Privatizing Transportation Systems
Highways, Buses, Rail, water and airports:
Literature Review
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The Problem with Highway funding
 Congestions cost America $168 billion a year. If not resolved then
cities will die as centers of economic productivity, as centers of
culture, and a pleasant place to live. Over half of interstate are
congested and one fourth of bridges are rated deficient.
 The annual investment needed to maintain the current level of
pavement condition using public funding is 8.3% short.
 In order to just keep pace with the growth in driving and truck usage,
capital spending should be higher by 74% than current capital
spending of $68.1 billion.
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Advantages of P3 in Transport
PPPs have been widely recognized over the last several years as an
innovative approach to transportation funding and procurement
that can reduce project costs, accelerate project delivery, transfer
project risks to the private sector, and provide valuable, highquality projects; but these benefits alone do not explain the
growing number of PPPs that are being procured in the United
States.
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Reasons for P3 in transport
PPPs are being utilized at a record pace because they:
 Respond to congestion and system unreliability by providing high-quality, well
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managed projects and better performance;
Address the demand for transportation investment by providing access to a vast
amount of private capital available for investment in transportation;
Reduce the wasteful effects of political and special purpose spending by
incorporating financial accountability for investment decisions into the
transportation funding process;
Help align the Nation’s transportation funding policy with critical energy and
environmental policies by substituting private capital for fuel tax revenue;
Accelerate project delivery by providing upfront private capital for a project’s full
cost.
History of P3 Hwys in US
 Prior to 2005 P3 were from DB to DFBOM.
 Since 2005, long term concession-based P3. Private sector
assumes significant financial risk related to operation &
maintenance, and for new projects risks related to design and
construction. The private partner assumes greater financial
risk. For existing highways risks involved in operation &
maintenance. For new projects: the design, and construction.
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Benefits of P3
 P3 save 6-40% in construction cost, and limit potential overruns through fixed–
price contracts. Private capital ease public debt.
A good example is the Miami Port Tunnel project. The planners calculated $68M a year
payments by FLDOT for design, construction, operation, and maintenance. The bidder
selected required annual payment of just $33M.
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P3 are no riskier than procurement approaches. P3 can reduce public sector
exposure by well structured concession agreements. Financial incentives to
concessioners can assure high operation and maintenance standards. Proper
allocation of risk between the two sectors can reduce overall risk, accelerate project
delivery and reduce cost.
A good example is P3 of VIDOT for I-95/Capitol beltway corridor where the concessionaire
assumed the financial, technological and operational risks of implementing a variable toll rate
based on congested (peak time) system. It assumed the risk for the expected return if the
project is successful.
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Benefits of P3
 P3 encourage innovations and greater introduction of IT at the
construction stage to achieve lower DPV for the project. Life
time savings in operation and maintenance costs.
 P3 shortens project completion significantly. Immediate
availability of private capital accelerates the project that otherwise
will be delayed until public resources become available.
The concession for improving 800 bridges in Missouri was
assigned to one private partner per bridge. It will take 5 years
instead of 20 years to the public sector.
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Private Toll Roads in the US, 2008
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Long term (LT)Concessions of Existing
Highways
 Chicago Skyway P3
Description: 1st LT concession of existing toll road in US. 7.8 miles. Connecting the
Dan Ryan EXPWY in south Chicago with the Indiana toll road. Private consortium
includes Spanish Cintra and the Australian Macquarie. Both toll roads developers.
Terms: The Concessionaire paid upfront the City of Chicago $1.8B and will operate and
maintain the toll road for 99 years, collect all revenues for the 99 years. Revenues will
be used for operations, and maintenance, repay debt, and contribution to equity. Annual
toll prices were preset through 2017, and capped thereafter at the greater of 2%, CPI, or
Per Capita GDP. Chicago used the proceeds to fund several programs.
 Indiana Toll Road (ITR)
Description: Competitive bidding to operate and maintain the east-west 157 miles
road connecting the Chicago Skyway and the Ohio Turnpike. Again, Cintra and
Macquarie won the contract.
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Chicago & Indiana P3 Toll Roads
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LT Concessions of Existing Hwys
ITR (cont. )
The concessionaire paid upfront $3.8 B. Again, BOT for 75 years. Unlike Chicago, Indiana
invests all in the 10 years road improvement projects, and transportation projects for the IN
counties.
