In general, it is more advantageous to use subsidy monies to reduce fares than improve service levels. This is contrary to the historical behavior of the CTA. Analysis in the "Management Objectives and the Causes of Mass Transit Deficits" paper found that for most of its existence the CTA has preferred to raise fares rather than cut service. Although service has been reduced, particularly on the bus system, average load factors for both bus and rail are only half of what they were in 1948. It appears to have been, and still is, more politically palatable to share the misery among many anonymous people by means of a fare increase than to affect a smaller, identifiable, group by a service cut.

This seemingly worldwide phenomenon has made riders worse off. Even if overall subsidy levels were not increased, society would be better off if service levels were reduced, and the money saved channeled into reductions in fares. The size of this welfare loss in Chicago in the early 1990s is estimated by this paper to be $76 million a year, or about $15 for each resident of Cook County.

The paper then models the effect of changes in fares and service levels on social welfare. At the combination of fares and service levels that maximize welfare, the benefit of increasing the overall level of subsidies was found to be $1.16 per $1 of subsidy. The return on transit subsidies is slightly less than the $1.26 in social loses incurred in raising an additional $1 in sales taxes. The approximate nature of the model makes it difficult to conclude with certainty that subsidies are currently "too high." Certainly one could not argue that current subsidies are grossly wasteful.

Many commentators believe that the current costs of service provision are higher than they could be, or should be. In Chicago, costs escalated in the period between 1965 and 1980. Even though costs have stabilized since 1980, and have even slightly decreased, they are still about 70% higher in real terms than they were in 1965. The model was re-estimated to observe the effect of reducing unit costs by 10%, 20% and 30%. Such cost reductions will only affect the returns to increasing the level of service, as fare reductions only affect the revenue side of the equation. The paper finds that cost reduction brings a much better balance of fares and service levels. This is especially the case for off-peak bus service. In addition, the reduced costs mean that a given level of subsidy will produce more service, and hence more riders. As a result, the returns to subsidies increase, and this can justify providing even more subsidies. Therefore, rather paradoxically, reductions in cost justify additional subsidies not cost increases.

The Future: Ian Savage, "Can privatization solve all of Chicago's public transportation problems?" In John G. Allen and Ian Savage (editors), Reinventing Mass Transit: Moving into the Millennium. Chicago, Ill.: Regional Transportation Authority, 1999 [13 pages, 77 kb PDF].

In the past twenty years, private operation of urban transit services has been transformed from being a radical experiment to almost the norm. This is especially the case in Europe, Australasia and parts of South America. However, in Chicago - like many cities in the United States - there has been a reluctance to consider privatization due to memories of the poor financial performance of the predecessors of the CTA. Indeed it is possible to argue that the most successful period for transit service in Chicago was the first seventeen years of the CTA's existence. However, after 1964 things went horribly wrong. In many ways the objectives of privatization are to reverse some of the bad things that happened.

Privatization can take many forms, ranging from the transfer of a public monopoly to private ownership, to complete deregulation with no controls on entry, prices, and levels of service. For more than twenty years I have advocated a middle ground, an approach which has come to be known as competitive contracting. This is particularly applicable to bus services. Under this system, monopoly rights to operate individual routes for a period of three to five years are put out to bid. Depending on the type of contract used, firms bid on the basis of the cost or the amount of the subsidy required to provide service. Typically the public authority specifies the level of service to be provided, the fares to be charged, and arranges for the marketing of the network of services and the sale of system-wide passes. The best-known example of such a system is London.

I would also advocate that the existing CTA bus operating division be broken up into smaller units, and sold to the private sector, although I would be open to retaining some in-house capability to protect against the forming of private cartels that drive up contract prices. These ex-CTA companies would then compete against each other and against existing private sector firms to win the contracts. The new opportunities may attract well-known national and multinational transportation conglomerates to establish operating bases in the city. The CTA would continue to exist, but as a marketing and procurement organization. While these proposals may sound very radical to a Chicago audience, they would be regarded as rather conservative by worldwide standards.

The main advantage of competitive contracting would be to remove the cost inefficiencies that emerged in Chicago between 1965 and 1980. Elsewhere in the world, competitive contracting has shown itself to be an effective method to reduce inefficiencies and reduce unit cost by 20% to 30%. As a consequence there will be a more socially beneficial balance between fares and service levels (as analyzed in the paper "Evaluating Transit Subsidies in Chicago"). Furthermore, reductions in unit operating costs can be used to lower fares, increase service levels, fund capital rehabilitation, or be returned to taxpayers as a reduced sales tax levy.

However, privatization should not be considered as a complete panacea for all of transit's ills. There are open questions as to the appropriate methods of service provision in lower density parts of the city, whether all of the additional capacity provided in the peak is justified, and whether there should be differential fares between the bus and rail system and between different times of day. These are also pressing policy issues for transit, and ones that are not directly tied to the privatization debate.

Return to Ian Savage's Home Page