Permanent Citizens Advisory Committee

Privatizing MTA Services, Cost Savings or Political Buzzword?

Executive Summary

Today, New York's Metropolitan Transportation Authority faces decreasing subsidies and, at the same time, faces increasing needs for service, infrastructure repair, and expansion. Some economists and policy makers are of the opinion that privatization of public services increases agency efficiency and decreases costs. Privatization is an omnibus word for private participation in public agency service provision. This paper explores three types of privatization for public transportation agencies: the sale of a state owned enterprise; placing a public agency under private management; and the use of private funding and management, rather than public, for new capital development. The goal is to determine whether privatization, when applied to the Metropolitan Transportation Authority (MTA), will meet the goals of decreasing costs and increasing efficiency.

Many public transportation agencies have experience with these types of privatization, including London Transport, British Rail, the Washington Metropolitan Area Transit Authority, and New Jersey Transit. Lessons are to be learned from the experiences of these agencies. Privatization is not an easy process and results differ from case to case. In many of the agency examples, there have been both negative and positive consequences of privatization. These results include union protests and halts in services on one side and dramatic cost savings in subsidies on the other. In the case of the sale of the United Kingdom's British Rail, service has suffered under private ownership. In Indianapolis, bus services have become more efficient and expanded under private management. At New Jersey Transit, private management of a capital project is saving time and money. Privatization of services is not a simple answer for the financial difficulties facing the MTA.

Conclusions and guidance are offered as to the process of privatization of public transportation services:

· Privatization is not a panacea for investment starved public transportation agencies.

· Intense examination of contracting out and selling public transportation systems is necessary to determine financial benefits of privatization.

· Private operations of transportation systems work best when public oversight is maintained versus deregulation.

· Gross cost contracts encourage more competition than net cost contracts.

· Union issues are barriers to contracting private management of services operated by public employees.

In terms of privatization of MTA services, the PCAC recommends that the MTA:

· Not contract out or sell the MTA public transportation network on a large scale.

· Examine the benefits of contracting out or selling Staten Island Railway to a private firm.

· Examine the benefits of contracting out new bus routes to private operators.

· Study the development of upcoming London Underground infrastructure contract for benefits which may be applied to MTA contracts.

Although large scale privatization of operations is not recommended for the MTA, generating private funding and utilizing private management of capital projects is encouraged. Public private partnerships generate private revenue for public transportation agencies. Public private partnerships between public transportation agencies and private developers are widespread, because proximity to transit access is an attraction for developers.

Real estate value capture mechanisms, like tax increment financing, are promising tools for generating private funding for public transportation capital and operating budgets. Real estate values can increase due to public transportation development. This increase can be gleaned by public transportation agencies and used to pay for construction projects. The MTA should look to partner with New York City and New York State to mandate exactions from private developers. Many MTA projects are candidates for private partnerships.

Greater private participation in the construction process is also promising as a time and cost savings technique. The turnkey procurement method bundles the design, build, operate, and maintenance aspects of the construction process. Public transportation agencies invite private firms to team together to propose and construct new developments. This technique has been proven efficient by New Jersey Transit and might also benefit the MTA in certain circumstances.

In terms of generating private funding and using private management for capital programs, the PCAC recommends that the MTA:

· Pursue public private partnerships in which private developers contribute directly to capital construction costs or in which private partners lease public transportation property above or next to stations.

· Invite private retailers to design, construct, and maintain retail spaces in stations in order to shift the financial burden of design and construction to the private sector.

· Capitalize on voluntary programs like Adopt-a-Station and the Franklin Street Economic Development Corporation example, where developers contribute to rehabilitating stations while performing a community service and promoting their philanthropic activities.

· Be aggressive with developers to secure financial contributions when developments negatively impact MTA services, or team with the city or state to legislate a set mandatory exaction on new developments that impact MTA services.

· Work with legislators to implement a tax increment financing mechanism to collect revenues generated by increases to real estate values that occur following transit improvements.

· Use turnkey procurement for standalone developments.

There are many opportunities for the MTA to utilize private partnerships and private management for projects which are currently in planning phases. The MTA must begin to work on private partnerships now, while there is still adequate time to incorporate these time saving and revenue generating techniques in the planning process. The MTA is an integral aspect of public services which benefits both riders and non-riders. Developing new MTA services impacts real estate prices and New York's economic vitality. The MTA should look to capture some of this financial benefit.

The MTA should further explore public private partnerships, real estate value capture mechanisms, and the turnkey procurement method for:

· An intermodal transportation hub at Sunnyside Yard serving the MTA agencies and other carriers. The facility would be an expansion of the station the Long Island Rail Road proposes to build as part of East Side Access.

· The proposed Second Avenue Subway.

· The Metro-North Railroad Hudson Line Extension project.

Privatization works best for failing, inefficient, financially strapped public transportation agencies. With agencies that exhibit high operating subsidies and low operating efficiency, contracting out to private service providers can be a good remedy for their financial difficulties. However, the MTA does not fit this mold. In recent years, the MTA has cut costs through its 1995-1999 financial plan, increased bus and subway services, and cut passenger fares. Under strong leadership, the MTA has pulled itself out of a state of complete disrepair into an era of growth. As a vital public service, the MTA should remain under public management.

However, privatization for capital construction can benefit the MTA. Private management for development projects, the turnkey method, is promising as a cost and time savings technique and should be further explored by the MTA. There are also many opportunities for the MTA to generate private funding through public private partnerships and real estate value capture mechanisms. The MTA should capitalize on its importance to land values. The MTA can do more to meet the needs of its riders by expanding its capital construction program with the help of private funding and management.

Copies of the full report are available upon request.

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