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 Boston’s public transport authority, 37% - in St/Louis, 31% - in Atlanta3). But it’s 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 doesn’t mean that there is not enough demand for urban mass transit to be viable and it can’t 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 90’s 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.

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 O’Toole, Policy Analysis (November 10, 2010) 3 Ibid. 4 Ibid 5 Cities on the move: a World Bank urban transport strategy review (2002)

New mass transit system was designed by specialist of Belgian company Louis Berger S. 7 Ibid. when most of people in Ukraine sleep and rest at home after New Year’s Eve) it was almost impossible to get a bus and bus stops were more crowded than at workaday rush hours. 6 Making Transportation Sustainable: Insights from Germany. with no need to wait. Prepared for the Brookings Institution Metropolitan Policy Program (April 2009). while in a free market routes compete with each other. they are not very useful. 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. 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!). Todd Litman. John Pucher. this problem seems to be overestimated: transportation expenses are not by far the most significant among poor people. While openly admitting inconveniences created by reform. under public pressure. what will make their situation even worse. Ralph Buehler. Proponents of centralized public transport. Critique of Fixing Transit: The Case For Privatization”. It may seem like a joke. like justice. all existed before routes (created by market) were abolished and replaced by new. Partially.Buehler. who were able to provide service in city was reduced from 42 to 4 (two of them are municipal companies). 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. less crowded – and. those needs can be satisfied by big number of routes and vehicles. visible side of the topic. in few weeks quietly. is “blind”. supporting strategic industries. Indeed.But still. when new rules were introduced. The balance can be approached only by free competition: with less entry barriers and route planning as possible. of course it’s more comfortable. Pucher and Kunert 6 among most important advantages of German urban transport have listed high level of bicycle use and walking in German cities. therefore are motivated to adapt to passengers’ needs. it’s almost impossible to gather any relevant data other than public surveys. The number of companies. But it’s only one. but such solution obviously will be economically ineffective. Victoria Transport Policy Institute (18 March 2011) . If one monopoly controls whole city. but considering traffic unpredictability. protecting environment. But. Historically. problem of low frequency could be solved by fixed schedules. government vehicles usually are bigger. This topic is very difficult to study empirically. but such approach can take even more grotesque form. First of all. reducing traffic and improving neighborhoods78. when faced with its obvious financial unsustainability and permanent need of taxpayer’s money. it has no interest to maximize profit from specific route. very often deregulated mass transit systems are accused in low quality. 8 Contrasting Visions of Public Transport. the most often used was argument about supporting the poor: free market price system. with no financial responsibility and with populist political incentives. 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. Example of failure of government intrusion into public transport market was seen this year in Lviv. and Uwe Kunert. usually argue that it should serve other purposes: providing mobility for economically and physically disadvantage people.A. if bus is half-empty. The problem is that information about citizen’s needs in specific routes and about position of those needs on their value scales is widely dispersed and unarticulated. But already first day of new system was a complete failure: on a holiday (Jan 1st. therefore some economically disadvantage people will not be able to use public transport. increasing land value. with such approach nationalized should be most part of the economy. with reduction of their number by almost a half. and Lviv Polytechnic University. For the same reasons it’s very hard to effectively satisfy public needs in specific routes from a central authority without market price system. step by step new routes were changed very close to existed before. Of course.

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. not bounded to public transport (why should it be bounded. Government is always worse in providing any goods and services. 2010) . it doesn’t look like a help to the poor. 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. to solve environmental problems (air pollution) we should return back to legal system. including environmental. that public transport is not undoubtedly environmental friendly. therefore they usually occupy two (sometimes even three) lines on the roads near stops. what shows absurdity of situation. In fact. Policy Analysis (November 10. don’t people themselves know better what they need?). but not here. Even though in time of massive public transport nationalization in the West. Walter Block. As well. But. besides. even if we would agree about motives of proponents of centralized public transport. So. tend to operate bigger vehicles. Long buses and trams seem to be not a solution. public transport is no exception. there is no way to answer properly these questions. where air pollution was properly treated as property invasion – then polluters will pay and therefore polluting activities will be discouraged naturally9. environmental approach should be completely reconsidered. It’s without taking into consideration the time wasted in public transport. in USA in 2008 cars on average used only 2% more energy per passenger mile than transit10. as mentioned before. most loud is the environmental argument: public transport allows to reduce environmental damage per trip – people should be encouraged to use it. which otherwise could be used on other goals. For example. therefore subsidies are needed to keep excessive quality and lowered prices. this goal can be achieved with less harmful intrusions. 9 See more in Environmentalism and Economic Freedom: The Case for Private Property Rights. rather like indirect order to use public transport) or in form of direct payments. But case of air pollution isn’t quite different from visible pollution (garbage): it’s not okay to throw garbage on someone’s property and such activity is penalized. Who should decide how much money is okay to spend on environmental goals? Who should pay? Under present legal system. It’s also noteworthy. above that. In conclusion. it can be achieved not by nationalized mass transit. So.housing and food production first of all. Again. Similar situation with “supporting strategic industries” argument: supporting some industries means indirect harming another. today. it wasn’t heard very often and taken into consideration. their means are wrong – all these goals can be better achieved by private mass transit with less harm to society. But even if we would agree that society has to provide help to the poor in the matter of transportation. But it’s only because there are more willing people to buy it there – therefore less people to buy land or house in other areas. but by mass transit itself. And what about positive impact of public transport on land value? It’s true – real estate in areas with better access to mass transit tends to be more expensive. Journal of Business Ethics 17: 1887-1899 (1988) 10 Fixing Transit: The Case for Privatization by Randal O’Toole. Probably. Another popular case in defense of public transportation subsidies – it should solve traffic problems: fewer cars – less congestion. it’s not a reason for public transport nationalization. public transport by raising value of one property necessarily reduces value of another. 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. monopolistic government-owned public transport companies. probably. much more effective way would be subsidizing those in need directly. they need more time and space on crossroads and turns. But as environmental case. like pollution fares (taxes).

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