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Getting Around New York

from the magazine

Getting Around New York

Market-Based Mass Transit Summer 1993

New York City’s traffic problem is unique in the United States. Because it is situated mostly on a small, densely populated group of islands, the city has a transportation network characterized by choke points and congestion. The cost and difficulty of moving people and goods into, around, and out of the city is a serious constraint on the local economy. And the pollution emitted by vehicles trapped in traffic makes New York one of the nation’s smoggiest cities.

The challenge facing city officials, therefore, is to reduce reliance on the private automobile, the principal cause of congestion. Drivers must be enticed into leaving their cars at home and using multi-passenger modes of transportation, surface or subway. To accomplish this, the city will have to make public transit more convenient, safe, and economical. At the same time, officials should allocate the limited capacity of roadways, bridges, and tunnels more effectively.

Improving the transit system enough to make riders out of drivers will take money, and raising this money through higher taxes or fares is probably neither politically nor economically viable. It is possible, however, to use existing resources far more efficiently. More than $1 billion a year could be saved by public agencies and the riding public if transportation officials took advantage of powerful market forces. The city would profit immensely if it introduced more competition into the system, established pricing methods that better reflect the costs of transportation facilities, and opened the market more to private-sector firms.

Spurring Competition
Because the Transit Authority has a monopoly on subway and most bus service, it has very little incentive to operate efficiently. When the city took over the subway system in 1940 from the private companies that had operated it, a major goal was to preserve the nickel fare, which ended up lasting only eight more years. If the fare had gone up at the rate of inflation since 1948, it would be only 27 cents today. And the current fare of $1.25 covers only a fraction of the average cost of a subway or bus ride, which stands at about $3.50; the difference is ultimately made up by taxpayers. The average cost per passenger has been increasing more than twice as rapidly as the inflation rate since 1980; had it just matched inflation, the city would have saved more than $1.5 billion in 1990 alone.

Yet there is no inherent reason an urban transit system must be subsidized by the government. Buenos Aires, a modern metropolis of 12 million people, has an entirely private bus system consisting of some two hundred different companies. They receive no subsidies, pay full taxes like any other business, charge reasonable fares, have a huge ridership, and provide excellent service.

A subsidized public monopoly is almost a guarantee of inefficiency. Yet surface transit in cities is a service that readily lends itself to competition. Many cities in the United States and elsewhere are introducing competition in previously monopolistic public transportation systems. Under this approach, a public agency designs bus routes, prescribes schedules, sets fares, and conducts a competition to select the organization—it may be the public bus agency or a private firm—that mill provide the service under a contract. The contract generally lasts for several years, specifies penalties in case of poor performance, and allows the government to abrogate the contract for cause. In most cases, very large savings, averaging more than 30 percent, have been realized, while the quality and level of service are at least as good as before. The experiences of these cities could provide valuable lessons for New York’s transportation officials:


  • San Diego. Ironically for New York, San Diego’s decision to begin contracting with private bus companies was prompted by a 1979 labor agreement in which the public bus agency, the San Diego Transit Corporation, gave its drivers wages that turned out to be even higher than those in New York. San Diego officials were stunned by this revelation, given New York’s unenviable national reputation for profligacy in spending on city employees. As a result, San Diego embarked on a gradual program of competitive contracting. Today, almost 30 percent of the work is performed by contractors, with striking results. The average cost per mile for contract service is $2.22, or 45 percent less than the San Diego Transit Corporation’s cost of $4.03. Competitive pressures helped arrest the growth in the public agency’s costs as well. And all of this was accomplished without layoffs, because the rate of contracting was kept well within the rate of normal employee attrition. "If New York public transit bus costs had replicated San Diego’s performance, nearly $2 billion would have been saved over the last decade,“ says bus expert Wendell Cox.
  • Los Angeles. Los Angeles has the largest competitive contracting program in the nation, using more than three hundred private buses. Audits by Price Waterhouse show average savings of 51 percent on the private lines. Moreover, vehicle breakdowns have been greatly reduced and accident rates decreased by a third. Some routes that had been stated to be cut because their costs were too high were saved by contracting them out. Later, when fares were raised on publicly operated routes, the private companies were able to preserve their lower fares.
  • Denver. In 1988 Colorado became the first state to mandate competitive contracting, requiring the Denver Rapid Transit District (RTD) to contract out 20 percent of its bus service over two years, without layoffs. Workers were to be paid even though they were not working, a situation that could have been avoided if the rate of contracting had been linked to the rate of attrition, as in San Diego. Still, external audits show large savings: 27.5 percent the first year and 31 percent the second, after accounting for the cost of idle labor and underused facilities.
  • Houston. In 1983 the city’s bus agency, Houston Metro, contracted for a park-and-ride service through competitive bidding. Costs were 34 percent less than for Metro’s in-house service, $4.66 per mile as opposed to $7.07. When the contract was renewed in 1985, savings went up to 38 percent. In 1990 service began on a regular bus route; the contractor’s price of $52.31 per hour of service was 28 percent lower than the in-house cost of $72.31.
  • London. About one-third of London’s bus routes, almost sixty million miles, are contracted competitively. This is the equivalent of about half of all New York’s bus service. London has been so effective at creating a competitive environment that the 12 public bus agencies have been forced to improve their efficiency to the point where they have won 60 percent of the two hundred competitively contracted routes.
  • New York should institute a program of competitive contracting for bus operations. For example, high-cost, low-ridership, and late-night routes could be contracted out to authorized van services. Some rush-hour service could also be contracted out. It is a common misconception that mass transit makes a lot of money during rush hour, when every bus and subway car is packed with passengers. In fact, rush hour is a big money-loser, because in order to handle the peak load, a transit agency must buy and maintain more buses, employ more fulltime drivers, and build more garages to store the buses when they are not in service. The TA would reduce its expenses if it supplemented its own efforts by contracting competitively for rush-hour service with companies that have lower costs.

