PUBLIC PROCUREMENT AND THE RISE OF NATIONAL CHAMPIONSIN THE DEREGULATED EUROPEAN MARKETS FOR PUBLICTRANSPORTATION 1Gunnar Alexandersson and Staffan HulténStockholm School of Economics and Ecole Centrale Paris 2AbstractAn important element in the deregulation of the public sector in the European Union (EU) ispublic procurement. EU has created a Community legislation on public procurement which aimsat reducing costs for contracting authorities, increase intra-Community competition in keyindustries, and permit competitive European firms to develop.Public transportation is one of the affected sectors. For instance, the opening up of nationalmarkets of railway passenger services has created new opportunities for railway operators tobecome international players. In this paper we look at these trends of development in a context ofthe creation and viability of national champions. A comparative case study approach is used tofind similarities and differences between the strategies of Sweden, Germany, Great Britain andFrance concerning deregulation and public procurement of railway services.The internationalization patterns of the countries’ railway operators are analyzed, as well as theimpact of time lags in the adoption of the EU public procurement legislation. We identify anumber of transition problems or failures in the process of going from state enterprise to acompetitive market, and argue that different problems arise depending on whether a country hasadopted a first-mover, follower or laggard policy. It seems clear that the four countries seek verydifferent goals when they apply EU legislation. While Sweden and Great Britain promotecompetition by inviting foreign firms to their national public transport markets, France is closest toa strategy of seeking to develop multi-national or European champions in the sector.IntroductionPublic procurement of services and products is an important ingredient in the deregulation of thepublic sector in the European Union (EU). The Community legislation on public procurementaims at reducing costs for contracting authorities, increase intra-Community competition in keyindustries, and permit competitive European firms to develop.Public procurement of goods and services is a multibillion Euro industry, being applied in manydifferent public sectors in Europe. Its importance also tends to increase as more sectors are beingderegulated and opened to competition. One such sector is the public transportation sector. Sincethe mid 1980’s, deregulation, privatization and various forms of franchising and tendering have 1 We gratefully acknowledge research funding from the Swedish National Rail Administration. We also thankProfessor Yair Aharoni, Tel Aviv University, and Associate Professor Henrik Glimstedt, Stockholm School ofEconomics, for comments on an earlier version of this paper.2 Gunnar Alexandersson is a doctoral candidate at Stockholm School of Economics. Staffan Hultén is an AssociateProfessor at Stockholm School of Economics and a recurrent visiting professor at Laboratoire Stratégie &Technologie at Ecole Centrale Paris.affected public transportation in several countries in Europe. Beginning with bus services, asimilar development has followed for railway services during the 1990’s.The opening up of national markets in the railway passenger sector has created opportunities forrailway operators and firms to become international. Previously, the scope for internationalrailway companies was very limited, simply because it would have required control andownership of railway infrastructure in several (and preferably bordering) countries. However, thespread of reforms implying vertical separation of railway infrastructure from operations, coupledwith the introduction of public tendering of railway services, have in effect changed all that.Despite the fact that the railway industry is still widely considered to be a network industry, it isnowadays even possible for a company to run railway services in a number of countries withoutany common borders at all. A common network is no longer needed.In this paper we look at these trends of development in a context of the creation and viability ofnational champions. Since the 1960’s, governments in several European countries have tried todevelop national champions, initially to meet competition from American and Japanese firms.The deregulations of the 1990’s, along with public procurement of public utilities, challengesome of these national champions, while others seem able to benefit and may become importantmulti-national or European champions.An important part of the paper is devoted to a case study of the deregulation and publicprocurement of passenger railway services in four EU member states: France, Germany, GreatBritain and Sweden. The paper has five main goals: a) to compare the deregulation of railwaypassenger services in these four countries, b) to analyze the internationalization pattern of thecountries’ railway operators, c) to analyze how time lags in the adoption of the publicprocurement legislation in these countries influence market processes and competition, d) toanalyze various transition problems following from the process of increasing competition, and e)to consider the impact of national champions going international in the European passengerrailway market.National champions in theory and practiceIn the 1960’s, several European countries experienced a shift in their industrial policy, fromgoverning an industrial sector’s activity towards developing national champions that couldbecome players in the internationally competitive arena. The focus on national champions was inparticular applied by France, for both historical and institutional reasons. Hayward (1995) claimsthat, in the contexts of growing international competition as a consequence of trade liberalization(in particular from American firms), a common belief in France was that the “industrialbackwardness” of the country motivated public intervention, financial support and officialguidance. Other countries followed France, using similar policy instruments, such as providingcapital on favored terms, discrimination in government procurement policies, and subsidizationof research programs (Vernon, 1974).In the early 1980’s, France suggested the same kind of policies on the European Community(EC) level and