Privatization in mass transit

Privatization in mass transit

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Privatization in mass transit
Alternate Title:
Technical memorandum number one : overview of privatization
Portion of title:
Overview of privatization
Florida -- Dept. of Transportation
University of South Florida -- Center for Urban Transportation Research
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Center for Urban Transportation Research, University of South Florida
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v, 90 leaves : ill. ; 28 cm.


Subjects / Keywords:
Local transit -- Deregulation -- United States ( lcsh )
Local transit -- Finance -- United States ( lcsh )
Local transit -- Deregulation -- Florida ( lcsh )
local government publication ( marcgt )
bibliography ( marcgt )
non-fiction ( marcgt )


General Note:
"May 1992."
General Note:
"Prepared for Florida Department of Transportation."
Statement of Responsibility:
by Center for Urban Transportation Research, College of Engineering, University of South Florida.

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University of South Florida Library
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University of South Florida
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Privatization in mass transit.
n Technical memorandum #1,
p Overview of privatization /
by Center for Urban Transportation Research, College of Engineering, University of South Florida.
3 246
Technical memorandum number one : overview of privatization
Overview of privatization
[Tampa] :
Center for Urban Transportation Research, University of South Florida,
v, 90 leaves :
ill. ;
28 cm.
"May 1992."
"Prepared for Florida Department of Transportation."
Local transit
x Deregulation
z United States.
Local transit
United States
Local transit
1 710
Dept. of Transportation.
University of South Florida.
Center for Urban Transportation Research.
t Center for Urban Transportation Research Publications [USF].
4 856


PRIVATIZATION IN MASS TRANSIT Technical Memorandum #1: Overview of Priva tization Prepared for: Florida Department of Tran s port a tion By: Center for Urban Transportation Research College of Eng i neering University of Sou t h Florida May 1992


FOREWORD Under contract with the Florida Department of Transportation (FOOT), the Center for Urban Transportation Research (CUTR) prepared an overview of privatization which culminated In Technical Memorandum # 1 This m emorandum i s one of three technical memoranda that are to be prepared as part of this project, and i s i n tended to trace the history and evolution of privatization in mass transit. This results i n an understanding of the definition of privatization, the arguments for and against various privatization activities, the specific funct i ons that can be potentially privatized, and the specific considerat i ons associated with the contracting of transit operations, maintena nce, and administration. The following CUIR staff assisted in the research and preparation of this t echnical memorandum. CUIR Director: Gary L Brosch Project Director: Steven E. Polzin, P E., Ph D Deputy Director for Policy Ana lysi s Project Manager: William L Ball, Research Associate Staff Support: Eric Hill, Research Associate Stacey Bricka, Researcli Associate Patricia Henderson, Research Associate Terri Oates, Project Assistant Patricia Turner, Project Assistant Tony Rodriguez, Graduate Research Assistant Joel Rey Graduate Research Assistant ii


. TABLE OF CONTENTS I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . 1 TI. PRIVATIZATION DEFINED . . . . . . . . . . . . . . . . 3 Overview . . . . . . . . . . . . . . . . . . . . . . . . . 3 Growth and Purpose of Government . . . . . . . . . . . . . . 3 Classification of Goods and Services . . . . . . . . . . . . . . 5 Categories of Privatization . . . . . . . . . . . . . . . . . . 8 III. GOVERNMENT ROLE IN TRANSIT PRIVATIZATION . . . . . . 9 Evolution of Mass Transjt Through 1985 . . . . . . . . . . . . . 9 Federal Initiative in Transit Privatization . . . . . . . . . . . . . 13 UMTA Initial Philosophy . . . . . . . . . . . . . . . . . . . 15 Evolution Since 1985 . . . . . . . . . . . . . . . . . . . 19 Florida . . . . . . . . . . . . . . . . . . . . . . . . . . 21 IV. TilE TRANSIT PRIVATIZATION DEBATE . . . . . . . . . . 23 v. VI. Textbook Case for Privatization . . . . . . . . . . . . . . . . 23, Contracting of Services . . . . . . . . . . . . . . . . . . . . 25 Other Public/Private Partnerships in Mass Transit . . . . . . . . . 44 INVENTORY OF TRANSIT PRIVATIZATION ACTIVITIES . . . . 51 Transit System Organization and Structure . . . . . . . . . . . . 51 TilE CONTRACTING DECISION . . . . . . . . . . . . . . . 61 Transit Operations . . . . . . . . . . . . . . . . . . . . . 61 Transit Maintenance . . . . . . . . . . . . . . . . . . . . 69 Transit Administration . . . . . . . . . . . . . . . . . . . . 70 Level of Discretion Given to Private Sector . . . . . . . . . . . . 72 The Contracting Decision A Summary . . . . . . . . . . . . 72 Vll. SUMMARY . . . . . . . . . . . . . . . . . . . . . . . 74 BffiUOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . 78 111


LIST OF TABLES Table 1 Suburbanization of Population and Shift i n Travel Modes, 1950 to 1980 .... ........ ........................... T able 2 Mass Transit Trends ......................... ......... Table 3 Summary of Issues in the Contracting of Transit Operations ..... Table 4 Reasons for Contracting by Service Type, California Transit Systems ............................................ Table 5 Operation Activities .......... ................ ........ T able 6 Maintenance Activities ....... ..................... .... T able 7 Admi nistration Activities ...... ..... . ..... ............ Table 8 Public/Private Approaches to the Provision of Transit Operations . . . . . . . . . . . . . . . . . . . . . T able 9 Public/Private Approac hes to Transit Maintenance ........... Table 10 Public/Private Approaches to Transit Administration ....... . . T able 11 Summary of issues in the Contracting of Ti-ansit Operatio ns ..... I V 11 12 29 40 59 59 60 64 69 71 76


Figure 1 Figure 2 Figilre 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 LIST Or FIGURES Total Government Expenditures ...................... .. .. 4 Government Expenditure as a Percent of GNP ............... 4 Classification of Mass Transit ..... ...................... 7 Mass Transit, f rom Toll Good to Public Good .............. 7 Major Trends in Transit Ridership ........................ 10 Percent of Revenue Miles Provided by the Private Sector, Florida, 1985-1990 . . . . . . . . . . . . . . . . . . 26 Percent of Passenger Trip s Provided by the Private Sector, Florida, 1985-1990 . . . . . . . . . . . . . . . . . .. 26 Percent of Passenger Trips Provided by the Private Sector, Florida, 1985-1990 . . . . . . . . . . . . . . . . . . 26 Percent of Revenue Miles Pro vided by the Private Sector, United States, 1984-1989 .............. . ............ . 27 Percent of Passenger Trips Provided by the Private Sector, United States, 1984-1989 .... : ................... ....... 27 Percent of Passenger Trips Provided by. the Private Sector, United States, 1984-1989 ............................... 28 Sample Transit System Organization Chart .................. 52 Criteria Implications Model for Transit Operations .......... 63 Criteria Implications Model for Transit Operations, A Consideration of the Seven Approaches ..................... ......... 67 Criteria Implications Model for Transit Operations, Transit System Example ..................................... 68 v


I. INTRODUCTION Privatization has become an imp ortant issue i n the transit industry du ring the past decade and became a public policy issue in general as early as 1971.1 The contracting of goods and services and various other public/private partnerships is becoming a common occurrence throughout the United States and even more so in other deve loped countries throughout the world. The issue of privatization in the mass transit industry is one that bas evolved considerably o ver time, particularly since 1985 when the Office of Private Sector Initiatives was established at the Urban Mass Transit Administration (UMTA), now known as the Federal Transit Administration (FI'A). The purpose of this office is to encourage privatization efforts in the transit industry. The intent of this privatization study is to discuss the status and potential of privatization of mass trans it in Florida. The study will resul t in three technical memoranda and an executive summary. This Technical Memorandum ( # 1) is desigJied to provide an overview of privatization in the transit industry and inclu des the following sect ions: Privatization Defined This section begins with a brief overview of the definition of privatization in general. This is followe d by a discussion of the growth and p\lrpose of government in the provision of goods and services. Classification of goods and services is discussed in the context of which entity, private or public, is best for t he production and distribution of goods and service s. The various categories of privatization are provided at t he conclusion of this section. Government Role in Transit Privatization This section retraces the evolution of public transportation in the United States. The role of UMTA in this evolutionary process is reviewed, along with the evolving privatizat ion philosophy. State level privatization initiatives in Florida are also reviewed. The Transit Privatization Debate After presenting the tex tbook case in support of the concept of privatization, this sec tio n highlights and discusses the arguments in favor of and against privatization activities in the transit industry. 1E.S. Savas, friygh"-zglipn, ne Better Govencmrmt (Chatham. N/: Chatham House Publishers, 1987), p. 122 1


Inventory of Transit Privatization ActivitiesThis section describes a typical transit system's organization and structure. The activities and responsibilities are identified for each function within a transit system, including operations, maintenance, and administration. After the inventory of activities is compiled, potential private sector providers for each of these activities are suggested. The Contracting Decision Various approaches to the contracting of operations, maintenance, and administration are reviewed in this section Each approach identifies the specific roles of the public and private sectors, ranging from full public sector responsibility to full private sector responsibility. SummaryThe final section summarizes the contents of this technical memorandum and provides some insight as to the work that is to be conducted in subsequent tasks Specific transit privatization efforts at the national level and in Florida will be identified and reviewed in Technical Memorandum #2. This review will provide an understanding of national trends and activities by which to compare privatization experiences in Florida. Technical Memorandum #3 will evaluate transit privatization efforts in Florida and compare these efforts to those made throughout the country. Relative successes and failures will be identified; unique national efforts will be emphasized, based on the potential they might have iii Florida. Areas Will be iqentified and ranked according to their chances for success based on observations of efforts made throughout the countcy. The approach to and characteristics of a successful privatization contract will also be identified. State and l oca l initiatives concerning transit privatization efforts will be recommended where deemed appropriate. An Executive Summary will be prepared which will summarize the results of the three Technical Memoranda. 2


OVERVIEW H. PRIVATIZATION DEFINED p ri-va-tize (pri've riz') vt. tiz'ing fo make or hold private; specif, to tum over (a public property, sen>ice, etc.) to private interests pri'vatiza'tion n. Webster's New World Dimonary According to Webster's New World Dictionary, to privatize is to turn over a public property, service, or function to the private sector. Privatization in the mass transit industry may include a contract with a private sector company to operate transit service, to provide maintenance of vehicles, or to manage and administer a mass transit program. In addition, it may involve the encouragement of the private sector to directly-operate and compete in the provision of transit services or to create ot!Jer types of pub lic/ private partnerships. The definition of privatization varies considerably across the country and is expanding to include the acquisition and operation of public facilities by the private sector and even the sal e of public assets to the private sector This section begins with a discussion of the growth and purpose of government in tlie provision of goods and s ervices and is followed by a classification of goods and services based on the charactetistics of consumption. The specific characteristics of mass trans it are highlighted and discussed Finally, this section identifies tbe major categories of privatization that 'vill be considered in this technical memorandum. GROWI'H AND PURPOSE OF GOVERNMENT Figure 1 r epresents total federal, state, and local government expenditures for selected years from 1929 through 1987.2 Tota l expenditures increased from just over $10 billion in 1929 to nearly $1.6 trillion in 1987, an increas e of 152 percent. Likewise, total government expenditures as a percent of gross national product (GNP) have significantly increased over the same t ime period. Figure 2 indicates that government expenditures amounted to 10 'Dennis C. Mueller, Public Cloicc U (CAmbridge, MA: Cambridge University Press, 1989), p. 321. 3


percent of GNP in 1 929 and 35 percent in !987.3 This information indicates that the ro le of government has grown dramatically in this century. 'IOid. FIGURE 1 Total Goveromeot Expeaditures (millions o f current U.S. dollars) $1,600,000 r--------------$1,200,000 +--'!""----, ......... .... ............ 1m .Fedenl $800,000 t--.1..:=----..J-... :;;;;:;;:" $400,000 +1929 19}9 1949 1959 1969 1919 1984 1987 FIGUREl Expe oclltu""' as a Percent. or GNP II s.Jte& }0% 20% +10% 1929 19}9 1949 1959 1969 1979 1984 1987 4


The purpose of government has been deb a ted through the yea r s Most agree that it is necessary for government in volvem ent in the market for some good and services; however, differences in opinion arise co n cerning t he degree of invo l vement that government sho uld have in the provision of goods and services The traditional purpose of government is to intervene when the private market fails to achieve an optimal or nearoptimal allocation of resources. That is, it is the responsibility of the government to provide public goods in order to eliminate deficiencies of the free market. The trad i tional argument logically leads to a discussion of the nature of goods and services and how they are classified. In particular, bOW is mass transit classified? Is it a public good, or is the government intervening in a market that would otherwise be supplied by the private sector? CLASSIF I CATION OF GOODS AN D SERVICES The classification of goods and services4 can be determined by a consideration of two criteria: the feasibility of exclusion and t he jo intness of consumption. "'Feasibility of exclusion" refers to the ability to prevent consumption of a good, generally through pricing. A good is characterized by excl u sion when buyers can be excluded" from consumption unless they mee t conditions established by the seller of the good, i.e., can pay the price. Feasibility of exclusion can be easily understood by considering two e)(treme examples. Goods purchased in the grocery store are characterized by complete exclusion since consumers must meet the demands o f the grocer by paying the price for each good. Alternatively, national defense is characterized by n o exclusion since the protection offereCI is consumed by all house h olds. There is no easy way to exclude anyo n e from the consumption of national defense A majority of goods inc l uding mass transit, f all somewhere between these two extremes. "Jointness of consumption" refers to whether a good can be co n sumed by a single i n dividual or several individuals at the same time. A good can be characterized as "jointly consumed when many individuals can consume a good simul t aneously without lowering the quantity or quality of the good Again, the concept is best understood by considering two extremes. Goods purchased from the grocery store are c h aracterized by individual consumption, wh il e national defense is clearly characterized by joint consumption since all households consume national defense simultaneously. 'Hereafter, the use of the word will refer co both goods and services. 5


