Transit Outsourcing Booms — But Are There Safety Trade-offs?

30streetcar.600.jpgNew Orleans streetcars, such as the one pictured above, are about to be outsourced to a private French company. (Photo: NYT)

The Wall Street Journal reports
today on the growing number of cities around the country that are in
talks to outsource local transit systems to cope with the budgetary
pressures of the recession.

New Orleans plans to outsource nearly every aspect of its
mass-transit system to a French company, an approach that could appeal
to other cash-strapped American cities looking to cut spending without
eliminating bus or rail services.

Under terms of a deal struck earlier this month, the New Orleans
Regional Transit Authority will pay a subsidiary of Veolia
Environnement about $56.3 million each year, and potentially $600
million over the next decade, to finance, manage and operate the city’s
bus and streetcar lines.

The deal could eventually save Norta — which spends about $72
million a year to run its system — as much as 30%, said Chairman Cesar

Transit outsourcing is a notion that sounds reasonable enough, particularly given Congress’ reluctance
to let large cities use federal money on operating costs. But the
Journal omitted a notable detail about Veolia, the French company
that’s poised to run transit networks in New Orleans and Savannah,
Georgia: It is battling Los Angeles’ Metrolink commuter rail in court over a September crash that killed 25 people.

crash occurred when Robert Sanchez, a Metrolink engineer hired by
Veolia, ran a red light and hit a Union Pacific freight train. Sanchez
was later revealed to be sending text messages 22 seconds before impact, and federal investigators found that he invited a local teen to try driving his train.

Veolia strongly defended its safety record following the Metrolink crash, though L.A. has since scaled back its use of private transit contractors amid local reports that listed the company’s past missteps.

Veolia’s website notes that
its deals are not "privatization" — a word that carries a somewhat
loaded political subtext — but "outsourcing," which does not entitle a
private firm to "the acquisition of all of the public company’s assets."

no matter what term is used, letting contractors bid to manage local
transit raises the question of whether safety and service trade-offs
are inevitable as the firms work to maximize their profit potential.

The rest of the Journal’s article on transit outsourcing is viewable in full after the jump.

"This is a model that will grow jobs…and create an enormous
opportunity for cities," said Mark Joseph, chief executive of Veolia’s
transportation unit.

Outsourcing can introduce new risks, including the financial
soundness of the companies involved and the potential for a backlash if
residents come to feel a deal isn’t in the public interest. In the past
year, financial issues have grounded or delayed deals to privatize
Chicago’s Midway Airport and build a new tunnel to the Port of Miami.

It is unusual for a big-city transit agency in the U.S. to delegate
so much control to a private company, but the New Orleans transit deal
shows how far some cities may go to preserve key services as the
recession drags on.

Across the country, the traditional revenue streams that transit
agencies rely on are declining, but interest in bus and rail service is
growing. Faced with a budget crunch, an increasing number of cities may
join New Orleans in seeking to curb costs by turning operations over to
private companies that can potentially run systems more efficiently.

Officials in Savannah, Ga., are negotiating a similar contract with
Veolia to the one New Orleans worked out. Patrick Shay, a board member
of the regional authority who has been involved in the talks, said
Savannah needs help in areas ranging from software to supply-chain
management in order to improve its bus system.

In the Phoenix area, Valley Metro’s new 20-mile light-rail line is
being operated by private contractor Alternate Concepts Inc., and the
transit authority plans 37 miles of new rail service in the years
ahead. Already, Valley Metro outsources its bus services. "We live,
breathe and eat with our contractors," said Susan Tierney, a Valley
Metro spokeswoman.

In March, the transit authority in Houston awarded a $1.5 billion
contract to a division of Parsons Corp. to build, operate and maintain
four new light-rail lines. Transit agencies in Dallas and Fort Worth,
Texas, are seeking a private partner to finance, build, maintain and
run a 67.7-mile passenger-rail network starting in 2013.

Outsourcing, particularly the kind of wholesale delegation coming to
New Orleans, doesn’t work for every transit agency. In Los Angeles, the
Metropolitan Transportation Authority contracts out service on 21 of
its 200 bus lines at savings of roughly $45 per hour of operation,
according to spokesman Rick Jager. Despite the savings, Mr. Jager said
the authority has no further plans to outsource because labor
agreements with its unionized work force prevent it.

Many agencies with older systems "can’t get off first base with
contracting because the labor unions are so powerful," said Cal
Marsella, general manager at Denver’s Regional Transportation District.

The Amalgamated Transit Union, which represents bus drivers across the country, didn’t respond to requests for comment.

Mr. Marsella’s agency outsources about 47% of its fixed-route bus
service to Veolia and Ohio-based First Transit Inc. Buses operated by
the companies are on time at roughly the same rate as the buses driven
by RTD employees, Mr. Marsella said, but the privately run buses
produce cost savings of roughly $30 an hour. Among the reasons:
Starting pay for bus drivers employed by RTD is $15.49 per hour, versus
$12.25 for ones the companies hire.

