Management & Operations

Contractors Feel Strain of Tight Transit Markets

Posted on April 1, 2006

The standard estimate on the amount of transit service outsourced to private contractors is 10%, with no significant growth in sight. Trying to grow the slice of that pie has been difficult, mainly because of resistance from general managers and transit boards who are afraid of losing control. Combined with that is resistance from organized labor, which historically prefers to deal with public agencies rather than private entities. The keys to breaking down this resistance are education, exceptional listening skills and industry collaboration. So say four representatives of contractor companies — Ronald Hartman, senior vice president of business development, Connex North America; James O’Leary, principal, Alternate Concepts; Nick Promponas, senior vice president, First Transit Inc.; and Irwin Rosenberg, vice president, governmental relations and business development, Laidlaw Transit Services. Cliff Henke, former editor of METRO Magazine, recently convened a roundtable with Hartman, O’Leary, Promponas and Rosenberg to discuss these issues. METRO has followed contracting for many years and has tracked the steady increase throughout the last decade. In recent years that growth has flattened, however. Why is it that contracting hasn’t grown more in recent years?
There has been a lot of pressure applied to transit agencies by opponents of outsourcing in recent years, and they have been successful in slowing any progress on the issue. I also look at the rules that encouraged contracting in the 1980s that were taken away in the 1990s by the Clinton Administration, and they have taken their toll. We also haven’t done a very good job of making our case as an industry in waging this campaign proactively; instead, we have reacted to the misinformation by opponents. NICK PROMPONAS: It’s particularly discouraging when you see a few properties that are actually taking operations back in-house. As Irwin said, the opponents of contracting have been winning of late. Hopefully, the decision Capital Metro in Austin to have a private contractor perform the operations and maintenance for its new BRT system will become an example that others can follow. RONALD HARTMAN: I don’t know if I would quite agree that we have been losing. We see some big opportunities out there, particularly on rail contracts as some of the commuter rail contracts performed by Amtrak come up for renewal. I also think we just have not done a very good job of getting the word out and making our point to general managers and boards that contracting gives them even more flexibility and control over operations and can provide more service and higher quality service at lower cost. What are some of the contracting opportunities in the public transit sector?
The paratransit area is still very competitive. We continue to see opportunities in the rail market, particularly in commuter rail. On the bus side, it’s pretty level. I don’t see any new incentives on the public side to outsource operations. When transit systems consider taking contracted work back in-house, it sounds to me like it’s a political decision based on union pressure in most cases. Is that a fair statement?
Labor plays into it, but I think it’s a combination of factors. We at Laidlaw don’t get a lot of credit for the fact that most of our operations have collective-bargaining agreements, particularly for our fixed-route services. Paratransit tends to be smaller, but larger contracts typically tend to be represented by collective bargaining agreements as well. So it’s not an issue of union vs. non-union. Politically, that’s never been clearly understood. Of course, if the labor union has its choice, it’s going to prefer a public relationship versus a private relationship because it can put pressure on public officials, but with a private organization, no means no. We can fault ourselves too. As an industry, we haven’t done a very good job working together. As a group, we did get some effective language changes in SAFETEA-LU this past year, but overall we are not working together to capitalize on this change. Only 10% of fixed-route service is contracted, and this has been the case for more than 10 years. Another issue is whether transit systems are fully allocating their own costs when comparing them against contractor costs. Is that also a complicating factor?
It’s clearly an issue where some of the public agencies are bidding against us. But I’m not sure how far we’re going to get with language [in SAFETEA-LU] and revised federal regulations. I was on the public side much longer than I’ve been on the private side. In the 1980s, we had all sorts of rules and requirements, but, frankly, they never got in the way of what I wanted to do. The key issue is about proving our worth and value. I don’t want a contract with a public agency because they’re getting forced into it. It’s a prescription for failure. Can you give a particular example where you might see opportunity to convince the public sector to outsource?
I don’t want to mention anything specific, but I think we need to do a better job of listening to what the issues are out there. We need to understand the true problems and challenges that public agencies are facing and then come to them with solutions. We need to show them that we can solve problems that they can’t solve themselves. O’LEARY: As an industry, we don’t promulgate the successful models. The commuter rail contract in Boston two years ago was a real success for the MBTA [Massachusetts Bay Transportation Authority]. They recognized that if they were going to outsource its commuter rail operations and provide competition, they had to respect the rights that labor had earned over the last 80 years. And they did that successfully, allowing for reasonable risk sharing and for efficiencies to be developed by the contractor. That’s a model that runs across the industry, not only the rail side but on the bus side as well. It’s an area where, as Ron said, you need a lot of dialogue with the public managers. The comment that I hear repeatedly from general managers is that they want more control and feel they have more control if their own people are doing it. That’s not true. If they write the contract with the proper terms and conditions, they can have a lot of control with better quality and greater efficiency. Is this is an educational problem? Or a documentation-of-experience problem? Or a negotiation strategy issue?
