An Incentive Scheme for Equipment Replacement Subsidy in Beijing Metro System

The Beijing metro system is owned by a state-owned company on behalf of the government who fully financed its construction. The service provision and equipment replacement are delegated to semi-private or state-owned operating companies. To meet the public affordability, the fare in Beijing metro system is heavily regulated by the government. The fare income however does not cover the cost of operating company. Government subsidy is therefore required to ensure the sustainable operation of Beijing metro. Cost-plus and fixed-price contracts are commonly used subsidy contract, but they lack incentives to reduce the amount of government subsidy. This paper proposes introduction of incentives to the contract to reduce the amount of government subsidy while the resulting equipment reliability does not compromise service quality and safety. In the proposed contract, the government first pays an agreed sum and then shares the deviation of the final cost from the agreed price with the operating company. An illustrative study demonstrates that the proposed incentive scheme is able to encourage the operating companies to reduce their costs and thus the government subsidy while the level of service safety and quality are upheld.