The degree of exclusion and the j ointness of consumption permit the classification of goods into four categories: private goods, conunon-pool goods, toll goods and public goods. These categories are the theoretical extreme combinations of the two criteria. Very few goods (if any) can be classified as one of these pure forrns; a majority of goods fall between the combinations at. different degrees of exclusion and of joint consump t ion Each pure form is defined below and is followed by a selected good service, or facility which a11proximates the pure form. To enhance the understanding of this concept. a diagram is provided in Figure 3.5 (1) Private Goods refers to goods produced by the private sector where exclusion is completely feasible and consumption is completely individual, i e., private automobile. (2) Common-Pool Goods refers to goods produced where exclusion is completely infeasible, yet consumption remains completely individual, i.e., the air we breathe. (3) Toll Goods refers to goods produced where exclusion is completely feasible and consumption is completely joint, i.e., mass transit (4) Public Goods refers to goods p r oduced w here exclusion is COI!lpletely infeasible and consumption is completely joint, i.e city street. Mass transit fits the criterion for a public good in that it can be consumed jointly, but it also fits the criterion for a private good in that it can be excluded from certain potential consumers. As a result, mass transit is classified somewhere between a purely public and a purely private good As the figure indicates, mass transit is therefore classified as a toll goop. Transit can be consumed jointly; however, since users must pay for the service, inherent exclusion exists for those who cannot afford to pay for the use of the service. In the early 1900s, mass transit was profitably provided by the private sector. However, w i th the advent of the automobile most mass transit systems were unable to compete as viable transportation alternatives. The deterioration of private mass transit eve n tually brought about involvement by the public sector to ensure that a means of transportation was available for all citizens. 'Savas, Priyqrjzarion; The Key ro Bttr Qovemmrnr, pp. 36-38. 6


The status of transit in today's society is that it is being treated more as a public good than as a toll good. Decisions concerning where and to what extent mass transit is to be provided are made politically. As Figure 4 indicates, mass transit has moved from the toll good realm to ward the public good realm. Various forms of privatization can be used to reverse this process. The decision that must be made is where along this line should mass transit be provided so as to serve the best interest of the public FIGURE 4 Mass 1\ault Fl'

Although certain localized markets do exist where for-profit mass transit is possible, the transit industry as a whole would agree that widespread provision of for-profit mass transit is infeasible. However, ma ny contend that s trategic us e of the private s ecto r through competitive contracting and various public/private partnership arrangements can result in more effective and efficient provision of transit services. Several categories of transit privatization will be reviewed in this memorandum. CATEGORIES OF PRIVATIZATION Privatization activities can be placed into two major categories: the contracting of services and public/private partnerships.6 The contracting of services is the most common form of privatization. A government entity contracts with a private sector company or organization to provide a specific service such as the provision of transit services, garbage collection, building or grounds maintenance, etc. Other public/private partnerships include such arrangements as joint development, cross-border leasing, transp orta tion demand management initiatives, and turnkey operations. All of these privatization opportunities 'vill be discussed in this technical memorandum. .. "Touche Ross, f!jvgtjWi011 in Americg (Washington, DC; Touche Ross, 1987), p. J. 8


JII. GOVERNMENT ROLE IN TRANSIT PRIVATIZATION This section reviews the evolution of mass transit and transit privatization in the United Sta tes. A brief summary of the mass transit ind ustry prior to 1985 is provided, along with a discussion of numerous factors that contributed to many changes in the transit industry. The creation of the Urban Mass Transportati?n Administration (UMTA) and its role in the transit industry is discussed. A review of the federal initiative in privatization during the early 1980s is provided and is followed by a discussion of UMTA's initial philosophy regarding privatization. Privatiza tion programs created by UMT A to provide more opportunities for the private sector are also reviewed. This section then reviews how UMTA 's original privatization philosophy evolved so that the implementation of the program has remained feasible and attractive to the industry . The section concludes wit h a review of government involvement in pr ivat ization within the state of Florida. EVOLUTION OF MASS TRANSIT THROUGH 1985 Most transit systems operating in the United States started as private companies that provided service in metropolitan areas. The transit-dependent markets that existed in these areas from the late l930s to the late 1950s he lped most of these systems to with. little or no public and to even realize a profit. Competition from the automobile contributed to declining transi t ridership, and many companies went out of business or struggled to survive. By the early 1970s, nearly all private transit systems either had been acquired by public authoritie s or ceased to exist. This resulted from a number of factors including suburbanization, rising incomes, declining automobile costs, and numerous others. During World War II, the U.S. economy was in an upswing, but motor fuel was ratio ned, making single-occupant automobile travel impractical and uneconomical. As indicated in Figure 5, rapid growth in transit ridership was experienced in this country during the war. However, this trend did not continue in the post-war era Ridership began to decline f rom the levels experienced during the war Cheaper fuel and a government policy t ha t encouraged low-density housing contributed to the suburba nization that occurred during t he 1960s. Along with the development of the automobile, suburbanization caused a loss of urban population densities, resulting in a nega tive effect on the profitability of transit systems. 9


FIGURES Major Trends in TnllSit Ridership 25 . '. ::. ... ,.,-z . -. ;;..-:.t ... ; : I 20 15 .. r' \ \ . 1f .. i / ;. :.:::; \ "-J ...... ,,;; .,;o, .. : f j / v .f;-.;,. .. ........ . 10 5 \'lj lo.._ , 1 900. 1910 l920 19:l0 1940 1950 1960 I Grow!h ol Sroa< Railways I WotldWarl and Post WtJt Boom I II Greal World Cheap Energy and Oepr8$$lon Waiii GraMh of SUburbs Source: American Public Transit Associ.ltion (APTA) 1971) 19110 1990 lnlergovemmerrtal PartnefWp Table 1 provides data concemfng the extent of suburbanization from 1950 to 1980. These data show the percent of the population residing in t h e central city and suburba!l ring. It. also summarizes d(lta on travel modes from 1950 to 1 990. As discussed above, these data depict a significant shift in the country's population from residing in urban areas to residing in s uburban areas . The data also indicate a s hift from mass transit use to private automobile use. In an effort to survive and maintain profitability, transit systems raised fares and c ut unprofitable serviceS: At the same time, these systems were unable to invest in capital equipment. Each of these measures was viewed by the bus i ndustry as necessary for survival, but, in fact, they contributed to further declines in transit patronage and reductions in the number of bus systems that remained in operat i on. . As other American cities grew into metropoli t an areas, the need for integrated transit services increased. However, many conventional transit markets, in which most travel focused on destinations within the central b u siness district, evolved into cities with several destination centers. The dispersion of destination centers made it extremely difficult for private trans i t systems to operate effectively. As a res ult, many private transit companies 1 0


deteriorated rapidly Along with the declines i n ridership, this created concerns about the financial stability of the industry in the early 1960s. TABLE 1 Suburbanlzallon or Populallon and Shllt In Travel Modes, 1950 to 1980 iJfff::..,. .... ;,.... . : .. ... , . '-'"'. . ::-sul>urbantziiilo!J *'B t': 1i;\$rlk ., ; Travel Modes. . wK. " .( ....... '' Total Passtnger Passenger Cars Year Central Cll)' Suburban Ring (biUions or Trips (millions) vehicle miles) 1950 57.3% 42. 7% 17,246 n/a 1960 49.2% 50.8% 9,395 nfa 1970 43.1% 56. 9% 7,332 916.7 1980 39.89% 60. 11% 8,228 1,111.6 1990 n/a nja 8,873 1,485.5 Sources: Edwin S. Mills and Bruce W Hamilton, Urban Economics, pp. 64, 229; APTA, 1991 Transit fact !!QQk; United States Department of Transportation, Highway Statistics !989, 1990; Oak Ridge National Laboratory. Transportation Encrg:,: Data &ok; Edition 11, 1991. In response to these concerns, Congress established t h e Urban Mass Transportation Adrriinistration (UMTA) The purpose of this agency was to revitalize the transit industry through grant programs aimed at providing funding for capital and operating costs of transit services. UMT A helped many city and regional au t horities acquire private transit companies and also provided the federal funding necessary to help resurrect t h e declining industry. By supporting transit, UMTA brought new challenges to the industry Federal subsidies did not resolve the problems Indeed, this public policy helped eliminate the economic incentives for operating mass transit systems and has often been blamed for contributing to higher transit costs and reduced revenues. As indicated in Table 2, total revenue of transit systems increased 363 percent, from 3.5 billion in 1975 to nearly 16 billion in 1990, while total ridership increased 21 percent from 1970 to 1990 (from 7.3 billion to 8.8 bill ion passenger trips)-1 At the same time, total 'James A. Dunn Jr. and William Felix, Privatizing Local Services As a federal Policy Gog!; The Cast of N e w ltmy Trt111sll (At/tlll/4.' Annual Meeling of /he Somhem Political Science Associlllion, 1990), p. 2 l1


operating expense increase 389 percent while total operating revenues increased 138 percent, which resulted in a significant decline in the operating ratio (operating revenue divided by operating expense), from 54 p ercent in 1975 to 37 percent in 1990. TABLEZ Mass Traosil Tronds (ill mlilions) . 1975 3,752.5 54% 1?80 42% 1985 37% Source: APT A, 1991 Tranished mass transit systems. However, despite the increase in government involvement, declines in productivity and the return on transit investments remained prevalent in the industry. ln addition, increases in ridership were marginal (21 percent increase for the period from 1970 to 1990) when compared to the change in funding to this industry. Although it permitted continued operation of transit systems, public support did not result in improved productivity or increased ridership. By the early 1980s, UMT A began to reconsider its r ole as the financier of transit agencies. The UMTA program, which grew to over $4 billion in the early 1980s, declined to $3 billion by 1985.8 Local government officials discovered that budget problems were not only a concern at the federal level but at all levels of government. Also, during much of the 1 980s. the country continued to experience significant demographic changes. As suburbs began to mature, they also started serving as trip destinations for a significant portion of commuters. Reverse commuting (a commute trip that has an urban area as its origin and a sub urban area as its destination) was beginning to compri s e a much greater portion of peak hour trips. 'Ibid., p. 4. 12


This signaled a dramatic change in travel patterns for most systems Instead of suburbtO central city trips, many tr i ps became central city-to-suburb or suburb-to-s u burb trips, making it difficult for transit to provide cost-effective service. Changes in transit operating practices, markets, and funding created a challenge for all parties involved in the transit industry Transit systems needed t o maintain quality service for the public but they also needed adequate funding. Transit patrons needed seivice, but at an affordable price. FEDERAL INITIATIVE IN TRANSIT PRIVATIZATION By the beginning of the first Reagan administration in 1981, it was generally believed that federal transit assistance should not continue to grow. The administration subsequently adopted the following policy: Stop spending federal money on new rail trans i t systems; stop giving federal operating subsidies to a transit industry whose deficits are rising every year; return competition and private enterprise to a central role in the urban transit industry.9 Administration officials Who criticized the increased amount .of federal funding to transit systems developed what bas been phrased as the "privatization paradigm." This practice sought to encourage such activities as "load shedding." Load shedding refers to the contracting of the more expensive transit services, such as high-cost special services for the elderly and hand i capped, low volume routes weekend services, and rush hour service on highly patronized routes In September 1983, UMT A worked to develop a policy that would prompt more private enterprise participation in mass transit programs. Most transit officia l s believed this new concept in transit services was based on the Reagan administration's overall strategy to return some public services to the private sector where they could potentially be provided in a more efficient manner It was considered u nfair to exclude private operators from the mass transit markets. The revised program was a significant attempt to include private carriers in local transit planning and opera t ions. 'Ibid., p. 6. 13


Historically, transit systems have contracted with the private sector for a variety of goods a nd servi ces but never as a matter of policy, although such a policy was in the orig inal Urban Mass Transportation Act: ... the Secretary finds that such program, to the maximum extent feasible, provides for the participation of private mass transportation companies ... ."10 [emphasis added] In October 1984, UMTA's Policy on Private Enterprise Involvement was announced. This policy was viewed as evidence that a new philosophy was being established in the administration of federal transit programs. The policy would no longer allow mass transit systems to monopolize transit markets, especially in charter services. The goal was to initiate a practice that would enable private trans it systems to become partners in meeting local transit needs. Legislative Background of Private Enterprise in Mass Transit The first reference to private carrier inclusion occurs in Section Two of the 1964 Urban Mass Transportation Act. It states the following: The purpose of the Act is to encourage the planning and establishment of area wide urban mass transportation systems, needed for economical and desirable urban development, with the cooperation of public and private mass transportation companies; and to provide assistance to public bodies in financing such systems, to be operated by public or private mass transportation companies, as determined by local needs.n This provides a good reference for the development of privatization policies in the mass transit industry and leads to three other provisions in the Act that relate directly to the Private Enterprise Involvement Program Sections 3(e), 8(e), and 9() provide the lega l foundation for the program. 10Section 3(e)(2), UMTA Ac4 1964. 11Edward Weiner, Urban Trga.sooaeJion Plonninr in the United States, An Historical Qyetyiew (New Praeger Publisher$, 1987), p. 92. 14


Section 3(e) protects existing private mass transportation companie s from federally-assisted acquisition or competitive service. The Secretary of the U.S Department of Transportation (US DOT) is th e final authority on whether protection for private operators is warranted. More specifically, th e Secretary may find tha t financial assistanc e to a public body or agency is essential for maintaining a transit program within a give n local area. The Secretary may find that such assistance will, "to the maximum extent feasi ble," include any private carriers in the transit planning process. In addition, if a private carrier, franchise, or property is acquired via financial assistance to a public agency, just compensation will be paid as required by state and local laws. Another provi sio n allows the Secretary of Labor to v erify that any assistanc e will not have an adverse e{fect on employment conditi ons in th e transit industry Section 8( e) requires that federallyassisted plans and programs encourage the active participation of private enterprise to the "maximum extent fe as ible." It also re quires the UMT A Admi nistrato r to determine whether the planning process complies with Section 8. Section 9(f) requires that the l ocal program of projects be planned and determined with inpu t from interested parries and that the program be published to afford all a ff ected citizens--pri vat e transportation provider s and othe r s --the op portunity to comment.'2 UMTA lNlTIAL' PHILOSOPHY Soon after announcing its new poli cy on private enterp rise participation, UMTA officials di scovered tl:lat promulgating this concept would be a significant challenge. The challeng e was to main tain local decis i orunak:ing authority for transit operations while at t he same time creating an environment conducive to private involvement in th e deve lopment of transit services. The issue was furthe r complicated by th e fact that mOSt decisions concerning transi t services were made by local transit authorities, many of which viewed this new policy as detrimental to their future existe nce. The policy' s aim was to promote competition in the transit industry by requiring federal grantees to develop local processes for cons i dering private sector involvement in the delivery of transit services. This policy also req uired the documentation of private particip ation as part of grantees' Section 3 and 9 programs. Loca l authorities were given the flexibility to "FtdUGI Highway Administnztion, Private Stctor Briel! (April 1987), p 2 IS


determine how to include private participation in the delivery of transit services for their market needs, but were req uired to comply with the UMTA Private Enterprise Policy. The policy designates the local Metropolitan Planning Organization (MPO) as the responsible agent for ensuring that the process is followed. One of the UMT A programs immediately affected by the new policy was the Public/ Private Partnership Program. As pan of the original Urban Mass Transportation Act of 1964, a Public/Private Partnership Program was established to encourage local public/private partnerships in the development of urban and suburban transportation facilities and services. UMTA's role was to provide seed funding for the implementatio n of local capital and service development projects that had been primarily funded by local governments and private sector entities. The program was not intended to provide continued federal funds for capital, operating, and maintenance expenditures. UMT A's privatization program resulted in increased opportunities for public/private partnerships and increased the chances of building successful relationships between the public and private sectors. tl Policy UMTA's policy on Private.Enterprise Participation is based on t hree objectives: Compliance With Legislative Mandates. Containment of Costs. Improved Response to Changing Market Demands. Compliance with Legislative MandatesAs indicated previously, Sections 3(e) and 8(e) of the Urban Mass Transportation Act of 1964 conditioned federal financial assistance on findings that local transportation plans and programs, "to the maximum extent feasible," provide for the participation of private mass tr ansportation companies and encourage the participation of private enterprise.14 The Surface Transportation Assistance Act o f 1982 added strength to this policy by amending section 9(f) of the Ac t to require grantees t o include private carriers in the transit planning process. "UrbiJII Mess TtiJIISpoltalion AdministroJion, Public/Private Pqdlrtrsltjps (Washington, DC: Urban M

