Competitive Contracting: Experience & Issues
With Implications For New York

by Wendell Cox & Nick Newton Getting from Here to There: A Transportation Plan for New York in the 21st Century
New York 18 June 1996

Portions of this paper are based upon: Summary of International Urban Transport Competition with Case Studies: Copenhagen, London, and San Diego by Wendell Cox, Jean Love and Nick Newton (formerly of London Transport) 4th International Conference on Competition and Ownership in Land Passenger Transport. (Rotorua, New Zealand, July 1995).

THE FUNDAMENTALS: PUBLIC PURPOSES

The public purpose of transit: Any complete discussion of competitive contracting should start with the fundamentals --- an understanding of the public purpose of the service for which competitive contracting is being considered. The public purpose of public transit --- the reason that public subsidies are granted to public transit --- is to serve riders and the community. There are two primary public purposes, whose service benefits the riders directly, and in so doing make for a better community.

Public purpose: The transit dependent market: Public transit provides low cost mobility to those with limited financial resources, or whose physical disabilities make transit service their only mobility alternative. These are the transit dependent.

Public purpose: The discretionary market: Public transit provides an alternative form of transportation for people who would otherwise travel by automobile. This is the "discretionary" market. New York's discretionary is unique among US cities, in that the density of public transit and the population density makes it feasible for large numbers of "discretionary" riders to forgo the very ownership of automobiles.

Market rate government: Competitive contracting is a strategy for ensuring that public services are produced at market rates, thereby maximizing public service to intended recipients.

THE COMPETITIVE CONTRACTING REVOLUTION

Rising costs have induced governments to use competitive alternatives. Throughout the developed world, the public monopoly approach has driven transit costs well above market rates. As fiscal difficulties have mounted, governments of both the right and the left have converted their public transit systems to competitive contracting to save money, keep fares affordable, and expand services. (In the less developed world most public transit services are operated by private entrepreneurs without government subsidy.)

Competitive contracting is spreading to urban rail. Early competitive contracting was limited to bus services. Now, subway service has been competitively contracted in Stockholm. Urban rail systems will be competitively contracted in Adelaide and Perth. Commuter rail service has been or is being converted in Sweden, Germany, the United Kingdom and the United States.

The International Pattern: Generally the pattern with respect to competitively provided and commercially provided public transit services is as follows (commercially provided service is generally not competitively contracted, but is an indicator of the private market's capability for providing competitively contracted service).

North America: Public monopoly remains dominant, with gradual increases in competitive contracting (now approximately 8 percent of bus service in the US and 15 percent of commuter rail).

Europe & Australasia: Public monopoly is being replaced by competitive contracting, with separation of policy from operations (transit agencies are not allowed to directly operate transit service, but must competitively contract for all service). Some commercial services operate, the most significant in the United Kingdom outside London, Sydney, Paris, and the New York City area (especially New Jersey).

Japan and developing Asia: There is some public operation, but most public transit service (bus and rail) is provided by private companies on a commercial basis.

Metropolitan Tokyo has the world's highest public transit ridership --- at more than 15 billion linked trips annually, and more than 500 transit trips per capita. By comparison total US transit unlinked trips are below 6 billion, and per capita ridership is under 30. New York metropolitan unlinked trips per capita is estimated at 105. Private bus and rail operators in Tokyo carry nearly twice as many riders annually as the entire US transit industry.

Seoul has closed its public bus system, with all services now provided by private companies.

Developing nations-Not formerly communist: There is some public operation, with public operation generally declining in importance.

Caracas, Santiago (Chile) and Bamako (Mali) have closed their publicly operated bus systems. Sao Paulo will convert to fully private operation. Santiago uses a competitive contracting to award central city bus routes (operators pay for the right to provide service), while other services have been deregulated.

Istanbul and Calcutta are increasing the percentage of services provided by private operators. In many urban areas, private operators, especially mini-bus operators, carry the overwhelming percentage of riders.

South Africa: More than 40 percent of work trips are carried by private operators using unsubsidized "kombi-taxis" (minibuses). Ownership of kombi-taxis industry has been a one of the most important sources of capital formation for Blacks. In the Johannesburg area a bus-taxi lane has been built from Soweto to the Johannesburg central business district.

Developing nations: Formerly communist: The most extensive public operations are in formerly communist nations, but private operation is expanding.

