Racing Public Transport to the Bottom

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dubtransThe decision by the National Transport Authority (NTA) to franchise out 10 percent of Dublin Bus and Bus Eireann routes for private tendering, which could cause industrial disruption, signals the start of the race-to-the-bottom in the public transport sector.

One of the more interesting aspects is that the NTA did not model their proposals, did not produce a business impact-assessment, did not undertake a cost-benefit analysis to justify the need for, or benefits from for franchising.  Now just think on that for a moment.  If a private sector company decided it was going to franchise or outsource 10 percent of its business, there would be cost-benefit analyses and business –impact assessments all over the place – upsides, downsides, alternatives.  Any senior management attempting to railroad such a franchise initiative through without such analyses would be clearing out their desks by noon.

What the NTA did do was commission Ernst & Young (E&Y) to provide an analysis.  And in keeping with that time-honoured tradition of providing the conclusion that the commissioning agency desires, E&Y did not disappoint (just as they didn’t disappoint Anglo-Irish Bank).  So what was E&Y’s main argument?  That franchising delivers efficiencies and cost reductions.  What did they base this on?  One academic study.

The OECD’s Privatisation and Regulation of Urban Transit Systems which E&Y relied on is certainly a comprehensive study, gathering evidence from a range of countries that purport to show the efficiency of privatisation of public transport systems.  The problem with this approach is that you can find academic studies producing a number of conflicting and contradictory conclusions over the same proposition.

For instance, the OECD study claimed that in Sweden between 1987 and 1993, following privatisation, total bus transport costs fell by 13 percent.  However, a more recent study found there is no evidence that the Swedish model of competitive tendering has reduced costs. Rather, the cost per passenger trip increased well above the rate of inflation while efficiency levels fell by over 30 percent.  This study was available to E&Y; they decided not to present this information.

Or how about this: a wide ranging international study of bus services covered 73 cities with different types of bus operators in Europe, North America, Latin America Asia and the Middle East.   It found no significant difference in efficiency between public or private operators:

‘Statistical tests do not show any significance as regards relationship between efficiency and the type of operator….The efficient cities … are spread over different continents and public administration styles – Anglo-Saxon, Nordic and bureaucratic – and they are not concentrated in any specific type of operator.’

I could go on an on – but you get the point.  Pull out an academic study that supports your preconceived position, claim this is what the ‘experts’ find, and ignore all other studies and experts who show something different – that approach hardly instils confidence.

Actually, E&Y gave the game away in a wonderful paragraph:

‘The key advantages associated with a move . . .  to competitive tendering stem from elementary economic theory in relation to the effects of competitive pressures and market discipline. In essence, by putting the contract out to tender, market forces are brought to bear to reveal the most economically efficient provider, thereby leading to lower costs and – all things equal – a reduced requirement for subvention.’

There are two things here:  first, is ‘elementary economic theory’.  There you have it – ‘my ancient neo-classical economics professor said competition is best, so let’s privatise public transport – and ,hey, why not primary education . . . ‘  Never mind that this elementary economic theory is highly disputed – especially in public services;  if you repeat it enough times you don’t have to bother with evidence or facts.

No wonder E&Y didn’t include the new wave sweeping through Europe – re-municipalisation of transport systems and public services in general.  Local /regional governments – Germany, France, UK to name some – that had previously privatised their public transport are taking them into public control because of poor service and high fares.  These places tried elementary economic theory – it didn’t work out.

But it’s the ‘reduce subvention’ argument that is the stunner.

 ‘A comparative analysis of subvention levels across Europe indicated that levels of public transport subvention vary between 35 and 60 percent of revenue. When all State interventions are taken into account, the level of subvention to Dublin Bus is at the upper end of the range.’

This is an outrageous assertion.  The fact is that Dublin has a rock-bottom level of public subsidy.

pubsub

This comes from two studies (here and here).   Rather than being at the upper end, the subsidy to Dublin bus transport is well below that of other cities.

