Public Transit and Privatization: Pros and Cons

Private Operators Are Changing How Public Transportation Is Run

People on a bus
(Cultura/Zero Creatives/Getty Images)

In the United States, most public transit systems are operated by public agencies. As a result, public transit employees tend to enjoy excellent wages, benefits, and retirement plans. In an effort to cut costs, some public transit agencies have contracted out their operations to private operators. Contracting out can take one of two forms.

Private Company Operates the Service But the Public Agency Plans the Service

In this scenario, the public agency would tender a request for proposals (RFP) for the operation of some or all of their transit services, and private companies would bid on them.

For agencies that have more than one mode of transit, different companies could operate different modes. In fact, some cities may divide up their bus routes into different groups which are divided in between multiple private operators.

Typically, the transit authority retains ownership of the vehicles; and in this form, the transit authority would provide the private operator with the routes and schedules that they are to operate. The major advantage of contracting out operations in this manner is to save money. Traditionally, economic efficiency was achieved due to the fact that the workforce of privately owned transit operators was not unionized. Now, however, the unionization rates of these operators approaches that of traditional self-run systems, although wages may still be lower. Today, the majority of financial savings are likely to accrue from not having to pay large public sector healthcare and retirement benefits to the contracted-out employees.

The major disadvantage of contracting out is a belief that the employees hired by private companies are not as good as ones at public agencies, perhaps due to less rigorous hiring standards and lower compensation. If true, then such things as accident and complaint rates should be higher for service run by private companies than they would be for public agencies.

Although several major transit systems operate both contracted-out and self-operated routes and would be able to test this hypothesis, it has been difficult to get the needed information.

Transit agencies that contract out all their operations in this manner include ones in Phoenix, Las Vegas, and Honolulu. Other transit agencies that contract out only a portion of their routes include ones in Denver; Orange County, CA; and Los Angeles. Data from the National Transit Database suggest a relationship between contracting out and cost per revenue hour of operation, as systems we looked at that contracted out more of their service had a lower operating cost than the ones who contracted out less. 

Private Company Both Operates and Plans the Service

In this arrangement, more common in other countries, especially parts of Australia and England outside of London, private companies design and operate their own transit systems in the same jurisdiction as other companies doing the same thing. As a result, they compete against each other for transit patronage in much the same way that airlines compete for passengers. The government role is usually reduced to offering one or more bus companies subsidies to provide service to important areas that are uneconomical to serve.

The major advantage of operating service in this manner is that private companies will be able to serve the market as economically efficiently as possible without as much of the political interference that usually prevents public transit agencies from being run as a business. Private operators will be able to change routes, schedules, and fares as frequently as necessary without the need for lengthy public hearings and political approval. Another advantage is the same as the first option above: as private operators pay their employees less in wages and benefits than the public sector does, the cost of operating the service is lower.

These advantages are offset by two major disadvantages. First, if businesses operate transit networks in order to make a profit, then they will only serve profitable routes and times.

The government will have to pay them to operate service at unprofitable times and to unprofitable places; the result could well be an increase in subsidization required, as the government will have to pay to operate essential lifelines services without the benefit of the fare revenue collected from busy routes. Because, as private businesses, they would naturally want to make as much money as possible, they are likely to want to force as many people into the bus at once as possible. Headways will be increased to the bare minimum required to avoid pass-ups, and fares will likely increase.

Second, passenger confusion will increase as there will likely not be one place where information about all public transit options is provided. A private company certainly has no incentive to provide details about his competitor's services, and will likely leave them off any transit maps the company makes. The passenger will be left thinking that no public transit options exist in a particular area that is only served by the competitor. Of course, public transit riders in Southern California are well aware of this problem, as maps from some of the municipal transit agencies make no mention of transit options provided by other agencies in their area. 

Outlook for Privatization of Public Transit

Due to the recession and the subsequent drain in financing for transit systems, which has caused the vast majority of them to raise fares, cut service, or both, the privatization of public transit operations is likely to continue and even to accelerate in the United States. However, due to public policies that aim to ensure transit access for the poor, this privatization is likely to take the form of the first variety described above, so that the public agency can maintain adequate service coverage and low fares.