Evaluation: Both significant upfront private capital. Long term concession. Mature with
existing customers.
Pocahontas Pkwy
No proven customer base for a large upfront pay by concessioner. 9 miles bypass, southeast
of Richmond VI connecting I-95 with I-295. State funded through a non-for-profit entity
that issues construction bonds. When opened no sufficient toll revenues to pay the debt. VI
decided to convert from non-profit to LT concession type P3.
Terms: 99 years concession with an Australian toll road operator. Price Included debt,
maintenance and repairs by VDOT and the transaction costs. Prices capped to provide
necessary returns. If excess revenues result then shared with VDOT.
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PPP: New Highways
 Impetus: Intermodal Surface Transportation Efficiency Act
(ISTEA), 1991. Expanded toll facilities eligibility for Federal
aid for construction (re), resurfacing, rehabilitation,
conversion to toll roads. Allowed also State funding and
shared responsibility with private sector. Exception:
Interstate system.
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PPP new Highways: Principles
 Always PPP where ownership shifts to
public entities
 Always existence of non-toll alternative
road
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Rt. 91 in Ca.
Description: 10 miles 91 express 4-lanes within the median
area of SR 91. Connecting 55 Freeway near Anaheim to run
east-west to the border of Riverside County. Affluent local
population, 8% annual increase in traffic—high congestion.
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SR 91
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Rt. 91: Ca. Nature of PPP, Operation
 BTO. CPTC Corp. built it, cedes ownership to State in exchange
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for 35 years lease to operate the road. Toll charged and 50%
discount for 3+ people in car.
Demand sensitive pricing by time of day and distance.
Guaranteed 65 MPH otherwise money back
Fully automated operation
Immediate removal of non-operating vehicles.
Results: Profitable from first year. Average occupancy 1.65
where 20% of which are carpoolers (3+)
CPTC’s revenue increased 45% in its third year of operations,
mainly because it was able to steeply increase average tolls.
Vehicle trips rose 8% to 25.4k/day for the year.
Dulles Greenway
 Built as BOT in 1995 in Virginia. 15 miles from Dulles Intern’l
Airport to Leesburg. 4 lanes and 250 ft right of way. Private
consortium financed, built, and operates it. Connecting the
Beltway near D.C. (I-495) with Dulles Airport.
 Special legislation to establish prerequisites for construction &
operation of a private toll road
 A commission was set up to regulate applicants, supervise, control
operators, and approve/revise prices.
 Total estimated cost $326M. $68M initial investment by partners;
of which $22 equity and $46M guarantee against project risk.
$202M by consortium of 10 lending institutions.
 http://americancityandcounty.com/mag/government_making_inroads_private/
 http://americancityandcounty.com/mag/government_making_inroads_private/
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Dulles private Toll Road
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Greenway: Features
 BOT. Transferred to State (VI) after 40 years. Subjected
to utility style regulation. Targeted return 21%.
 Prices fixed for all day and all 7 interchanges. In 1995
price $1.75 ridership 10K vs. anticipated 30K. In 1996,
price lowered to $1– ridership grew to 17K. In 1997,
price increased to $1.15. Toll collection below
anticipation.
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Lessons learned
 Drivers are reluctant of paying tolls that do not vary by distance and time of
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day. Demand sensitive pricing (discriminatory prices) also assure higher
revenues, and avoidance of congestion.
Private toll road companies face difficulties in land acquisition and managing
environmental concerns. Rt. 91 had no land acquisition while the
Greenway suffered additional cost related to delay in land purchase. DOT
enjoys eminent domain provision in assembling land. Timely land
acquisition added to the cost of the Greenway.
Private companies unlike public entities cannot finance using tax exempt
securities. Thus, private companies pay higher interest.
Private companies unlike public entities do not enjoy sovereign immunity.
Full liabilities for accidents adding in case of BOT additional operating cost.
Toll roads should enjoy existing demand and not be subjected to induced
development that will produce travel demand. The initial cost of toll roads
includes high land acquisition and construction while revenues are low
extending for a long period of time.
Lessons learned (Continued)
 Metropolitan roads that serve peak time traffic (e.g. Rt. 91) are
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more financially viable than intercity roads (e.g. the Greenway).
Most private investments have alternative use in case of failure.
No alternative use for failed toll road which raises uncertainty
and higher financial costs.