In New Orleans, the city’s unionized bus drivers will become Veolia
employees, and their labor agreements will be honored, Mr. Joseph said.

  • NCTD in North San Diego County is in the midst of seeking a contractor to operate its bus service:

    While some folks like the Reason Foundation (who extol privatization) will gush, the full story is complicated. It can be argued it will save money contracting. This of course devalues all the years of work experience etc. lost in the process. Most agency general counsel lack the skill and experience needed to draft contracts that need to be carefully prepared when agencies undertake such initiatives. The bid process is limited as few private companies have the expertise etc. to handle anything beyond a fleet of 20 or so. And contracting requires adroit managerial supervision with knowledge of what you need to keep an eye on. Two major agencies in the L.A. area (Foothill and AVTA) have had near meltdowns in service in recent years due to problems with contractors. Like any solution it carries its own set of challenges and pitfalls.

    And once you disband your public employee unit and go with contracting you are unlikely to ever re-establish it. The late James Cragin, a then Metro Board member, warned that Metro likely could never reestablish its Police force when the agency decided to replace it with a partnership with local police agencies. And whether the new arrangement was a good idea or not is moot since the reality is we are now stuck with it (the new Metro contract with the Sheriff took forever to negotiate and yet ended up far short of the reforms it should have contained–the LASD folks had Metro over a barrel partly beacuse they know Metro has no viable alternative).

  • limit

    Right of Way work performed by Metro is outsourced and ill managed. Sure Caltrans, FHWA, and FTA try to provide oversight but with cut and run consultants oversight can only go so far.

  • Much of the cost savings are neutered with the oversight required for the contractor. However, the benefits of contracting are strike-proofing, an easier ability to fire problem employees, and more transparency in costs (since you are writing a check to the contractor every month). Technology like GPS tracking can eliminate some of the problems with keeping track of contracted vehicles, if the contract allows terms such as on time performance, late pullouts, etc. to be enforced by the GPS. And there are ways to improve the bidding process to allow for greater competition. For example, Foothill Transit supplies the buses for the contractor and this allows a relatively small outfit, MV Transportation, to operate the service. I do agree there are tremendous challenges when a contractor decides to stop performing, with legal action required, but that is no different than when a union wants to make a point with a work slow down or “work to the book”. And too often contractors are in bed with politicians and managers who refuse to allow the public agency to enforce the terms of the contract, but again that’s not much different from the unions buying off the Mayor and his appointees. If the public agency has the backbone to enforce the terms of the contract, contracting can be a very powerful way to gain accountability, which is more important in my opinion than the cost savings.

  • Contracting means the agency and officials have no direct control of service–you add a layer of management and at times you see this used as an excuse (“We have no role in this current labor dispute between the contractor and their employees”). Amd let us be blunt, the savings come from hiring cheaper employees. The mysterious efficencies that advocates claim are the source of savings realy don’t hold up to scrutiny. And I can assure you the upper management is paid just as well as their peers.

    It is a cheaper but not in my view a inherently superior way of providing service. It calls for care and an understanding of the pitfalls. It can work well or collapse into a mess.

    I only now noticed the article quotes Julie Austin who recently was brought in as NCTD’s Director of Policy & Strategic Planning. She used to be Foothill’s Exec. Director–

    That may explain why this is on the table. Or at least that the new head of NCTD (who comes from back east) sought out someone who knows the local lay of the land for this sort of thing. I am unsure of the chronology etc. but at least that means NCTD does have in Ms. Austin someone who understand the sort of complexieties I previously noted. If you are going to do it, at least such a resource who has a “been there,done that” background is in my view essential. Contracting is not the sort of thing you want to undertake where you learn how to do it as you go along.

    On the SO.CA.TAmember board Charles Hiobbs mused how does the federal 13(c) labor protections play out regarding this proposal. … lrd_04.pdf

    I wish I could answer that. I didn’t see any refernce to the union for these effected employees in the article.

  • Transit outsourcing sounds good enough!!! but how sound it will prove is still a question mark. Large cities can use use federal money on operating costs now, good news.

  • getting right consultancy and then right contract so that you need not to re-do this is hard task to accomplish. Most agencies counsel and offer transportation consultancy service that lack the skill and experience needed to draft contracts that need to be carefully prepared.

    Very few companies leverage expertise in the transportation field.