Moscow: An estimated 50 million passengers are carried by private fixed route taxis --- approximately as many riders as are carried in Milwaukee

Ukraine: Hundreds of private buses are now operating in cities throughout this nation. Private buses account for 20 percent of transit service in Odessa.

FROM MONOPOLY TO COMPETITION: SERVING THE PUBLIC INTEREST

Monopoly generally violates the public interest. A monopoly can charge higher prices, and produce products of lesser quality, because consumers have no choice. It is not that monopolists are evil --- it is that they, like all of us, tend first to serve their own interests. A monopoly can increase its revenues by violating the interests of consumers.

Competition tends to serve consumers. Producers compete on price and quality. Producers in a competitive market are not morally superior to monopolists. They, like monopolists and the rest of us, tend to seek their own best interests. And in a competitive market, the producer prospers by serving the interests of consumers. Choice empowers consumers and polices producers.

Public policy is opposed to monopoly. Public policy is generally opposed to private monopoly. Where monopoly is unavoidable, it is regulated by government in an effort to protect the interests of consumers.

Governments avoid monopoly in purchasing supplies and services. This same principle is carried over to the operation of government itself. Laws and regulations require government to purchase services and supplies through the competitive market.

The exception: Governments discourage labor competition in public services.

Government does not subject its procurement of labor to competition. And labor represents the largest share of public transit expenditures. With respect to labor, government operates as a monopoly. And monopoly is no better in government that it is in the private sector. People who work in government, like everyone else, generally seek their own best interests. Too often in government, the incentive structure rewards managers based upon the size of their budget or the size of their staff. The public manager who serves the interests of consumers by providing the same or better service while reducing costs or reducing staff imperils his or her career advancement.

Because of the non-competitive nature of government labor, there is no economic brake on costs, only a political brake --- and that is a pretty ineffective brake. As a result there is a general tendency for unit costs to rise above inflation, and to be higher than in the competitive market.

Public Monopoly in Transit

Origins: Throughout Europe and North America, governments replaced their unprofitable private franchise operations with government monopolies. Herbert Morrison, father of London Transport, and later a cabinet minister in Clement Atlee's post-war Labour government predicted that public operation would be less expensive than private operation, because there would be no profit motive; the public transit agency would be exempt from taxation, and employees and managers would be driven by the public interest rather than private interests.

The United States: Similar expectations were expressed in the United States. For example, it was predicted that a subsidy of $37 million ($127 million in 1994$) would permit Washington, DC to maintain bus service levels and eliminate fares. In 1994, bus service levels have declined, yet operating expenses are $175 million higher.

The public monopoly model has failed. A fatal flaw in the public monopoly model was the assumption that public managers and employees would pursue the public interest at their own expense. The public sector employs human beings with the same tendencies as those employed in the private sector. The public monopoly model has not worked in transit, largely because public agencies have been unable to control costs in the absence of the competitive incentives that turn self interest into consumer benefit in the competitive market. As a result, the considerable real increase in transit subsidies has not produced a corresponding increase in service.

The failure is not attributable to management or transit boards. Neither is it attributable to the transit unions, which have advanced the interests of their members, as they are supposed to do. The lack of competitive incentives deprived management and transit boards of management prerogatives, while providing lucrative opportunities for the unions.

COMPETITIVE CONTRACTING

Definition: Competitive contracting is the provision of a public service through a competitively awarded contract. It has been used for decades by private and public organizations to ensure that goods and services of a defined quantity and quality are produced for the lowest possible cost.

Full public control is retained. The public agency seeks competitive bids to provide a particular public service. The public agency establishes quality and quantity specifications. The competitive market responds to the invitation of the public agency, and one or more producer is selected to provide a specific service for a period of time. The public sector retains policy control over the service, while the competitive market produces the service under public scrutiny.

Competitive contracting reduces public costs in three ways:

Lower services costs through provision of service at no more than the competitive rate (the "going rate"). Cost savings of 15 to 50 percent are frequent, with occasional savings of up to 75 percent. Touche Ross reports cost savings in 98 percent of cases.

The "ripple" effect: Lower direct public service costs as public agencies improve their cost performance in response to the competitive environment. Competitive contracting not only results in lower costs for the public services competitively contracted, it also induces improved internal public cost performance. This been identified in various public services, including solid waste collection, public transit, fire protection, and other services. Public employee unions have negotiated competitive wage and benefit packages in response to competitive contracting.

New tax revenues. Lower net costs as a result of tax revenues paid by private contractors on the public services they operate.