Success requires one company to build and operate the toll road
for a long period of time.
Success requires simple and immediate land acquisition
Success requires a committed political champion
Problems with Dulles Greenway
 Fixed price for tolls. Demand sensitive prices over distance traveled,
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time of day, week day-weekend
Excessive regulation by State/lenders for toll restructuring, change
of speed
Real cost of regulation in time and expenses
No tax exempt securities raising developer’s interest payments
Accidents and other liabilities absent for public roads that enjoy
sovereign immunity
No eminent domain provision to acquire necessary land.
Negotiations for land took time and additional resources adding to
cost
Expensive project that is contingent upon stimulation of land use or
induced traffic in the remote future with high risk
BOT Tunnel in Hong Kong
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Feb 1988, the HK Gov’t granted a 30 year franchise to a
private consortium. Longest road in HK 4 KM twin tube 4
lanes tunnel and approaching lanes. Completed 2 months
ahead of schedule at TC of $276.5M
Financed completely by private sector
Shareholders contributed equity 1 to 2.6 debt
Risk for non-completion ran for just 18 months construction period.
Risk was low because the tunnel method used was well known.
Good reputation of contractor, and $400K per day penalty
Cost overrun risk was overcome by several guarantees of
shareholders. To ensure project quality, a 10 year performance bond
to address performance risk was put up by contractor
Post completion risks ran for 12 year loan period. Shareholders
purchased i.r. cap. Cash flow risk was mitigated by HK gov’t
approval to increase tolls.
LT Concessions for New Hwys
Texas, Virginia and Florida lead in P3 for new and capital
improvements. TxDOT initiated the innovative Trans-Texas Corridor
(TTC) projects. TTC is a proposed network of super-highway
corridors that could include separate lanes for passenger vehicles, and
large trucks, freight and high speed commuter railways, water lines,
oil and gas pipelines, electricity and communication services.
TTC must be built with P3. Principles of TxDOT:
1. It will oversee planning, construction, maintenance.
2. Government needs innovations of private sector.
3. TTC is a LT, concession based P3 which includes private sector’s share in design,
construction, financing, operation and maintenance(1).
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For each segment: 1. A competitive bidding. 2. The consortium provides a master
development and financial plans. 3. Development of 1st facility under a separate facility
agreement.
Hi Occupancy Toll Lanes (HOT)
 VIDOT and a private consortium agreement for a concession to
design, build, operate and maintain 2 HOT lanes on 14 miles
portion of the Capital Beltway. Concessionaire will construct 2
general purpose lanes and convert the two innermost to HOT.
Toll revenues will finance $1.4B of the $1.8B expected cost.
$588M loan from USDOT, $589M private bonds, and $350M
consortium equity, and $409M of state sources.
 PPP is possible for projects that generate negative profits; bidding
on minimum subsidy. Used for low traffic bridges in Missouri,
and BART’s Oakland Airport connection.
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Federal Programs encouraging P3
 Private Activity Bonds. IRS allowed issuance of public issuer
of private Tax exempt bonds (PABs) to finance privately
developed and operated hwys and freight transfer facilities. The
private developer is deemed the borrower and is responsible for
the repayment. The total Federal PABs is limited to $15B and
allocated by the Secretary of USDOT.
 TIFIA. The Transportation Infrastructure Finance and Innovation
Act, 1998. Federal direct loan, loan guarantee or a line of credit.
For direct loans, payments start up to 5 years and final maturity
35 years after project completion. USDOT may allow payment
deferrals. Private sector is allowed to combine TIFIA with PABs
for P3 transactions.
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Managing Risks in P3
 LT Toll concession (or lease, franchise) agreements where private
consortium design, finances, builds, and maintains a toll project
for 35-99 years in exchange for toll collection.
 Advantages: pool risks and deploy expertise across multiple
countries. Innovations in toll collection eliminate any congestions
at the booths.
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Managing Risks in P3
 New innovative approach to transportation funding. Risks exist to the public
sector, however, they are manageable and can be mitigated. Create well
balanced P3, perform due diligence before committing to project, and
negotiate well structured concession agreements.
 Agreements should specify performance standards for facility conditions, safety
measures, levels of service, and maintenance obligations. Failure to obey may
revert right to collect tolls. Also, existence of public alternative will reduce use
of the poorly maintained P3 facility.
