New Report Lauds Transit Contracting

By Baruch Feigenbaum

In late September, the Eno Center for Transportation released “A Bid for Better Transit,” a report focused on improving transit service via contracted operations. I recommend reading this well-written report, which provides a snapshot of contracting throughout the world.

U.S. transit service has long been among the worst in the developed world. One of the biggest differences between U.S. and European agencies is the prevalence of contracting for services. In Europe contracting out is a normal procedure. But in this country, contracting is bitterly fought by unions, urban Democrats and some transit rider groups as inherently inferior to directly operated service.

The Eno report starts by providing a history of U.S. transit operations. It reminds us that originally, all U.S. transit service was privately operated. Once the public sector took over in the 1960s, costs grew rapidly. To reduce the costs, the Reagan Administration developed policies to encourage contracting. The hope was that competition would force transit agencies to improve. Despite these efforts, opposition to contracting grew. The fact that several initial contracts were poorly written and structured did not help.

Some federal regulations, such as the Americans with Disabilities Act, that require service to the elderly and disabled in areas where fixed-route service is provided, encourage contracting. Since demand-response is typically 3% of an agency’s service but can amount to 18% of its costs, contracting is an attractive alternative. Other laws, such as labor protection provision 13c, make contracting challenging. The provision protects the jobs and rights of transit workers transitioning from the public to private sector and vice versa, making contracting less appealing.

The Eno report examines the transit systems in three European cities and three U.S. cities. European cities are far more open to contracting.

London has experimented with different types of contracts, largely to reduce costs. At first, London used gross-cost contracts, which paid operators to run routes at a fixed fee. The contracting reduced operating costs by an impressive 16%. However, since the contracts did not have financial incentives for performance, service quality fell. When London Transport was reorganized as Transport for London, the agency started using quality-incentive contracts. These contracts rely on detailed metrics such as excess wait times and on-time performance. This approach improved contractor performance, reducing excess wait time by 50%. However, it also increased operating costs faster than inflation.

Stockholm contracts almost every aspect of its public transit system including route planning. The city wanted to reduce costs and improve customer satisfaction (which was only around 50%). Stockholm made some significant changes before it contracted out service. It shifted more than 90% of its operating employees into the private sector. Instead of focusing on running day-to-day operations, the agency now focuses on setting standards and overseeing contractor service. Originally, the city compensated the contractor based on the number of bus-kilometers operated. However, this increased costs so Stockholm switched to performance metrics such as vehicle cleanliness and service delays. Stockholm also allows private firms to design the service in their service area. Contractors get bonuses for increasing passengers, and ridership is up 70% since contracting began.

Oslo shifted to competitive contracting and created a new provider, Ruter, which was owned by the government. Both Ruter and private companies bid for service, and both have won contracts. The early contracts focused on cost savings, which averaged 10-20%. Today Ruter focuses on price, service performance, bus quality, planned efficiencies and environmental effects. As in London and Stockholm, the transit agency refocused on managing service rather than operating it.

U.S. contracting has not gone as well. New Orleans contracted much of its transit service after Hurricane Katrina. However, its in-house staff (one person) was too small to accurately manage the contracts. In 2009, the city added staff but leaders were unhappy that the transit system lacked an operations plan. The most recent 2014 contract with transit operators gives the public sector oversight and management responsibilities.

Due to political opposition, Vancouver has never been able to successfully contract its transit operations. Its only contract has been a design-build-operate-maintain P3 to operate one rail line.

Los Angeles County has a mix of transit agencies that either contract all of their services or very few of them. The DASH buses run by the city of L.A. are completely contracted. Over time the city has developed an experienced team for overseeing and evaluating contracts. Foothill Transit, which serves part of the San Gabriel Valley, initially contracted both its service and its management. In 2013 it brought its management in-house but hired staff from its former contractor. Foothill can penalize the contractor on any of 41 metrics but can provide a bonus on 6 of them. Metrolink, the regional rail network, also contracts its service but L.A. Metro, the biggest transit agency in the county, contracts very little service.

Contracting can save money by reducing labor expenses, increasing vehicle usage, employing fewer middle managers, and creating efficiencies. While service contracting (operating the rail or bus service) is the most common type of contract, infrastructure maintenance, ancillary services such as security, and service planning can all be performed by the private sector. However, not all contracting saves money.  When U.S. agencies contract it is typically for bus routes with low ridership and paratransit. Yet these agencies would get better overall value from contracting out a mix of different types of routes.

The Eno study found three important takeaways. First, government has a vital role in protecting taxpayers. Similar to public-private partnerships, the government must provide the contractor with a set of specific goals and employ a transit and contracting expert to make sure taxpayers are getting a good deal from the private entity.

Second, the contract must be aligned with the private sector’s profit potential. For example, London uses bus wait time as a performance measure. If the contractor’s time is above a certain threshold, it gets a smaller payment. If the wait time is reduced, it gets a bonus. As a result, the contractor has a financial interest in finding ways to reduce wait time.

Third, agencies and contractors must work together. Contractors have advantages transit agencies do not have, such as the ability to think outside the box. A contractor could bring a new scheduling system from London to Stockholm. Working together also means changing the make-up of agency staff from transit operators to policy and management experts.

The report encourages agencies to contract service. While there is no one-size all solution, saving money and enhancing service should be every transit agency’s goal.

Read the Eno report here:

This article by Baruch Feigenbaum, transportation analyst for the Reason Foundation and a Senior Fellow with the Georgia Public Policy Foundation, first appeared in a Bob Poole’s November 2017 issue of Surface Transportation Innovations.