INTERNATIONAL OVERVIEW

Europe The conversion to competitive contracting is well under way in Europe.

European Union: A green paper issued by the European Commission (The Citizen's Network), under the auspices of Transport Minister Neil Kinnock, former British Labour Party leader, supports the expansion of competitive tendering in urban transit:

...the concession system - where services are subject to open tender but within a defined operational framework - is well suited to providing an environment which gives incentives to operators to raise standards whilst safeguarding system integration which is particularly important to urban and regional transport. The Commission considers that contracting concessions should be based on transparent, Europe-wide public tendering and will look at ways of promoting the concession (competitive tendering) system.

United Kingdom: All bus transit services have been or are being converted to competitive contracting or commercial operation. All commuter rail and intercity rail services are being converted to competitive contracting.

Greater London: Buses: Through the London Regional Transport Act (1984), Parliament strongly encouraged competitive contracting of bus services. In consequence, London Transport undertook a deliberate program of competitive contracting, and adopted the following policy:

LT's policy is to (use public-private competition) for the provision of goods and services where similar or greater efficiency can be obtained at lower cost without compromising safety. Internal departments, in some cases, are allowed to bid for this work.

Approximately 55 percent of London Transport (LT) bus service is now competitively contracted (nearly 3,000 buses). London's competitively contracted services carry more passengers than any American transit authority except for New York (more than 500 million annually). Full conversion to competitive contracting will be completed by 2000. In the interim, all non-competitive services are operated under negotiated contracts with the 10 recently privatized former bus operating subsidiaries of London Transport. Since 1985, bus service has been increased 26 percent, while the total cost of bus service declined 27 percent, largely as a result of competitive contracting (costs per mile have declined by more than 40 percent). Ridership has increased by one percent.

The operating ratio (percentage of operating costs covered by fares) for all bus services climbed from 60 percent in 1985 to 89 percent in 1995. As a result, government operating subsidies have been reduced by 87 percent. (in 1995, LT's combined bus and rail operations earned a profit on operations for the first time in decades.) London saved $3.4 billion relative to inflation from 1985 to 1994 from the combined effects of competitive contracting and competitive pressures. And by 1994, the annual savings relative to inflation were $590 million (1985 base). Policy is separated from operations.

Greater London: Commuter Rail: All British Rail services, including commuter rail services, are being converted to competitive contracting through a competitive franchising system. The first of the commuter rail components awarded involves a 75 percent reduction of public subsidy over the next seven years, assuming present service levels and quality.

United Kingdom outside London: All bus services were deregulated in 1986 as required by an act of Parliament. Non-commercial services are competitively tendered by local authorities. More than 75 percent of services are provided commercially (without subsidy). Operating costs per vehicle kilometer have declined by 45 percent (inflation adjusted). However, ridership has dropped by 27.5 percent. I would appear that the London public planning involvement, through competitive contracting, has been more successful than deregulation, in that ridership performance has been substantially better, and cost performance virtually the same.

Denmark: Under a 1989 Parliamentary mandate, Copenhagen has competitively contracted 45 percent of its bus service. Recently enacted legislation requires conversion of the remainder by 2002. Inflation-adjusted costs per mile of bus service declined 19.2 percent from 1989 to 1995 as a result of competitive contracting. The public transit authority credits competitive contracting with reversing the downward ridership trend. Between 1992 and 1994, the public operator reduced its cost 12 percent in response to the competitive environment. As competitive contracting continues to be implemented, the public operator is prohibited from incurring unit costs above the average cost per mile of competitively contracted services. Policy is being separated from operations.

Germany: Cities are preparing to competitively contract transit services, with implementation beginning within the next year. Commuter rail services will soon be competitively franchised in the Rhine-Ruhr urban area (Essen-Dusseldorf-Dortmund) Policy will be separated from operations.

Finland: Conversion of all bus services in the Helsinki metropolitan area to competitive contracting was begun and completed in 1995. The conversion was encouraged by an act of the national parliament. Policy is separated from operations.

Poland: Warsaw plans to convert its bus system to competitive contracting, and approximately 70 buses are now operated through competitive contracting. Policy is separated from operations.