 Private operator’s accountability to public authority and to the users which are
the source of revenues assures high standards. In Indiana’s Toll Road Concession,
standards were higher than when the State operated it. No formal standards for
public operation.
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Managing Risks in P3
• Public-Public Partnerships are not a good substitute for P3:
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Public entity does not enjoy unlimited authority to issue debt, and public
funds are limited. Thus, PPP’s equity contribution that yields higher
return than debt should not be avoided.
Private equity is another source of investment proceeds that is less
confined than debt.
Equity risk is borne by the private rather than by the public sector.
Much of the success of P3 is attributed to the innovative and superior
service, and accountability for its customers. Protection of equity
investment in a competitive environment lead to innovations. Private
bidders for P3 must incorporate cost and service innovations in their
proposals. Congress’s PAB program that allows tax-exempt bonds
enables private entities be at leveled field with public sector.
Managing Risks in P3
 Private investors will be interested in just profitable routes
1. Investment of private capital frees public sources of revenues
and debt to other transportation projects.
2. Possible packaging in P3 procurements of various return and
risk projects. Used in Mexico for toll roads and bridges.
3. Bidding on the lowest subsidy for non-profitable projects.
Example, the Port of Miami Tunnel or the Oakland Airport
Connector for design, construct and operate.
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Managing Risks in P3
Price regulation when Private toll operators enjoy monopolistic power
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Concession agreements for toll facilities often set ceiling limits. Hikes are
allowed for inflation, changes in GDP per capita, a fix percentage etc. In case
of congestion pricing, allow operator to vary tolls based on demand price
elasticity.
2. Failure to comply lead to shift control to the public authority.
3. Setting toll rates is important in a constrained or monopolistic market. Prices
should not exceed marginal social cost. In a constraint market with
monopolistic power, shadow tolls can be established and the revenues are paid
by the public authority. Thus, the concessionaire efficient performance is
reflected in the amount of traffic generated while shadow tolls are paid by the
public authority.
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Managing Risks in P3
 Price regulation when private operator enjoys monopolistic
power:
4. Another option is a regulator that approves private charged rates.
For Dulles Airport the regulator is allowed by State law to approve the
higher price of the three for the period 2013 through 2020: 1. The
increase of CPI plus 1%. 2. The increase of GDP. 3. 2.8%.
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Revenue sharing to regulate the private partner’s return on
investment. Limits private partner’s incentives to develop innovations
since the public partner can reap extra profits. Can encourage the
private partner to “overcapitalize” the project in order to increase
revenues without reaching the maximum rate of return. Best is to
protect consumers by regulating prices without hurting incentives to
innovate. Price regulation rather than regulation of rate of return.
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Managing Risks in P3
 Congestion pricing appears to improve traffic flow and social
benefits on all routes:
1. On such toll roads, traffic is diverted from peak to off-peak times and NOT
to other roads.
2. Diverts traffic from other roads to toll roads because of time saving and
certainty.
3. Managing demand on freeways by congestion pricing during peak time
improves traffic flow.
4. Congestion pricing can divert traffic to transit, which leads to increase net
benefits.
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Advantages of Tolling
 A safe and predictable source to serve the debt, maintain the road in good
condition.
 Creates a direct voluntary (market) link between the provider and the
consumer, assuring high performance by both the producer and employees to
satisfy customers. Customers pay for service they receive every time they
enter the road and will enter only if the benefits exceed the toll price.
 Under tax-and-grant system, the public sector produces a “wish list” of
transport projects. Assuming no net social external benefits, private
investments in roads justifies economic viable projects. R. 91 in CA is an
example of combined private sector’s initiatives and tolling.
 Variable tolls best to manage traffic flow. Stop-and-go traffic reduces capacity
of vehicles per lane from 2,000 per hour to 1,200. Traffic engineers can
calculate pricing to maintain 1,700-2,000 veh/hour/lane.
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Advantages of Tolling (cont.)
Price adjustment raises the efficient use of lanes. Example, tolled R.
91 is 1/3 of the entire lanes but carries ½ of rush hour total traffic
because of its free flow flexible pricing (1).
