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Article Summary

Sclar, Elliot D., K. H. Schaeffer, and Robert Brandwein. 1989. "The Emperor's New Clothes: Transit Privatization and Public Policy." Washington, D.C.: Economic Policy Institute.

Sclar, Schaeffer and Brandwein's paper is an examination of the impact of the five-year-old effort of the Urban Mass Transportation Administration (UMTA) to mandate state and local transit authorities to privatize their operations. Traditionally, transportation policy was regarded by the government as an integral part of economic development policy; in other words, public subsidy of infrastructure represents an investment in the overall productivity of the American Economy. However, political officials have begun to evaluate transportation policy and operations in terms of cost only instead of program outcome. The primary purpose of public transportation is to ensure the quick, safe, and efficient movement of people and goods around metropolitan areas, while promoting industry standards that take into account widespread traffic congestion, environmental quality, energy conservation, infrastructure investment and equal access to transportation for all citizens. A system which meets these criteria can only be achieved through comprehensive planning, design and operation -- not through disjointed operation by many private suppliers.

Until the1950's auto and truck transportation federal policy was aimed primarily at rural areas. Not until the 1940's did transportation policy begin to include urban roads and bridges. As the population in cities grew, so did the complication of safely and efficiently ensuring the continuous motion of people, goods and services. Federal policy mandated greater coordination and planning of transportation systems in cities. Transit operations were badly undercapitalized and barely able to remain in business. The Urban Mass Transportation Act of 1964 mandated the creation of Metropolitan Planning Organizations (MPO) which lead to the creation of public transportation planning authorities across the nation. Federal funding was directed toward the capital needs of transportation, and the taking over of aged and failing private local providers. Substantial funding to improve and set up better public transportation infrastructure continued through the 1970's.

With the election of Ronald Reagan in 1981, federal transportation policy took a different direction -- toward that of privatization. Two main goals were placed at the top of the transportation policy agenda: to reduce federal spending on transportation programs, and to establish a more central role in public transport for the private sector. Congress, however, disagreed completely with these objectives and the mandating of state and local sectors to privatize. In 1987 it passed a bill that extended federal subsidization of the transportation systems for another four years. This deadlock over transportation policy between Congress and the Administration continues.

Theory says that competition will force prices closer to the actual level of production cost under conditions of efficient operation. However, and examination of studies done for UMTA shows that the data does not support this theory. The authors cite two firms, which carelessly ignored complex conceptual and measurement problems in their studies. UMTA, then selectively used this research to support their pro-privatization programs.

Other problems with contracting that are identified are:

  • Lack of competition stability over the long-run: competition assumes that there will be a steady stream of many suppliers competing to provide service. However, sellers are always looking for ways to eliminate their competition, and in reality they often succeed. Eventually, one or two major players will dominate the market, and the industry will be back to a monopoly situation where the provider has greater leverage in charging a higher price. Westchester County serves as an example of this situation.
  • Politics does often interfere with the competitive bidding process: i.e. the contract does not always go to the lowest bidder.
  • Can little fish EVER eat big fish? Contrary to the intentions of privatization advocates, the majority of successful players winning transit contracts are large national multi-product firms, as opposed to small, efficient, entrepreneurial operators.
  • Contractors work for the transit agency, not the rider: The claim that service quality will increase with privatization because private providers will be more responsive to riders is not necessarily true. Vendors do not necessarily see their long-term interests tied to the rider's well-being as much as public transit agencies do. Private operators feel insulated from the direct contact with and responsibility to the rider.
  • The relationship between the public agency and contractor can often be adversarial and difficult to manage: The need to monitor and make decisions about sometimes necessary expansion of services in an area where service is contracted is challenging and can cause tension between the two entities.

The way in which cost is measured in the bidding process gives advantage to private sector contractors. When evaluating the cost of service provided by public sector or non-profit bidders, public agencies use the method of fully allocated cost, which includes the direct costs of service plus overhead for administration, facilities, etc. However, for private sector bidders, any legitimate bid (showing only incremental costs) is taken as a fair basis for comparison. Therefore, public providers are at a disadvantage in the bidding process. Additionally, private contractors are able to cover a loss through cash flow from other operations until they are able to obtain more power in the market and then raise their costs.

Lower labor costs is one of the most dominant arguments used by privatization advocates. They allege that transportation drivers and mechanics are overcompensated for jobs that require little skill. However, driving a bus should not be considered a low-skill job that has little effect on people's lives. If bus drivers fail to report to work, riders do not get to work, to the store, or to the doctor. Sporadically provided bus routing hurts the economy and people's quality of life.

Additionally, when examining the increase in costs in the transit industry, it can be shown that only 43% of the increase in costs is due to increase in wages and productivity. Further examination of these causes shows that there have been no technological advances in the transit industry since the 1920s. Additionally, another reason for the decrease in labor productivity can be attributed to the fact that peak ridership has increased and therefore the number of transit workers increase by more than the number of transit miles.

Urban transport policy with the goal of fast, safe and efficient movement of people and goods must incorporate three elements: the importance of local OPTION in contracting, the need for subsidy, and the breadth of proper transportation policy goals.