Containment or Costs In li ght of the increasing cost of operati ng mass tr ansit systems, privatization has been viewed as the most promising mechanism to im p rove transit's cost performance. 1m proved Response to Changing Market Demands As discussed earlier, a significant demographic change took place during the 1980s. Traditional commute trips, which began in suburbs and ended in urban centers, were being overwhelmed by urban-to-suburban trips and suburban-to-suburban trips. The intention of this objective is to use privatization to help meet the changing market demand of transit markets. The policy states that privatization enables transit providers to be more flexible in responding to new types of trip making At the same time, it allows mass transit systems to focus on traditional route services. Private Enterprise Participat ion Program Elements The Private Enterprise Participation Program "stipulates that the private sector be assured of participation in transit plannittg and operations through the establishment of a local process that sets forth mechanisms for participation." Each grantee must develop and adopt a local process that will include private participati o n il\ the delivery of transportation services "to the maximum extent feasible" in order to be in compliance with the UMTA legislative mandate. The local process must incl ude the following elements: Notification and Early Consultation The process must provide for notice to and early consultation with private operators concerning plans for new or restructured service, as well as periodic re-examination of existing service. Consideration of Private Service Provision This elernent refers to periodic examination of each route to determine if it co u ld be more efficiently provided by a private sector entity ''Periodic examination" refers to at least once every th ree years. Compliance. The compliance elem.ent requires a description of how new and restructured services have been evaluated to determine if they could be more efficiently provided l'ly private sector entities pursuant to a competi tive bidding process. Cost Comparisons The use of costs as a factor in the public/private decision is the mo't controversial and misunderstood element o! the policy statement. When comparing serv;(e. proposals from public and private operators, UMTA grantees must prepare a fully-allocated 17


cost comparison. Fully-allocated costs refer to the cost of providing a s erv i ce inclu ding the appropriate share of overhead and other s hared expenses. J.S The use of fully-allocated cost analysis ensures that local decisionmakers have considered all costs associated with in-house proviSion of transit services. Complaints. The process provides for a dispute resolution process that affords all interested parties an opporTUnity to object to initial decisions concerning t he delivery of transit services. UMTA's complaint process is designed to accept appeals of the local dispute resolution process. Capital Cost of Contracting -This UMT A policy permits grantees the option to use capital assistance rather than operating assistance to pay for the cost of privately-owned capital resources in the provision of transit serv!ces awarded to the private sector entity through the competitive bidding process. As mentioned earlier, it is the responsibility of the MPO to verify that grantees are in compliance with the program elements identified above. MPOs rely on two documents, the Annual Element (AE) and the Transportation Improvement Program (TIP), to make their decisions. The AE lists the programs and projects scheduled for the following year within a region. The TIP specifies the region's priorities over the next five years, the first year being consistent with the AE. Prior to submitting the AE, the MPO is required to certify that grantees have followed the appropriate local process and to describe how the local process led to the development of the projects contained in the AE. State Response to UMTA Philosophy UMT A's philosophy of mandating private sector involvement in the p lanni ng and operation of transit services was not supported by most states with the enthusiasm that UMTA had anticipated. While some state and local agencies attempted to make policies and guidelines to meet the policy requirements, many legislated statutes to placate UMT A and to accommodate private sector entry into the tra.nsit industry. New Jersey Trans i t (NJT) is one of only a few state agencies that adopted a program to mee t the UMT A privatization challenge. The NJT policy requires the agency to review its service every year and to contract out approximately five percent of its transit operations to the private sector "PrivaliZ4liotl Council TnlllSponation Task Force, fuhlicfrivate Parowships in fn(rqs((UcQI-e, A Briif Guide to Proit.ct Prfncjplu. 9114 Ltfislative lniligtivts (Washington, DC: Privatization Council, 1991), Appendix A. 18


However, NIT does not use the UMT A-recommended fully-allocated cost analysis methodology for cost comparisons. NJT uses an avoidable c o s t criteria (actual cost reduction) wben comparing its in-house costs of service provision w i th t ha t of private sector entities. EVOLUTION SINCE 1.985 The new private participation policy was viewed as an assistance program that could help private systems take over a significant portion of the regional markets. Early attempts at implementing this policy focused on involving private systems in the local transit planni n g process, improving public/private consultation, and developing a disp ute resolution process It i s clear that UMT A officials had great difficulty in obtaining the cooperation of public transit systems. They realized that the philosophy would have to evolve in order to ach ieve acceptability in a transit industry that had p r oven to be extremely volatile Since Congress was reluctant to revise the 1964 Urban Mass Transportation Act to force increased p rivate participation, a new concept was needed To gain acceptance from the transit industry, UMTA implemented a policy that conditioned grant funding on compliance with UMTA's priva tization program. In light of this new requirement, many agencies developed prograJllS to ensure !hat the disbursement of capital and operating funds would be interrupted. The repe.rcussions of this unwritten policy created artirnosity toward the administration from local officials In 1986 a House Appropriations Committee i nvestigated charges that UMTA was "conditioning" approval of grant applications on t he progress toward its administrat ively mandated privatization goals.16 ln the appr opriation authorization, Congress critica l of UMT A's unwritten policy. Congress also re b utted the ad mini stration's atte mpt at setting quotas to be met by transit agencies and indicated that the administrative leverage of UMTA had its limits. Because of criticism from Congress, UMTA changed its philosophical tactics. Without broad support for the privatization program from the transit industry, the program had poo r prospects for success. As a result, UMTA began to rethink its position on its privatiz a tio n policies and programs. "Dunn tutd Felix, p. 10. 19


Current Philosophy Unlike the original concept of privatization, where UMTA encouraged mass tra nsit systems to include private systems in the provision of mass transit services, the most recent approach is quite different. With changing transit markets, a federal budget crisis, and transit budget deficits, UMT A discovered that, instead of competing fo r existing markets, more emphasis should be placed on specialized markets, including express commute, reverse commute, paratransit, and regional services. Effective use of the private sector could be made in serving these specialized markets. As stated earlier, conventional transit markets are rapidly changing and new transit markets are emerging. As a result, the proportion of trips destined for the central city continues to decline. An increasing number of trips are oriented from the central city to the suburbs and from suburb-to-suburb. Moreover, metropolitan t rav e l requirements have become too diverse and diffused to be served with a s ingle, uniform type of service. A significant portion of urban travel demand has become segmented into small market niches that require a more personalized, custom-tailored approach. Private sector invol vement in transit services to these non-traditional markets appears to be a viable alternative for meeting their specialized requirements. UMTA established the Entrepreneurial Services Challenge Grant Program (ESP) in 1987 to encourage private entrepreneurs to provide market-driven services. The program is based on a dual belief that large, publicly-run transit systems cannot be "all things to all people" and that consumers will support a well-operated, well -managed, profit-making transit operation that addresses their specific needs.17 UMTA believes that such services can be most effectively provided by private entrepreneurs with assistance from the business community, local government, neighborhood groups, and the local trans it agency. Rather than a system approach to meeting needs, thes e services tend to represent a network of individualized and high quality services that are supported by fares and/ or beneficiaries. UMTA regards this new approach as an impetus to e ntrepreneurial involvement in mass transit and as a market for the private sector to focus its effo rts. It also encourages the private community, business groups, and corporate employers to develop services to meet their own needs rather than to depend upon the public sector to do it for them. "Utban Mass Transporl4ticn Administrarion, Proceedj11gs from OriQudo AnnuQ/ Conference. p. JJ.]. 20


Congress has not contributed strong legislative support to this program. With the exception of the actions taken in response to the 1986 charges of conditioning the a pproval of grants on the progress that agencies were making to comply with the administration's mandate, very little has been done . During the 1990s, the transit industry will be faced with additional demands and requirements that conventional transit systems will find difficult to meet. One of these requirements comes under the new amendments to the 1990 Clean Air Act. Under this amendment, employers are required to reduce their employees' use of single-occupant automobiles for commuting to work when the company does not comply wit)! the requirements of the Act. This could stimulate the need for commute alternatives, such as va npool s buses, shuttles from train stations and park-and-ride lots, and others. Another federal policy t hat will influence transit systems throughout the U.S. is the Americans With Disabilities Act (ADA). This Act mandates that transit services be fully accessible to all members of society, including the disabled population. This is an expensive requirement for most transit agencies, but it provides an opportunity for the private sector to become even more involved in the provision of transit services to all segments of the population. FLORIDA In Florida, privatization of transit operations has not proceeded to the same extent as in the New Jersey example. Notwithstanding the efforts to contract paratransit services by some of the state's transit systems and an attempt to sell franchise rights to the private sector for the development of a high speed rail system, the State of Florida has remained neutral with respect to the privatization of mass transit serv ices. However, several Florida transit system$ have privatized certain services, and other systems have investigated the potential benefits that can be realized by contracting some fixed-route service. In 1988, the Metro-Dade Transit Agency (MDTA) initiated a Private Enterprise Participation Program as an UMTA demonstration project, which resulted in a contract for fixed-route service with Greyhound Lines. A six-month evaluation of this contract by Price Waterhouse revealed that, although substantial cost savings were realized, the contract also resulted in a decline in service quality, service reliability and ridership. 21


In Tampa, the Hillsborough Area Regional Transit (HART) conducted a study in 1987 that focused on the benefits of a public/private partnership in providing quality transportation services in Hillsborough County. The study recommended a growth strategy that would use existing HART resources and private sector resources t o improve the quality of service i n this area. Due to a change in management at HART and declines in ridership and funding the agency bas not been able to implement the recommended strategy. Tri-County Commuter Rail (Tri-Rail) operates a commuter rail line from Palm Beach County through Broward County to Dade County. The administration and operation of this system are provided completely by a private sector company under contract with FDOT In fiscal year 1990, 10 Florida systems provided some fiXedroute transit service through contracts with private sector entities Likewise, 11 Flo rida systems contracted with private entities to provide demand-response services. Although no privatization efforts have been specifically sponsored or mandated by the State of Florida, it is clear that nothing has been done to preclude the implementation of privatization efforts. It is evident that the State of Florida and FDOT have remained neutral concerning the concept of privatization. However, interest in the concept is clearly expressed by FDOT through the sponsors h ip of this specific privatization study. hiterest in the privatization of toll facilit i es wa5 indicated recently when Florida passed legislation to foster the privatization phil osophy within the state. The Florida Private Transportation Facilities Act (1991), Section 334.30 of the Florida Statutes, authorizes t he Florida Department of Transportation, with legislative approval, to enter into agreements a ll owing private entities to construct and operate privately owned and financed transportation facilities; authorizing the private entity to charge tolls or fares; requiring private transportation facilities to comply with all requirements of federa l state and local laws, and state regional, and local comprehensive plans, and department rules, policies, procedures, and standards for transportation facilities, and any other conditions which the department determines to be in the public's best interest; authorizing the department to exercise any power possessed by it to facilitate private transportation projects; providing an effective date.'8 Although this Act refers to private toll facilit i es, it does indicate a willingness of the State Legislature to support private sector involveme nt. "Florida Private Transportation Facilities AC4 Seclion A. 22


IV. THE TRANSIT PRIVATIZATION DEBATE The debate over the use of privatization in the t

Perfect mobility of resources. Perfect knowledge of market. No positive or negat ive extetrtalilies. No concentration of power among the private buyers or se11ers. When these conditions are met, the market is perfectly competitive and has the following desirable characteristics: Consumer preferences are fulfilled with largest amount of goods consistent with minimum prices, the lowest costs of production, and known techniques of business firms. Society's resources are allocated in the most efficient manner. Flexible product and resou rce prices assure full employment o( all resources used in the production of goods and services. Competition among employers for resources causes resource owners to be paid their opportunity costs, which is determined by the market value of the respective contributions to total output by each resource. With consumer incomes and preferences assumed to be constant, aggregate consumer satisfaction would be maximized because goods/services would be distributed among consumers according to their demands.19 . The characteristics described above provide a strong textbook case for privatization, with the logic being that, through privatization, these desirable characteristics can be approximated. Everyone agrees that perfectly competitive markets do not exist in reality, and many argue that perfect competition is purely a theoretical model and is impractical. Economists argue that perfect competition is a the ore tical extreme used to describe an optimal market situation that is relatively simple. Suppo rters of privatization believe that moving away from public to private provision of goods and services (or somewhere in between) will at least help to achieve some of the positive q ualitie s of perfect competition. Furthermore, public agencies are not subjected to market forces which would force them to provide goods and services in an efficient manner. In a perfectly competitive market, if a firm does not conform to the market forces, it will be driven out of business. The application and consideration of privatization in the transit industry has been discussed thoroughly in the literature, with the majority of transit privatization referring to the 19Miiron H. Spencer, CoartnuWIJ! MjcrQeCQ112'nics (New York: Wayne State University. 1990), p. IH 24


contracting of services to the private sector. This form of privatization permits the public agency to be involved in the provision of the good or service while s t ill involving the p r ivate sector. Contracting services is discussed at length in the functional areas of operations maintenance, and administration. Other types of privatization are also discussed, including joint development, a:oss border leasing, transportation demand management initiatives, and turnkey operations. CONTRACl'ING OF SERVICES The contracting of services in the transit industry is the most common form of privatization and will be discussed in three functional areas, including operations, maintenance, and administration. Operations Specific types of operations include demand-response services, commuter express bus services, and other fixed-route services such as local bus service. Demand-response service is historically viewed as the operation most commonly contracted to the private sector A voluminous amount of literature exists concerning the contracting of transit service operations. Transit Contracting in Florida -A review of the 19 major transit systems in Florida indicates that the extent of privatization has increased over time in the provision of both demand-response (DR) services and fixed-route (FR) services. The number of revenue miles provided by private systems as a percent of the total revenue miles provided in the state of Florida increased from two percent in 1985 to over 14 percent in 1990 The increase is particularly significant in the provision of DR services, which incr eased from 34 percent in 1985 to nearly 74 percent in 1990. I ncreases are also apparent in the number of passenger trips and the amount of operating expense. Figures 6 through 8 provide selected data as taken from Section 15 reports prepared by Florida's transit systems.20 "'Urban Mass Tran.rporttztitm Administratiall, Nariona! Urban Mass Transportarion Starisrics, Section /5(lnaugl Repgrts, 1984-1989. and aelUal 1990 Section 15 reportS submitted by Florida's transit systems. 25


