The Influence of Transport Economic

Transport economics is crucial to enable buyers to get a realistic picture of how much the service they are purchasing should cost. In-depth knowledge of transport economic will provide the municipalities the ability to understand cost drivers and calculate an approximate price for the service (Bel & Fageda, 2010; Greco et al., 2015). Bø et al. (2012) estimated the cost of one second extra loading time per stop by a household waste collection route equaling approximately 20.000 NOK per year. Other cost drivers affecting the service are material (trucks, chambers), refuse collectors, fuel usage, and administrative costs. Results from our data collection show a varying degree of transport economic competence within the municipalities and inter-municipal cooperation. A similarity between all interview objects is that none of them are sacrificing much effort calculating the price before the publication of the tender. Some of the municipalities are calculating an

approximate minimum and maximum price, where the difference are several mNOK, while others are using historical prices as a benchmark, and perhaps adjusting it for population growth.

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Furthermore, we see that a majority of the municipalities interviewed use the price on the bids received by the suppliers as a baseline. When many bids are received, this should provide a realistic picture of the market. However, as we have seen, a few suppliers represent the most significant market share today, which could give the municipalities incorrect information regarding market costs and increase the risk of information asymmetry that occurs in principal-agent theory. Thus, the suppliers possess much power when it comes to information regarding costs. As stated by ROAF “This competence has the suppliers that purchase the trucks and are hiring the collectors, and they are the one calculating the price. We think that we need to trust the suppliers since they conduct the calculations and

measurements”. Furthermore, RfD states that it is the supplier’s responsibility to calculate how much material and waste collectors they need to ensure proper capacity, and that the costs involved after contract signing should be the suppliers’

risk considerations.

Our research shows that the municipalities have small to no information of what the suppliers’ costs were during the previous contract period. As most are calculating the approximate price of the tender based on historical prices, the results lack considerations on whether the previous contract price contained a big margin, or if the suppliers were suffering from a deficit. The suppliers could further find information on the previous tender and use this price to calculate an approximate bid for the new tender. This could lead to a biased price, and one of the parts in the buyer-supplier relationship could suffer, while the other part gain benefits. Altogether, this will have a negative impact on the service efficiency and thus performance and sustainability. If the contract price is too low, the supplier could suffer from internal inefficiency. On the other hand, a contract price that is too big will have a negative impact on the municipality and promote inefficiency as well. Cost-information sharing could improve the firm's’ efficiency, as well as improve future cost savings. This result is also found in empirical studies done by Bel and Fageda (2010) and Greco et al. (2015), which investigated the municipal solid waste collection costs.

Further, data shows that the suppliers possess much power regarding the costs associated with the service, while the municipalities accept the costs calculated by the suppliers. This information asymmetry provides the suppliers' abilities to misuse the cost calculations provided when municipalities are asking for insight

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into the suppliers’ calculations due to FOA §24-9. It is impossible to know whether the bids are priced correctly when the municipalities have little or no information regarding relevant cost drivers. The numbers of trucks and waste collectors generate increased costs, and it is crucial for the municipalities to gain a higher knowledge of the cost levels to understand the service they are

outsourcing. Furthermore, previous studies regarding time- consumption should be implemented when municipalities are calculating the value of the tender since the service is profoundly affected by the time used for emptying each bin and the frequency of each stop (Bø et al., 2012).

The lack of knowledge regarding transport economics could have been a factor affecting the suppliers’ behavior and aggressive market competition that lead to underpriced contracts and bankruptcies in Norway. An example of this is when Oslo asked for insight in Veireno’s calculations and accepted the offer even though several critical cost elements such as administrative costs were omitted (Kommunerevisjonen, 2018). The bid that was priced far below Oslo’s pre-calculated contract value was seemingly accepted due to a lack of transport competence since aspects like usage of half the previous vehicle fleet was

recognized as a solution. The contractor can only reject an offer if the price or cost level cannot be explained to the necessary extent from the information requested in the regulations for public procurement (FOA, § 24-9 (2)). Thus, the

municipalities do have the possibility to reject an offer, but it requires several omitted cost elements, or the implementation of the service is at stake due to economic problems. Increased knowledge of cost drivers could thus promote a sustainable contract due to an accurate price calculation in advance of the publication of the tender.

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