Transport•innovation

A new way to procure

2011-12-08T10:11:00.001-08:00

Photo credit: Chicago-L.org

The CTA's new 5000-series rail car costs $1.6 million dollars a pop—which means, when that 8-car train pulls into the station, you're staring at a cool $12,800,000.

Why so expensive? After all, you can buy a private jet for half the price. At that price, they should come with Italian hand-stitched leather seats instead of those plastic bucket seats... right?

There are a few contributors to the extreme price:

Non-standardization. Although most mass transit systems use the same gauge rail (ahem, BART), the platform heights, third rail type and voltage, platform lengths, clearance widths, signal system, and maximum curve radii are all vastly different. That means that every new order of trains essentially has to be entirely custom designed.
No economy of scale. Once the trains are designed, the manufacturing process often has to be started from scratch. Besides specifying the process itself, this can even include procuring or building factories to satisfy Buy American laws—just for the life of the order.
Few suppliers. In fact, there is only one American manufacturer of railcars left. Most equipment in the US is now designed by Bombardier (Canadian), Kawasaki (Japanese), or Alstom (French). So in the absence of a whole lot of competition, the bids are all high.

It's not hard to imagine a new business model in this space, one that works more like the development and sales of automobiles or airplanes do.

Theoretically, a private supplier could standardize the basic technology and build platforms that can be adjusted to spec. Factory processes would have to be innovated, of course: for instance, adjusting the suspension for a different platform heights and using different transformers for different voltages. The truth is, the combination of factors is not infinite, and by standardizing as much as possible, better economies of scale could be established, engineering could be cut in the long-run, production could be more continuous, and industry innovations could be faster to disseminate. Plus, agencies could cut down on their costs of having to define in detail the specifications for new vehicles because the standardized units would already be compliant with ADA laws and have the latest technology offered as build-to-order options.

The biggest difficulty I can imagine is that the public procurement bidding process might not support this as it exists today. Because vehicles probably wouldn't be built exactly to RFP spec, public agencies would have to reconsider the way they perform large procurements.

But that's not such a bad thing, because the public procurement process is rife with waste. Imagine a change on a much larger scale: for example, a government agency in charge of establishing standards for all public services, thereby giving individual agencies must less work to do in the first place, saving money at the state and local level, and allowing private industry to simply build to those standards. The CTA wouldn't have to order a 5000-series car with every painstaking detail, they'd just order a 48' long, 9'4"-wide railcar with blue seats and top-loading 600V third rail shoes.

Most of the rest of the work would already be done.

CTA asks citizens for budget ideas

2011-11-05T12:17:00.000-07:00

Among American transit operators, the Chicago Transit Authority (CTA) has done a stellar job in recent years utilizing new technology. Of particular note is sharing its live bus and train tracking data to app developers through APIs, which has resulted in some pretty fantastic mobile apps. Over the past few months, CTA has finally made the leap into social media, opening official accounts on Facebook, Twitter, Flickr, and Youtube.

Keeping a Web presence on the aforementioned social sites is standard fare these days (no pun intended), and CTA has been faithfully updating all of them with information about service updates and construction projects.

But what is much more interesting is they also opened an account on IdeaScale that solicits ideas from the community for their 2012 budget recommendations.

CTA's president Forrest Claypool has already made a number of recommendations in the preliminary budget, which includes departmental consolidation, an innovative approach to station renewal, and reduction of staffing to the lowest levels in the history of the agency. But major budget problems remain, and CTA will likely have to raise fares sharply and/or further cut service in the coming years.

I conducted a whole bunch of public meetings while I was at HSH, and, at least on the Eastern seaboard, they generally tend to be poorly attended, or be filled with people with agendas (or just complaints). Attracting bright minds and everyday people is not an easy task—after all, bright, everyday people have other things they need to attend to. Moving customer input to the Internet where it can be used at people's convenience is an obvious move, but it has to be done correctly.

IdeaScale is a pretty well-designed Web site. People suggest ideas, and then it is voted up or down and commented on by other users. But it will only work if people actually use it. CTA can do a few things to help:

Advertise it. They have free ad space in their stations, vehicles, and Web site. I've seen no evidence of this, yet.
Reward people. Provide some sort of compensation (free Transit Cards?) for ideas that get incorporated into the budget plan. Or better yet, run contests in area business and design schools to find the most innovative solutions.
Talk to people. CTA managers should respond to the ideas suggested to engage conversation. Many people think public agencies aren't really listening to them. They will only be convinced to help if they think their ideas matter.

