Monday, December 14, 2009

Beyond private and public

There's been some buzz around the web lately about "public-private partnerships," which are apparently the latest word in transit financing. Some are understandably opposed to this because they connect it with "privatization," which is a trend that goes back at least thirty years. But all these different names obscure the fact that governments and private organizations have been interacting for hundreds of years, and that there are common threads throughout.

In the transit field, even the most private carrier relies on some government security, and even the most public agency contracts out some of its services to for-profit companies, buys insurance from private insurers, and sells bonds to private investors. In between there is a range of possibilities; I think it's useful to distinguish them along several axes. The government can have a greater or lesser share in funding the infrastructure or the rolling stock, in paying for operations, in assuming risk, in collecting revenue, and in controlling routes and schedules.

In the example of the New York MTA, the government funds the capital expenses and pays for a dwindling share of operations, but the rest of the operations are funded through fares, tolls, advertising, rent and a jumble of sales and payroll taxes. Although the authority is nominally government-controlled, the government shares de facto power with shifting alliances of real estate firms representing the largest contributors to the mortgage recording taxes, and friends and campaign contributors to various politicians. The risk is mostly borne by the authority, and the MTA buses enjoy a monopoly on most surface routes.

In contrast, the "private" bus lines that used to run in Brooklyn, Queens and the Bronx were contracted by the New York City Department of Transportation. The buses, and possibly the garages, were paid for and owned by the city. The city paid for the roads and bridges, assumed pretty much all the risk, and guaranteed a monopoly on those routes. I'm not too clear on it, but I believe that the city paid whatever operating costs were not covered by fares, and possibly a small guaranteed profit. I believe the contract that the Massachusetts Bay Transportation Authority has with a private consortium to run its commuter rail lines is similar. Although the New York situation evolved out of a legacy system, I believe it is this kind of arrangement that most transit planners think of when they think of privatization.

Then there are the various "private investment" schemes, where the government will sell some of the risk to private firms. In essence, the government is making a bet with the private investors. If farebox revenue goes up, the investors make money; if revenue goes down, people still get transit service. In the "leaseback" arrangement the private investors have no control over fares, timetables or routes, but in other arrangements they could.

In the private commuter bus lines that travel through the Lincoln Tunnel, although the routes and timetables are determined by the companies, there are restrictions as to what changes they can make and how. The operations are paid by fares, with some companies receiving government assistance, and any excess revenue going to corporate profits. The roads, the tunnel and the terminals are mostly paid for by the government and the Port Authority, but the companies pay tolls and gate fees for their use. In most cases, the buses are paid for and owned by the government. Each company has an implied monopoly on its route, and the government cannot legally engage in "destructive competition," although in theory I believe it's possible for one company to challenge another's monopoly. The risk is shared between the government and the operators.

The jitneys that are found in many developing countries, and also here in New York and New Jersey, are subsidized by publicly funded roads, bridges and tunnels, but the buses are usually privately financed, and operations are paid for through revenue collected directly by the operators, with the government taking a share through taxes and tolls and the operators and syndicates dividing the rest. There are usually no timetables; such dispatching as there is is controlled by the syndicates. The routing is sometimes controlled by the government, sometimes by the syndicates or operators. There is no official monopoly, although the syndicates may try to enforce one. Most of the risk is borne by the operators.

In all of these situations, it seems that there is a range of government financing, from infrastructure alone to infrastructure plus rolling stock, to both of those plus operations subsidies. The government can also enforce a monopoly to a greater or lesser extent, and assume a greater or lesser amount of risk. Funding seems to determine control: the more subsidies the government gives, the more control it has over routes and timetables.

Let's go back to that paraphrase of Melissa Thomasson about healthcare economics that I discussed in October:
Melissa Thomasson says that what we have combines the worst of the market and the worst of government. Markets are usually really good at controlling costs. When they work best, products come into existence, like cell phones or stockings. They start expensive, and then they get cheaper and better. But markets don't guarantee that everyone can afford the things they need. Government can be good at that, ensuring universal access. But when you're paying for everybody, it's hard to control costs.

It sounds like the typical "privatization" arrangement that I discussed above is also the worst combination of the market and government, and the "legacy" arrangement we find in New Jersey isn't much better. You get all the rigidity of government and all the greed of the private sector. If you've got a monopoly and rigid control of fares, routes and timetables, you might as well have the government doing it. Otherwise it just sounds like a union-busting tactic.

Selling the risk to private investors sounds like a nice idea until you think that with peak oil, farebox revenue is pretty likely to rise. It seems like a bad idea for governments to turn control over to private entities to eliminate a risk that's actually pretty low.

Meanwhile, in the private situations like the jitneys you do get the creativity of the market and the absorption of risk, and you can still keep the government involved enough to ensure access for all and things like safety, efficiency and clean air. If we want to work towards involving the private sector, that seems like the best arrangement for passengers and for the environment.


David Marcus said...

I think the Jitney model is great, with the exception that it leads to a very fractured transit system. My ideal would be something like many regulated Jitney companies with their schedules integrated in Google Transit.

BruceMcF said...

There is one big dividing line - is the operating recovery ratio above 100% or below? Most transit falls on sub-100% side, as does most intercity conventional rail, but as has been discussed here as "the formula for profitable transit", in some contexts transit can rise above 100%, and High Speed Rail often lies in that range as well (of course, it trains off operating cost efficiencies for higher up-front capital costs).

Where operating ratios are over 100%, the government can provide infrastructure connecting the places they want to see connected, and then put the franchise to operate services out to bid.

By contrast, that franchise approach can only work for services with operating ratios below 100% if there is some system of subsidies for service provision that allows the services to look like services with 100%+ operating recovery ratios on the books of the private operator.

And in the second case, then the government gets what it pays for. If it subsidizes certain passenger classes (retirees, students, youth, etc.), the effectiveness of the service received by the subsidized group will depend on the terms of the subsidy compared to the price elasticity of that class. If it subsidizes generically by passenger mile, the system will work to get people that want longer trips ... if it subsidizes by trip, the system will work to attract people who want to hop on and off. And etcetera.

A Basic Needs, ("priority, bottom up, whatever") approach would identify what is the Basic Need for transport, and have a government provided service for that, and then identify what are the net external benefits of additional transport alternatives, and offer a subsidy reflecting those external benefits to private operators who bid for a franchise.

The political problem with that approach in the US is that its politically commonplace to demonize those who require the service provided by the common base level as "them", which supports an extreme bias in underestimating an appropriate level of service in meeting the Basic Need.

Louis said...

It seems to me that the jitney service in New Jersey at least does not really operate so independently. In fact, it is often providing a private feeder service to or from a PATH station. The PATH system is not and could not really be run by jitney syndicates. Therefore, they do not provide a fully privatized transit service.

David Marcus said...

@Louis, agreed that Jitney service can't replace great transit, especially captial-intensive rail transit. On the other hand, there are so many transit holes. I like the idea of nimble private operators seeing a transit need and filling it. No bureaucratic sign-off required.

Louis said...

@David Marcus,

I certainly agree with you. All I'm saying is that those services tend to be piggy-back services, and we really should not let them be used as ammo against public transit, since there would be far less private transit without public transit (and certain, public on-street accomodations and parking for buses).

That said, they do provide a great service in New Jersey and New York City, and compliment high-frequency, high-ridership service with lower costs than similar public bus service could. Better information and image would make them a better public utility, and allow more people to use jitneys than just those who are daily riders "in the know".