FIGURE 6 P e rcent or Revenue Miles Provided by the Privlltt Sector as a Percent or Total Revenue Miles Florida, 1985 -t -1 i "',, . ,,,,,,,,,,,. ,,.,.,,I, r 1990 FIGURE 7 Percent of Passenger Trips Served by the Private Sector as a Percent of Total Passenger Trips Florida, 1985 SO'l(. 7::------""'---,----, fl1k I . . 1' 40'% , ........ .... . ... .............. , , 20% t . . . : . : ........... ) ...... . ... ....... L .... ........ .... I i : 1985 1986 1987 1988 1989 1990 FIGURE 8 Percent of Operating Expense Consumed by the Private Se

Transit Contracting i n the United States -Figures 9 thro u g h 11 p rov ide the p e rc e nt o f t r ansit services provi d ed by the private sector for t he na ti on as a whol e as measu r ed by revenue mil es, passenger trips and o p erating expense Th e t h ree modes in which privatization has had t h e greatest impa ct are provided in the t able and include fixed-route motorbus (MB) commut e r rail (CR), and demand-response (DR) The data are provided for the years 1984 through 1989. Other modes, such as rapid rail, stre e tcar, trolley bus, ferr)' boat, and otherS, are not included because little or none of the service provided t h r ough these other mode s has been contracted ou t21 FIGURE9 Pemot o r Miles Provided b y the Pri vate Sector as a Ptreeot o r Total R even ue Miles United States, 1984-1989 (1)'/, r ................. .... .. ........ ..... j ................... !, ....... ........... i.. ........ ...... l 1 t i -1t-MO!Dtl>us 40l(, ...... .......... !............ ..... .. \ -r-Commuter hi! 20% ............... .. -...... J:lemaod.Respoose 1984 1981 1986 1 987 1988 1989 FIGURE 10 Perce n t o r Passenger Trips Se.ved by the Private Sector as a Perceot ot Total P a ssenger Trips U n ited States 1984-1989 80%T \ l ' .. fl:lh ........ t " ' ' i \ ..:_ 40% r ........ .. .. 1"'. ....... Commuter hi! ' 1 m t ... r--n..-1-Response 0% !::::; 1984 1985 1986 1987 1988 1989 11Urban Mass TronsportolionAdminisrr at ion, Noliomd Urban Mass Tron.spo rtatiotl Statistics, SecliOIJ 15 Annual Rep011s, 1984-1989. 27


FIGURE 11 Pera:n t or Operating Expense Coosume d by the Pdvnt e S(ctor as a Percent of Total Opernting Expense United States, 1984 60% t== == .. .. ;::: ... . .... ...... E .. .............. :t.... _:5 .... .. .. : : 4.5% .......... ...... .', ... . ........ . ........ . . ...... , ,,,,, _,,, --Moto!bus 1986 1987 1988 The amount of fixed-r o ute motorb u s service contrac ted to the private sector as a percent of total fixed-route motorbus service has increased only slightly from 1984 to 1989. The same data calculated for commuter rail indicates t hat t h e amount of service contracted as a percent of total service has declined o ver the sam e t ime period. The demand-respo nse service is clearly the dominant privatized s erv ice at the natio nal level just as in Flor ida. However, unlike Florida, t he percent of dem andresponse provided by the private sec to r as a percent of total dema nd -res ponse service was relative l y stable from 1984 to 1989. For exampl e 68 percent of all demand-response r evenue miles was pr o vided by the private sector in 1984, which declined slightly t o 64 percent in 1989. The tren d is also relatively stable for demand-response passenger trips, declining from 66 percent to 65 percent. However, it is clear that the operating expense for p ri vately-operated demand response services as a percent of total has increased consistently over time from 49 percent in 1984 to 55 percent in 1989. The effect of UMTA's private enterpr i se policy enacted in 1985 does not appear to have significantly impacted the portion of services provided by the priva t e sector at the national level. Significant privatization was alr eady prevalent in demand-response services prior to the enactment of this policy. The slight increases in the contracting of fiXed-route motorbus services may be attributed, in part, to UMTA's policy. 28


Despite the pressure and encouragement expressed by UMT A in t h e mid to lat e 1980s, i t i s clear that, with the exception of demand response service, widesp read contracting of transit services has not occurred in the United States or in Florida. Even in the case of demand-response service significant contracting occurred prior to the private enterprise policy established at UMTA. If t he textbook case for privatization is true, it is not clear why the use of privatization bas not been more widespread in the provision of all types of services. The remainder of this section will review various arguments in favor of and against the privatization of transit operations. The Contracting of Operations The debate over the contracting of transit operations continues to be a widely-discussed topic throughout the United States. This section discusses the major issues related to the concept and presents the various arguments in favor of and against the use of privatization in the context of the iden t ified issues. Table 3 summarizes the issues and arguments associated with the contracting of transit operations A detailed discussion of the issues is provided as well. TABLE3 Summary of Issues in the Contracting of Transit OperaUons Reduced Bureaucracy Reduced Time Costs Slower Cost Growth Potential for Economies of Seale Potential for Labor Specialization Exj>ancled Tax Base for Transit Optimal Allocation of Resources Minimum Cost Incentive for Efficient Production Public Provision Less Costly Neglected Costs of Private Provision Cost Allocation Deficiencies Exploitation of Transit Employees Contract Waste Monopoly Power in Long Run Potential for Corruption Reduced Cost is Wrong Priority Contract Shortcomings Insufficient Number Deterioration in Service Quality Deterioration in Strong Union 29


!&ll -Many efforts have been made to compare the costs of public and private provision of transit services. A majority of these efforts suggest that s i gnificant cost sav:ings can result from the contracting of operations.22 Others believe that cost savings cannot always be achieved and that, in most cases, the methodologies used for cost comparisons inherently favor the private sector option.%3 As a result, arguments can be made to support and refute the idea that' cost savings exist as a result of the contracting of operations. In situations where private operators have been substituted for previously publicly-operated transit service, actual cost sav:ings can be measured. A sample of seven such substitutions in the U .S were reviewed, with resulting cost savings ranging from 22 to 39 percent.24 If cost sav:ings do exist, it is interesting to note that very few research efforts have been conducted to determine the sources of these sav:ings. Many contest that, if cost savings do result from the contracting of operations, it is at the direct expense of transit labor in the form of reduced wages and fringe benefits. Teal and Black attribute a significant portion of the savings to wage and fringe differentials between public and private systems. However, Teal also attributes significant sav:ings to increased employee productivity and reduced overhead in the private sector.25 In addition, Black also indicates that specific work rules contribute to reduced employee productivity in the public sector.26 Regardless of the source of cost savings, the threat or reality of contracting can significantly impact public agencies. The prospect of hav:ing private operators replace serv:ice prev:iously prov:ided by the public agency can greatly influence wage negotiations, work rules, and productivity. . . Arguments for and against cost savings as a result of contracting are presented on the following page. '-'RtJger F. "issues Raised By Competitive CoiiiNZcting of Bus Tronsit Services in tJoe USA." Trgn.rnonorion P/annlnc and Techno/OJ1'l (United Iangdom: Gordon and Breach Science Publishers SA, 1991), pp. 393-396-"Elliott D. Sclar, K. H. Schaeffer, ised By Competitive Contracting of Bus Transit Services in rlre USA," p. 393. "Ibid, p. 403. '"Al4n Black, fdygrlrgrion of Urban Transit: A Differeac Perwecrive (Lawrence. KS: Tronsportation Research Boord, 1991), p. 18. 30


Cost-Related Alguments For Contracting: Reduced Bureaucracy -Thomas Borcherding has suggested what is known as the "Bureaucratic Rule of Two,''27 which refers to the belief that "removal of an activity from the private to the public sector will double its unit cost of production." The term refers to the idea that bureaucracy leads to greater costs. It has been suggested that the private sector can provide services at much lower costs bec ause of reduced labor costs, lower overhead, and freedom from regulatory burden. In addition, the administration and monitorin g of private contracts tend to be a small percentage of the cost of providing service, and transition costs from public provision to private provision do not eliminate the savings resulting from competitive contracting.28 Reduced Time Costs -When a public agency desires to significantly expand transit services, it often requires an extended period of time to acquire the equipment and facilities necessary for expansion. The contracting of services to the private sector eliminates the need for acquisitions; equipment and facilities already owned by the private sector can be used for expansion or, if additional equipment and facilities are required, the private sector can procure them more rapidly. Slower Cost Growth -Costs resulting from competitively contracted services tend to rise at a much slower than those from publicly-provided services. For exa!llple, a suburban Chicago public bus syste m competitively contracts for service on many of its routes. From 1986 to 1987, costs increased 3.2 p ercent on publicly-operated routes; however, the cost of service provided on the contracted routes declined in new contracts and resulted in savings that ranged between 2.6 and 32.9 percent?9 Potential for Economies of Scale -Mass transit systems may benefit from large private transit providers who may enjoy economies of scale. Although much of the li tera ture suggests that mass transit operation is not characterized by economies, a private contractor operates differently from a public entity. A private contractor can increase capacity without limiting service to a localized area. Contracts can be negotiated in 11/anw T. Bennett and Manuel H. Johnson, Beaer Qovemment gt Hal[the J'tice: Privale ProdJI,riQa a[ l'>tbli< Services (Ottawa, JL: Caroline House Publishers, 1981), p. 37. 21Teal, "Issues Rllised by Conrracting of Bus Transit Service in tilt USA," pp. '"Wendell Car and lean d Public Pumose for fnblk Transit: A Response to rheEPl Rw>rt Policy Swdv No. 211! (Santa MQrlica, CA: Reason Foundation, 1990), pp. 17-18. 31


numerous areas across the country. When a private operator has numerous contracts with public agencies for the provision of transit services, the fll 3. "Sclar, Schaeffer, and Brandweirl, p. 1 "ll>ld. 32


Cost AllocaJion Deficiencies Cost comparisons ate believed to have deficiencies which result in biases in favor of ihe private competitive bidde r: (1) the fully allocated public: cost for a given route includ es a ponio n of adJninistrative overhead and is compared to competitive bids that do not include administrative overhead; (2) the ini tia l bids are often below the true cost of providing services since bidders are known to be willing to accept a loss initially in order to capture a shar e of the market ; (3) cost comparisons often ignore public equipment and services provided to privat e contractors by the public agenc:y; (4) cost comparisons do not take into account the differences in the quality of service, including safety, reliability, etc; (5) private firms entering the market often underbid due to a lack of knowledge about the indust ry. ExploitaJion of Tran.sit Employees -It is sugges ted that transit employees, both public and private, may be exploited as a result of privatization effons.n lf the majority of cost savings are attributed to wage and Cringe differentials, then private employees are being exploited by private companies in order to reduce costs and secure a position in the market. ln addition, wheneve r existing service is contracted out, jobs are taken from public employees, thereby reducing their welfare as well. As a result, it can be argued that employees of both public and private transit providers are adverse ly affected by the contracting of operations, with the exception of those instances where individuals who were previously unemployed are provided with new employment opportunities. Contract WasteOpponents of transit privatiza tion obje ct to the need to admiruster and monitor contracts when awarding contracts competitively. They believe that administrative overhead has unnecessarily increased due to this requirement over and above the existing overhead. Competition The issue of competition was discussed earlier in the textbook case for privatization. As would be expected, proponents of privatization reference the desirable characteristics of perfect competition when arguing in favor of the contracting of services . Competition AJxuments For CofllracJing: Optimal Allocation of Resources The textbook definition indicates that perfect competition is defined when each individual seller faces competition from other sellers to the point where the market price is automatically deterrruned by the market as a "Biadr, p. 18. 33


whole No individual seller has control over the price. As a r esult, the allocation of resources is optimal, and all output is produced at minimum average cost. That is, provision of outpu t or services is efficient iii all respects. The process of competitive bidding is intended to force competition in the provision of contracted services. This should help result in conditions that approximate the textbook theory. Minimum Cost -Competition can help achieve an optimal allocation of resources in the transit industry where the services are provided at a minimum cost. The use of competitive contracting forces bidding firms to operate in the most efficient manner possible in order to successfully win contracts with the public agency. In addition, the public agency could also compete for the competitive contract and submit a bid along with private operators. Incentive for Efficient Production -The incentive to produce goods and services as efficiently as possible coincides with the textbook definition of competition. Privatization is a mechanism for moving towards competition. Competitive firms are constantly working to find meth_ods for lowering costs so as to maximize profits This incentive does not exist when public agencies are responsible for the operation of a transit system. Competition Against ConJracting: Monopoly Power in Lon8 Run -The be lief that competition is inh erently present in t he concept of transit privatization is not necessarily true in the long run.34 The problem is that suppliers of any service in a competitive environment continually search for mechanisms that will give them an advantage in the market. If any such advantage is achieved, then varying levels of monopolistic power begin to emerge. Even if competition exists initially, there is no particular reason to believe that it will persist in the long run. In the nineteenth century, all mass transit systems were privately built, owned, and operated. "At first there was intense competition, but over time stronger companies bought out weaker ones, and monopolies emerged in many cities.,.J.S Reality suggests that a sufficient number of competitive suppliers will no t always be available, particularly when lengthy contracts are awarded. "Sclar, Schaeffer, and Brandwe(n, p. 20. "Black, p. I. 34


Potential for Corruption Whenever humans are involved in the solicitation and awarding of competitive bids, there will always be cases of corruption where public officials are offered bribes or otherwise benefit from s u ccessfully award ing contracts to specific bidders.36 Reduced Cost is Wrong Priority Despite the possibility of increased competi t ion, "privatization establishes the wrong pri ority for urban transportation systems."37 The primary goal of using privatization is to reduce costs. Many believe that this should not be the priority, but that the goal s h ou l d be to optimize the speed, safety, and convenience of citizens travelling in the service area of a transit system. Contract Shortcomings Depending on the length and composition of awarded contracts, the selected contractor may not be sufficiently rewarded for innovation and cost reduction, thereby eliminating the incentive to increase the efficiency with which goods and services are provided. Insufficient Number of Suppliers In many geographic areas of the United States, an insufficient number of suppliers of equipment and facilities may exist. If this is the case, the transit system may still be able to take advantage of the limited availability in the private sector; however, the limited number of suppliers will also limit the . amount of competition that exists in the market for the equipment and facilities. . OuaUty of Senice Quality of service i s often overlooked in studies of the benefits of privatization, particularly the contracting of t ransit o perat i ons Evidence that is available does not provide a clear picture concerning this issue. In many instances, the quality of service has been maintained in the shift from public provision to pr i vate provision of services. However, in other cases, problems have surfaced in the areas of service reliability and on-time performance as a result of the private provision of services. Each side of the issue is discussed in the arguments below. Additional controlled studies comparing the reliability and ontime performance of public versus private provision of the same or s imi lar service are necessary in order to reach a conclusion concerning this issue. "Poole, QbitiOilJIO Priv(llization. p. 10. 11Sclar, Schaeffer, and Bra11dwein, p. 1, 35