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Reasons for Customers Use of Toll
Roads
Research in Ontario, Canada related to the 407 Express Toll
Route revealed 3 reasons:
1. Time saving
2. Reliability and convenience of the trip
3. Safety of the hwy.
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407 Private Toll Road, Ontario, Canada
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407 private Toll Road
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Traffic & Revenue Model
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Projections of population and land use in corridor
Estimate Trip Generation
Traffic Assignment to different roads based on origins &
Destination & the time on each route
Time saved ($ per hour) and likely toll rates
Forecast volumes willing to pay the toll and divert to the new
road
Annual revenues calculated
Annual operating costs
From 6 & 7 annual profits
Costs Estimates
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Capital costs estimated include design, permitting, land,
construction, legal and financing fees plus reserve fund for
uncertainty and bond insurance against default (to raise the debt
rating and lower the interest rate).
Landers want cushion termed “coverage ratio” between net
revenue and debt services obligations at 1.3 ratio.
25-30 years bonds with fixed interest rate. Toll rates are set
based on constant debt service requirements through the life of
the loan. Holds if revenue forecasts are conservative and no
inflation.
Problems with Traditional Model
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Traffic forecasts were on the high side. Population growth or
real estate development in corridor did not materialize.
This uncertainty creates pressure for larger reserve funds,
reduces credit rating, need to raise faced interest, call for shared
tax money and elimination of some road projects.
The old model of paying off the bonds and removing the tolls is
impossible. Also, roads need complete rebuild every 30-50 years.
Innovative Financial Alternatives
 GARVEE bonds: State DOTs borrow by pledging a portion of their future
federal highway grant receipts to service the debt. A method of financing
projects but is small in relation to the amount available for investment.
 Shadow tolls: A way to enlist the private sector in financing, building, and
operating existing road. Government commits a consortium over the life time
of agreement, pre-defined per vehicle driven or per vehicle/mile of traffic.
Saves tolls collection costs. Limitation: No new revenues are generated.
Portugal, Spain, Finland, Britain. Politically popular to current officials while
letting future government pay the cost. New European version is Availability
Concession where long term rental payments are made. Like of prisons cells,
and schools.
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Innovative Financial Alternatives (Cont.)
 Non-Profit Corporations: allowed to issue tax-exempt toll
revenue bonds. Termed also 63-20 corps, after the numbering
by IRS. Non-profit corp. had to be an arm length from both
state DOT, and from for profit construction corp.
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Initiated by engineering and construction firms interested in design
and construction projects. The State is the other interested party in
getting a road it may not otherwise get.
The firms lose interest once the project is built and their fees are
paid. The non-profit has no equity and no shareholders with vested
interest. Its directors are chosen after the road is complete and thus
unaccountable for failure. Indeed all failed.
Long Term Toll Concession: Advantages
 Greater access to capital. Traditional bond investors in toll roads
get no upside advantage because they do not share profits and are
only concern with downside risks. Debt coverage ratio=annual
revenues/annual debt services= 1.25 to 2.00. This reduces the
amount of capital that can be raised for construction in taxexempt markets.
 Private concessionaires can fill in the gap with equity money. In
Australia large IPOs of stocks. Concession Cos. are flexible in
the ratio of debt/equity. Bond financing recovers capital entirely
in 25, 30 or at most 40 years. Concessions can be structured for
75+ years.
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Long Term Toll Concession: Advantages
 Financing based on bond markets requires large amount to reserve
funds since all the capital is under debt that must be met.
Provider of equity can deny dividends when revenues are tight for
years. Thus, concession toll road funded by a mix of equity and
debt can better survive during years of low revenues.
 New financial instruments: Goldman Sachs and a British report
estimate $250B available for toll roads. In the 1st half of 2006,
$100B was globally raised for infrastructures mostly in the US.
Pension funds are interested because of long term prospects. The
problem is lack of investment opportunities not in available capital.
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Long Term Toll Concession: Advantages
 Toll rate flexibility: Set at market value and raised by the
concession limits. Tolls of public roads are not raised as long as
debt service is paid, and do not reflect rising opportunity cost of
time saved or increase of the time saved. Tolls seldom reflect the
effects of inflation. The Indiana Toll Road kept prices constant
over 20 years regardless of increase in traffic flow, causing
congestion. Often when a road needs significant improvements,
tolls are raised by 1/3, causing a decline in usage which could
have been avoided if LT inflation would have been used.
 Private vs. public operator can upgrade electronic systems while
public agencies face difficulties in raising the capital to do so.
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Long Term Toll Concession: Advantages
(Occurs approx. every 7 years).
