The case against nationalized urban transport

by Bogdan Kalmuk 23.06.2012 In western countries, urban public transport is rarely considered as possible to operate without strict government (municipal) regulation, especially in big cities. Public transport is a good field for social engineers and populist politics: first can use it to manipulate people lives (to decide how, where and when how many people should go, to impact prices of the land), second - by making nice-looking, loud investments and subsidizing different categories of people to gain voters. With such approach to public transport there is no surprise, that most of government (municipal)-owned or heavily regulated urban transport systems are financially unsustainable. Probably, all of them are unprofitable, relying on government subsidies. For example, in France, on average, fares cover only about a third of transportation costs1, similar situation - in USA (in 20 biggest urban areas fares of public transport companies pay off 31% of their costs, in San Jose and Salt Lake City passengers directly pay only for about 1/10 of transportation costs2). Lot of those companies are deeply in debt (for example, debt service exceeds 41% of total costs (without depreciation) of Bostons public transport authority, 37% - in St/Louis, 31% - in Atlanta3). But its not only the case of money redistribution (from taxpayers to passengers). As always in the case of government management, nationalized transit systems are also highly ineffective: the resources, which otherwise could be used in other areas of economy, are overused and wasted here. In USA, from 1965, when local authorities started to rapidly take over control of public transport, to 2008 inflation adjusted operating costs per trip have risen by 125%4. But it doesnt mean that there is not enough demand for urban mass transit to be viable and it cant be profitable. Quite opposite. First of all, it was profitable before nationalization. And it still is mostly in developing countries where due to high levels of corruption and budget shortage governments did not particularly concentrate on public transport, so private sector successfully provides that service. For example, such industry developed in Lviv, Ukraine: after first appearing in late 90s private transit companies very quickly spread throughout the city even despite the fact that their fares were almost twice time bigger than those of city-owned buses, trolleybuses and trams. Soon, under their competitive pressure municipal bus company was forced to completely copy their business model. By the end of 2011 there were 42 operators of bus transit in Lviv. Probably, there would be even more if not licensing rules, which almost prohibited the entry of new companies to the market in last years. The number of routes has risen from less than 30 to about 100. While privately owned bus service obviously is profitable, city owned electric transit (supposedly less costly) was and still is highly unprofitable (even despite government subsidies), it permanently faces a threat of being disconnected from electric energy provision for debt. In some cases government gave back control over public transport in Western Europe (most famously in UK in 1985) and, as it could be expected, the results was very good: introduction of competition in big European cities allowed to reduce costs per vehicle kilometer by up to 40% and increased service frequencies5.
1

Review of French experience with respect to public sector financing of urban transport, Louis Berger SA, 2000 2 Fixing Transi: The Case for Privatisation by Randal OToole, Policy Analysis (November 10, 2010) 3 Ibid. 4 Ibid 5 Cities on the move: a World Bank urban transport strategy review (2002)

But still, very often deregulated mass transit systems are accused in low quality. Indeed, with no financial responsibility and with populist political incentives, government vehicles usually are bigger, less crowded and, if bus is half-empty, of course its more comfortable. But its only one, visible side of the topic. Smaller vehicles to carry same number of people with approximately same costs have to ride more often and frequency is also very important: passengers want to get buses as soon as they come to the bus-stop, with no need to wait. Partially, problem of low frequency could be solved by fixed schedules, but considering traffic unpredictability, they are not very useful. In the whole mostly empirical discussion about privatization/nationalization/regulation of public transport important point of consumer satisfaction with transit routes is often missed out. This topic is very difficult to study empirically, its almost impossible to gather any relevant data other than public surveys. For the same reasons its very hard to effectively satisfy public needs in specific routes from a central authority without market price system. The problem is that information about citizens needs in specific routes and about position of those needs on their value scales is widely dispersed and unarticulated. If one monopoly controls whole city, it has no interest to maximize profit from specific route, while in a free market routes compete with each other, therefore are motivated to adapt to passengers needs. Of course, those needs can be satisfied by big number of routes and vehicles, but such solution obviously will be economically ineffective. The balance can be approached only by free competition: with less entry barriers and route planning as possible. Example of failure of government intrusion into public transport market was seen this year in Lviv, when new rules were introduced. New mass transit system was designed by specialist of Belgian company Louis Berger S.A. and Lviv Polytechnic University. The number of companies, who were able to provide service in city was reduced from 42 to 4 (two of them are municipal companies), all existed before routes (created by market) were abolished and replaced by new, with reduction of their number by almost a half. But already first day of new system was a complete failure: on a holiday (Jan 1st, when most of people in Ukraine sleep and rest at home after New Years Eve) it was almost impossible to get a bus and bus stops were more crowded than at workaday rush hours. But, under public pressure, in few weeks quietly, step by step new routes were changed very close to existed before, and in a need of bigger number of buses some companies were allowed to come back to the market clear sign of market created routes superiority over those created by supposedly word-class transportation specialists. While openly admitting inconveniences created by reform, city bureaucrats as probably the main achievement of new system named substantial increase of electric transport revenues (as a result of improvement of bus transit system!). It may seem like a joke, but such approach can take even more grotesque form- Buehler, Pucher and Kunert 6 among most important advantages of German urban transport have listed high level of bicycle use and walking in German cities. Proponents of centralized public transport, when faced with its obvious financial unsustainability and permanent need of taxpayers money, usually argue that it should serve other purposes: providing mobility for economically and physically disadvantage people, protecting environment, increasing land value, supporting strategic industries, reducing traffic and improving neighborhoods78. Historically, the most often used was argument about supporting the poor: free market price system, like justice, is blind, therefore some economically disadvantage people will not be able to use public transport, what will make their situation even worse. First of all, this problem seems to be overestimated: transportation expenses are not by far the most significant among poor people, with such approach nationalized should be most part of the economy,
6

