This is last one of my reflections on David Levinson’s important contribution via CityLab on How to Make Mass Transit Funding Sustainable Once and For All.

My responses so far:

Part 1: Institutional Structure
Part 2: Competitive Tendering
Part 3: Farecards
Part 4: Capital Cost Recovery Mic Drop
Part 5: Private equity

Today we take up point 7 in his list on his list:

7. Since transit benefits local areas, it should be primarily locally funded and managed. Federal funding for transit has distorted investment to be capital intensive — favoring ribbon-cuttings for politicians — while resulting in neglect for local operations. While the rational local transit organization will take advantage of federal largesse, there is no good reason for federal involvement. Over the next few transportation legislative cycles, it is likely that federal grant programs (funding) will be transformed into loans (financing). Mass transit utilities would be better adapted to this new environment.

Ok, so I’m torn here because I am usually the only urban scholar who says openly that walking, biking, and transit advocates have overstated their claims to global benefits in trying to make a case for their slice of federal dollars, and I applaud Levinson for even saying so. Being brilliant is easy for somebody like Levinson. Being brave enough to say something this politically unpopular with the vast majority of scholars in your field? That’s a lot harder, and I’m grateful for his not leaving me to be the only one critical of my field’s claims about our entitlement to crawl into the federal taxpayers’ pockets.

That said, I’m not sure I am on board. I seriously do not know what I think here.

I ruffled everybody’s feathers with this discussion awhile ago on this blog, and I’ve published discussions on what the changes in federal pots of money mean for local transit, so I don’t feel the need to repeat myself. Here are some:

• Would Transit Be Better off With Devolution
• The federal case for transit bank
• The anti-federalist case for transit funding

Now, why do I waffle? Well, first, many problems are local problems if you really come down to it.

If there is no compelling need for federal transit policy, there is similarly no compelling need for housing, education, or urban development policies, either. IOW, do we want to have national urban policy in place, or do we just let 1,000 flowers bloom and say to hell with it? Most places where transit is really truly financially viable in the manner Levinson envisions are places that can, in fact, leverage the funding to build and run their own systems, and as I speculated in previous articles, might be better off so doing.

In addition, Levinson is right; passing along the capital costs to others is a recipe for an overcapitalized system.

The real pain comes in thinking about those places that don’t have deep pockets. Without difficult-to-justify federal capital subsidies, there is no Portland as it exists now, and while I die inside every time one of my starry-eyed students/philosopher-kings advocates for yet another slow light rail in Los Angeles “because Portland!”, federal subsidies have given the US truly important social experiments with transit, given how the feds shoveled out for BART, Portland, and DC’s metro. Nope it wasn’t particularly just or rational, but it sure has been interesting and transformative, and for the better. In concert with transit experiments in Europe, Asia, and South America, it’s mattered a lot to urban scholarship.

This type of risk-taking strikes me as infinitely reasonable, and while we could try to shove all that money into an “urban experimentation lab fund” and let the folks at DARPA take their whack, I’m not sure social experimentation really works like that. I think it’s a good deal messier, more incremental, and grounded in the serendipities of real life than rational planning for experimentation might be. If one of the principles of social intervention is a law unintended consequences, then some of those unintended consequences are likely to be good just like some are troubling.

It’s wasteful to some degree, and that’s irritating, but I guess I’m not that bothered by it all. I think inquiry and experimentation matters, and what happened with Portland isn’t stupid or wasteful, even if many of the people trying to copy it out of context are doing stupid things: the fact they see something real and worth replicating strikes me as valuable.

Which leads me to my point: the feds can and probably should intervene in strategic ways in cities, particularly when cities are at Portland’s scale. If we really do believe that there are normatively better ways for cities to be, then there is a role for federal governments to play in setting standards and incentives. Either that, or the nation-state is nothing but a military and monetary policy entity. Is that what we want? Or do we want federal leadership? (I think we want both metropolitan and federal leadership, and it means a rather messy trading back-and-forth, but I’ve not got an actual argument to support that inkling.)

Well, that’s all I got. My best to Levinson and the folks at CityLab for producing something interesting. The field needs more of it, and I had a great deal of fun reflecting on the piece.

I’m almost done with my responses to David Levinson’s important contribution via CityLab on How to Make Mass Transit Funding Sustainable Once and For All.

My responses so far:

• Part 1: Institutional Structure
• Part 2: Competitive Tendering
• Part 3: Farecards and Technology
• Part 4: Capital Cost Recovery Mic Drop and the 490 Burger Kings Problem

Today we take up point 6 in his list of seven points, even though I’m only part 5, as I skipped some, because I FELT LIKE IT, OK?