 Private operator can easier adjust staffing and training.
 Public operators defer maintenance when necessary while private operator
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must comply by contract or to maintain customers.
Private operator has easier time implementing congestion tolling; responding to
changing demand level and price elasticities.
Labor cost of toll collectors in the public sector is double of the private sector’s.
Also, raises in the public sector’s wages are input or seniority based rather than
by productivity.
When toll roads are operated by cities then maintenance is conducted by the
relevant city department and is queued there with all other jobs uncontrollable
by the road management.
Private toll road operators can combine toll collection across state lines.
Long Term Toll Concession: Advantages
 Expertise gained of major projects can be globally transferred by
private operators from one place to other. State Turnpike
experience is lost if no more major projects are internally initiated.
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Funding of Roads
 US: toll revenues enable tax exempt bonds, and hwy trust funds supported by
dedicated motor fuel tax.
 Europe: No hwy trust fund nor tax exempt bonds. Toll funded long term
concessions: 1st France then Italy, Spain and Portugal. The toll roads companies
started out as state owned and controlled while since the mid 90’s they were
sold. These companies invest in Latin America, Eastern Europe and the UK.
 Australia: Toll road companies operate under LT concession agreements
operate all urban expressways in Melbourne and Sidney since 1990. Now, these
companies went global and developed road mutual funds for LT investors.
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LT Concession Models
Works well for large scale hwy, bridge and tunnel projects. Reasons:
 Private equity can be raised if excess demand and willingness to pay exist for LT right to
toll. Patient capital is less vulnerable to default in the early years of new toll roads.
 The private sector absorbs the risks of cost overruns, unmet construction schedules,
traffic shortfall. Accountability.
 Concessioner that operates and maintains the road has no incentive to “cut corners” in
the construction phase.
 Innovations by private sector: e-collected tolls, demand sensitive pricing by time of day
and the day of the week (R. 91). Same in Paris, the mother co. of R. 91 where a tunnel
was built under Versailles to complete a ring road (A86).
 In Melbourne, a private toll co. linked 3 existing roads in densed urban areas by tunnels
and elevated roads.
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References
 Samuel, Peter, 2007. The Role of Tolls in Financing 21st Century Highways, the Reason
Foundation, Policy Study 359, Los Angeles.
 US DOT, 2008. Innovation Wave: An Update on the Burgeoning Private Sector Role in
U.S. Highway and Transit Infrastructure, July 18.
 US GAO, 2008. Highway Public-Private Partnerships: More Rigorous Up-Front
Analysis Could Better Secure potential benefits and Protect the Public Interest. GAO08-44.
 Poole, Robert, and Samuel, Peter, 2006. The Return of Private Toll Roads”, Public
Roads, Vol. 69 (5): March/April.
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Privatizing Transit Systems
Problem: Real Cost per transit trip has increased three times since
Congress gave cities and states incentives to take over private transit in
1964. Worker productivity expressed as number of riders carried by
worker declined by more than 50 percent, the amount of energy to
carry a bus rider one mile increased by 75 percent, and the number of
transit trips per urban resident declined from over 60 per year in 1964
to 45 in 2008. Over the same period, real operating costs per rider
tripled, while fare revenues rose merely 8%.
(For entire discussion, Randal O’Toole, Fixing Transit: The Case for
Privatization, CATO Institute, November 10, 2010)
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Cost of Moving passenger one mile
Mode
Cost per Passenger Mile
Airlines:
15c
Driving
23c
Amtrak
60c
Urban transit
$1.00
Public Subsidy
1c
1c
30c
79c
Buses use far more energy and pollute much more per passenger
mile than the average car. Transit agencies try more to get federal
and state appropriations than sales from satisfied consumers
leading for visible capital improvement.
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Privatizing Transit
Significance of Problem: Dependency on state tax
collection makes transit funding vulnerable to economic
trends. State operating funding are based on sales and
income taxes that are very elastic to economic down trends.
Property taxes collections that are less sensitive to economic
trends provide only 2% of transit operating funds.
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History
 Until 1964 most urban transit privately owned & profitable.
 Commuter rail service in Boston, Chicago, NY, and Phila were
losing money and threatened to discontinue service
 These cities could not afford the increase that will result in auto
traffic to these cities and the RR lines crossed state lines.