At the end of the day, there will be no panacea for CTA's budget problems. Major structural problems exist in CTA's funding model and labor relationships. As I've written here, they need to avoid the temptation to sell their long-term worth for short-term fixes. They also need to look both to the state and to their own business models to find new sources of revenue.

But recruiting bright and inquiring minds to invest their brainwaves in the problem is definitely a big step in the right direction.

Thoughts on Public Private Partnerships

2011-10-07T15:41:00.000-07:00

Photo credit: The Guardian (UK)

In 2008, the London Underground absorbed the two Metronet infracos (private infrastructure companies) which had been responsible for running the sub-surface division of the metro system. In 2010, Mayor of London Boris Johnson condemned the Public Private Partnership contracts (PPPs) and subsequently, the government agency Transport for London (TfL) took control of Tube Lines, the infraco which is responsible for the Jubilee, Northern, and Piccadilly lines.

By all measures, the PPP scheme was a catastrophe for the already cash-strapped government, and an expensive one to boot. The private corporations which had taken ownership and responsibility for the operations and upgrade of existing Tube lines cost taxpayers more money, provided worsened service with more disruptions, had a record of safety incidents, and failed to meet project deadlines and requirements.

PPPs were promised to do the exact opposite things for London's network. What went wrong? Read on to find out.

The theory

PPPs originated as a new business model that would get private corporations to provide infrastructure to the public at essentially no cost, by using governmental powers to acquire land and property as necessary, then granting the private corporations the rights to revenue from the finished product or service. (This rarely worked out in practice.) In modern times, they are a way of offloading the work from public agencies to private companies.

The free market can often operate with lower costs and more efficiency, have fewer procedural roadblocks, have more flexible management and labor, have access to additional sources of labor, and/or have more specialized experience performing the required tasks.

Private partners can be enlisted to design, build, finance, operate, lease, or any combination of these things, depending on the need. Private partners can either be subsidized by the government for a limited period or be required to secure their own private financing.

The controversy

Source: In The Public Interest

In reality, the "free market" advantage of PPPs generally evaporates once the winning bidder is selected. Much of what the government does is by nature a natural monopoly—that is, they provide services that have a tremendous economy of scale and thus make competition impractical. (Can you imagine GM deciding to build a second subway system in New York?) So, in essence, PPPs often grant monopolies on public goods to private corporations.

Of course, monopolies are problematic because, in the absence of competition or alternatives, there is little motivation to improve the quality or performance of a product—even when the corporation begins with "good" intentions. When the government operates a monopoly (such as a metro system), they are at least theoretically accountable to taxpayers voting them out. (In practice, it's a little messier!)

PPPs are problematic in a myriad other ways:

Probably the largest problem with the current way PPPs are handled by government is the lack of oversight in the contracting process. After all, the contract and its outlined obligations are the only ways the public can ensure that the private corporation is held to do a "good" or, at least, adequate job. Serious contractual problems seem to be the norm, with nearly 50% ending up in renegotiation—which means more legal costs for the citizenry to pay.
Theoretically, the threat of the contract being transferred at the end of the term would motivate the corporation to do a better job. In reality, the contracts tend to be extremely long and the cost of entry for a replacement contractor high.
Taxpayers bear more of the risk. If the PPP fails, the government has to step in and assume the burden—because the alternative is to let the infrastructure itself collapse. These costs are high.
Governments may save on the short-term, but long-term prospects are usually worse. And, one of the largest problems facing governments is long-term insolvency. For instance, Chicago has already spent most of the money they saved by leasing the parking meters for 99 years, and no longer has the stream of revenue, severely undervaluing its long-term assets; worse, Chicago has less jurisdiction over the use of its own street space as it is contractually challenging, to say the least, to alter the number of parking spaces (this is one of the major issues in planning Chicago's Bus Rapid Transit and protected bike lane network.)
There are ethical and legal concerns about the use of eminent domain and transferring seized property to a private entity. Sometimes these battles can end up in massive inefficiencies in legal costs and delays, as in the Columbia University Manhattanville case.
The formation of a PPP can be extremely expensive for the government.
Although PPPs often use taxpayer funds, they are generally not subject to the same transparency laws that the public sector is.