  • Author: Ollie MIKOSZA
    Offer to cities for outsourcing of their mass-transit systems development and operation based on “MISTER” PRT (Personal Rapid Transit).
    Economic and Performance Macro-Analysis.
    From the viewpoint of cities, which are considering this new type of public transit system, the outsourcing may become the best way to achieve the solution to the mass-transit problems, especially in the times of economic crisis and cash shortage. Outsourcing will enable any city to have a MISTER system without any risk whatsoever, because this risk would be passed onto the system developer and operator. Since payments would be effected only if the system performance met the contract conditions, hence there would be no risk to the City.
    Contracting a certain level of performance, i.e. number of passenger-miles per day (with peak hour capacity as well) at much lower cost than for any other type of public transit, and having a real possibility of Net Earnings from the system operation – should be more than attractive to any city.
    As mentioned above, all of the risk is passed on to the private investor, who would build, manage and operate MISTER system. Usual duration terms of such outsourcing contracts for bus or other public transit services are between 20 and 30 years. Of course, the investor would expect a good return on such an investment too, but he is the one who is risking his capital.
    All that is required from the City to take advantage of this offer, is to sign a 20 year CONDITIONAL contract for MISTER services of a minimum 7 miles (10 km) 2-way guideway, which will then deliver the specified performance levels of mass-transit (more details below). The city would only have to select (jointly with investor) suitable routes, where the system covers most transit needs and to provide small areas of city land for the posts, stops, service yards etc.
    The 7 mile system will be a complete facility including service centre, approx 70 stops and 1000+ vehicles, capable of carrying 36,000 passenger-miles per peaktime hour in a single direction or 57,000 passenger-miles per peaktime hour across the entire system. It is more than any LRT or bus system of same length can do and is suited for an average daily demand of 50,000 passengers – some 15 million passengers annually. However the excess of vehicles, over average demand, is almost 4:1, which guarantees that peak time waiting will be minimized, while there will be no waiting during all other times.
    The contracted cost for such a system would be approx. $20 mil p/year over 20 years. This cost would be offset by earnings of some $30 million p/year, i.e. profit of $10 million, shared by the city and the investor. And this is calculated at a cost of only $1,50 per average 3 mile (5 km) trip with average occupancy of 1.5 persons per vehicle, and faster than by car.
    If the system was tripled in size to some 20 miles, net annual earnings would increase to approx. $40 mil p/year, after payment of $50 mil p/year to the investor-operator.
    Because the MISTER system is a comparable, yet better transit solution, than any LRT (Light Rail Transit i.e. Tramway) or bus system, not to mention a subway, therefore we hope that this offer will be given serious consideration by city Councils to improve the quality of life for it’s citizens.
    By all technical, functional and economic accounts – MISTER is also a better solution than any other PRT system in operation or development.
    As a comparison, an estimated costs for LRT system of similar length and capacity would bring a city a net deficit of some $20 mil p/year. Even this figure is calculated with 50% development subsidy from the state or some other transit agency. In addition, trip times on MISTER systems are half that of LRT times, not to mention comfort and safety. In addition MISTER’s peak capacity would be some 30% higher.
    The net financial difference In favor of even a 7 mile MISTER system over an LRT system would be at least $30 mil p/year times a 20 year period.
    The investor-operator and the city would jointly share the additional profit from the system’s operation on a 50/50 basis. When the contracted daily system capacity and/or network length need to be increased due to popular demand – which is certainly expected over such a long period of operation – profits from the system’s operation will increase as well.
    Demand for PRT services of 50,000 trips per day have been estimated by comparing the demand of some of the existing LRT and metro systems in Europe. Quite likely, similar or higher demand levels can be expected in the USA.
    It is also expected that the actual demand will be higher than assumed, because people will inevitably prefer MISTER PRT to any public transit system, even to their own cars. This is because the comfort level will be that of a car, while commute costs of $1,50 per trip make it more than accessible for everyone, not to mention the safety and speed factors of MISTER transit. More demand means higher profits, while system capacity and comfort do not become diminished.
    The issues with ROW (Right of Way) in the case of MISTER are minimal, as well as development time when compared to LRT.
    The table below shows basic capacity and financial parameters of MISTER and LRT.

    Outsourcing Summary: 7 mile MISTER system 7 mile LRT/Tram 20 mile MISTER system
    length of 2way track – mile (total guideway length = 2X) 7 7 20
    Expected daily PAX-trips 50 000 50 000 150 000
    Max. PAX no. Per direction per hour (ppdph) 5 143 3 566 5 143
    Peaktime hourly PAX-mile capacity in one direction (linear) 36 000 24 962 102 857
    TOTAL cost to the City over the outsourcing period in (mil) $375 $845 $918
    including : operating costs $94 $224 $207
    capital costs $80 $280 $210
    State financing for LRT = 50%
    financing costs $76 $265 $195
    investor margin 33% 9% 33%
    Outsourcing period (years) 20 20 20
    Annual outsourcing cost (mil) $19 $42 $46
    Annual income from tickets and advertising (mil) $29 $25 $88
    Annual profit/loss(-) in mil $10 -$18 $42


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