Sweden: In 1989, parliament (socialist government [Social Democratic Party]) enacted legislation to encourage competitive contracting. Fifty percent of bus service is currently competitively contracted in Stockholm with plans to increase contracting to 100 percent. Outside Stockholm, most counties have competitively contracted three rounds (1989, 1992, 1995) and average a decrease in costs of 10 percent with each round. Overall cost savings have been nearly 20 percent. In Goteborg (the second largest city), competitive contracting reduced costs per mile by nearly half from 1989 to 1993. Competitive contracting has been extended to rail services:

Some Stockholm subway routes have been competitively contracted.

The nation's commuter rail service is competitively contracted with savings of 30 percent.

Australia: Competitive pressure is being brought to bear in all major metropolitan areas.

Adelaide: The conservative (Liberal Party) South Australian state government is requiring that all Adelaide transit service be converted to competitive contracting over a 2.5 year schedule. The first contracts were awarded in late 1995. The urban rail system then be competitively contracted. In preparation for contracting, costs per mile of the government owned bus system have been reduced by 25 percent. The government owned operating facilities and vehicles will be made available to contractors, at market lease rates, with the eventual intention to sell unnecessary facilities. Policy is separated from operations.

Brisbane: The socialist (Labor Party) Queensland state government mandated the Brisbane public transit system to improve productivity by 30 percent or the entire system will be competitively contracted. In response, costs per mile have already been reduced by more than 20 percent.

Melbourne: The conservative (Liberal Party) Victoria state government competitively contracted most of the Melbourne bus system in 1993. The government was recently returned to power with an overwhelming mandate, and anticipates competitive contracting the balance of the bus system, the street car system and rail maintenance services. Policy is separated from operations.

Sydney: Since 1989, New South Wales has been competitively contracting bus services that replaced rural rail service and late night rail service in Sydney. At the same time, the public transit operator has been required to substantially reduce costs per mile under threat of competitive contracting. These actions were taken by the former conservative (Liberal Party-National Party coalition) New South Wales state government. Policy is separated from operations.

Perth has begun competitive contracting, with the intention of competitively contracting the entire bus system over a seven year period, as required by the conservative (Liberal Party) Western Australia state government. The urban rail system will also be competitively contracted. In preparation for competitive contracting, the government owned bus operator has reduced its costs per mile by 25 percent. The government owned system has also begun selling over-built or redundant capital facilities, such as its central maintenance facility. Policy is separated from operations.

United States: Implementation of competitive contracting has been slow in the United States, largely hampered by restrictive a federal transit labor law that requires up to six years severance pay for laid off employees. Nonetheless, progress has been made. Many public transit agencies are now considering competitive contracting for the first time. New York has estimated that it could save $160 million annually by competitively contracting bus services.

San Diego: San Diego is the only US urban area with a systematic commitment to competitive contracting, and policy is separated from operations. The impetus for competitive contracting first came from local governments that were subsidizing the public transit operator and later from the public transit marketing authority (which is prohibited from operating service). The public transit marketing authority has adopted the following policy:

Constructive competition for provision of services will be encouraged. An annual review of ...(non-competitive)... services for potential contract award will be included in the ... plan development process.

Competitive contracting started in 1980 and now accounts for 35 percent of service. The conversion has been accomplished within the driver attrition rate to avoid the costly federal labor mandates. Yet, savings have been substantial. Competitively contracted bus services are 44 percent less costly than non-competitive services. In response to the competition, the former public monopoly operator has reduced its costs per mile by 23 percent (inflation adjusted) in contrast to the significant cost escalation that has occurred among US transit agencies. System wide bus costs declined 33.2 percent between 1979 and 1995 with annual savings of $34 million and total savings of $275 million (inflation adjusted). The reduction in costs made it possible to increase bus service levels by 55 percent, while total operating costs increased only 3.6 percent (inflation adjusted).

Los Angeles: Los Angeles competitively contracted transit routes that were threatened with cancellation as a result of financial constraints. The impetus for competitive contracting came from local governments and from a policy organization that oversaw transit in Los Angeles until the early 1990s (the Los Angeles County Transportation Commission). Ridership on the competitively contracted routes increased 150 percent in contrast with the overall downward tend in Los Angeles. In an independent audit, Price Waterhouse reported:

Cost savings of 60 percent savings per mile (public costs were 150 percent higher than competitive costs).

Better service quality: An improvement in service reliability of over 300 percent, a 75 percent reduction in passenger complaints, and virtually the same safety performance relative to the public operator.

In addition, fares on the competitively contracted services have been kept lower than on the regional system because of the lower costs. Approximately 15 percent of Los Angeles transit services are now competitively contracted. Policy is somewhat separated from operations, in that the dominant transit operator is a subsidiary of the transit policy board.