Private business is an important partner

Source: urbanrail

There are PPPs that seem to be working well, and bike sharing programs are a promising frontier for the model. Private business is a critical partner to the government, and private corporations can indeed be far more efficient, specialized, and flexible than their government equivalents—in the right conditions. But we are at serious risk of suffering disaster through short-sighted planning. We have to ensure:

That private partners are held accountable, either through legislation requiring transparency, or majority share ownership by the government (like MTR);
That we perform a thorough Cost-Benefit Analysis of PPP structures to prove they will actually save government money in the long-term, either through direct or indirect (i.e., economic development from an otherwise impossible-to-fund project), or significantly improved delivery of service for taxpayers;
That the contracts themselves are required to go through much more oversight, analysis, and public input.

A business model for a profitable transit system

2011-09-29T13:05:00.000-07:00

Mass transit systems are vital to a city and the overall health of the economy. After all, if the NYC Subway shut down, 5.1 million people every day would either not be able to get to work, would be delayed in far-worsened traffic, and/or would have to spend significantly more money on transportation. This would have obvious effects on private business.

Metro systems, with massive passenger throughputs, low friction steel-on-steel rails, and electric propulsion, are tremendously efficient and are by far the greenest way to move about an urban area. However, the cost of building and maintaining complicated infrastructure such as metros is tremendous.

Is the idea of a profitable metro system just a pipe dream? Read on to find out more.

First, we have to define profitability. Metro systems have two major types of costs:

Operational costs, from day-to-day activities. This includes labor, maintenance, fare collection, and cleaning.
Capital costs, from major investments. This includes renovations, expansions, new technologies, and new lines and stations.

For instance, Amtrak's Acela line, the only high-speed line in existence in the USA, recoups all operational costs (from fares), but not capital costs, which are funded through a variety of government subsidies.

Hong Kong's MTR system is probably the most notable modern model of a system that makes a profit on both counts. MTR is now privatized, although the government remains a major shareholder. MTR uses a rather innovative funding model. In essence, they act not only as a transit operator, but also as a real estate company, raking in billions of dollars (US) of profit annually while still operating a highly modernized network and covering most capital costs. They do so by developing the land around their transit hubs, building their own homes, offices, stores, and even a series of shopping malls. After all, if they are providing the trip to the destination, why not make money off the destination itself?

This isn't actually a novel business model, even in the USA. Back in the days when Los Angeles had the most extensive streetcar network in the world, private operators of transit systems often developed land along the corridors. Costs of building and operating these networks have ballooned since most systems were either dismantled, sabotaged, or taken over by the government following the explosion of private automobile ownership in the 1950s.

But how important is it actually that metros make a profit for the operators? After all, the economic benefit for the city and economy from an efficient transit system are tremendous. Without an effective transit system, many major cities would suffer huge hardship both in total business and tax collections, so it is usually worth the investment. Still, state and city budgets in the USA are in tremendous distress. So why isn't the CTA, for instance, acting as its own developer for some of it's Transit-Oriented Demand properties to make up for long-term shortfalls in the budget, rather than trying to cash out quickly by selling the land?

One common argument against privatization is that if transit companies were fully privatized without the government holding majority ownership or at least enforcing standards, there would be less motivation to provide "good" service. After all, running a clean, fast, and efficient transit system itself is an expensive proposition in the USA in 2011, so there is more incentive to focus on the profitable arms of business, while leaving the actual transit part to languish.

I'll talk more about this tension and its relationship to Public-Private Partnerships (PPPs) in my next post.

Hello

2011-09-23T12:21:00.000-07:00

This blog was created for MBA 517 - Strategic Competitiveness.

Outside of my life at the IIT Institute of Design and Stuart School of Business in Chicago, where I am a dual-degree Master of Design/MBA candidate (class of 2012), I am a hobbyist urban sustainability and transportation enthusiast and advocate. I have prior experience working in public involvement and transportation planning for an urban planning and engineering firm in New York City.

Thoughout the semester, I will follow and analyze innovative business models and ideas in transportation from around the world. Afterwards, who knows what can happen?

- Max