Running up a Profit, Running down a City

The title for this post borrows from an article by Robert Rowthorn (my old Cambridge professor) and Terry Ward in the 1979 Cambridge Journal of Economics, titled “How to run a company and run down an economy.”  It’s still a classic on the difference between private cost-benefit accounting and social cost-benefit accounting (showing how the logic of coal-mine closures had different results for business and for society).  In the Walrasian world, of course, there’s no difference between private and social benefits, which is why private optimization always leads to welfare maximization.  In the real world, of course, there’s no iota of a reason to believe that what’s best for private producers is automatically the best for efficiency, for output, or for human well-being.

I was reminded of this truth by the experience of living in Auckland, NZ for 6 months — and in particular by trying to navigate that city’s utterly bizarre transit system (which is a hodge-podge of a dozen different private companies, all contracted — and subsidized — by the regional government).  Below is a longer version of my recent G&M column on this topic.  The idea of watching a bus zoom by waiting passengers in order to meet the pseudo-rationalist performance target embedded in this bizarre system, is a great metaphor for the social irrationality of so much of capitalism.

One subject I had no space in the newspaper column for was the impact of privatization on the wages & conditions of transit workers in Auckland.  Needless to say, the dog-eat-dog battle for contracts has put downward pressure on compensation and work practices.  Typical wages in bus driving are $17 per hour.  Some drivers don’t get overtime.  Benefits are scarce.  And split shifts (where the driver has 4 hours to kill, unpaid, between two 3 hour shifts) are ubiquitous.  I would argue this hasn’t reduced the cost to the public purse, and certainly not to the travelling public.  I would argue, rather, that bus drivers are subsidizing (through their low pay and lousy conditions) the deadweight efficiency losses that are so obvious in this bizarre system.

Here’s the column…

            Toronto’s main business lobby, the Board of Trade, recently called for the outsourcing of public transit services to private companies, part of their free advice to the next mayor on how to reduce the city’s deficit.  On one level, this proposal is unremarkable: just the latest in a chorus of business demands that governments fix their deficits by selling off, contracting out, or eliminating altogether some of the public services they provide.  (Funny, when the economy was strong and governments enjoyed surpluses, I don’t recall any business group demanding that government buy up new assets and expand public programs.  So maybe it’s not about the budget, after all.)

            This particular proposal caught my eye, however, because I am residing temporarily in Auckland, New Zealand’s biggest city.  (I’m here for a few months trailing after my brainy spouse, who’s on sabbatical here.)  Not having a car, we rely on public transit.  Auckland’s is without a doubt the most fragmented, expensive, and maddening system I’ve ever used.  Oh, and by the way: it’s 100% private.

            The gory details provide a useful caution for those who believe that the private market always does things better.  New Zealand municipalities were forced by conservative national governments in the 1980s and 1990s to sell off many public assets, including transit.  They assumed free market forces would cut costs and improve productivity.  The reality has been quite the opposite.  Indeed, since the 1980s New Zealand’s productivity has fallen far behind other OECD countries (including neighbouring Australia), yet costs and taxes remain relatively high.  The government even had to buy back some of the privatized companies that failed entirely (like Kiwi Rail and Air New Zealand).

           Today Auckland’s regional government contracts a dozen different private firms to supply bus, rail, and ferry services.  A complex network of interlocking ownership links many of these suppliers (so much for the mantra of “competition”).  The biggest, Infratil, is a $2 billion giant with a broad portfolio of privatized assets, including transit, electricity, and even airports.  (That’ll surely catch the Board of Trade’s attention!)

           The hodge-podge is all the worse because each company accepts only its own tickets, not those offered by competitors.  Since inter-company transfers are impossible, bus routes are insanely circuitous (in order to maximize the area covered by each individual route).  My daughter’s bus trip to school takes three long detours through different residential neighbourhoods, doubling the 5 kilometres she would otherwise travel 

            Tickets are expensive.  Passengers pay according to how far they travel (and then pay again if they need a transfer).  Very short trips (of a few stops) cost as little as $1.70 – but another $1.10-$1.60 is added each time the bus passes through another invisible “stage.”  Travelling 40 kilometers from the north end of Auckland to the south costs between $12.70 and $16.50 (depending which companies are used), and takes two hours.  Passengers traveling the same distance in Toronto (say, from Scarborough to Etobicoke) pay $3 once, and can do it in less than half the time.

            City planners impose various pseudo-quantitative performance indicators on the contractors, like sophisticated GPS systems to monitor on-time performance.  But even this minimal nod to public accountability produces all sorts of unintended consequences.  Bus companies fear being fined for missing on-time targets – but are driven by the profit motive to ruthlessly minimize outlays on equipment and drivers.  The resulting pressure is intense on drivers (some of whom don’t even get paid overtime) to meet unrealistic timetables; a media exposé last year showed this often requires breaking the speed limit.  Several times we’ve waited for a bus, only to see it careen by without stopping, the driver shrugging helplessly and pointing at his watch.

            That anecdote sums up perfectly the irrationality of this system.  The top priority becomes ensuring that a private company reaches its profit targets, not picking up people who need a ride.

            Yet Aucklanders still pay for transit – three times over.  Once through their taxes: subsidies to private transit consume half of all property taxes collected by the regional government.  Then again at the farebox.  And finally a third time, through the inconvenience of a fragmented, mismanaged system.

            No wonder Aucklanders take transit one-quarter as often, on average, as Torontonians.  So before anyone gets carried away with enthusiasm for the inherent efficiency of the private sector, come and visit Auckland.  It’s a beautiful city.  But you’ll need to rent a car; don’t bother with the bus.