    When contracts are put up for bid, outside firms and the TA’s own workforce should compete fairly and equally. Both the TA and private firms would have to respond at the same time to the same requests for bids, and be subject to the same service specifications, conditions, and penalties. The price of the TA bid would have to be calculated by an impartial outside authority, to reflect the full cost of TA bus service. As in London, the TA would eventually be forced to adopt the same productive practices as the private firms, and its costs would decline.

    Contract specifications for each route would set forth the schedule; number of seats or runs per hour; vehicle markings; performance standards for such things as on-time departures, cancellations, cleanliness, vehicle conditions, and safety records; and penalties for poor performance. Monitoring contractor performance is a necessary aspect of competitive contracting. It is usually understood to be an additional cost imposed by contracting, though similar monitoring should be, but rarely is, performed on service provided by government agencies.

    A word is in order about the seven subsidized private bus lines that currently operate in the city. These lines, all in local service, have exclusive franchises and “earn” city-guaranteed profits of between 3 percent and 6.38 percent of their revenues; the cost of these subsidies ($94 million in fiscal 1992) represents one of the most rapidly escalating items in the city budget. In no way do these firms demonstrate the virtues of private enterprise and competition. Rather, they are a historical anomaly, operating under in-perpetuity franchises that should be phased out and replaced by contracts of finite duration awarded through a competitive process open to all qualified bidders.

    In addition, the same type of contracting procedure should be applied to other TA operations whenever feasible. Support services such as vehicle maintenance and cleaning and subway station cleaning lend themselves to this approach. When the TA overhauled its subway cars, it used both its in-house workforce and a private contractor; the latter proved to be better and cheaper.

    Contracting has not been successful everywhere it has been tried. The experiences of two cities, Miami and New Orleans, are instructive for New York. In both cases, the costs of competitive service were lower, but service was worse by some measures. Private contractors in each city accused the public agencies of reneging on their promise to supply buses in good condition. In the end, because of union opposition, both cities abandoned competitive contracting.

    It is crucial that New York’s leaders muster the political will to make a real commitment to competition. The mayor and City Council should take the initiative, and the State Legislature should mandate competitive contracting for the TA just as the Colorado Legislature did for Denver’s RTD. Strong opposition can be expected from the public employee unions affected. As in San Diego, it can be overcome through a no-layoff policy, by tying the rate of contracting to the normal rate of attrition (about 7 percent annually). Severance benefits and early retirement plans could be used to accelerate voluntary attrition. Finally, current employees could be encouraged to form their own private firms and take over some of the routes.

    With a gradual competitive contracting effort, the TA would eventually achieve annual savings of about $600 million, an estimate based on results achieved elsewhere. This money could be used to improve the quality of the TA’s own service, making it more attractive to riders and thereby reducing the use of private autos.

    Fares and Tolls
    At present, the limited capacity of bridges, tunnels, and roads in the New York area is allocated almost entirely through the simplistic and inefficient principle of first come, first served. The region’s officials should adopt a rational policy of tolls and differential pricing, using time-tested market mechanisms to modify commuter behavior in desirable ways.