Point 6:

6. Utilities and transportation services can use private equity and bond markets to unlock value. If Uber is valued at $17 billion (or even one-tenth that), how much capital would a well-governed mass transit utility with actual users be able to raise?

Wheee! Money!!!

First, Uber is probably over-valued, but Levinson admits that. Second, yes, we know we have a lot of assets wrapped up in transit, but not all of them are useful. If it’s true that US operators overcapitalize, that means that while we certainly have a lot of productive assets in transit, some of them are not particularly productive and will just go to the great depreciation bin in the sky rather than make anybody any serious coin. This is why some of us get so shouty about bad public investments.

For somebody like Levinson, retiring those assets or redeploying them elsewhere is what should happen because continuing to operate unproductive assets is throwing good money after bad, as people with more sense about money than me say.

However, I’m going to say something that is going to make errrbody unhappy: transit’s assets are worth more as assets because we all know the taxpayer will buy them back if private sector managers allow things to go pear-shaped. If there is something that, over the course of its history, has been ‘too big to fail’, it is transit. From the municipal bail-outs of holding companies in the mid 20th century to the devastating strikes that occurred before then, disrupting transit service in the pre-auto world paid out well for both capital and labor. It was textbook Ralph Miliband. So we should think Uber-level values with a bail-out and buy-out guarantee–which is basically what just about all major infrastructure transfers to the private sector turn out to be given enough time, save for some examples in Asia.

So just as competitive bidding has worked well for London, their public-private partnership on the rail side didn’t go all that well. The Metronet-London Underground deal came about in 1998 in part because the transit provider, Transport for London, was financially stretched and their capital stock decayed. This is a big deal: taking over large capital stocks is risky, let alone doing so because you have to bail somebody out. It means you probably have crumbling assets with an uncertain price tag to fix. We aren’t talking about water or electricity infrastructure nobody sees, and you can let everything look a bit shabby even if you do draw the line at serious threats to service. A big part of what we envision with private transit companies are clean, well-maintained stations and vehicles, and that costs.

Private companies seek to shift the risk of acquiring those assets back onto the public sector to protect themselves from default during construction and reinvestment. Those guarantees can effectively shift the risks of cost overruns and poor management right back onto taxpayers. Metronet ran into similar capital cost over-runs that plague public agencies. On a 30 year contract, they came back to the agency just a few years into the contract arguing that the scope of the renovation work had to be reduced for them to stay solvent. The result is that in 2009, the company went into insolvency administration, and in time the Mayor of London ordered the buyout of Metronet’s contract, which placed the debt back onto the English public and cost taxpayers an additional 100 to 410 million pounds. While newspapers blamed the public sector partner for failing to manage the contracts properly, the public audit on the deal cited Metronet’s own corporate governance and poor management as the primary reason for the failed partnership.

Just to argue the point about how hard it is to predict how these deals can go, another private member of the original 1998 partnership, Tube Lines, experienced none of the cost over-runs, delivered on its agreements, and maintained its contract until 2010 when it, too, was purchased back by the public agency after a dispute over the contract.

So for all practical purposes, the public-private-partnership shimmy–sell off assets for a quick cash infusion, take them back when the company doesn’t want ’em–already allows governments to draw on equity. Governments really are the lowest rate borrowers, due to their ability to fall back on taxpayers, and there are costs to transferring ownership from public agencies to private entities, let alone maintaining the relationships. As a result I’m not sure that private sector equity makes a huge difference here.

Finally, would it kill us to have some transit space remain public space? Penn Station is a valuable building, but some of its value comes from its location and use, and some comes from knowing we own it and some dickweed Frank McCourt/Donald Sterling landlord isn’t going to put the squeeze on us. I value that knowledge, don’t you?

Edited to add: David Levisnon notes in his response that Penn Station was privately owned and destroyed, and, that Grand Central Station is still privately owned. We can’t be anywhere, apparently, where a landlord can’t kick us out unless it’s in a home we own!