Quality of Sezvice Algwnents For Contracting: Quality of Service Maintained Many studies indicate that transit users believe service offered by private operators is of a h i gher quality than those ope rated d i rectly by the agency. More Responsive to Changes in Demands Private companies tend to be more responsive to changes in consumer de mands. If permitted by the contract, a private system could adjust service so as to maximize the use of the system as consumer preferences change in response to changes in the physical and economic environment. 'wbi.le the ability of many privatized services to be responsive is limited in terms of service design, private sector services can be significantly different from public sector service with respect to customer courtesy, driver attitudes, and other service characteristics. Quality of Sezvice Algumenls Against Contracting: Deteriorating Service Quality and Reliability Opponents of privatization often argue that the incentive to minimize costs and maximize profits results in a deterioration of the .quality of service. I t is believed that c ompetitive firms will attempt to cut comeJ;'S in order t\) gain the competitive edge necessary to penetrate the for a particular good or service being contracted for by t he transit system. Transit Labor Implications The implications of contract ing as it relates to transit system employees are significant. Regardless of how privatization is addressed and imple mented, labor is affected. When previously directly-operated services are contracted to the private sector, the demand for existing system labor declines. When new services are contracted to the private sector, the potential for hiring new syste m employees is eliminated. Most view this situation as adversely affecting transit empl oyees. The resulting dilemma is diliicult to deal with, particularly since a significant portion of the cost savings is attributed by most to lower wages and fringe benefits provided by private sector firms. The arguments are strong for both sides of the issue. Labor Implications A1gumenls For Contracting: Union Employees Overcompensated The strength of unions and/ or the unwillingness of management to negotiate aggressively has resulted in high compensation of 36


employees in tenns of wages and fri n ge benefits i n numerous ind u stries in the United States, e.g., the auto industry. The same trend has occurred in the transit industry. Protective legislation and the strength of unions has resulted in wages and benefits that are much greater than the fair market value that would otherwise occur in the private sector. Labor Implicaticns Alguments Against Contracting: Strong Union Opposition Union opposition to transit privatization has been particularly prevalent since UMTA's emphasis on private enterprise participation in the 1980s. Labor unions often raise the issue that poorly-qualified and poorly-trained non-union private drivers are taking the jobs away from union members, which enables private contractors to undercut existing transit industry wage scales. If private contractors are able to provide services at a lower cost than the public agencies, transit labor unions contend that the source of this cost savings is due entirely to wage differentials. Other Considerations Several other relevant issues are addressed in the following paragraphs with respect to the concept of privatization as it relates to the contracting of operations. PoliJical Aspects The political aspects of the public provision of mass transit are significanL Typically, transit systems are governed by a Board of Directors, almost all of whom are political players in the community As a result politics will a lways play a role in the decisionmalcing of a transit system. Many believe that the involvement of the private sector in the provision of services and functions within a transit system will lessen the political nature of decisions made in a fully public operation. For example, aggressive affirmative action programs or political patronage may not be as easily implemented if the transit agency does not directly control the workforce. Others believe that political involvement is just as intense (perhaps more) when privatization is introduced to the public decisionmaking process. In addition to lobbying pressures exerted by private entities, it is politically easier to oppose spending believed to be inefficient than to oppose a program, such as mass transit, that is believed to ha, e significant public benefits. 37


Many politicians and officials adhere to the privatization principle purely on philosophical grounds that the government sho uld not be doing anything that the private sector i s capable of doing on its own or th rough contracting with the public sector. Others feel strongly that the provision of transit services is strictly a social responsibility that should be provided and monitored by the public sector. Service Organization To the extent that it desires, a public transit system maintains control over how services are organized. The public agency controls policy decisions and operations This may involve very little discretion or significant discretion given to contractors who provide goods and services for the transit agency. However, the level of discretion for the good or service to be provided must be clearly defined in the contractual arrangement, including the determination of which specific goods/services are to be provided, the establishment of performance standards, the administration of contracts, and the monitoring of performance. By maintaining control, the agency will be able to achieve a desired level of social equity Numerous other factors must be considered closely in the process of negotiating a contract, including the s iz e of the service package, the length of the contract, and who is responsible for providing vehicles for the service. Contract issues and specifications will be analyzed more closely in subsequent technical memoranda Service Co111i:nuiJyTransit agencie s often express concern that, if services are privatized, and especially if the private sector is relied upon to provide and mainienance . f acilities, the transit agency risks being unable to accomplish its mandate should the contractor fail or go bankrupt. Similarly, age ncies m ay fee l that the right to strike for private sector employees may give advantages to labor in cases where public sector employees are precluded from striking. In either case, contracting of tr ansit operations involves risks with respect to service continuity. Safety -Although there is no concrete evidence to suggest a decline in safety as a result of the contracting of operations, opponents of the concept argue that significant wage and fringe differentials result from a decline in the quality of work performed by employees, particularly that of the bus operators. The Contracting of Maintenance Various maintenance needs are also commonly contracted for, inciud ing those necessary for transit vehicles, other capital equipment, and buildings/facilities A discussion of transit maintenance duties is provided in a subsequent section of this memorandum. 38


In the overall scope of contracting transit functions, most efforts focus on transit operations. However, in some transit systems, contracting maintenance service is more prevalent and is the primary area to be privatized. In some systems, the opportunity may exist to contract out the entire vehicle maintenance function. In most cases, maintenance services are contracted when it is not economical to employ full-time labor, when the existing maintenance facility does not have adequate capacity, or when specialized capabilities or expertise are required (hazardous services or highly-skilled labor) Arguments for and against contracting of maintenance services are presented below. Cost Savings Cost savings is the major impetus for contracting maintenance. Public agencies see the improvements that have occurred in the use of technology, skill, training, and management practices of private firms as a measurable way to reduce the costs of maintenance services. Contracting maintenance and support operations can enable many public transit agencies to reduce capital and operating costs by over 30 percent and to improve service.38 A survey was conducted of the public transit systems in California to assess the extent of contracting for maintenance services in the state. This study reveals reasons for privatizing operations, maintenance, and administration The results are provided in Table 4 and indicate that privatization efforts in maintenance are driven primarily by cost considerations. A total of 42 percent of the systems in California cited cost as the reason for contracting vehicle maintenance, while 67 percent cited the same reason for contracting non-vehicle maintenance. "ConiTrl<;t Sen>ic" Associalion, Final Report Techl!o/pgy lmoa;JS EvqluotiQIJ. (Washington DC: Urban Mass Transportation Administration, 1989), p. 1. 39


. Revenue Service Vehicle Maiateo.ance NoaA ehicle Maintenance Administrative Services TABLE4 Reasons for Contracting by Semce Type, California TraDSil Systems" 18% 69% 8% 6% 4Z% 9% 17% 67% 8% 24% 33% 14% S% 43% 12% 21% 8% 0% 19% 33% Flexibility Another significant reason for the decision to contract vehicle maintenance is the flexibility provided through contracting. Flexibility in this context refers to the ability to obtain the necessary skills without a long-term commitment. This also serves as a tool for determining future costs and is viewed as a cost saving measure. Twenty one percent of the systems in California cited this as a reason to contract maintenance to a private firm. New Service Providing maintenance for new service is also an argument for contracting maintenance service Maintenance service is not always available in the area were the new service is initiated. Therefore, it is prudent to contract the maintenance of vehicles to private firms rather than birild a public facility, especially if the viability of the new service is questionable with respect to long-term operation. Qualified Contractors Exist Qualified contractors do exist who can fulfill the necessary requirements for transit maintenance. However, it will be necessary to improve the awareness of the existence of such contractors to all segments of the transit industry. Contracting Procedures Affect Control Procurement regulations have evolved to limit competition to qualified firms with adequate capital, to address potential distortions caused by low bid requirements, to provide incentives and penalties for performance, 19Systan,Inc, V.e Use of (:cn@ctinr By Public Tromit Arencies in CaJifomia. (Los Altos, CA: California Deptutmtnt of iransportGtion. 1986), p. 28. 40


and to afford contracting agencies control over their vendors.40 This type of policy allows maintenance contractors greater access to the transit market and more latitude in the negotiations of a contract for the t ransit system. Recall that the study of California systems considered this a significant reason to contract maintenance services. MultiAgency Depots for Repair, Rebuild, and Testing -Significant cost savings can be achieved by developing regional centers that can serve as maintenance facilities for an array of transportation modes such as t rucks, buses, and rail. In addition to consolidating redundant facilities and avoiding construction of more unnecessary capacity, regional operations will lower costs thro ugh use of mass production techniques, reduced parts inventories, and less management layering.41 Leaseback Arrangements -These types of arrangements are commonplace in the transit indus try. In most arrangements, property owned by the transit system is leased to a ve ndor to be operated as a maintenance facility and is then contracted with by the transit system. In the transit industry, this is known as a type of turnkey arrangement. M ore creative lease agreements will allow these types of contracts to play a significant role in privatizing maintenance services . Automated Mainlenance Management Systems -Thro ugh the use of ,modem information systems, work flow and the cosl: of performing maintenance tasks can be accurately monitored for decisionmalcing by transit managers. This will allow cost comparisons to be made between the private and public sectors and allow man agers to evaluate the cost-effectiveness of ma intena nce practices. A significant contracting opportunity exists because in-house employees do not necessarily have the capability to develop and maintain sophisticated compu ter software and bardware .42 .. Conlrtl

Alguments Against ConJracting: Agency Standards The cost-minimizing attitude of p rivat e firms requires inspect ion programs to ensure that vehicles are maintained at acceptab le standards.43 If contract standards are not monitored effectively, t he cost of contracting can nullify any cost savings over the term of the contract Stability of the Vendor Some transit mana gers choose not to contract maintenance service for fear that a vendor will either change ownership or go out of business Since it cannot be assumed that the new owner of a current maintenance agreement will continue its service contingency, arrangements must be included in the cost of contracting with a vendor. The same will occur i f a firm goes out of business. In either case, this can cause major disruptions in maintenance service and, subsequent ly, in service operations. The Contracting of Administration Various administrative functions of transit agencies are often contracted, including management, accounting, and marketing functions. Many areas of administration lend themselves to contracting Often, the skill levels required to perform specific duties or tasks are not available from the personnel within a transit system This is frequently the case with rural and small urban t r ansit systems. The reasons for contracting administrative services are somewhat different from 1 he considerations associated with contracting for operations and maintenance services, where cost is the most inlportant motivation. A review of Table 4, which highlights the results of the contracting study involving transit systems in California, supports this statement. Although cost savings remains an important consideration for the contracting nf administrative services (33 percent), the flexibility (33 percent) that it can offer is indicated as being just as important Arguments for and against contracting administrative services are presented below. '"Urllon Mass Transportation AdministrtUion, Barrim to friva(t SfC(or PanjcipatiQrJ in Public "'\ p. 17. 42


Arguments For Contracting: Temporary Labor The survey of California systems indi cated t hat most o f t h ese services, such as marketing and accounting, can be provided without the use of full time labor. In situations where a public agency contracts with a private transit system, the public agency may only have the option of co n tracting for administrative personnel. Special Skills As mentioned earlier, special skills are often required to adequately fulfill administrative functions. This is also a factor in contracting administrative services, particularly when public sector compensation may not be able to attract or afford highly-skilled, full-time employees or individuals who perform hazardous work functions. It is interesting to note that the cost of contracting for an administrative function may exceed the cost to perform that service "in-house." In this situation, the significance of contracting relates to added ret urn in quality of work and expertise that a private firm can potentially provide. Arguments Against Contracting: . Performance Because most admil)istrative functions are difficult to quantify it may take additional staff time and resources to evaluate the effectiveness of a vendor as well as to monitor performance. Supervision Guidelines for supervising contracted personnel can be complex, and understanding their position within the organizat ion can be difficult. Liability -Some administrative functions serve as a liaison between the contracting agency and another public agency i n volving information that is sensitive to the contracting agency. Resolving disputes that may develop on behalf of a contracted vendor can be costly. An example of this would be a contract with a vendor to complete a transit system's ann u al Section 15 Report. Since this report helps determine funding levels for trans i t systems, a report that is not completed accurately could have a significant impact on the amount of funding the reporting system receives. 43


OTHER PUBLIC/PRIVATE PARTNERSHIPS IN MASS TRANSIT Transit systems can use various types of public/private partnerships to achieve additional revenues, cost savings, or the enhancement of facilities and services of the system. Regardless of the type of public/private partnership implemented, successful partnership arrangements should have the following characteristics:44 (1) Active and persuasive personal leadership from both the public and private sectors. (2) Clear and specific objectives. (3) Flexibility for negotiating alternative plans. (4) Shared planning and implementation responsibilities. (5) A "win-win" result, where benefits are enjoyed by both sectors. A number of specific public/private partnerships are defined and discussed below, including joint development, cross border leasing, transportation demand management initiatives, and turnkey operations. Joint Development In the transit industry, joint development refers to real estate development that is integrated with an existing or proposed transit station/stop or other transit facility.45 A public agency typically negotiates with a private entity to jointly develop a real estate project that will benefit both parties involved in 'the investment. Both sectors share the risk involved in the real estate investment as well as the benefits that can result from the development. Examples of joint development may include an office building constructed in the air rights of a rail station or the construction of retail mall with direct access to a transit station/tenninal.46 Joint development projects can result in millions of dollars of additional revenues annually. Successful projects have been implemented in Washington, Miami, Atlanta, Denver, and numerous other cities. MLouis E. Keefer As.sodales, PrQjjt lmRiications of Joillt Deyelop.ment: Three Institytional Al?Droache.t (Arlington, VA: Urban Mass Transportlllion AdmiJtistration Office of Plan11ing Assistance, 1984), p. 34. 4FrtUich and uitner, P.C, freliminazy E>qluotion ofDARTJojnt 12fveloument Bevenye l'etentials (Dallas. TX: Dallas Ami Rapid Transit, 1985), p. 1 J. "Public Technology, Inc, Joint Deyt/Qpment: A Handbook for l.pca/ Govemmenr Q(ficiqls (Washington, DC: Urllan Mass Tronsponalion Administration Office of Planning Assistance, 1983), p. J. 44


