Saturday, May 15, 2010

The difficulty with cross-subsidy

Recently I've been pointing to privately owned and operated bus service as a way to keep transit running. I'm not exactly happy about this, but I want to get where I'm going without too much waiting or crowding. Beyond that, I want to keep increasing the competitiveness of transit in order to get people out of their cars and fight pollution and carnage, waste and inequity.

I don't want to give you the impression that private buses will necessarily be better than government buses, or that government has no role in transit. On the contrary, we've seen that unregulated transit tends to be restricted to places where it is profitable, undermining our goal of access for all. It is often dangerous, conflicting with our goal of increasing safety, and frequently uncomfortable. Private buses may also be more polluting, and spend a lot of time idling. All these problems decrease the competitive advantage of transit, conflicting with most of our goals.

Some government involvement is definitely needed for transit to serve our goals. In this post I'm going to talk about what government can do to promote coverage. As Jarrett Walker writes (PDF), "Coverage goals are met by the availability of service, regardless of its patronage." Expanding coverage helps provide access for all and improve our proximate goal of competitiveness.

At the most basic level, we can simply divide up the routes into those that have enough profit potential to attract a private operator, and those that don't. The government can operate the unprofitable routes, and license private operators to serve the profitable ones. This is essentially how it works in Rockland County, where the for-profit Rockland Coaches (currently owned by the Scottish conglomerate Stagecoach, doing business as Red and Tan Lines or Coachusa) operates the profitable commuter routes to Manhattan, earning a $9 million profit in 2007 but accepting $4 million in state aid in 2008. The government agency Transport of Rockland operates the unprofitable local routes, receiving more than $13 million in subsidies in 2007 and $16 million in 2008.

That leads us to a question, though: why not just let the government run the profitable routes, and cross-subsidize the unprofitable routes? What if Rockland County took over Red and Tan and merged it with Transport of Rockland? It would have been able to use the $9 million profit from last year to offset the $13 million deficit from the local routes, requiring only $4 million in subsidies. This is essentially what the MTA does with its bus routes: the $1.9 million operating surplus from the M23 is used to cover the $1.6 million operating deficit on the M104 and the $350,000 deficit on the M72.

The problem is that the surplus from profitable routes are not usually as high when they're operated by government agencies. Cost is lower for private operators, in part due to labor issues. They can also charge market prices (like $8.85 for a one-way bus trip from the Port Authority to Nyack), which is very difficult for a public agency to do. It's also a lot harder for a government operator to abandon a route, so the government agencies are much more timid when it comes to expanding routes, knowing that they might be stuck with them for years to come. There is less incentive for them to add extra buses to supplement an existing schedule.

Put this all together, and the government may not actually earn much from profitable transit routes. It may cost just as much to subsidize the unprofitable routes, and the profitable routes may even require subsidies. Because of this, it is often better to simply subsidize the unprofitable routes and leave the profitable ones to private operators.


BruceMcF said...

Of course, one reason that setting a "profitable price" is harder for a government is they are more exposed to pressure to set a more economically beneficial price.

After all, a common carrier transport route that is running at a profit on direct benefits to passengers alone after covering all economic costs ... is not providing enough transport. The free ride taken on the back of passengers by all other beneficiaries is economically inefficient.

What we do in the US is then to set things up so that the better a mode is at externalizing costs, the more we rely on it. However, that is also a flawed approach, since its quite possible that the passenger benefit is greater than the direct share of costs while the total benefit is less than the total cost.

Since land cannot increase in value below a baseline level without transport access, one approach to getting second party benefits covered is with a land tax.

Jarrett at said...

The British solution to all of this, outside of London, is to allow private companies to run commercial routes competitively while subsidizing them to run the coverage routes. I'd encourage you to look into the UK experience as you explore this issue.

The problem is, this is a very poor way to make a coherent network. (The NY subway, after all, is full of discontuities between numbered and lettered lines dating from the days when they were "commercially profitable" and therefore competing with eachother.)

Greater London is the sole exception to the UK privatization model. There, private companies are hired to run some of the buses, but the bus routes and schedules are all designed by the central authority, Transport for London. TfL is only able to offer a coherent and integrated network, including integrated fares, because of these powers.

Having worked for years in both systems (the UK system is of course the Aus/NZ one for the most part), I prefer the US and London model. We need central planning of at least the major high-frequency network. And the trend in Australia is to move back in that direction.

For example, we need this because we need this network to be permanent enough that we can use it to leverage development, and that's more likely to happen if government commits to it than if the private sector does.

When transit is a totally private, for-profit business, or subsidized to behave like one, it ceases to be an effective instrument of a city's sustainability policy, and harder to integrate with the other policies of the city. That's a problem in the UK outside London, and it's the slippery slope to which jitney fascination can lead.

Hire private companies to drive and maintain the buses if they can offer quality at a lower unit cost. But don't privatize planning!

BruceMcF said...

A follow up to that is that there is an important unplanned component to coverage and service. And now there is the technology to keep track of whether dial-a-ride (or click-a-ride when internet access esp. via mobile devices is added in) is abusing their license to act as jitneys, by tracking whether the stops and starts largely match up with the requests that have been entered and paid for through the dial a ride system.

Matt Miller said...

Bruce, could you speak more as to this technology? Does a specific commercial vendor of the technology exist, or are you talking of the independent elements exist in non-commercialized form?

jazumah said...

NJT does cross-subsidize. As a whole, they lose nothing on their NYC express routes and this is by design. Those profits are used to maintain the integrity of local bus networks within the state.

I have proposed a cross-subsidy agreement to two agencies if they are willing to assist in helping us to obtain financing for a for-profit project. I would rather take 20% of my profit and use it to subsidize their budget because I can do it cheaper and it builds my portfolio. Most companies don't think like that. They view the loss-making routes as something killing their profit, not as an opportunity to provide broader network coverage. To some extent, the NJ carriers get it because they run some commuter routes at a loss in order to use that federally funded bus in charter work. If everyone were that smart (on both sides), there would be a lot more transit.

The issue is greed. Private carriers don't want much risk and the public sector likes building monuments to itself. Clayton County Transit was shut down March 31 and Yuma County Area Transit will be shut down June 30without a miracle. I haven't heard much about transit agencies shutting down in the past, but the reality is that a 20%-25% farebox recovery ratio is inherently unstable.