Ok, continuing on with my responses to David Levinson’s important contribution via CityLab on How to Make Mass Transit Funding Sustainable Once and For All. The series so far:

Part 1: Institutional Structure
Part 2: Competitive Tendering
Part 3: Farecards

and today, Part 4, is the capital cost recovery mic drop:

4. Capital costs for new or rebuilt transit systems should be recovered from land value capture. Transit services create value they cannot fully capture themselves through the farebox (though they would capture more of this with higher fares). That value spills over to nearby land owners, whose property value increases due to the accessibility transit provides and thus the higher rents they can charge. The amount of value captured by the system signals whether the investment is worth making. If some of that value were captured, more revenue would be available to make investments. Transit utilities should have the authority to develop land at stops and stations, and to develop air rights over their tracks, and to contract with private developers to coordinate station locations. Local units of government desiring routes and stations should have the authority to implement local taxes to subsidize the transit utility for the cost of building the line. But the line should only be built if it can at least break even operationally. If the route cannot be funded from land value capture and farebox revenues, it should not be built (emphasis mine).

FWABOOOM!

Yeah, that’s a mic drop. Levinson here is a getting pretty emphatic, so much so that he contradicts himself a bit, but not intentionally, I don’t think. Levinson is arguing from the vantage point of the utility. Throughout the rest of the piece, he says that if jurisdictions want to contract for negative-revenue lines, then fine. If taxpayers have a democratic preference for transit, then so be it. His last statement here is a bit of an overstatement based on what he says elsewhere. That’s not as clear as it might be here because he uses general language for what I think is actually a mode-specific set of problems that are easily fixed with good risk assessment on the part of bond issuers and developers.

To wit: so let’s say that Jurisdiction A wants service. This is likely to be a money loser, given the people who live in Jurisdiction A. Jurisdiction A pays for bus service. If, eventually, Jurisdiction A decides they just don’t want service anymore, Transit Utility takes its buses and employs them elsewhere: no blood, no foul. If Transit Utility has been sucked into a big, immovable capital investment in Jurisdiction A and suddenly it doesn’t want to sponsor service anymore, then that is a problem, although some of the rolling stock can certainly go elsewhere.

What Levinson is trying to get at here simply concerns the “eyes bigger than market” problem that plenty of cities get into over things like stadium deals. If you actually live in a world where land taxes aren’t distorted (which I don’t, so there’s that), letting utilities buy and develop around train stations makes abundant sense. Here’s the part of the equation that I think really matters: if you require local jurisdictions to provide a portion of the capital and operating subsidies for service, they then have every incentive (instead of the incentive they have now), to alter their local zoning and approvals process ahead of time so that development around station areas can actually occur.

Right now, you have jurisdictions with people who are very avid about wanting rail transit. We must have rail now. We also have the people who wind up living next to the rail line, and some of them are much less avid. They, too, have influence on city hall. So it’s entirely too possible right at the moment, in many American cities, for suburban districts to demand very expensive investments and then only allow park-and-ride facilities by them because our residents are both pro-transit and anti-development. Well, screw that. (That? That’s a technical policy prescription). You want a train? Fine. Either let us build 70 100-story apartment complexes next to the station (if it pencils for us) or you pay whatever portion of the capital and operating costs that apartment complex would have covered for the utility. Your choice. Again, rich districts can have their single-acre lots if they want, and they can have their trains if they want them–even if nobody wants to take the train and they just use it as decoration. They just can’t stick the rest of us with the bills for those trains. That is what Levinson wants to get here. It’s not out of the question that some jurisdictions would be happier paying for negative revenue lines than they would be allowing development. I don’t think they should be allowed to get away with that, but zoning is still a local jurisdictional power and it should be. But if they want to pull that crap, it should be their financial problem to grapple with, not everybody else’s. Most jurisdictions would see the writing on the wall, stop playing games, and get the zoning and approvals done fast. Faster development near stations means more ridership faster.

In my example, you can see the implicit assumptions about cross-subsidies that Levinson is making here. Even if your train station gets 5 customers a day, a public utility with land development rights might actually be willing to operate service there if they can get real estate development to pencil out.

One last point he doesn’t discuss concerns “coordinating development” at stops. This point slips by, and it’s unfortunate because I like it very much because I think it’s the answer to what I call the “490 Burger Kings” problem. I’m not sure what he means here, but I do know that I would prefer to see far more coordinated land use planning and real estate development at the regional scale. Why? It’s complicated, which is why Levinson doesn’t get into it, but it’s important. So one way for a variety of land uses to be transit-accessible is to just have everywhere be accessible. Lots of transit advocates would love that, and I would, too, but it’s an expensive idea. One thing I have my undergrads do in class is that I ask them about their junior high and high school after school activities, and they range from tae kwon do, horseback riding, cello lessons, yoga, rock-climbing, etc. Then I ask them to route those activities via public transit. It’s illustrative: it’s really hard to do most of those trips on public transit. I can get you to 490 Burger Kings on LA’s transit, but I’ll be damned if I can get you to a geriatrician in anything less than 2.5 hours and three transfers (How families work through these questions are interesting: I suspect in some places, if a kid can’t take himself to activity on transit, he doesn’t do the activity.)