Benefits Numerous benefits of joint development can be identified from the perspective of the transit system, the public sector in general, and the private sector Transit Syste!" Benefits Increased ridership through the implementation of residential, commercial, and institutional projects that attract transit users Increased revenue from the sale or lease of the transit system's real estate to the private sector entity. Enhanced environment around the transit station/stop or facility as a result of amenities .added by the private sector. Reduced costs due to the sharing of land acquisition and construction costs of new facilities. Improved intermodal connections within and between public and private transportation systems. Public Sector Benefits Expanded job opportunities. Opportunity to increase local property and sales tax base. OpportUnity to implement regional planning policies. Opportunity to recapture some of the value added to private property by a major public improvement Private Sector Benents Shared expenses and risks with a pub li c agency and reduction in land acquisition and site preparation costs . Increased opportunity to capitalize on the market for various types of land uses resulting from the linkage with new transit facilities. Opportunity for improved internal circulation and other amenities that can give the project investment a competitive advantage. Prospect for expedited approvals and cooperation of various public sector agencies. "Ibid. 45


Risks There is a cenain amount of risk associated with a real estate investment and, although the risk is shared in a joint development project, the potential for failure still exists. The primary risks associated with joint development include the unpredictability of the real estate market and the significant potential for project delays.48 Unpredictability of the Real Estate Market The volatility of the real estate investment results in significant risk being associated with joint development projects, panicularly those projects that require an extended period of time to negotiate, plan, and implement. As an example, a joint development project that took five years to implement likely coincided with numerous up and down cycles in the economy and the real estate market. Potential for Project Delays More often than not, significant project de l ays occur when the public sector is involved in a development project. Causes for delay include legal issues, unanticipated planning and funding requirements, public opposition, and others Regardless, the likelihood of delays is usually greater with the involvement of the public sector. Additional delays are difficult to tolerate for the private sector since time is such an important factor in their financial stability. Other disadvantages include the following: . Not Conducive to Small Developer Part icipatio n -In order for joint development to be worthwhile the project must be relatively large. As a result, participation of small developers is nearly impossible May Compromise the Best Public Option -To facilitate a successful joint development project, it may sometimes be necessary for the public agency to compromise the best public opt ion, i.e., the selected station location may not be ideal with respect to service design but may be ideal to accommodate the joint development project. In summary, significant additional revenues can be achieved through the implementat ion of joint development projects Benefits can be enjoyed by the transit system, the public sector, and the private sector 1-{owever, risks are involved. These risks are reduced as a result of the shared responsibility for the project by both the public and private sectors "Ibid, p 29. 46


Cross Border Leasing49 Cross border leasing is an innovative financing technique that invol ves the sale and leaseback of public transit vehicles by a foreign investor seeking to use the tax shelter be nefits of owning and depreciating assets. The technique evolved f rom a similar technique knoWn as "safe harbor leasing," under which public transit vehic les or other assets are purchased by a private U.S. entity for the tax shelter benefits. These vehicles would then be leased back to the transit system. The transit system would also receive a negotiated ponion of the tax benefits realized under the agreement. Safe harbor leasing was abolished by the 1986 Tax Reform Act, since these tax benefits reduced the U.S. general fund and resulted in an i ndirect subsidy of public transit by the Treasury. The logic behind cross border leasing is the same as safe harbor leasing, with the exception that cross border involves a private entity from a foreign country. A typical cross border leasing arrangement occurs as follows: (1) A U.S. transit system nego tiat es a purchase agreement with a vehicle manufacturer. (2) 'J1!e transit system pays for the vehicles. (3) The vehicles are inunediately sold to the private foreign entity. (4) The transit and foreign entity negotiate a leaseback agreement. The financial benefits to a transit system that can result from a cross border lease vary, depending upon the countries involved in the lease, the s ize of the transaction, the types of vehicles purchases, and other factors. Transit systems can typically expect to receive compensation ranging from four to eight percent of the vehicle sales price, less transactio n costs. For example, a purchase of transit vehicles totaling $100 million could result in a financial benefit between $4 and $8 million prior to the inclusion of transaction costs Due to the transaction costs, "the feasibility of a cross border lease agreement is dependent upon the size of the transaction. A transaction of $20 million is generally accepted as a minimum for being financially feasible. Average transactions are approximately $50 million. "Patrick Griffllh/Center for Uroan Transportation Research, cross Border LeasingImplementation '""" and ApplicatiOIU" Paper presented 01/he ASCE/ITE Co11[ercnce 011 lmplementing RegWnlll Mobility Solm""'' Secaucus, Nl: 1991. 47


Although potential financial benefits are significant, t h ere are also i nheren t risks involved in the transaction, including: Negotiations could fail to produce an agreement between the parties involved. If this were to occur, significant up-front costs would be incurred without an agreement ever being reached i.e., legal fees, t ravel expenses, etc. Other risks associated with cross border leasing can result from "unwind events." Unwind events refer to situations in which the lease agreement could be terminated. Examples where this could occur include loss of leased equipment as a result of damage, bankruptcy of any of the parties involved tax law or currency changes, or other specific events specified in the lease agreement. UMTA has adopted a policy of supporting t hese transactions. UMTA Circular C 7020.1, issued in April 1990, states: .. .it is UMTA's policy to encourage and facilitate its grantees' use of innovative financing and funding options. One of these options is for grantees to enter into certain leasing arrangements with foreign entities referred to as cross-border leases." The adoption of this policy by UMTA has resulted in sev eral success ful cross border leasing transactions, including those negotiated by the San Diego Metropolitan Development Board and the New Jersey Transit Corporation. UMT A's poiicy will undoubtedly encourage more use of this innovative financing technique in the future. Although it has been used primarily for the acquisition of rail vehicles, applications of this technique may extend to other types of capital as well. Public/Private Partnerships In Transportation Demand Management5 Transportation Demand Management (TOM) is a transportation planning process designed to alleviate congestion on highways TOM initiatives can be classified into three major categories: '"Ctntu for Urot111 Trt11tSpottati011 Rsearr:h, Commute Alternatives Svslems Handbook (Tampa, FL: Cent

(1) Actions that promote alternatives to the automobile. (2) Actions that encourage more efficient use of alternative transportation systems. (3) Actions that discourage automobile use. These actions are typically implemented by public/private partnerships that form Commuter Assistance Programs (CAPs) and Transportation Management Associations (TMAs). Through the activities of CAPs, TMAs, and other public/private organizations, TDM initiatives are being implemented across the state of Florida and the U.S. In an effort t o address congestion, growth management, energy, and air quality issues, these programs focus on reducing the number of peak-hour single occupant vehicles through the use of TDM initiatives such as carpooling, vanpooling, bicycling, walking, and the use of mass transit. The logic behind these types of arrangements points to private sector involvement. The probability for success in these TDM initiatives is enhanced when members of the private community "buy in" to the concept of TDM. In addition, TDM approaches involve very little capital, unlike most capital-intensive approaches to addressing transportation problems, such as increased spending on highways and fiXed-guideway systems. Turnkey Operations A turnkey operation consists of a public agency issuing a performance specification for the construction of an entire system, whether it be a rail system or a sewage treatment plant. The logic is that private sector consort i a will compete to provide final design and construction and assist in the operation for a given period of time indicated in the contract specification. By turning the entire project over to the private sector, the public agency no longer needs to be concerned with cost overruns, on-time delivery, or the communication necessaty to coordinate numerous equipment suppliers and contractors.51 At the end of the specified time period, the private sector consortia then t urns the "keys" over to the local public sponsoring agency. I n a typical turnkey arrangement, the private sector consortium indicates in its proposal what it is willing to contribute to the cost of constructing the system. In return, the selected consortium receives benefits in the form of real estate development righ ts along the newly constructed system or in the air space above a station within the new l y-constructed system. "Jean Matie Aubrio4 ''Tough Talk On Turnkey," September 1991. 49


As a result, the private consortium benefits from ;eal estate deve l opment and the public agency benefits from the red uced cost o f implementing the system. As federal assistance has declined in recent years for capital-intensive transit projeCts, local agencies have begun looking to turnkey operations as a mechanism for implementing systems that would otherwise not be in place. If the situation is right, a turnkey operation can be a win-win situation for both. the public and private sectors. However, just as with joint development, the success of the project weighs heavily on the rea l estate mar ket. so


V. INVENTORY OF TRANSIT PRIVATIZATION ACfMTIES This section discusses the functions of a mass transit agency. A sample organizational chart is presented, along with a review of t he functional areas within a transit agency. The functions fall into one of three areas: operations, mai n tenance, or administration. Each area is defined below and the specific functions are presented. Thi s is followed by a review of the public/private alternatives to providing each o f the functions. TRANSIT SYSTEM ORGANIZATION AND STRUCTURE A typical organization structure for a transit system is shown in Figure 12. In most communities, the transit system i s governed by a board of directors whose members are either elected or appointed. The board of directors has seven major tasks: Establishing objectives for the board of directors. Establishing a strategy for the transit system. Approving management objectives. Resolving major issues. Acting as an intermediary. Obtaining revenues for the transit system. Evaluating the management of t)le transit systemP The chairman of the board of directors is responsible for s eeing that the transit agency's overall actions are in line with th e goals and objectives of the municipality served.53 A$ a result, the board plays an important r ole in the decision to privatize functions within a trans i t agency. The functions of a transit agency fall into one o f three areas: operations, maintenance, and administration. Each of these are described in detail below, along with an inventory of activities that can potentially be privatized. 1Institute jOF Urban Transportation aJ lndi4na Uuiversity, Handbook for Manarement Perfonnance cfudits (B/OQmington, IN: Url>an Mass Transportation Administration University Research and Training Program, 1988), p. 20. "George E Gray and Luter A. Hoe/, eds., fld>fjc Trglh!o0!1ation: fll/!!nine OperatiQJY. and Manaument (Engkwood Cliffs, Nl: PrmticeHa/1, 1979), p. 427 51


. . Operation s '--J'lrcd.-FIGURE 11 S.:Jmple Sysum Cb::trt Board of DirectOrs Executive Director Maint enance r-VciUclo NonVcHdo 52 I A dministrati on -M Hwnan -


. Operations The operations function of a transit agency include s all daily activities necessary to provide service to the community. This includes scheduling, dispatching, and the actual provision of s ervice. The size of tile system varies with the type of operation. Demand-respome systems tend to operate on a smaller scale than fixed-route systems. Passengers access the systems by walking to a designated location (fixedr oute) or contacting a central control center (demand-response). Demand-Response Services Demand-response services are generally offered by smaller scale systems in response to needs driven by transportation disadvantaged markets. The vehicles may be taxis, vans, or small/medium-sized buses. Most passenger trips are ordered by contacting a control center and infor ming it of trip origin, destination, and desired departure time. Subscription service, where the passe nge rs request the same service on a regular basis, is also possible. Demand-response service differs from fixed-route service in that passengers call a central control center to arrange service. A dispatcher in the center who has a good knowledge of the service area and its traffkconditions records t his information and schedules the vehicles to pick up and dr.op off as many passengers on a single trip as possible without. exceeding a reasonable circuitry and time of travel for any one passenger. . Demand-response service can be the optimal mode in providing the following four types of services: Special services for the disabled and elderly. Demonstration service in areas not served by transit. Late night or off-peak service, substituting for very lightly traveled bus routes in low-density areas. Transit services in small cities, or transit service in suburban areas coordinated with regular bus lines servicing the central city, or feeders to suburban rail transit stations.S4 "Vuktvt R. Vuchic, Uan fib!jc TrrmSI10!tation: Systems and Tes;hnQ/ofll' (EJtglewood Cliffs, Nl: Prentice-Hall, 1 981), pp. 6()2.60$. 53


Fixed R oute Se rvi ces Fixed-route services are provi ded along des i gnated r outes at schedule d beadways. N o prearr angement is necessary fo r service and trips can be purchased on a d ail y w eekly, o r monthly basis. Variations in fixe d rout e services include local bus s ervic e, rapid rail advance d guideway, commuter e xp ress s ervice f eeder routes, vanp o ol s, and park and rid e routes The types of fixed -r o ute services typ i cally conside red as good candidates for privat i zation inclu de: Fixe d -r oute, local bus s e rvices. Co mmuter express service s. F eede r services. Van p o ol s ervices. Par k and ri d e service s M a in t enance The main t enance fun c tio n o f a transit agency ensu res th e p rotec ti o n and p r olongation of the useful life of a system s cap i tal assets in a cos t -effe ctive manner The five ma j o r tas k s o f a trans i t maintenan c e d e p artment are: Preparin g a compre h e nsive main te n ance p l a n. D e v e l o ping 3.11d maintainin g a p r ev e nrive mainte nan c e program. P roviding for adequate d i a gnostic and repair f a cili t i es. Recruiting and deve loping personn el. Develo p in g and m aintaining a n effective mainte n anc e manag ement i nforma tion s ystem. 55 Trans it a g encies perform two type s of maintenance : v ehi c l e and nonv e hi cle. Vehicle ma int enance may be performed o n a se t schedule or on an as n ee ded basis. N o n v ehicle m ain tenance is performed on a rang e of items, from physical struc t u re s t o office equipment. Each of thes e functions is descri bed below, alon g with specific act ivi ties whi c h can be p ri vatized. Vehic:le Ma i ntenance Vehicle ma i n t e nan ce i s a n imponant a c tivity f or ensuring th a t t h e flee t is me chanically capab le o f s a f ely pr o vidi ng s e rvice. The decision to priv atize v e hicl e maintenance is a fun ction of sp a c e require m e nt s, c o s t co nsi d era t ions a nd t h e unifor mity of "Ibid., p 33. 54


workload needs, all of which determine wHether fullt im e maintenance staffing is possible and/or necessary.56 In addition, the availability of special skills and state-of-the-art equipment also plays an important role in this decision to privatize ma i ntenance activities. The following maintenance services are typically considered as candidates for privatizatio n: Engine and component rebuilding. Tue maintenance. Rehabilitation services. Air conditioning system maintenance Seat repair. Painting. Body work- Non-revenue vehicle maintenance Towing. Non-Vehicle Maintenance -Non-vehicle maintenance is performed on capital equipment ranging from major facilities to office equipment. As non-vehicle equipment and facilities have become more sophisticated, the privatization alternative has become more attractive, since the system is not required to have specialized labor on staff. In addition, the nature of many routine, non-vehicle activities may not require full-time employees to per(orm the necessary services .. Examples include the maintenance of: Office equipmenl Radio and communications systems. Building and grounds. Janitorial service. Data processing/management information systems equipment.s' Bus shelters and signs. "Public/Privale Worldng Group of the America11 Public Transit Asscx:ia/ion, Public TrQllSit S