Denver: In 1988, the Colorado legislature enacted legislation requiring Denver's public transit system, the Regional Transportation District (RTD), to competitively contract 20 percent of its bus service (this is the only compulsory competitive contracting legislation in the United States). This program was evaluated in its early years by KPMG Peat Marwick, which found considerable cost savings. A more recent performance audit was performed by Mundle & Associates and Wendell Cox Consultancy.

There had been recent reports that competitive unit costs had risen to internal cost levels. This resulted from incorrect accounting for bus capital costs. RTD chose to use the contracts as a mechanism for purchasing new buses, requiring the contractors to supply new buses. RTD holds an option to purchase at contract expiration. This artificially increased project capital costs, and RTD's capital cost per bus purchased under the option will eventually be 50 percent higher than if it had purchased the buses itself (this reflects U.S. public sector capital purchase advantages).

Operating cost savings remain well below public costs. Operating costs have been in the 31 percent to 35 percent range. Overall cost performance has improved considerably. In the six years prior to competitive contracting, total operating costs rose by 18.8 percent, while service levels were increased 17.5 percent. In the six years since competitive contracting has begun, operating costs have increased by 1.5 percent, while service levels have increased by 18.9 percent. It is projected that at least $88 million will have been saved by the time the present contracts expire in 1999.

The Mundle & Associates-Wendell Cox Consultancy report confirmed service quality findings in an earlier report by KPMG Peat Marwick which had noted that:

No relationship was found between safety and quality of service and higher bus operator turnover. In most measures, the contractors performed as well or better than RTD despite lower (market determined) wages.

Policy is not separated from operations.

Las Vegas: Fast growing Las Vegas has converted its entire transit system to competitive contracting, the first such complete conversion in a major US urban area. Las Vegas operates more than 200 buses. Ridership has nearly tripled, placing Las Vegas, the nation's 40th largest urban area, among the top US 25 urban areas in transit ridership. Costs per hour are 30 percent lower than any other US transit system of similar size. Separation of policy from operations exists in that the urban transit authority is not a service operator.

Commuter Rail: Commuter rail service is being competitively contracted in Boston, Los Angeles, San Diego, San Francisco and Washington-Baltimore. With the expansion of rail competitive contracting, it is likely that European suppliers will enter future competitions for US commuter rail services.

Competitive contracting is expanding world-wide. The trend to convert transit systems to competitive contracting has gained considerable momentum in countries where public subsidies are required. Bus, trolleybus, and rail modes have been competitively contracted.

Competitive contracting serves public purposes even when budgets are cut. Competitive contracting has made it possible for transit agencies to substantially increase service levels while operating budgets have remained approximately the same or even declined.

THE COMPETITIVE MODEL

Public-private competition. The emerging competitive contracting model is more accurately described as public-private competition. This model is being adopted not only in transit, but also in municipal governments, such as Indianapolis under the leadership of Mayor Stephen Goldsmith. Under this model, service contracts are awarded to the lowest responsible and responsive proposer, public or private. As such, competitive contracting cannot cost more than public monopoly service provision.

This raises an important point. It is not the private sector is superior to the public sector, it is that competition is superior to monopoly.. Public agencies have demonstrated time and again their ability to improve efficiency and effectiveness in competitive situations.

The best results have been obtained where there is "separation of policy from operations" --- where contracting is administered by an organization other than the public transit operator. Contracting organizations are referred to as marketing authorities or policy authorities. Separation of policy from operations is has become routine, to ensure fair administration of the contracting process (an organization with operating division that competes for contracts cannot objectively administer the contract process) Policy is (or will be) separated from operations in virtually all cases cited except Denver. New York already has the rudiments of a separation of policy from operations structure.

The importance of public administration. The success of competitive contracting depends in large measure on skilled and dedicated public administrators. Important principles should be followed, to ensure that the program serves the public purpose of providing the most quality transit service for the financial resources available.

Designing competitive contracting for the public good. The primacy of public purposes must drive the design of competitive contracting systems. The following principles should be observed.

First: the contracting agency should retain full policy control. The public agency determines service levels, service standards and awards the contract to the responsible and responsive proposer whose price is the lowest. The public agency monitors contract compliance and terminates contracts in cases of unsatisfactory performance.