I’m getting to the idea that while some land uses and businesses are things that really flourish at all station areas, we could increase the usefulness of TOD if we could include a diversity of activities and businesses throughout the system. Nope, not every TOD needs a zumba studio, but it would be nice if a few did have them. Yep, cafes, Famima-type grabby-food stores? Those you probably want at all stations. Tae kwon do? Nah. But at some stations, yes. Because people spend a lot of time in leisure and entertainment activities, and if you could suss that, you’d increase the value of the transit system without having to extend the system everywhere it currently is not.

Today I continue with my response to David Levinson’s How to Make Mass Transit Sustainable Once and For All. Monday I discussed the institutional structure Levinson suggested. Tuesday I discussed competitive tendering.

Today I want to take up smart cards, as this suggestion from Levinson confuses me a bit:

3. Transit utilities should require smart card use and encourage seasonal passes (perhaps subsidized by employers and universities as a benefit) to lower the marginal cost paid by transit users, reduce boarding times, establish a more stable revenue base, and increase ridership. This is much like unlimited minutes (or bandwidth) by your telecommunications provider.

Most transit companies already do require smart card use, and I’m not sure what seasonal passes get anybody, even providers,that monthly or weekly passes don’t, except if you buy for longer periods of time, the transit company gets to use your money longer than if you buy week-by-week. The only thing I think might matter here are school-year passes that, if you purchase them in August, you can a better deal than if you buy month-by-month, and you don’t necessarily want a full yearly pass. It probably makes more sense, for example, for me to buy a pass like that than my yearly pass because I don’t commute much in the summer. Unless I am missing something, this is a minor point.

There are issues surrounding technology that I strongly suspect Levinson is thinking about but not explaining due to the format’s brevity requirements, and fare cards are a good example. We know that transit is a field that could benefit substantially from technology. But, privatization advocates argue, quangos have very little incentive to invest in technology that serves customers since they have little reason to fret about customer service. As a result, transit providers tend to invest in technologies that make their lives easier but do not prioritize technology adoption that serves passengers. Farecard actually are an example of that. Transit agencies use electronic fare systems to make collecting fares much more efficient with smart cards. As Levinson notes, these make boarding much faster and helps agencies stick to on-time performance goals since you don’t have people fumbling with change.

In so doing, however, different transit agencies within regions have adopted myriad different smart cards and card readers, and few have cards that work across multiple systems. As a result, farecards are usually much less easy for passengers to use across systems than the technologies really should allow. For transit managers, farecards for their own systems serve their ends: lower dwell times and easier revenue collection. But for individual agency managers, making the cards readable across multiple transit systems represents extra work and, probably, concessions that benefit the passenger rather than their agency. The coordination would require managers to negotiate with other agencies, and perhaps even change their own agency’s reader technologies to suit other agencies’, all to help customers. As a result, the innovation for customers’ benefit takes quite some time to occur, if it happens at all.

Privatization advocates point to how easily similar information and coordination problems have been resolved in the private sector, such as with different banks sharing automated teller machines (ATMs), in ways that critically improve customer service. Skeptics of privatization note that these perceived benefits of privatization represent cherrypicked examples, and that many of the so-called innovations of the private sector took far longer than privatization advocates allow, and that competition does not always lead to innovation or provide consumers with better technologies or more compatible systems. There are many examples of private companies, particularly software companies, that attempt to dominate their markets by refusing to make their products usable with their competitors’ products, to the detriment of consumers.

As I noted yesterday, I am taking some time to respond to David Levinson’s incredibly interesting piece on How to Make Mass Transit Sustainable Once and For All.

Yesterday I took up the institutional structure Levinson suggested.

Today I’ll start in the seven points. The first is competitive tendering:

The transit utility can lower costs by competitive tendering for routes. Just as bus companies today don’t manufacture their own vehicles, there is no economic requirement they run the buses themselves. The London model of bus franchises is instructive. Private firms bid to provide service on routes (and collect revenue) for a franchise period. If the route earns profits, they bid a positive amount. If the route loses money, they bid on how much subsidy is required for them to be willing to operate it. Transport for London monitors quality, collects fares (via the universal Oyster card), determines routes, and manages stops, stations, signage, and branding, so it appears as one unified system to riders. Bus ridership in London has risen significantly since competitive tendering.