 Congress chose to support these transit systems but could not
limit funding just to these 4 cities thus allowing all transit
authorities to apply for capital grants. Congress expected that
operating costs will continue to be covered.
 Private goal was just max. of profits. Public goals became mixed:
solve urban problems, save the CBD, help the poor & handicapped
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Productivity
 Routes were added into unprofitable areas
 Average # people onboard of a bus declined from 12 in 1977 to
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12 in 1977 to 9 in 2008.
# of people per bus mile declined 40% from 1964 and 2008.
# of transit riders per employee declined from 60K to 30K after
1964
Amount of energy used to move an auto passenger one mile
declined 30%, and increased 76% per transit bus between 1970
and 2008.
In 2008: transit used 3,360 and auto 3.440 BTUs per
passenger/mile
Fares & Costs
 1964 through 2008: Fares per trip using GDP deflators) declined
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4% while operating cost inclined 184%
1965 through 2008: Total operating subsidies have grown (again,
using GDP deflators) from $0.6B to $24.5B.
Reasons for the rise in costs: S Congress required workers’ unions
endorsement for grant applications. Transit agencies invested in
unnecessary high cost systems.
Since 1995 all governments provided $500B in real terms in
operating subsidies.
1965 through 2008: Use of transit declined from 60 per year to
45. Half of urban areas generate less than 10 trips per resident a
year.
Transit Trips per Operating
Employee (Randal O’Toole, 2010: 4
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Findings
 Presence of expensive rail transit system does not affect
ridership.
 Per capita transit ridership remained steady at 40-50 trips
per year while personal driving grew 120%. From 1970 to
2008, transit’s share of motorized urban travel declined from
4.2% to 1.8%.
 As a result of the 2008-9 recession, over 100 transit agencies
raised fares and/or cut service. NY’s MTA raised fares by
30% and eliminated 2 subway and 35 bus lines. NJ Transit
raised fares 25%
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Transit Tax Crisis
 1/3 of operating costs comes from fare box, 1/3 from state or local mostly
dedicated sales tax, 7% federal and 25% annual unsafe appropriations. Sales tax
are vulnerable to economic conditions. Transit agencies are reluctant of
creating reserves for recessions when mostly sales tax decline. The reason being
that government may require the use of such reserves. Thus, transit agencies
often resort to low return investments to avoid surplus. With little reserves,
agencies have to cut service at a slight recession when dedicated sales tax
decline.
 In most cities fares cover less than 20% of operating costs. So, 10% increase in
fares covers raises only 2% increase in revenues. It is perceived as tax increase,
unions do not regard it as their problem. Instead of the riders and providers,
demands are aimed to the State.
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Transit Debt Crisis
 The federal government pays up to 50% of capital outlays on
rail while the rest is mostly debt borne by the city.
 Federal funds pay most of new buses which are also
inexpensive. Thus, bus only agencies do not need to borrow.
 MBTA of Boston spends over $2 of $3 spent on operations.
St. Luis Metro spends $3 of every $5 spent on operations.
 A huge burden is the healthcare costs. Portland $1.18 on
every $1 of salary; NJT, San Francisco’s BART, Washington
Metro $0.75-$0.85 in benefits on $1 salary. Transit boards
agree to future liabilities that unaffect their present
operations.
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Transit Infrastructure Crisis
 A $78B backlog of work to bring transit assets into a “state
of good repair” (Federal Transit Administration, 2010).
Annual maintenance spending is less than is needed just to
keep rail and bus systems in their current state of poor repair.
The highway system is funded adequately by gas tax, tolls,
and other user fees. The highway and bridges have improved
since 1990.
 Bad maintenance condition of seven largest systems which
carry over 50% of all transit trips totaling $50B of which
$46B was for rail transit. ¾ of the 400 transit agencies was
due to rail deficiency.
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Transit Infrastructure Crisis
 The critical time when most of a rail line’s infrastructure
needs rehabilitation or replacement is when it reaches 30
years. The oldest parts of Atlanta’s reached 30 in 2009, San
Diego’s original light rail line in 2011, and Baltimore,
Buffalo, Miami, Portland, Sacramento, and San Jose before
2020. None of them has the financial resources for the
necessary rehabilitation when they are worn out. Some rail
lines will cease to exist.
 Obama’s head of the Federal transit Administration suggests
not to expand rail when operating costs are not fully covered.
