A Better Way For Transit

Commentary, Transportation, Peter Holle

Fewer Canadians are taking the bus. Before mass transit reaches the end of the line, we should look at solutions that have worked elsewhere. The demographic indicators are not favourable. Our cities are dispersing, as more people choose the suburban and country lifestyle. Rising incomes allow us this option, along with the comfortable vehicles that make increasing mobility possible. Malls and big box stores outside the core offer lower prices, more selection, and free parking. The Internet hastens the “death of distance” by allowing workplaces to thrive outside the traditional commerce of a downtown.

Cities with lower density present an almost insurmountable challenge for mass transit systems. As a stretched territory crimps frequent service, and transfer headaches multiply, public bus transport becomes too complicated and slow. The flexible and convenient car wins hands down.

Recent labour disruptions in several cities, including Calgary, Ottawa and Vancouver, are exacerbating the transit industry’s falling market share. Declines in revenue increase the pressure for higher fares and service reductions, or precisely the opposite of what’s needed to increase bus ridership. Wouldn’t it be wiser to lower fares and increase service levels to compete with cars?

Most of the public transit industry outside North America has done exactly that by moving to transit systems based on the “purchaser-provider split.” In European cities like London, Copenhagen and Stockholm, a public agency specifies service levels and then purchases them from competing vendors who provide the wheels, typically through multi-year contracts. In short, the service remains a public commitment but is competitively delivered by a mix of private or in-house providers. Routes that cannot cover their operating costs receive public support through a system known as “least-cost subsidy.” Here, bidders offer to operate the service specified in exchange for a public subsidy. The one who arranges to deliver the service for the lowest subsidy, wins the contract. In this scenario, lower fares and better service can both happen.

Splitting production from finance creates strong incentives for efficiency that do not exist in the traditional monopoly model found in Canadian cities. Consider the experience of London Transport, the public agency that manages more than 6,000 buses in the British capital’s transit system, the world’s largest. Between 1970 and 1985, bus costs per vehicle kilometre rose 79%. In response, lawmakers began converting the sprawling system into the competitive model. Public operators were reorganized into separate commercial entities and required to submit bids to London Transport along with private operators.

“We started small and learned from our mistakes as we went along,” says Nick Newton, who, as a London Transport manager, oversaw much of the transformation. Each year, a larger proportion of the system was made subject to competitive bidding. Tony Blair’s Labour government completed the conversion in 2000. Creating a level playing field between public and private operators presented one obstacle. Initially, in-house operators won six of the 12 routes submitted to competition. But an internal audit showed that three of the public bids were below cost, because they failed to account for capital costs and the need to generate a return on the money invested. As a result, the public operator was required to include a minimum return of 2.5% of capital.

Contracts are for three years, but contain a simple performance criterion. If the operator achieves a real cost reduction of 5%, the contract is extended for two years. This incentive has produced spectacular results by public sector standards. Prior to the beginning of the purchaser/provider split in 1989, all routes required a public subsidy; today, most are subsidy-free profit-makers. Mr. Newton cites London’s route 24, which originally covered 85% of its operating costs. In the competitive mode, with lower costs and better service, it eventually took in 125% of operating costs. System wide, the costs per vehicle kilometre fell by 51% from 1985 to 2000. This allowed the public system to expand service — also measured in vehicle kilometres — by 32%, while reducing expenditures by 35%. Ridership has reached its highest level in 20 years. The turnaround has saved London Transport an estimated $11-billion.

Some critics claim that these massive efficiencies were bought at the expense of lower pay for bus drivers. In fact, the competitive model pays drivers the same amount as before (sometimes offering them profit sharing, to boot) but requires them to work smarter. They spend less time, for example, waiting around in canteens. Rigid work rules are gone. Layers of management fat have been peeled away, and building and maintenance facilities rationalized. Pre-World War II buses had wood trim on their exteriors and had to park indoors at night to protect them from the elements. Today, route operators store buses without wood trim outside or in empty car parks at supermarkets or subway stations. Ten garages disappeared, shrinking operating costs while allowing the sale of valuable real estate for other uses.

Mr. Newton, now an executive at the Strategic Rail Authority, the government agency that franchises all of Britain’s national passenger rail services, sums up London Transport’s new look: “The system is now run for the people; it has become relevant to the public again.”

Britain’s Labour government aside, sophisticated social democratic countries in Scandinavia have adopted the competitive transit model as well. Denmark’s parliament mandated it in 1989, converting Copenhagen’s entire bus system by 1995. By 1999, cost per vehicle kilometre had been reduced by 24%, saving US$400-million. After years of decline, higher service levels in the Danish capital have led to a 9% increase in ridership. In Stockholm, parliament required conversion of all bus services to competitive tendering beginning in 1991. Ridership is at a record high while costs per vehicle kilometre have fallen 20%. The net savings have so far totalled more than $1.5-billion.

Transit’s steady market share decline in Canada is not inevitable and can be reversed. The European successes provide a road map for better service, lower prices and fuller buses.