Contracting Out Transit Can Drive Quality, Cost Improvements

By Joe Hillman and Baruch Feigenbaum

Of all Americans living in poverty, 20% do not have access to a car and rely on mass transit systems to travel beyond their immediate neighborhood. An effective transit network would provide these individuals with adequate access to jobs, doctors, grocery stores, schools, parks and other institutions. But the large, blank checks often given to mass transit agencies do not create effective transit networks for the people most in need of transit services.

For the past two decades, transit agencies have chosen to use their increasing taxpayer subsidies to attempt to attract wealthier transit-choice riders to the detriment of lower-income transit-dependent riders. Now, the coronavirus pandemic is further revealing the dire financial situations many transit agencies are facing and it is time for city and state officials to reevaluate their approach to public transportation.

One way they can do so is by considering transit contracting, which has evolved over the past 50 years and can help systems cut costs, improve service quality and provide a venue for entrepreneurship.

Transit agencies can contract with private companies to manage a portion, or all of, their services while still maintaining ownership and the ability to set policies and goals. There is a broad consensus that transit contracting saves taxpayers money both directly through reduced operational costs and indirectly by increasing competition with the public sector.

Transit agencies that pursued competitive contracting have been known to save as much as 30-50%. Savings even occur when contractors pay a prevailing wage determined by existing government employee collective bargaining agreements.

Critics often make the incorrect argument that any cost savings are due to wage cuts to workers’ pay and service cuts that reduce options for riders. While the 1990s certainly saw some poorly crafted transit contracts do those things, today’s contracting practices are greatly improved and designed to hold private operators accountable through incentives and penalties.

For example, Transport for London, the transportation agency for the United Kingdom’s largest city, contracts out all its bus services and uses discretionary bonuses as an incentive for service improvements. Accordingly, the private operators are encouraged to experiment, innovate and adopt new technologies beyond what is stipulated in their contract agreements. Other incentives include contract extensions if an operator is exceeding service and financial expectations, and predetermined bonuses that are distributed after certain service benchmarks are met.

Similarly, penalties are used in most transit contracts. Generally, penalties are doled out if service expectations are not met, with the monetary amount increasing as a given measure of service quality decreases. For example, the city of Phoenix’s contract with First Transit contains a liquidated damages schedule of $5,000 –  per route – if the company’s on-time performance is below 94%. The penalty rises to $10,000 per route if on-time performance drops below 91% and to $15,000 per route if it falls below 88%.

Other service measures built into contracts can detail metrics for service frequency, customer satisfaction, and the number of breakdowns or accidents.

Contracting transit is not the sale of public infrastructure, but rather an agreement setting clear expectations for providing a service. Modern contracting practices have evolved to codify and enforce a transit agency’s desired service standards, cleanliness levels and customer satisfaction.

This higher level of accountability and goal-setting particularly benefits lower-income transit riders who rely on the services the most.

In contrast, city officials have no such enforcement mechanisms to ensure a high caliber of service quality when transit is operated by the government. In those cases, the transit agency both operates the transit system and measures its own level of service quality, muddying its responsibility to properly identify, report and address issues. In fact, there may be a negative incentive to avoid fixing problems so the transit agency can tell the city or state government it needs more taxpayer dollars to solve the issues.

Fundamentally, the contracting process is designed to strike the optimal balance between costs and services. The best overall value, which includes service quality, determines which private operator receives the contract. Then the city or transit agency acts as the oversight body, which results in higher accountability.

Contracting transit services can also promote entrepreneurship if cities decrease the barriers to entry. Rather than contracting out to a sole operator, for example, cities can instead create groups of routes that balance high- and low-demand routes. Small companies can more feasibly bid on smaller contracts. Cities can also stagger contracts by year, allowing for a greater frequency of bidding opportunities. Large companies will likely win some contracts where they provide the best overall value, but decreased barriers allow small businesses to have a fair chance.

Although contracting has been traditionally viewed as a way to cut costs, the practice actually deploys a robust set of tools to improve quality. Cities and transit agencies should work with labor unions to arrive at mutually beneficial contracting practices, and encourage competition among private providers.

This commentary, originally published by Reason Foundation August  20, 2020, is published with permission by the Georgia Public Policy Foundation. Access the original commentary here.


Joe Hillman is a transportation policy research intern at Reason Foundation and Baruch Feigenbaum is senior managing director of transportation policy at Reason Foundation, lead author of Reason’s Annual Highway Report and a Senior Fellow at the Georgia Public Policy Foundation. Established in 1991, the Foundation is a trusted, independent resource for voters and elected officials. The Foundation provides actionable solutions to real-life problems by bringing people together. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (August 28, 2020). Permission to reprint in whole or in part is hereby granted, provided the authors and their affiliations are cited.