Instead, to designate painted “bus rapid Transit”.
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Transit Innovation Crisis
 Public transit agencies incorrectly replaced low-cost buses
with high-cost rail.
 “Dial-a-ride”: allows people to connect for a small bus pick
up close to their door while allowing others to be picked-up
or dropped. San Jose’s Santa Clara County transit District
adopted the service but failed due to access demand. Taxi
Cos sued the District for “infringing on their exclusive right
to carry people door-to-door. The District ceased service.
Automation through the internet could solve the excess
demand of the call center.
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Transit Innovation Crisis (Contin.)
 Rigid commuter rail that is a capital most expensive form
and leads among limited # of points have been constructed
rather than adding “dial a bus”.
 In the 1970’s, Atlanta, D.C., San Francisco creating rail with
technology dated back to 1904
 In the 1980’s, San Diego, Portland, Buffalo built light rail of
1939
 In 2001, Portland added streetcars of technology dated back to
1888.
 Mass rail transit built after 1976 still carry less than 1% of
passengers travelling.
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Transit Subsidies
 Supporters of such subsidies justify the subsidies by exaggerated
externalities. Randal O’Toole showed in a 2008 CATO
publication that per passenger/mile it is the same as driving.
BTUs by car is 3,400, while 3,400 by bus. Rail transit’s is 2,500
but include also high building energy. Total energy cost of driving
is 5,500 BTUs for driving and 6,400 for rail transit.
 Considering fare box charges including capital and operating
subsidies, cost per passenger/mile for transit is $0.98 while for
car only $0.22.
 No federal or state subsidies for highways. All is funded by user
fees. Congress authorized in 2008 diversion of more funds from
highway user fees to transit.
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Privatize Transit
 Transit productivity has declined since transit managers are
not required to cover costs. Greater budget leads to improve
stance of managers.
 Transit creates new programs during economic boom time
that are not sustainable in the long run. Lobbying groups
demand increased subsidy in recessions when revenues from
State sales tax diminish.
 Politicians invest in expensive infrastructure in the short run,
ignoring long term financial consequences.
 Public failure to innovate unlike the private sector.
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Examples of Private Transit
 Atlantic City Jitney Assoc. Group of private bus owners that
operate routes from NJ Transit to the hotels subsidized by the
latter and 4 charge fares. Operates since 1915.
 With the construction of bridges, highways tunnels, and
trains, Hudson subway, ferry service across the Hudson
ceased in the 1960’s. In 1986, the NU system of Ferryboat
service across the Hudson started, including ferryboats and
buses-one fare. Following 9/11 with the interruption of
subway service, many boats were added. NY Waterway is
doing well despite competition by subsidized buses and
PATH subway trains.
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Contracting Out Bus Services
 Colorado’s legislature required that half of Denver’s bus
service is contracted out. The private operator charged
$5.01 per bus mile in 2008 compared with public’s cost of
$9.65 (plus taxes and fees).
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Effects of Privatization
 Focus on high demand areas like CBD and reduced service in
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suburbs.
Use more technology and reduce on infrastructure investment.
Use vehicles size to address demand and economize on labor.
Private investors will use low cost, flexible bus service to replace
when amortized rail, streetcars, light rail.
Private operators may keep subways, suburban rail where 60% of
operating costs are covered by fares.
Bus service will continue in highly dense areas; in low density use
20 seats buses instead of existing 40 seaters.
Privatization Action Plan
 Switch from gasoline tax to currently 1.5c per mileage fee of
driving. Allow higher fees on congested roads all
electronically collect.
 End subsidy of transit. Transit federal funding aimed at
specific objectives like reduce pollution or congestion. User
fees will enable privatization of transit. Beware of
monopolistic power.
 Federal funds should be based on user fees collected to
encourage transit agencies to improve service. Rely more on
user fees and less on general ledger.
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Conclusions
 Public ownership of transit led to decline of productivity, increase
in costs, and insignificant improve in output. 90% of federal
subsidies are absorbed by higher wages of monopolistic unionized
workers. Monopolistic transit leads to strong political lobby groups
that promote expensive construction, transit contractors,
manufacturing of railcars.
 Privatization will lead to responsiveness to users, less better
service, and lower costs.
O’Toole Randal, Fixing transit: The Case for Privatization”, Policy Analysis 670, CATO Institute,
November 10, 2010.
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