Administration The administration of a trans i t agency is respons i b l e for support i ng the overall management of the transit agency. The major aspects of administration are p l anning, marketing, human resources, and finance and account i ng Other activities i nclude labor relations, legal services, internal auditing, and public affairs A discussio n of the various functions follows P l anning The five main tasks of a transit agency p l anning department are: Analyzing markets. Conducting research. Planning facilities. Planning service. Section 15 report preparation. The function of the planning department is to e nsure a cost-e f fect i ve u s e of system assets. It is responsible for ensuring that community needs are met through service design, including route location, hours of service frequency of service, fare structure, etc. Another responsibility is to monitor changes in the phys i cal operating env ironment and to anticipate events that will necessitate a reevaluation of s ervice. The preparation of schedules is also a critical part of planninjl .ss It is possible for all of these activities to be privatized . Marketing The marketing function traditionally involves f ive ma i n tasks: Conducting research. Developing a marketing plan. Producing/printing schedules and brochures. Pricing service. Promoting service "Institute for Urban Tlllllsportation at Indiana University, p. 24 56


The research conducted in this function focuses on current and potential transit riders. It should also determine who does not use transit and why. The information gathered through the research process is used by management and policymakers in developing an overall strategy for the system.59 It i s possible for all of these ac t ivi t ies to be privatized. Human Resources Human r esources is a term commonly used to refer to the labor relations and personnel functions of an organization. In a transit agency, this function is responsible for: Personnel planning and staffing. Employee training. Employee compensation. Labor relations. Employee recruiting, screening, and selecting. Employee performance evaluation.60 Benefits management. Grievances. Finance and Accounting The nine main task s of this function involve: Budgeting and financial planning. Monitoring revenue and .expenditu res. Establishing and implementing protective controls. Financial consulting. Management audits. Financial audits. Accounting for the payroll. Complying with grant requirements.61 Section 15 report preparat ion It is possible to privatize all these activities by contracting with an independent CPA or accounting firm. "Ibid., p. 30. "'Ibid., pp. 4142 "Ibid., P 38. 57


Other Activities In addition to these ma i n administrative functions, activities relating to labor relations, legal services, internal auditing, and public affairs are also performed. While not directly related to the actual provision of services, these activities are necessary to ensure a smooth running agency. A partial list of activities in this area that may be privatized include: Data processing. Telephone information services. Legal services. Legislative assistance. Risk management. Security services. Construction management.62 Architectural/ engineering services Construction services. Joint development planning. Project financing.63 Each of these major functions is summarized in Tables S through 7. Also shown in the tables are the type of private sector entity that would be appropriate for each activity recommended as a .Privatization candidate. "'APT.A. p. 13. "Ibid., p. 14. 58


CATEGORY NAME Demand-Responsive Route Commuter Rail TABLE 5 Operation Activities AcnVITY PRIVATE SECTOR PROVIDER Scheduling Paratransit Companies/Bus Companies Dispatching Paratransit Companies/Bus Companies Provision of Senice Patransit Companies/Bus Companies Regular Service Management Companies Feeder Service Paratransit/School BusjMgmt Companies Express Service Paratransit/School BusfMgmt Companies Park n-Ride Service Management Companies Provision of Service Management Companies Source: Carter-Goble Associates, Privaie Sector Contr act ine Worhhop Manual for Rural and Small Utb an Public Transportation Providers, p In-8. CATEGORY NAME Vehicle Non Vehicle TABLE6 Maintenance Atti't'ities AcnVITY PRIVATE SECTOR PROVIDER Vehicle Cleaning Local Garages/Specialty Service Corp. Body/Paint Work Body /Paint Shops Repai!s/Overhauls EJll9ne(Transmission Shops Routine Maintenance Local Garages/Auto or Truck Dealerships Office Equipment Business Machine Repai! Shops Radios Authorized Service Repair Shops Buildings Janitorial Service, General Contractor Grounds G eneral Contractor Data Processing Service Contractor Source: Carter-Gable Associates, Pcivate Soctor C ontra cting Wocl;shogManuDI [0 Rwat and Small Urban Public Innspouatjon Providers, p. lll-8. 59


. CATEGORY Planning Marketing Human Resources F"mance/ Accounting Othe r TABL AdmlolstraliOQ Activities . ACOVITY PRIVATE SECfOR PROVIDER Section 15 Reports Consultant Transit Development Plan Consultant Management Audit$ Consultant/Management Company Special Studies Consultant/Management Company Route Evaluation Consultant/Management Co./Service Contractor Market Analysis Research F"ltlllS Planning Facilities Consultant/Management Company Planni.og Service Consultant/Management Co./Service Contractor Marketing Analysis Research rums Campaigns Marketing/Public Relations Firms Advertising Marketing/Public Relations Farms Labor Relations Consultant/Management Company Employee Training Consultant/Management Company Employee Benefits Consultant/Management Company Recruiting Consultant/Management Company Employee Evaluation Company Section 15 Report s CPA Fum Budget CPA rU1ll Fmancial Planning CPA Firm Monthly Accounting CPA Firm Audits CPA rum Payroll CPA Firm Grant Administration Service Contractor /Management Company Reporting CPA/Data Processing Company Computer Processing Consultant/Service Contractor/Management Co Procurement Consultant/Service Contractor/Management Co. Legal Services Legal Firm Public Affairs Consultant/Management Company Souree: Carter Goble Associates, Private Sector Contracting Workshop Manual for Rural and Small Urban Public Tra!l.lportatjon Providers. p. 111-8. 60


VI. THE CONTRACTING DECISION Various approaches to contracting transit operations, maintenance, and administration are reviewed in this section. Each approach identifies the specific roles of the public and private sectors, ranging from fuU public sector responsibility to full private sector responsibility. The range of options suggested for each contracting category is intended not to be comprehensive but to provide an array of possible approaches. The primary focus of this section concerns privatization of transit operations; however, brief discussions are also provided concerning the contracting of maintena n ce and administration. TRANSIT OPERATIONS Three major criteria are typically used when making decisionS concerning transit operations: effectiveness, efficiency, and equity. This section direc tly applies t hese criteria using the "Criteria Implications Model for Transit Operations," a model developed by CUTR specifically for this project. Once the model is explained, the implications of the contracting decision on the model are explored to determine how privatization might help or hinder transit systems in their efforts to meet these criteria. EtTectiveness Effectiveness refers to the relative degree of success in meeting the objectives of a transit system. The objectives may be determined by the Board of Directors, the executive director, system staff, citizens in the service area, or a combination thereof. As a result, effectiveness may be defined differently by each individual transit agency. However, a range of objectives can be considered in the analysis. At one extreme, a transit system's objective may be to make transit service available to every person in the community. At the other extreme, the objective may be to provide the best service possible to selected parts of the community where demand is greatest. In each case, if both systems a r e satisfying their objectives, then they are both characterized as being effective. Efficiency Efficiency refers to the allocation of resources to achieve the chosen level of output at a minimum cost. In the context of mass transit, service is said to be efficient when a given amount of service is provided at the least possible operating expense. A transit system 61


attempting to achieve efficiency s hould not be concerned with how much service to produce, but rather with how and where to provide the service. Equity Equity refers to fairness in the distribution of welfare and serviceS. In the context of mass transit, the service m ay be termed "equitable" if an equal amount and quality of service is provided to all individuals within the service area. Although the equity criterion ultimately involves value judgments, the definition indicated will be used in this analysis and is a necessary consideration for public policy decisions. Criteria Implications Model for Transit Operalions Given the basic definitions provided for each of the criteria. a model can be devised which shows that a transit system inherently chooses its level of efficiency and equity when its objectives are specified and achieved (effectiveness). To illustrate, Figure 13 measures efficiency and equity on the vertical axis and effectiveness (transit system objective) along the horizontal axis. Measuring efficiency and equity on the same vertical axis may raise questions; however, absolute measurement is not the intent of t he model. The intent is to provide relative magnitudes of the criteria in theory only. As stated in the defiriitlon for effectiveness, a transit system is deemed to be effective if it achieves its specified objectives." Recall that the range of objectives has two extremes: ( 1) providing service to the community to the maximum extent possible (full service}, and (2) providing selected services which reflect the greatest demand (select service). This range is shown as the two extremes for the effectiveness criterion in Figure 13. Each transit system is assumed to meet its specified objectives, and therefore is assumed to be providing effective service. As a result, the point of operation along the horizontal axis is given and, as a transit system moves from "full service" to "select service" along the horizo ntal axis, equity decreases and efficiency increases. This intuitively makes sense since, as the system moves toward "select service," fewer individuals in the service area are provided the opportunity to use the transit service (less equitable). At the same time, efficiency inc reases since services with the least amount of patronage are eliminated. As a result, the equity curve is depicted by a downward sloping line, while the efficiency curve is depicted by an upward sloping line. The precise slopes of these lines are unknown; however, the intent of the model is to show only whether the equity and efficiency lines are 62


upward or downward sloping. The exact slopes cannot b e estimated and are not necessary for the purpos e s of the model. Since effectiveness is defmed by the transit system's objective, the p oint along the horizontal axis is given. If a vertical line is drawn from this po i nt, relat i ve levels of efficiency and equity can be determined. For example if transit system A decides that i ts objec tive is to produce service at point A, that serv i ce results in a relatively high leve l of equity (Q1 ) and a relatively low level of efficiency (F1). Alterna t ive l y transit system B may choose to be much more selective in its service decis i ons (see point B) As a res u lt, system B achieves a higher level of efficiency (F:J, but a lower l evel of equity (Q2 ) than transit system A Based on their objectives, t ransit systems A and B are inherently indicating their preference to achieve more equity or more e f ficiency Equilibrium can be achieved at the intersection of the equity and efficiency lines, at point E. This is the point at which equity and e(ficiency are jointly maximized FIGURE 13 Crltria Implications Model ror Transit 0Jltlons t .QI i F2 f "'' '" ' ' .. ' ' '''" ''"' ' ' ""'"""'"" '!"' .. "''"' "'"'''"' "''''M" ,..,,,,,. ., , ''' "''' ' ' Ql . .. . ... ,,_, ,,,,,,, ,,, .. ,,_,,+,,,.,,,_,,,,,,,,, , PI 1 ....... ... .. ... .................... ............. 'V Lew Full Servloe Bffcctiveness (Ttuti.t S)'t!em Objec:tive) 63 8 Effi.d <1 Public:


Approaches to the Provision of Transit Operations Several public/private alternatives for the p rovis ion of transit services are reviewed, all o f which involve varying levels of participation by both the p ublic and private sectors. The purpose of this section is to review an array of pub li c/private approaches to the provis i on of transit operations and to determine t he implicat i ons of these approaches on the Criteria Implications Model. Table 8 presents seven public/private approaches to the p rovision of transit services and identifies the pub li c and private sector roles in each of the approaches This table is an adaptation of work previously conducted by Pagano.64 TABLE 8 Public/Private Approaches to tbe Provision of Transit Operations APPROACH PUBLIC SECTOR ROLE PRIVATE SECTOR ROLE 1 S)'Siem-wide planning, coordination, and No rote. operation. 2 System-wide planning and coordination; Operation of demand-response and Operation of r1Xedroute service. feeder bus service throutW. a competitive bidding 3 System-wide. planning and coordination; Operation of demand-response, feeder Operation of a majority of fuced-route bus, and some ftXcd-route sorviee through service. a competitive bidding proeess. 4 System-wide planning and coord inat ion Operation of demand-response, feeder with input from contractors; Operation of bus, and some ftXed-route service through a majority of flXed-route services. a compelitive bidding process; Can provide input concerning planning and coordination of contracced services. 5 Systemwi de planning and coordination OperatiOn$ of ruced route, demand response, and feeder bus through a competitive biddiog process. 6 Competition with the prlvate sector; Competition with the public sector; s.ys.temwide planning. coordination, and planning, coordination, and direct operation of serviees. operation of competitive services. 7 Regulation and some level of funding All services through competitive bidding support. proeess; planning. coordination, and operation negotialed by private rums and public agency. "'Anlhorry M. Pagano. ptfvtUe Sector Alternatives for Public Trall.!portation. Tranwmt!l!ion Oumwty, pp. 4).1 449. 64


Each approach considers which sector i s to be responsible for the basic roles of planning. coordination, and operations As indicated previously, the list of approaches is intended not to be comprehensive, but t o provid e an array of possible approach es. A transit system could choose one of these approaches, a combination of these approaches, or an entirely different approach. Description o r A pproaches A brief description of the public/private approaches to transit operations is provided in this section. Approach # 1 This approach describes r he type of transit system that cu rrentl y exists in many urban areas of the country. The coordina tion, plannin_g, and operation of transit servi ces are provided solely by the public transit system The private sector has no role under this ap proach. A ppro a ch #2 The second approach is similar to the first, with the exception that all demand-response and feeder bus services are contrac ted to the private sector through a competitive bidding process. The transit system continues to provide coordination and plalllling for all services, but only operates fixed-route services Approach #3 This approach goes one step further by not only contracting for demand-response and feeder bus services, but also contracting for selected fixed-route services deemed appropriate for t he co m petitive bidding process System wide planning and coordination continue to be handled b y the transit system. Approach # 4 The fourth approach is exactly the same as approach #3, except that now the private contractors are given the opportunity to provide input into the planning and coordination of the contracted services. Approach #S Under this arrangement the transit system continues to provide planning and c o ordination for the enti r e system; however, services, including fixed-route. demand-r e sp o nse, and feeder bus are provided by the p r ivate sector through the competitive bidding process. Approach #6 This approach permits both the public and private sectors to compet e in the provision of transit services. Both the public and private sectors are responsible for plannin g, coordinating, and operating their respective services 65