  •  If the subvention were increased to the average of the other cities, Dublin Bus could be receiving an additional €175 million.
  • If the subsidy increased to the London level, Dublin Bus could be receiving an additional €53 million.

An average EU subvention could transform bus services in the Dublin area –substantial expansion in services combined with fare reductions.  In addition, given that bus transport is highly labour intensive, an expansion of services would return a considerable amount of that subvention to the Exchequer through additional tax revenue.

So how does E&Y justify the assertion that the subsidy to Dublin Bus is at the upper-range of subsidies throughout Europe?  They throw in everything and the kitchen sink:  Department of Social Protection payment for Free Travel Scheme, tax relief for Taxsaver scheme, emergency funding, etc.). E&Y includes revenues that are not part of a subvention comparison; for instance, they didn’t include tax breaks and social protection payments in other cities. They are deliberately not comparing like-with-like in order to justify a reduction in the subvention to a public transport system that is already starving of support.

Ok, so the NTA and the E&Y didn’t model their proposals.  Let’s try it ourselves – admittedly, a short-order back of the envelope job.

In Dublin Bus there are three main areas of expenditure:  employee compensation (wages, pension contributions, PRSI), non-payroll expenditure (fuel, office, depot, etc.) and investment).  Here’s how it breaks down.

dbExpenNow let’s assume that it is not the NTA’s intention to see wages and working conditions worsen but they want to achieve a 15 percent reduction in costs.  67 percent of total costs come from employee compensation.  Excluding this leaves the cost of materials and services.  However some of the cost here is fixed.  For instance, fuel makes up 40 percent of the cost of materials and services.  There is little left over to achieve savings.  A 15 percent savings would mean nearly wiping out all spending on non-fixed materials and services.

Of course, the NTA is only franchising out routes.  But since they didn’t model the cost per route, we don’t know where the savings can be made.  Will private operators increase productivity without hitting wages by running more buses per route, picking up more customers, driving faster?  Will they benefit from hidden subsidies from Dublin Bus (for instance, will they pay the monitoring and compliance costs which are part of the franchising costs)?  All these are basic questions which are not only not answered, they were not even asked.

Let’s cut to the chase:  the savings will come from driving down wages and working conditions. CIE workers transferring to private sector operators have been assured they will keep their pay and conditions, in particular pensions (though this is disputed).  However, what of employees who did not work for CIE?  Will they have the same wages? Te same working conditions?  Will they have a defined benefit scheme operated by their employer?  Will they have the right to collective bargaining?  The only way to make substantial savings through franchising is to embark on a race-to-the-bottom – both for workers and service quality.

This is no way to run a modern public transport system in a European capital.

There is still enough time to salvage this wreckage and put it right.  At the very least, the NTA could conduct a detailed cost-benefit analysis at both company and route level; one way to do this is through a simulated franchising exercise – to see if there are savings and where those savings come from (if they come from wage, working condition and/or service depression – well, that tells a story).

Or they could go further and become a leading European public transport agency:

  • Examine the operations in other cities (and not just Britain – there is a Europe beyond Britain) to see how they do it, what we can learn and how we can apply best practice here:  all done openly and publicly
  • Explore new and innovative public transport options from train, bus, biking and walking – there are so many ideas being put into practice everywhere:  check out here and here; and if you want to really push out the envelope,try this out.
  • Develop a new economic and social model showing the costs and benefits from both massive reductions in fares through higher subventions (the savings to the public transport user would be spent in the wider economy), environmental benefits, benefits to specific communities, individual health benefits – why not an interactive website where you can compare the savings moving from car to public transport (did you know that the total cost of private car use is between €10,000 and €22,000 per year?).

The NTA could transform itself into a dynamic and innovative agency pioneering public transport beyond the current frontier.  This requires political and corporate vision.  This would be a far greater contribution to the economy and society than producing tired, out-of-date and economically damaging privatisation plans.

And the first step:  withdraw the franchising proposals and start over in a better and more productive place.

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Note:  Readers might be interested in this publication from the European Federation of Public Services Union which looks at public and private sector efficiency.

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