Public or Private?

Agencies have to look at the pros and cons when deciding on whether to use contracted services, in-house staff or a combination of the two. Three agencies provide their experiences from three different viewpoints; SunLine Transit uses all in-house staff, Foothill Transit runs with all contracted service and Phoenix Public Transport utilizes a combination of the two.

Keeping it Within
The decision to use contracted employees vs. in-house has pros as well as cons. The general contention of transit agencies is that using contracted employees is normally more cost effective. Let’s touch on the overall advantage of hiring contracted employees from a financial perspective. Contractors make money by keeping costs low. They often hire at an hourly rate, less than those paid by the transit agency; for example — the transit agency pays drivers $20 per hour and the contractor pays $12 per hour.

There are many expenses for in-house employees that an employer must pay, as opposed to contracted employees, such as a share of the Social Security and Medical taxes, state unemployment compensation insurance and workers’ compensation insurance. The costs of providing benefits, which have increased dramatically, can increase payroll costs as much as 30 percent.

On the other hand, overseeing contracted operations is fairly expensive. The contracted employee drives vehicles usually owned by the transit agency. The agency’s maintenance department must inspect and insure the vehicles. It is in the agency’s best interest to inspect cleanliness and operation of the vehicles as the agency logo appears on the outside of each contract-operated bus or van.

Under a contracted operation, a transit agency will assign one or two people to manage the operation. This is believed, in the long run, to save money.

If the agency has good managers handling the operation, they can oversee a “good” contract operator without many issues. But if there are issues with the contracted operator, the agency must go through the process of documenting discrepancies and assessing penalties. Refuting the penalties can be time-consuming and even lead to litigation, potentially a very costly process for the transit agency and the contractor. Non-responsive contractors can be exceptionally hard to manage and can waste a lot of the agency’s management time, not to mention the possibility of ruining the agency’s reputation. Remember, the contractor does business under the good name of the transit agency.

In-house employees have a wide array of rights under state and federal law. There are a variety of legal claims that can potentially be brought up against an agency. Among the rights that are available to employees, but not contracted operators, are as follows: the right to receive at least the minimum wage, and for employees who qualify, overtime compensation at the rate of one-and-a-half times their regular hourly wage; protection from discrimination on the basis of race, national origin, color, religion and gender; the right to form a union; the right to take time off for a sick family member or bond with a new child.

Another downside to using contracted employees is that transit agencies lose control of the quality of service. Contractors are responsible for hiring and training of vehicle operators as well as managers of the operation. The transit agency must approve hiring and personnel policies and then monitor the drivers’ training program. In addition, the standards specified in the contract may not always be followed and the transit agency ends up “managing” the contractor. When the operation is conducted in-house, there is no middle management, or wall, between the management of the agency and the actual work performed by front-line employees. Control of the operation is direct and immediate.

A poor contractor can drag their feet when it comes to providing good service to passengers and can hire drivers that have a higher accident frequency rate than average. Even if the transit agency does not have to pay for the actual damage in an accident, the public sees their buses involved in accidents and perceives that the public transportation is unsafe. At SunLine, we have an intense on-going safety program to ensure the safety of passengers and operators.

SunLine has had past experience in using contracted employees in transit. For approximately 10 years, SunLine contracted with Mayflower and Laidlaw to provide paratransit service to the Coachella Valley. In September of 1999, SunLine purchased new vehicles and hired in-house employees.
All in all, from our experience of in-house operation versus contracted operation, although the ultimate costs may be higher, we believe it’s worth the expense. The service is directly managed and changes can be put in place to immediately correct an issue. In addition, the employees are accountable for their actions directly to transit management. Employees who do not perform to the standards of the agency can be disciplined and removed from service quickly. Those who perform to standards can immediately be rewarded for superior performance. When all operations are in-house, the agency gains a great deal of control of daily operations, the condition of their vehicles and the service to our customers. Here at SunLine, our goal to each of our passengers is to provide safe, reliable transportation. With our in-house staff, we believe we are accomplishing our goal.

Going Private
In the case of Foothill Transit, our administrative management is contracted to Veolia Transportation. The work done by the Veolia Transportation Management team includes many of the activities often performed by public sector staff. As private employees, we are able to provide our parent company with insight into the needs and challenges of an area of transportation that is normally governed by public employees. And in turn, Veolia is able to provide us with a broader perspective on the needs and challenges of the operations side of transportation. This professional give-and-take enhances our agency’s ability to respond quickly and intelligently to issues. It also allows us to be proactive in recognizing trends and avoiding pitfalls.

By bringing a private sector business perspective, we are constantly focused on the bottom-line impact to customers. That customer-focused approach forms the basis for how we put service on the street. By minimizing bureaucracy, Foothill Transit has greater flexibility and faster response time in meeting public need.