    Where feasible, free bridges, tunnels, and roads should be converted to toll facilities, with lower tolls for high-occupancy vehicles and during off-peak hours. That is, someone driving alone during rush hour would pay the highest toll; a driver carrying passengers during off-peak hours, including weekends, the lowest. Lower tolls for high-occupancy vehicles would encourage car-pooling; peak-period pricing would induce some motorists to change their travel habits and either switch to mass transit or drive during off-peak hours. A plan to impose tolls would no doubt arouse opposition, particularly from outer borough New Yorkers accustomed to entering Manhattan for free. But the results would be beneficial to all: less congestion, less pollution, and less fuel consumed in idling.

    The same pricing concept could be applied to congested bus and rapid transit routes. Fares should be set at higher levels during peak hours, as they are in many cities, including Washington, D.C. This would case peak-hour crowding and reduce the number of TA trains, buses, and transit employees needed during rush hours.

    Off-peak fares could be sharply discounted for the elderly and handicapped. And low-income workers would not have to suffer from higher peak-hour fares. Employers in low-wage industries could, in effect, give their workers small raises at no cost by changing their working hours to allow off-peak travel at the reduced fare. Alternatively, companies could give eligible employees tax-free vouchers, similar to those now available through the TransitChek program, to offset the higher fares.

    The TA should also change its fare structure to charge by distance traveled, abandoning the customary uniform fare. There are two good reasons for such a change. First, requiring every passenger to pay the same “average” fare may deter potential riders from using mass transit, instead of their cars, for short rides. Second, it costs more to transport people longer distances, and it is only fair that they pay for this benefit. (Under the current system, an executive who rides the Long Island Rail Road from Little Neck to midtown Manhattan gets a larger public subsidy than a worker who commutes from Harlem to the garment district.)

    Differential pricing based on time and distance is now possible for both mass-transit riders and drivers, thanks to new technologies: magnetic fare cards, already being planned by the TA for automated fare collection, and automatic vehicle identification systems, which allow nonstop toll collection from automobiles. Distinguishing between high- and low-occupancy vehicles would still require human intervention, however.

    Relieving the Regulatory Burden
    The role of private companies in a new transit strategy should not be limited to contracting for TA bus routes. Many private companies are already operating innovative transportation services—some legally, some not. The city government generally spurns the private sector and relies too heavily on the Transit Authority. Its challenge is to produce a better transportation system by marrying the strengths of both the public and private sectors.

    Historically, the private sector has introduced every significant innovation in transportation. In the 1820s, New York State had more than two hundred private road companies and more than four thousand miles of private toll roads. Private firms in New York City introduced America’s first fixed-route urban transportation service (the omnibus, 1827), the first urban rail system (the horsecar, 1832), the first rapid transit fine (the el, 1868), electric streetcars in the 1890s, the IRT subway in 1904, then electric trolley buses, buses powered by internal combustion engines, and, in 1968, express bus service.

    Innovation continues today. Entrepreneurs have reintroduced ferry services, reinvented jitneys (in the form of commuter and feeder vans), and created no fewer than three separate, supplementary taxi systems (livery services, black cars, and gypsy cabs) to overcome the city’s absurd, outdated limit on the number of licenses for yellow cabs. There is no question that the public likes these new private transportation services. Livery services and gypsy cabs are an important resource in the city’s poorer neighborhoods; black cars are popular in the corporate world.

    Vans serving middle- and working-class commuters are providing stiff competition for the city’s buses. In Jamaica, Queens, for example, vans generally kept their fares at $1.00 while the TA stepped up its fare to the current $1.25. As a result, patrons switched to the vans rather than ride the TA bus lines serving the Jamaica Center subway station. The TA estimates that it lost 16 percent of its riders on those routes, versus only 3.3 percent citywide, during the year ending in September 1992. In October, responding to this decline, the TA reduced the fare to 75 cents on the Jamaica lines—the first fare reduction in living memory. The TA had been goaded into competing with the popular vans, to the benefit of the public. But after several months, even the lower fare had failed to lure many van passengers back. The lesson for the TA is that the overall quality of service is what counts: the public is willing to pay more for better service. Top TA officials are beginning to learn this lesson, demonstrating a welcome concern for customer service.

    Many illegal vans do not meet safety standards, and even legal vans often operate only on high-volume routes during peak periods; these factors contribute to their low prices. One might also question the diligence with which entrepreneurs in this cash-only business pay their taxes.

    Still, the city’s efforts to drive the vans out of business are clearly not working. The van industry is large, popular, growing, and here to stay. It should be recognized as a useful, cost-effective component of the city’s transportation network, regulated appropriately, and assigned a legitimate role: providing service “in areas (1) where mass transit cannot now accommodate demands . . . and (2) that are not now served by mass transit,” as Robert Wagner Jr.’s Commission on the Year 2000 suggested. The industry could also serve as one source of bidders for contracts to operate TA bus routes.

