Thursday, February 1, 2007

Great Scott! Is The RTA Considering Privatization?

Scott McPherson, identified in a recent article as an RTA spokeman, may have earned he and his RTA colleagues a whole new set of friends.

At a meeting with south suburban officials, McPherson hinted that the RTA and the rest of the Moving Beyond Congestion proponents will be asking for an increase in the RTA's sales tax, which is currently 1 percent in Cook County but only 0.25% in the collar counties. So far, no surprises. This tax increase trial balloon has been released at many MBC events. Thus far, the tax increase idea has yet to be pricked.

But this is not all that McPherson said. The article quotes him as follows:

McPherson said that in addition to state and federal funding, RTA is considering privatization and bonding to hedge the budget shortfall.

Neither privatization nor bonding have been publicly reported as ideas being considered by the MBC proponents. But the whiff of such initiatives no doubt will get the investment banker and bond counsel types all wound up and beating a path to the senior executives at the RTA.

The bonding idea doesn't deserve much comment at this point. It is not likely that going into debt to meet operating expenses--assuming this is what McPherson meant--will meet with much favor. That is not much of a long-term strategy, although it may be necessary if the General Assembly rejects some or all of the proposed increase in the State operating subsidy sought by the MBC proponents.

The privatization idea, however, is much more intriguing. At first glance, the idea seems like a complete non-starter. After all, the transit agencies lose copious amounts of money, have high capital investment requirements, are heavily regulated, and are closely scrutinized by the media and the public. Who wouldn't want to shell out lots of money for that kind of asset?

So it is unlikely that by privatization the RTA/MBC means a long-term lease of the public transit system in exchange for an upfront payment like the $1.9 billion the City of Chicago received for a long-term lease of the Chicago Skyway. It is more likely that the RTA is intending to privatize some or all of the service provided by the public transit agencies.

This is just speculation of course, but here is how it might work. The RTA would put together a package consisting of (a) a bundle of public transit services (e.g., north suburban bus service), the equipment and other capital assets used for such service (e.g., buses) and, most importantly, the subsidies that would be payable to that service if it continued in public hands.

A private operator selected through competitive bidding would then agree to provide service according to the RTA's service standards. This operator would not be subject to the public sector labor contracts and work rules that continue to cost the service boards so much. If the private operator can deliver quality service at lower cost than the service board then the operator will, in effect, be able to pocket a portion of the RTA's operating subsidy pledged to it for its profit. (Note: Isn't there an onerous federal law that bars displacing public sector transit service employees by letting private operators use federally funded capital assets?)

This kind of privatization would send a shock wave through the area's transportation system and no doubt the political system as well. Labor strife would be guaranteed. Nonetheless, this model has been used in other countries with some success (e.g., British bus service). The City of Chicago is no stranger to privatization, as the labor unions' recent refusal to endorse Mayor Daley for re-election indicates.

Privatization might be the last best hope that the RTA/MBC proponents have to rein in labor costs, improve customer service and increase service efficiency before a transit system meltdown. After all, the MBC's request for additional operating subsidies starts at over $200 million for 2007 and rises rapidly after that. There is no guarantee that the General Assembly is going to give the RTA and the service boards that kind of blank check unless they take radical cost cutting measures.

Public transit systems rest on the notion that public transportation is a "natural monopoly" best left to public agencies with the exclusive franchise to run mass transit. That model may have fit the era--immediately after World World II--when public transit agencies emerged. The proliferation of private transportation providers such as those awful fake trolleys, employer-run bus shuttles, paratransit service providers and the like suggests that there may be real opportunities for some of the current public transit service to be shifted to private parties.

Such privately provided transit service would have to meet service standards, safety and other reasonable requirements. The RTA could be very helpful in prescribing a technological platform so that privately-supplied vehicles could be tracked and put into real-time vehicle arrival databases and the like. Maybe this effort could be the wedge by which the RTA finally prescribes a fare collection system that allows seamless travel among the various transit providers via a single fare card.

There are many hazards in this approach. The RTA's lack of spine when it comes to managing capital investments suggests that it would be incapable of the hard work of competitively bidding transit work to private providers, negotiating appropriate contracts and supervising the private providers to ensure that they are complying with the contracts.

However, energized by a legislative vote of confidence or scared stiff by the prospect of massive service cuts/fare increases if the MBC proponents return from Springfleld empty handed, the RTA just might find itself to try privatization. Indeed, the RTA Act already allows the RTA to enter into purchase of service contracts with private companies. But go through the hassle of privatization if there is a chance the General Assembly will appropriate enough money to keep funding the existing public sector wage rates, work rules and pensions.

Scott, it's Goldman Sachs on line one.

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