importance of this sector for the quality of social life and urban economic development, the literature contains little theoretical research on the market failures characteristic of this industry. There are also few studies on the consequences of alternative provision and regulation arrangements. This paper contributes to this second area of research. We describe the experience of Bogotá, Colombia, where a new hybrid system of urban public transport was put in place at the beginning of this century—hence its name, TransMilenio. The new system was designed after decades of learning about the failures of both publicly and privately owned systems. It currently supplies more than 20 percent of daily trips. By 2015, the complete TransMilenio system is expected to transport 80 percent of the city's population at an average speed of 25 kilometers per hour with a service quality similar to an underground metro system.

Several market failures affect the provision of urban mass transit: unclear definition of property rights on the curbside and on the road; collusion, which results in fares set above competitive equilibrium levels; misalignment of the incentives of bus drivers and owners (a typical principal-agent problem); and congestion and pollution.¹ In many developing countries, these market failures are exacerbated by weak regulation and enforcement. In Bogotá over the last three decades, city transportation was in the hands of private entrepreneurs, and local authorities were in charge of regulating the system and maintaining the road infrastructure. This arrangement suffered to some degree from all of these market failures. At the end of the 1990s, the system had an excess supply of usually empty and slow buses, low-quality service, and widespread inefficiency. Average travel time to work was one hour and ten minutes; obsolete vehicles were used; average speed was only ten kilometers per hour during peak hours; 70 percent of air pollution in the central corridors was generated by traffic; and accidents were frequent.

TransMilenio, a hybrid public-private scheme, was designed to overcome these market failures and improve urban transport quality. The first market failure, the unclear definition of property rights on the curbside and on the road, was solved via exclusive lanes and the construction of restricted-access elevated stations. Passengers pay for access to a system of buses and stations, as in an underground metro system, and not for access to the vehicles, as was previously the case. TransMilenio uses the left lane of the streets, and there is no staircase for accessing the buses, which facilitates transfers in different directions and improves the speed of passengers' movements.

The second failure TransMilenio addressed involved fares. These were traditionally set above competitive equilibrium levels, largely as a result of capture of the regulator. The theoretical literature identifies reasons for market power by the bus owners that can also support overpricing. Overinvestment in busses was profitable, leading to excess supply, low use, overcrowding of streets, low speeds, and pollution. In contrast, TransMilenio fares are set at the level at which they finance the long-term cost of provision, defined through a route-tendering process in which potential providers compete for the exclusive use of the roads based on the lowest cost bidding. Fares evolve based on the change in input prices and the number of passengers transported.

TransMilenio also faced a third market failure, which resulted from the private solution to the agency problem between affiliating firms and bus driver-owners. Under the traditional scheme, firms...