Second: the contracting agency should facilitate a competitive market. Contracts should be subjected to routine competitive, generally they should be re-bid at no more than five year increments. Individual contract sizes should be no larger than necessary. In most systems this means that there will be multiple contractors. All contract rates should be determined through the competitive process --- there should be no renegotiation or subsequent negotiation of contract rates. Where there are large capital purchase requirements, it may be less costly for the government agency to make the purchase and lease the capital assets to the contractors. And, public authorities should specify no labor arrangements except that contractors comply with the general labor laws and regulations that apply to all commercial enterprises (more below).

LABOR AND COMPETITIVE CONTRACTING

All factors of production should be obtained at competitive rates. To achieve the public purpose of producing the most public transit service in exchange for the taxes and user fees provided, it is necessary that all factors of production --- capital, labor and land --- be obtained for the competitive rate. Thus, there should be no public agency specification of labor rates, benefits, work rules or other arrangements. The nation and the state have a body of labor law and regulation that apply to all commercial enterprises, including producers of competitively contracted service.

"Living wage" ordinances: Recently, some local jurisdictions have enacted special purpose "living wage" ordinances that require public contractors to pay super-minimum wage rates, This is not to suggest the economic validity of minimum wage laws. But for all of their job and opportunity destroying impact, at least minimum wage laws do not single out a particular class of worker for favored treatment. "Living wage" ordinances discriminate against the vast majority of workers to provide benefits to a privileged few. or to comply with other anti-competitive labor market practices.

"Living wage" ordinances violate public purposes by imposing more costly than necessary labor arrangements, thereby reducing the amount of service that can be provided.

"Living wage" ordinances are discriminatory. They give a certain class of labor privileges that are not extended to other workers. If a government is to guarantee contractor employees a super-minimum wage, why not also similarly protect fast-food outlet employees, office clerks, and other workers? What is worse, the artificially high labor rates mandated by "living wage" ordinances are paid for by the very workers against whom such ordinances discriminate, through higher taxes and lower levels of service.

"Living wage" ordinances limit job creation. Because they reduce the amount of public service that can be produced, "living wage" ordinances reduce the number of jobs in the public transit industry. This is particularly onerous, in that inner city neighborhoods in which job creation is reduced have the highest unemployment rates in the nation.

Savings occur in all factors of production. Finally, it must be recognized that there is much more to competitive contracting savings than labor savings. Because management in the competitive market is faced with the potential for financial failure, there is an incentive to obtain more from virtually all factors of production.

Inefficient use of the factors of production: The pathetic decline of public transit in America is, at least in part, due to the failure of the present organizational structure to efficiently utilize the factors of production. In the non-competitive environment, public purposes have been hijacked, to the detriment of riders, potential riders, and the community.

SERVICE QUALITY

The profit motive improves service: One of the most frequently recurring concerns regards service quality. Sometimes this concern arises from an assumption that private service must necessarily be of lower quality than public service, since private operators are driven by the profit motive. Indeed, it is this very profit motive that is the best guarantor of quality service, because failure to provide quality service is likely to, and should, result in sanctions to and including contract termination.

The profit motive works in production of important products. The private sector provides many of the most important goods and services in society. Grocery stores are operated by the private sector; baby formula is produced by the private sector; telephone service is provided by the private sector, etc. Generally, government is not perceived by people as a high quality service provider --- Federal Express and United Parcel Service are perceived as better service providers than the United States Postal Service.

Private providers already produce important transportation services: Private transportation providers produce one-third of the nation's school bus service, two-thirds of the nation's paratransit service for the elderly and disabled, and more than 10 percent of conventional bus transit services. They would not be providing these services if their quality were substandard.

Competitively contracted service quality has been high. The overwhelming evidence is that private operators produce quality bus service in competitive contracting applications. Audits by big six accounting firms in Los Angeles and Denver found privately operated service to be equal to, or better than publicly operated service. London Transport found that privately operated service was generally of higher quality, and that when the public operator provided service in a competitive environment (faced with the threat of contract cancellation, like private carriers), service quality improved on the same services. Very little service converted to competitive contracting has reverted to non-competitive operation, and where it has, political pressures from transit unions, rather than service quality, has been the driving force.