Approach #7 In the final approach, aH planning, coordination, and operations are negotiated by private firms and the public agency. The public sector continues to be involved in the compe t itive bidding proce ss and with regulation that may be appropriate for safety considerations. Application or Contracting to Criteria Implications Model It is clear that, as a transit system moves from Approach # 1 to #7, the role and discretion given to the private sector is increasing, while the role of the public sector is decreasing. Each approach can now be applied to the Criteria Implications Model to determine how it affects the criteria relationships discussed previously. T\\:'0 primary assumptions are made in the application of the model: (1) As the role and level of discretion incr eases for the private sector, the efficiency line shifts parallel in an upward direction. As a res ul t, each transit system objective is now associated with a higher level of efficiency. This is a plausible assumption, since a significant majority of the literature concludes that t he services provided by the private sector (under contract) tend to be much more efficient than services provided by the public sector. (2) The transit system is assumed to be operating as efficiently as possible, given the current le vel of service as determined by the system's objective. That is, performance measures such as labor productivity are assumed to be maximized. Although t his may be an unrealistic assumption, it does not cha nge t h e implicat ions of contracting on the model. Removing this assumption would only complicate the model and would conclude with the same res ul t. Therefo re, the assumption is made to ensure that the model is more easily understood. As Figure 14 indicates, Approach #1 results in the existing efficiency curve for the public sector, since the private sector has no role. However, in each of the subsequent approaches, the efficiency curve shifts upward each time the role of the private sector increases. As a result a transit system objective can result in higher levels of efficiency, while maintaining the same level of equity. It is also important to note that the upward shifts in the efficiency curve coincide with increases in the efficiency-equity equilibrium (E" E2 etc.). If the 66


ultimate objective is to jointly maxtmtze both efficiency and equity, mcreases in the efficiency-equity equilibrium are desirable. Lower FIGURE 14 Criteria ImpUcatioos Model for Transit Operations, A Consideration or the Seven Approaches fuiiSeMoe (T...,oi.t s,,. ., ObjeiTel An example can be applied to the model to help understand the implications of contracting. The example is illustrated in Figure 15. Suppose a transit system's initial objective is defined as providing "full service" at point A. At that point, efficiency is at its lowest at F 1 while equity is maximized at Q1 The transit system realizes that significant cost savings could be achieved if it were to contract several of the f eeder service routes that serve its rail system. Since cost savings are realized, the system has increased the efficiency with which feeder service is being provided, thereby shifting the efficiency line parallel in an upwa rd direction. The result is an increase in efficiency to F2 while equity has been maintained at Q1 Next, the transit system decides to e limin ate several routes that are attracting very little ridership and to redirect the resources to enhance routes that have shown promise in attracting significant ridership. This indicates a change in the transit system's objective from A to B. Efficiency improved u p to F3 at t he expense of equity, which declined to Q2 The 67


decline in equity occurred due to the transit system movi ng away from its initial "full service" objective. As the figure indicates, policy decisions can continuously result in increases in efficiency and declines in equity to the point of equil ib rium at point E, where the transit system objective is at point C and both equity and efficiency are jointly maximized at FQ. All veaical increases in efficiency can be attributed to increased use of the private sector, while the sloped increases in efficiency resu lt from a in the transit system's objective to increase efficiency at the eJUlense of equity. FIGURE IS Criteria Implications Model for Transit Operations Transit System EXllmple Q2 F2 J!llle <1 Public FlA B C Fulls..vloo SelectSeMco Criteria Implications Summary (Trmoit s,._ Ob!eme) The implications of this theoretical model for transit system operations should be clear. If a system is able to achieve its objective, there are specific levels of equity and efficiency t hat coincide with that level of service. Through a cons i deration of the relationships. among these criteria, a system may want to adjust its system objective to achieve a greater level of equity, efficiency, or a better balance between the two criteria. The contracting of transit operations provides one mechanism for the transit system to adjust the criteria relationships to one that suitably matches the philosophy of t he transit system. 68


TRANSIT MAINTENANCE Several public/private options for the provision of vehicle and non-vehicle maintenance are reviewed in this section. Table 9 presents four approaches to the provision of maintenance services and identifies the public and private sector roles in each of the approaches. Just as indicated in the discussion of transit operations, these four approaches are not intended to be a comprehensive list of all possible app ro aches to the provision of transit maintenance The intent is to suggest several possible approaches. TABLE 9 PubUc/Prlvate Approaches lo Transit Maintenance APPROACH PUBLIC SECTOR ROLE PRIVATE SECTOR ROLE 1 System-wide vehicle and non vehicle N o roJ e. maintenance. 2 Nonvchiclc, preventive, and other Majo r maintenance efforts that are not limited needs as determined feasible for the public maintenance by the capacity of the public main t enance facilities. facilities. 3 Preventive n;tainteoance only. All otheJ maintenance need s. 4 No role. maintenance for entire system. Approach #1-In the first approach, the public sector is responsible for system wide vehicle and non-vehicle maintenance. In this arra n gement, the private sector has no role. In the short run, the transit system is limited by the capacity and technology of it.s existing maintenance facilities. Approach #7. The second approach places the responsibility for non -ve hicle, preventive, and other routine maintenance needs on the public sector. Minor maintenance needs are defined as those maintenance functions that can be adequately provided by the exist ing public sector facility. All major main tenance ne eds which go beyond the capacity of the existing maintenance facility are contracted to the private sector. Approach #3 Under this arrangement, the public sector is only responsible for preventive maintenance of the vehicles. All other maintenance responsibilities are contracted to the private sector. This may include leasing out facilities and equipm ent to be used by the private sector. 69


Approach #4 The final approach contracts all maintenance needs to the priva te sector. The public sector has no role other th an to monitor the con t racts established throug h the competitive bidding process. Based on the previous discussion concerning the contracting of maintenance, the r e are clearly many maintenance functions that can be provided by the private sector which could potentially result in cost savings. Several factors must be considered in the deci sion to contract for transit maintenance including the capacity and technology of existing maintenance facilities and the nature of the maintenance workload over time. Existing maintenance equipment and facilities should b e fully utilized as long as the technology is not outdated to the point of being detrimental to productivity. If equipment and facility technology reaches this point, then maintenance contracting should be considered. In addition, if maintenance needs have exceeded the capacity of the existing maintenance facility, then contracting should be considered. Finally, if the transit maintenance workload tends to fluctuate over time, contracting may be an ideal solution for handling the workload during the peak times. TRANSIT ADMINISTRATION Severa) public/private options for the provision of administrative responsibilities are. also reviewed. Table 10 presents five approaches to the provision of administrative services and identifies the public and private sector roles in each of the approaches. Again, just as with transit operations and maintenance, the list of administrative approaches is not intended to be a comprehensive list of options. A transit system could utilize one of the listed approaches, a combination of these approaches, or an entirely different approach to the provision of administrative services. Approach #1 The first approach places the burden of all administrative responsibilities on the public sector. The private sector has no role. All planning, marketing, and h uman resource issues, along with other miscellaneous administrative responsibilities are provide by employees working directly for t he transit system. Approach #2. In the second approach, the public sector is responsible for all administrative functions with the exception of those related to finance/accounting. This may include hiring an accounting firm for budgeting, financial planning, monthly accounting, auditing, payro ll and the preparation of various reports required of transit systems, i.e., Section 15 Report. 70


TABLEIO Public/Private Approaches to Tr ansit Administration APPROACH PUBLIC SECTOR ROLE PRIVATE SECTOR ROLE l System-wide administration. No role 2 ResP.,nsible for planning, marketing, Responsible for fl.nance/accounting human and other functions . misce.Uaneous administrative responsibilities. 3 Respons ible for plao.niDg, human Responsible for finance;ac:c:ouncing and resowccs, and other mlsceUaneous marketing fuuctions administrative responsibilities. 4 Responsible for planning and other Responsible for fUiancejaccounting. miscella.a.eous administrative marketing, and human resources. responsibilities. 5 Contract administration and some System-wide administration with tbe m.isceUaneous administratlvc cxccplioo of some miscellaneous responsibilities. administrative responsibilities. Approach #3 The third approach is th e same as Approach #2, except that the marketing functions are also contracted to the ptivate sector. A public relations firm could be hired to develop advenising ideas and a marketing campaign, while various research firms could be hired to conduct market analy ses Approach #4 An extension of Approach #3, t hi s approach inclu des the contracting of the finance/accounting and marketing functions as well as the human resources functions. A contract with a management company may result in the labor provided on-site by the contractor. The labor provided would already have expertise in issues such as labor relations, emp loyee training, employee benefits, recruiting, and others. Approach #5 In the final approach, all administrative functions could be carried out as a result of contracting with a manag ement firm, with the exception of the level of effort required to monitor the contract. There are many benefits to contracting with a management firm for administrative labor The primary benefit is the immed iate availability of staff kno wledg eable in the t rans i t industry Little research has been conducted to determine the implications o f contracting for administrative labor. It is uncertain whether cost savings are realized. Additional 71


research is needed in this area in order to better compare tbe performance of contract labor versus directly-hired labor. LEVEL OF DISCRETION GIVEN TO PRIVATE SECTOR The level of discretion and authority that a public agency gives to a private sector entity as part of a contractual arrangement bas critical impli ca tions with respect to the resulting benefits. Clearly, the more discretion given to a private contractor, the greater is the ability of that private entity to use its entrepreneurial skills to achieve cost savings and increased productivity. However, as the level of discretion to the private sector increases, the risk associated with the contractual arrangement also increases for the public agency initiat ing the contract. As an example, a contract that arranges for a private sector entity to provide drivers for a specific transit service gives the private entity very little discretion over decisiorunaking related to the provision of this service. In this scenario, the private entity provides labor only. If cost savings are achieved, it is solely th e result of wage and fringe differentials and not the result of competitive entrepreneurial skills. However, even if labor is the onl y of the private entity, entrepreneurial skills may be used in encouraging and motivating the drivers to increase productivity. There are numerous areas within the contracting decision where discretion can be given to the private entity, including provision of labor at various skill levels, procurement of capital equipment, route design, planning and scheduling service, and numerous others. These and other factors will be discussed at length in subsequent memoranda \vith respect to the level of discretion given to private contractors. TilE CONTRACTING DECISION A SUMMARY This section reviewed the various public/private alternatives to the production and provision of transit operations, maintenance, and adminis trat ion. A Criteria Implications Model for Transit Operations was proposed and developed as too l for understanding the implications of the contracting of transit operations. Contracting of maintenance and administration was also discussed along with a spectrum of the lev els of discretion that a transit system could choose to give to the private sector in the contracting of services. 72


This section was intended on l y to i ntrod u ce some initial thought s with respect to contracting in the transit industry. Subsequent technical memoranda will an alyze and discuss the implications of contracting much further. Particular emphasis will be p laced on the level of discretion given to private sector entities. 73


VII. SUMMARY "Privatization in Mass Transit" is the first of t h ree technical memoranda being prepared as part of a comprehensive transit privatization study sponsored by the Florida Department of Transportation. The purpose of this study is to discuss the status and potential of mass t ransit privatization in Florida. This technical mem orandum is comprised of five major sections, each of which is summarized below. Privatization Defined Privatization--turning over a public property, service, or function tO the private sector--in the mass transit indusuy has been a subject of great discussion in recent years. Contracting of transit operations, maintenance, and administration has been implemented by transit systems across the primarily in response to the p r ivatization policies developed by UMTA. Government involvement in mass transit has increased rapidly i n this century. Total government expenditure increased from j ust over $10 b illion in 1929 to nearly $1.6 trillion in 1987, an increase of 152 percent Most agree that some l evel of government involvemen t is necessary; however, differences in opinion arise concerning the degree of involvement that government should have in the provision of goods and services. The traditional purpose of government is to intervene when the private market fails to achieve an optimal or optimal allocation of resources. This leads to a discussion of the class i fication of goods and services. The classification process helps determine which goods and services should logjcally be provided by the public sector. Four cl aSsification categories were presented based on two criteria: the degree of exclusion and the jointness of consumption. These categories include private goods, common-pool goods, toll goods, and public goods Mass transit fits the criterion for a public good in that it can be consumed jointly, but it also fits the criterion for a private good in that it can be ex cluded from certain potential consumers. As a result, mass transit falls within the toll good classification. The status of mass transit in today's society is that it is b eing treated more as a public good than as a toll good Various forms of privatization can be u sed to move mass transit from the public good realm back towards the toll good realm. The decision that must be made is where along this line should mass transit be provided to serve the public's best interest. Two major categories of transit privatization were identified incl uding the contracting of services and public/private partnerships Contract i ng of services includes those services 74


related to the operation, maintenance, and administratio n associated with a transit system. Public/private partnerships include arrangements such as joint deve l opment, cross-border leasing, transportation demand management initiatives, and t urnkey operations. Government Role in Transit Privatization A review of the evolution of mass transit through 1985 provides some insights into how and why the industry went from one comprised primarily of private operations to one comprised primarily of public sector operations. The federal initiative in transit privatization in the early 1980s is reviewed along with UMT A's initial philosophy concerning this issue. This is followed by a discussion of the evolution of UMTA's privatization policies since 1985. The section concludes with a brief discussion of public/private arrangements that have been implemented in Florida, along with some recent privatization legislation passed by the Florida Legislature. The Transit Privatization Debate The debate over the use of privatization in mass transit has been heated, particularly since 1985 when UMTA began encouraging the concept "to the maximum extent feasible." Convincing arguments can be made in favor of and against the concept. The textbook case in favor of privatization lies in the theoretical framework of perfect competition, which provides convincing argtiments for the concept in theory. Specific arguments are discuss ed in this section which support and refute the contracting of operations, maintenance, and administration. A summary of the arguments concerning the contracting of operations is provided in Table 11. Other relevant considerations are discussed, including political aspects, service organization, service continuity, and safety. Arguments are made for the contracting of maintenance and administration as well, and a discussion of these is provided. A number of specific public/private partnerships in mass transit are discussed, including joint development, cross border leasing, transportation der.1and management initiatives, and turnkey operations. Each of these public/ private arrangements is discussed along with the advantages and disadvantages associated with their implementation. 75


TABLE 11 Summary of Issues in the Contrncting of Transit Operations Redueed Bureauency Redueed Tune Costs Slower Cost Growth of Cootractlng Potential for Eeonooes of Scale Potential Cot Labor Spedalizadoo Co5t or Public Provision Les.s Cos11y Neglected Costs of Private Provision Cost Allocation Deficiencies Exploitation of Transit Employees Contract Waste Tax Base for T,.,;,n:;;:.:;;;t_.,._,._,----L.-,----=------------l Optimal Allocation of Resources Minimum Cost I.Doeolive for Efficient Production Quality of Service Maintained < in Demands Monopoly Power in Long Run Potential for Corruption Reduced Cost is Wrong Priority Contract Shortcomings Insufficient Number of of SerYice Deterioration in Service Quality Deterioration in : rransit Labor Implications Union Union Opp0$ition .. Inventory ot Transit Privatization Activities Following the presentation of a typical transit system organization and structure, this section outlines the specific responsibilities of the three major functional areas of a transit system : operations, maintenance, and administration. After the specific responsibilities were identified, tables are provided that indicate potential private sector entities that could be contracted with to handle these responsibilities. The Contracting Decision The contracting decision reviews some specific approaches to the contracting of transit operations, maintenance, and administration. Numerous approaches are identified for each functional area, each of which involves varying levels of responsibility for the public and private sectors. The approaches presented are not intended to be a comprehensive list, but 76


are intended to provide a sense of the possibie public/private arrangements that could be implemented. The level of discretion and authority that a public agency gives to a private sector entity as part of a contractual arrangement bas critical implications with respect to the resulting benefits. Clearly, the more discretion given to a private contractor, the greater is the ability of the contractor to use its entrepreneurial skills to achieve cost savings and increased productivity. However, as the level of discretion to the private sector increases, the risk associated with the contractual arrangement also increases for the public agency. There are numerous areas within the contracting decision where discretion can be given to the private entity, including provision of labor at variou s skill levels, procurement of capital equipment, route design, planning and scheduling service, and numerous others. These and other factors will be discussed at length in subsequent memoranda with respect to the leve l of discretion given to private contractors. This section introduces initial thoughts with respect to contracting in the transit industry. Subsequent technical memoranda will analyze and discuss the implications of contracting much further. Particular emphasis will be placed on the level of discretion given to private sector entities once specific case studies have been analyzed more closely. 77


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Windsor, Duane. and Cliff Atherton. 'Priva


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