Contracting Out Bus Service: How Common Is It and What Are The Financial Effects?
This is the third in a series examining the effects of transit systems contracting out bus service. In the first one, the Privatization of Public Transit - Types of and Advantages and Disadvantages , I described two ways in which public transit could be privatized - one in which the private sector plans and operates the routes and one in which the public sector plans the routes while the private sector operates them - and some benefits and drawbacks of each. In the second one, , I examined what factors affect whether contracting out will be a success or failure . In this one, I answer the questions of how common contracting out is and the financial effects of contracting out. Much of this series is based on a groundbreaking article that has recently been published by the National Center for Transit Research at the University of South Florida which examines privatization trends in public transit in Florida and the United States from 1998 - 2009.
How Common Is Contracting Out?
Although the majority of transit systems are still completely directly operated, the number of systems that contract out at least part of their operation has increased, albeit slowly, between 1998 and 2008. In 1998, 296 transit systems directly operated all of their service while 54 contracted out part of their service and 79 contracted out all of it. By 2008, 314 transit systems directly operated all of their service while 63 contracted out part of their service and 120 contracted out all of it. The percentage of systems contracting out all of their service increased from 18.4 to 24.1 during this time period, while the percentage of systems directly operating all of their service declined from 69 to 63.2.
There is a significant difference in percentage of service that is contracted out based on agency size. Agencies were divided into three different categories based on the size of their fleets - operating fewer than fifty buses in maximum service was considered small, between fifty and two hundred forty-nine buses was considered medium, and two hundred fifty buses and greater was considered large. Small agencies were by far the most likely to contract out their service, with 1/3 of all vehicles in small agencies in 2008 being operated by private contractors. Medium agencies had about 1/5 of all vehicles operated by private contractors in 2008, while large agencies only had about 1/8 of all vehicles operated by private contractors. In a foreboding trend for union members, large agencies only had about 1/25 of all their vehicles operated by private contractors in 1998.
What Are the Financial Effects of Contracting Out?
In general, contracting out saves money: this savings is the major reason why the amount of private contracting in transit agencies is increasing. In 2008, the average cost of directly operating transit service in the United States was $119.61 per revenue hour, while the cost of contracted transit service was only $88.92. Interestingly, differences in cost between the two were most apparent in large agencies. In large agencies, directly operating service cost on average $129.58 per hour while contracting out cost $90.25. In comparison, the direct operation cost in medium agencies was $96.50 versus $92.36 for contracting out; and the direct operation cost in small agencies was $76.87 versus $75.61 for contracting out.
It is not surprising that larger agencies have higher costs, as larger agencies typically have stronger unions (more members) with better bargaining power (because larger transit agencies typically carry more passengers and are therefore more essential to the functioning of the city). Larger agencies also tend to have a larger number of ancillary employees who are not directly related to service provision, including more planners, human resources employees, and information technology specialists.
What is surprising is that the financial savings of contracting out is very minimal for small and medium size agencies. One could speculate that this result happens because the cost of tendering and administering the contract makes up a significant part of the total expenditures for agencies of that size. In addition, small and medium agencies may have more flexible work rules and lower wages due to lower union bargaining power.
Although the difference in cost between direct operation and contracting out is very significant for large agencies, when regional cost-of-living differences are taken into account the differences are probably less. It is important to note that virtually all the large agencies that contract out service are in the South and Southwest, areas of the country that typically have lower costs of living. Large agencies that contract out all of their service (and thus may skew the results) include the RTC of Southern Nevada (Las Vegas), Valley Metro of Phoenix, while Denver contracts out half of its service. In contrast, agencies such as New York and Chicago contract out none of their fixed-route service.
Conclusion
The amount of transit service contracted out to private operators is slowly increasing. This increase is probably due to the prospect for financial savings, especially for large operators. The general antipathy towards "highly-paid" public servants in today's America suggests that the contracting out trend, rather than abating, will increase in the future.