Public monopoly service quality: While most public transit agencies provide quality service, it must be noted that serious service quality problems arise, and often take years to resolve. The public sector itself has had considerable service quality problems. Late last year, San Francisco Muni was missing more than 10 percent of its trips. In the early 1980s, similar situations occurred in San Francisco, Cleveland and Detroit --- in Detroit more than 30 percent of trips were being missed by 1984. It is safe to say that any private operator missing 30 percent of trips, or even 10 percent --- whether in transit or in school busing --- would operate the service for long.

Public administration and service quality. Ultimately, service quality is the responsibility of the public agency, and not the private company. Effective public administration will quickly take remedial action to ensure sufficient service quality. Where such action is taken, either the operator will produce quality service, or another operator will.

CAPABILITY OF THE PRIVATE SECTOR

Contract Operators: The size of the private bus industry is not often appreciated. The private bus industry is very substantial, and capable of producing whatever level of public transit service called upon to operate.

Private bus companies operate more than 100,000 school buses in the United States --- more than 2.5 times the number of directly operated public transit buses. Each school day they carry as many passengers as all of the nation's public transit bus services. Private operators produce approximately one-third of the nation's school bus service in the United States, more than half in Canada, and virtually all in the United Kingdom, New Zealand and Australia.

The largest company --- Laidlaw Transit --- will operate more than 35,000 school and transit buses (in the United States and Canada) after completing of its merger with Charterways. This is nearly as many buses as U.S. transit agencies operate directly.

Private paratransit operators operate more than 10,000 vehicles under contract to public transit agencies. All of the 20 largest paratransit systems in the United States are competitively contracted.

Private bus operators operate 1,250 buses in northeastern New Jersey, especially into New York's Port Authority bus terminal. Fares and other commercial revenues cover 97 percent of operating costs and most of the capital costs. Annual passenger miles of these operators is nearly equal to that of Chicago Transit Authority buses, and exceeds all other transit agencies except New York City (TA) and Los Angeles (MTA).

Private publico (minibus) services in San Juan, PR carry three times as many passengers miles as the public bus system, and more than the entire bus system in St. Louis.

Miami's jitneys, whose operation has been severely restricted at the behest of the local transit operator, were carrying more passengers than that city's heavy rail system at their peak. A study indicated that two-thirds of the ridership was new --- it was not diverted from transit service.

The private charter bus industry operates 25,000 buses.

THE ROLE OF COMPETITIVE CONTRACTING IN TRANSIT

How much service should be subject to competition? If the public purpose of transit is to be served, then the appropriate course of action is to convert to the competitive model as quickly as possible, so that the amount of service, and impact of public transit can be maximized.

Transit's market share decline. Public transit's inability to maximize the use of its resources is a primary cause of its continuing market share declined. During the 1980s, transit's work trip market share increased in only 2 of the nations 39 metropolitan areas of more than one million people. During the 1990s, three quarters of these metropolitan areas have experienced declines in per capita transit ridership.

Preserving service levels: Some transit agencies are using competitive contracting primarily to preserve service that would otherwise be canceled. While this strategy is a step in the right direction from the perspective of cost effectiveness, it reflects a very dim vision --- focused on preserving rather than expanding the role of transit in the community.

Increasing transit ridership: Competitive contracting offers public transit a means to fulfill the vision of what transit can be --- a strategy to maximize ridership any level of expenditure.

THE POTENTIAL FOR COMPETITIVE CONTRACTING IN NEW YORK

Transit is important in New York. New York relies upon its transit system to a large degree. Per capita ridership is considerably above that of any other US metropolitan area, and metropolitan New York accounts for nearly 40 percent of US transit passenger miles.

Transit's market share is declining in New York.

During the 1980s, work trip market share declined by five percent in the New York metropolitan area.

From 1990 to 1994, per capita transit ridership declined nine percent in the New York metropolitan area.

NYCTA ridership has declined at a rapid rate. Over the past decade, NYCTA bus and rail ridership has declined by more than one third --- a decline that exceeds the total ridership of the next two largest US transit agencies (Chicago Transit Authority and Los Angeles County Metropolitan Transportation Authority).

NYCTA bus productivity could be improved: NYCTA's bus productivity has been declining at a rate of more than one percent per year. This is considerably less favorable than the productivity trend of transit agencies that have incorporated competitive contracting.

Public funding is scarce. The public funding situation is not likely to improve materially. In fact, it could deteriorate.

Competitive contracting would improve transit in New York. Conversion of transit services in the New York area to competitive contracting would use public subsidies, fare revenues and other commercial revenues in such a way as to maximize the return, maximize ridership, and reverse the downward trend of transit.