Making Transportation Sustainable: Insights from Germany, Ralph Buehler, John Pucher, and Uwe Kunert, Prepared for the Brookings Institution Metropolitan Policy Program (April 2009). 7 Ibid. 8 Contrasting Visions of Public Transport. Critique of Fixing Transit: The Case For Privatization, Todd Litman, Victoria Transport Policy Institute (18 March 2011)

housing and food production first of all. But even if we would agree that society has to provide help to the poor in the matter of transportation, its not a reason for public transport nationalization. Probably, much more effective way would be subsidizing those in need directly. It can be done either in form of transportation vouchers (such solution faces with a problem of lack of motivation for transport companies to pick up such passengers; besides, it doesnt look like a help to the poor, rather like indirect order to use public transport) or in form of direct payments, not bounded to public transport (why should it be bounded, dont people themselves know better what they need?). Even though in time of massive public transport nationalization in the West, it wasnt heard very often and taken into consideration, today, probably, most loud is the environmental argument: public transport allows to reduce environmental damage per trip people should be encouraged to use it, therefore subsidies are needed to keep excessive quality and lowered prices. Again, this goal can be achieved with less harmful intrusions, like pollution fares (taxes). But, above that, environmental approach should be completely reconsidered. Who should decide how much money is okay to spend on environmental goals? Who should pay? Under present legal system, there is no way to answer properly these questions. But case of air pollution isnt quite different from visible pollution (garbage): its not okay to throw garbage on someones property and such activity is penalized. So, to solve environmental problems (air pollution) we should return back to legal system, where air pollution was properly treated as property invasion then polluters will pay and therefore polluting activities will be discouraged naturally9. Its also noteworthy, that public transport is not undoubtedly environmental friendly. For example, in USA in 2008 cars on average used only 2% more energy per passenger mile than transit10. Its without taking into consideration the time wasted in public transport, which otherwise could be used on other goals, including environmental. Another popular case in defense of public transportation subsidies it should solve traffic problems: fewer cars less congestion. But as environmental case, it can be achieved not by nationalized mass transit, but by mass transit itself. In fact, monopolistic government-owned public transport companies, as mentioned before, tend to operate bigger vehicles. Long buses and trams seem to be not a solution, but rather a cause of lot of traffic problems: they need more time on a stop to unload and pick up passengers and more space to leave stops, therefore they usually occupy two (sometimes even three) lines on the roads near stops. As well, they need more time and space on crossroads and turns. And traffic problem by itself is result of another case government owning and running business (of roads): any service provider on the market is interested in

bigger consumption of his service, but not here, what shows absurdity of situation.
And what about positive impact of public transport on land value? Its true real estate in areas with better access to mass transit tends to be more expensive. But its only because there are more willing people to buy it there therefore less people to buy land or house in other areas. So, public transport by raising value of one property necessarily reduces value of another. Similar situation with supporting strategic industries argument: supporting some industries means indirect harming another. In conclusion, even if we would agree about motives of proponents of centralized public transport, their means are wrong all these goals can be better achieved by private mass transit with less harm to society. Government is always worse in providing any goods and services, public transport is no exception.

See more in Environmentalism and Economic Freedom: The Case for Private Property Rights, Walter Block, Journal of Business Ethics 17: 1887-1899 (1988) 10 Fixing Transit: The Case for Privatization by Randal OToole, Policy Analysis (November 10, 2010)