Competitive tendering works in many city services, so the idea that urban transit providers can contract out for service would not be unprecedented. Many cities, including my own beloved Los Angeles, contract out a million things, including sanitation services, and it all seems to work fine enough. Levinson’s description is so beautifully written and straightforward that I wish I’d written it so I could include it in the chapter on public transit I just wrote.

That said, Levinson does a sloppy here, and he’s a super-genius so he knows better. Yes, ridership in London has risen significantly, but so has population. We can’t conclude that contracting out has affected ridership without controlling for population change and other possible contributing factors, like immigration. As it is, this is post hoc ergo proper hoc arguing, and we need better analysis to conclude that privatization has actually resulted in the sort of service quality improvements that prompted higher ridership over what would have happened anyway. But it does show that contractors haven’t just made a deal and completely gutted service, which is one of the big fears. (And there are precedents for that worry: plenty of Santiago’s bus contractors act like big jerks, rather routinely. Capitalists are seldom worried about labor or customers; they worry about other capitalists.)

Also, London is a pretty exceptional transit market where you have a strong combination of population scale, density and origin-destination proximity. That means there is a transit market there, and lots of reasons for competitive bidding to actually exist. A better analogue for many American transit markets might be paratransit services, many of which are competitively tendered now, ostensibly. I say ostensibly because the efficiency gains you get from competitive bidding result by prompting private sector bidders to discipline themselves on costs, and that happens only if you have truly competitive bidding, and in many markets, you don’t. Again returning to the question of returns to scale I brought up yesterday, you don’t just decide at a moment’s notice you are going to bid on providing bus service to London. You need a fleet. You need operators. You can’t just promise you are going to get them. And that means there are a limited number of legitimate competitors where bidding involves high barriers to entry, such as with high capital costs, like transit.

One of the big controversies over high speed rail construction in California has been that a select group of contractors preparing a bid for the gigantic sugar ocean of HSR construction contracts will receive $4 million stipends just to prepare a bid. You would think that a shot at hundreds of billions of dollars coming in your direction would get companies in the race. But there are strong reasons for paying competitors to compete if you are worried that you won’t get enough bidders because if you don’t get enough bids, and you are pressed to deliver something, that bidding turns into a lop-sided negotiation where the granter does not necessarily hold much leverage. DARPA, for example, occasionally pays stipends to those bidding on particularly complicated or capital-intensive projects.

And yes, while there are good reasons to do it, the arrangement gets back-scratchy in ways that should worry us. So it’s pretty safe to say that London’s competitive bidding would be very different from, say, the bidding that occurs in Boise, Idaho, along with the worries about back scratchiness. Plenty of paratransit customers can tell you: the service can range from terrific to terrible, and just about all of it is expensive. (With apologies to paratransit operators in Boise, who may be wonderful for all I know.) In paratransit’s case, the service is still supplied because it’s required by law. But that’s not the case with contracted buses, and it’s possible to wind up with less service this way.

Second, going to back to Levinson’s own public utility example yesterday, cable companies are a terrific example of franchise bidders who treat their individual customers like crap once they get franchises in place. So the cable guy may, or may not, come between 9 am and 3 pm. Maybe. If he feels like it.

And that’s a really the key point for competitive tendering and service quality gains you hope to achieve: if you are going to to do this, you need to be clear on service expectations. The reason the cable guy gets to treat you like crap is that’s not part of the franchise agreement which centers on channels and rights for particular sports events–not customer service response times. You want cable, you wait for the guy. It’s not like you can go with a better company; you are not really the customer they have to compete for.

In a not-particularly-competitive bidding environment, private sector providers may not treat customers all that well, either, if they have the option of naming the price they want (negative bid) for supplying service the city wants. And the city may not award bids to the best customer servers: think of a company that a) is an easy-peezy contractor, lots of goodwill and hiring each other back and forth, and super-easy contract to manage but b) treats customers badly versus a company that is harder to manage because it’s always demanding things (“my customers need better stops!”, etc) but treats passengers well. The research on public administration suggests a competition between those two does not necessarily go the public’s way. Why? Yes, customers have political oversight and they can complain, but that may not be enough to overcome the internal constituency of the contract managers in the bureaucracy. Watch all seasons of “Yes, Minister.”

Finally, it may be easier from the private company’s perspective to simply bill the city than compete for customers. In theory, and with sufficient competition, they would have the incentive to compete on multiple dimensions: costs, contractual ease, customer service. But in noncompetitive environments in a winner-take-all bid, just one of those can win out, and it doesn’t have to be the first or the last.

If you are interesting in contracting, the University of Maryland’s Hiro Iseki has a lot of papers on the subject.