    There is ample room for debate over what specific circumstances would justify allowing private services. The TA, for example, complains of poaching by the vans in Jamaica. But market advocates could argue persuasively that the Jamaica example clearly represents a situation where “mass transit cannot now accommodate demands,” as evidenced by the fact that a significant portion of the riding public eschews the buses and prefers the vans for their speed, comfort, and convenience—a demand obviously not accommodated by the TA bus service.

    In any case, entrepreneurs are far better than bureaucratic agencies at discovering hitherto unrecognized transit needs and moving quickly and aggressively to satisfy them. A virtually infinite number of possible express and local transit routes could be handled by vehicles ranging from sedans to vans, minibuses, regular buses, and intercity cruisers. City policy should encourage entrepreneurs to serve new routes, particularly those feeding into subway and rail stations, by arranging for loading and unloading areas at these stations, and by contracting with private operators to give their passengers subsidized transfers to the subway or railroad.

    The city should establish regulatory guidelines to encourage and facilitate the orderly emergence of private services. A permit process would give would-be operators great freedom to start new services, while ensuring that they follow safety regulations.

    Under this system, an entrepreneur would apply to the regulatory body for a nonexclusive franchise to operate on any route he designs, providing it does not significantly overlap any existing transit routes. (The TA has satisfactory definitions of these circumstances.) The application would specify the route and the fare the operator will charge.

    The franchise would be awarded promptly and automatically upon demonstration that the driver has a valid license, the vehicle is inspected and insured, and the fare is posted conspicuously. The vehicle could be of any size, shape, and design, but would have to bear suitable markings. The franchise would be of finite duration, renewable through a fast and simple process.

    The operator could charge any fare he wished, provided it is uniform and prominently displayed. He could change the fare at any time with advance notification (say, thirty days) to the regulatory agency and passengers.

    The operator would be free to service his route as frequently or infrequently as he wishes, and could choose whether or not to post a schedule. Some might argue that strict service standards concerning schedules and operating hours should be a prerequisite for a permit. But this would inevitably require an exclusive franchise, which in turn would require public regulation of fares, leading to a cumbersome and political process for approving fare increases. If this path were followed, the likely result would be similar to today’s unsatisfactory situation, in which perpetual franchises are heavily subsidized and the number of franchised operators is arbitrarily limited. I argue that market forces would produce a satisfactory outcome, rewarding reliable and regular service. Companies offering good service would prosper as they gain brand-name recognition. Through trial and error, entrepreneurs would determine the optimal level of service, something neither they nor any regulator could know beforehand.

    Economic deregulation would be coupled with strong safety regulation, as it is in air travel. The regulatory agency would monitor the streets and enforce both strict prohibitions against unfranchised operators and full compliance with safety and insurance standards for licensed operators. Vehicles operated in flagrant violation of these standards would be impounded.

    Under the regulatory scheme outlined here, there may be occasional efforts to establish local cartels and limit competition. Unscrupulous operators might use violence to keep out new entrants and establish a local monopoly. Such concerns should not be used as an excuse to thwart these reforms, but the police should be prepared to deal with criminal behavior if it arises.

    These same market principles could be used to improve the city’s conventional taxi system, the yellow cabs. It remains a bizarre anomaly and a symbol of city government failure that the number of medallion cabs in New York has remained fixed at 11,787 for more than fifty years. A policy of either freeing entry into the licensed taxi business or lifting the numerical ceiling on the total fleet size is decades overdue. Washington, D.C., could provide a model.

    It has an excellent system, characterized by plentiful cabs, in good condition, driven by knowledgeable and courteous drivers who charge low fares. In New York, the livery and black car services and gypsy cabs are already competing extra-legally with yellow cabs; with proper safety regulation and enforcement, they could become legitimate providers of for-hire service. More competition would lead to lower prices-taxi riders might save $500 million a year, based on my extrapolations from estimates in a 1988 study by Elizabeth Roistacher of Queens College.

    Keep New York Moving
    The measures I have suggested would create a better transportation system in the city—one more convenient, responsive, comfortable, fast, safe, reliable, and economical; one that would encourage commuters to rely less on cars and more on multi-passenger vehicles and mass transit. My proposals would accomplish this by combining the advantages of both the private and public sectors.

    Gradual implementation of such policies over the next decade would ultimately result in savings of about $600 million annually in the TA budget. It would also bring about lower fares for taxis and perhaps other forms of transportation as well. Some or all of the savings could be reinvested in improving subway service, stations, and safety. The city would enjoy cleaner air, less congested streets, and a transportation system more conducive to economic growth. Both literally and figuratively, these reforms would help keep New York a city on the move.

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