All of the above. It’s an educational matter. It’s a matter of engaging both public and private entities in that dialogue. And it’s convincing general managers that reasonable risk sharing can occur, that it’s not going to be all on one party or the other. Part of it is that they’re so preoccupied with the day-to-day operation that they don’t have the opportunity to step back and look at the longer-term picture. We need more encouragement from the boards of directors and even from the politicians to say, “Hey, we need to be looking at alternatives.” On the bus side, is there opportunity in new service or existing service? Where do you see the opportunities?
I’m disappointed when I see agencies like Santa Clara [Valley Transportation Authority in California] willing to cut service by a significant percentage or increase fares without considering contracting for services. If you’re going to significantly restructure your service or substantially increase fares, you ought to be looking at contracting as a way to minimize that reduced service or the fare increase. Unfortunately, there are a lot of agencies out there that don’t consider that, even when it’s brought to their attention. I don’t think it’s that people are not aware; I think it’s a question of who we need to educate. According to a TRB study, 40% of the general managers who don’t contract won’t consider contracting. I’m sure they know it’s an option; they just choose not to do it. Did the TRB study describe the nature of the attitudinal barriers? Is it a fear of losing control?
To my recollection, the study didn’t go that far. But the public agency retains responsibility for policy issues, it’s just a matter of who operates the equipment and trying to get more service on the street in a more cost-effective way. PROMPONAS: The way I look at contracting, particularly with the bigger agencies, two immediate opportunities exist — contracting less productive work and contracting expanded services. I am not aware of any agencies that are expanding services, so the real opportunity for contractors and agencies would be the less productive work. A significant obstacle for an agency in making the decision to contract is union opposition, and in some cases, this opposition includes political support. The biggest sales pitch that the general manager has to make is to his or her board, the policymakers. The general manager must demonstrate how much money the agency can save by contracting, while also maintaining control of the service. I do not believe that contracting can work without gaining the support of all stakeholders, including the board but also staff. I don’t believe that there are enough agencies like the RTD in Denver, Houston [Metropolitan Transit Authority of Harris County] or Foothill Transit [in West Covina, Calif.] that believe in the contracting model for all of its benefits. Denver has had outsourcing forced upon them. A certain percentage of their service has to be contracted out by state law.
That’s not a proactive decision on their part, although I believe Cal Marsella and his staff firmly believe in it. ROSENBERG: I don’t think any percentage should be mandated, but I do disagree with Ron. If you look at the numbers during the 1980s, when the policies were in effect, and look at what happened in terms of the amount of service that was contracted and how it increased during that period, I would say the policy, even though it was perceived negatively, did have an impact. So I do think that federal guidelines and policies, as well as local and state policies, are effective. There are some states, such as California, Rhode Island and Washington, that actually have had legislation in play to eliminate or minimize contracting for services. Labor has been aggressive in trying to put forth legislation in certain areas. I don’t think there’s one specific solution, but there are a series of things that can be done outside of education. I think policy and legislation in key states can be helpful. Look at Colorado. Do you think we’d originally be operating service in Denver without that legislation? Competition among contractors has become very heated in recent years. What are some of the forces that are driving that?
The contractor share of the market is about 10%, and flat, and all of the companies competing for that 10% have pretty significant growth goals. How do you grow in this environment? You do it by taking work from the competitor. Unfortunately, to get more competitive, we’ve shrunk our margins. If you look at 15 years ago, our margins were higher than they are today. We were getting paid a reasonable return on our investment and for the risk that we assumed. Today, margins are too low for the risk and the investment. Do you think that’s also a function of the squeeze on operating budgets because of shortfalls in state and local funding?
I’ve had many conversations with CEOs about this. The general message is that it’s very difficult to sell Brand X to their board if Brand Y has a lower price. If both companies’ proposals meet all of their needs and wants, they have to go with the lowest price. Is it that RFPs are really IFPs and negotiated procurements are really low-bid procurements?
The buyer talks about wanting quality of service, yet at the end of the day, our service is viewed as a commodity. Unfortunately, folks within our industry have chosen to follow this trend and bid in that way. If you look at experiences reported in the newspaper, certain vendors are having service problems. It makes it more difficult to make the statement that we can do a better job and provide better quality in a more cost-efficient way while these vendors experience issues. We seem to have more problems today with service contracting where low bid has been the determining factor, more than I can recall in the past. Does the answer lie in structuring the contract differently?
If you say that you’re doing an RFP, it should be a true RFP and cost should only be one of the factors, and not the heaviest weighted factor. But often you’ll see that the final report was written in such a way that it comes back to cost. Normally I would say that the incumbent has the advantage, but the way the market is today, the incumbent is at a severe disadvantage. PROMPONAS: I agree with that, to some extent, depending on how aggressive your competitors are. If you’re the incumbent, you know how much it takes to run that operation. If you’re the buyer and you pass over the incumbent for a lower-priced vendor, are you really saving money? Are the savings justifiable if you sacrifice quality of service?

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