This flexibility allows for streamlined management functions. This is especially apparent in procurement, where accountability is balanced with efficient timelines that allow us to stay goal-oriented. This is the result of employing best business practices acquired through our private-sector business culture and is not something commonly associated with public agencies. At the same time, appropriate safeguards are in place to ensure accountability in the investment of public resources.

An added benefit to the agency is reduced risk overall. The contracted functions of the administration and operations are handled fully by those contractors. For example, that includes all personnel management covering hiring, benefits, pay, incentives and training. The contractor assumes the risks associated with its staffing functions. In addition, it assumes the liability risk of operating transit services. The agency keeps a firm control on costs via the contract giving the contractors incentive to operate safely and efficiently while providing a high-quality service in a competitive field.

As all parts of the agency are contracted for finite terms, there are regular bidding cycles that need to be executed in order to ensure that the agency is employing the most suitable vendors for the job. Some of the challenges associated with this include diminished continuity, instability due to possible contract changes, and possible distraction from the agency’s core mission — hopefully for only a short period of time while the transition, if any, occurs.

Having one set of vendors in any agency role for a long period of time does allow the professional staff to establish a certain amount of stability. However, the advantage to the agency is flexibility. If a contractors’ performance doesn’t meet agency standards, then steps can be taken to ‘change the guard’ as it were. The challenge here is to minimize the short-term impact of the changeover in favor of long-term agency health — and being able to distinguish when such a switch is to the agency’s advantage.

Changes do occur as a result of highly competitive bidding and as new demands for technological capability, employee retention and safety increase. It is important to keep close tabs on the temperature of the vendor and their employees during those transitions. Change can create uncertain ground resulting in low morale on both sides of the relationship, as well as having a possible customer impact as the new management grows into their role in the agency.

As the management staff of the agency are actually employees of the respective contractors, personnel issues and communications are always handled through the vendors. There isn’t, in our case, a direct line of communication between the administration and the individual coach operators putting service on the street. For example, when a change occurs in our fares or in service, our administrative staff communicates that information to the operations contractor management who are then responsible for providing the necessary training to the coach operators. The agency then has less control over the communication of that information which can sometimes have a direct impact on the service provided on the street.

Combining Public and Private
In Phoenix the transit system — like everything else — is growing. It might come as a surprise to learn a desert city is blossoming in such a profound way. But when it comes to Phoenix Public Transit, the municipal department in charge of bus service here, growth is the rule. The fleet is bigger than ever, with 535 buses traveling more than 21 million miles annually. The system sees an average of 114,000 boardings daily.

In part, these increases came about because Phoenix is steadily drawing in new residents. Phoenix is the fifth largest city in the country, in the fastest growing county in the United States. It is a big, hot place, mostly built when air conditioning made living in the desert reasonable instead of unbearable. Because of this and the difficulty of digging underground, Phoenix is a car city. It spreads out across 516 square miles. The vast distances and continued strong growth are some of the greatest challenges Phoenix Public Transit faces as a government institution.

The number of passengers and snarled traffic complicate the management of bus transit. Add to that a governmentally diverse transit landscape: Phoenix is bordered by nine other municipalities and a federally recognized American Indian reservation. The city is also a voting member of the Regional Public Transportation Authority (RPTA), a state-created entity overseeing cooperative transit development. To meet the needs of these many neighbors and partners, Phoenix Public Transit employs a combination of contracted service and staff-led administration. Many jobs within the department, from professional services such as auditing and public relations to on-bus advertising sales are done partially or completely by contracted workers. The largest contracts, by far, are agreements outlining bus service.

Most fixed-route service is provided through two companies, Veolia Transportation and Laidlaw Transit Services Inc., with a third company, MV Transportation, in charge of ADA paratransit service. Another company, First Transit, will take over Laidlaw’s routes in December 2007. Together, these companies provide full-service contracts that include vehicle maintenance and bus operator personnel management.

Phoenix Public Transit, in turn, employs more than a hundred staff members who manage purchasing and capital investment for the transit system. It also oversees technology and revenue development functions. Staff ensures cost-effective fulfillment of these agreements by working with other city entities like the Phoenix City Council and the council-appointed Citizens Transit Commission. Phoenix Public Transit also works with other municipalities to provide some services that cross city boundaries. Phoenix frequently sells a portion of its contracts to other cities, thus becoming the provider of transit service to thousands of people in neighboring communities.

This combination of staff-led and contracted management offers several benefits to Phoenix Public Transit and the residents it serves. Cost per ride throughout the system is one of the lowest among peer agencies. Use of two fixed-route operator contracts allows the city to focus staff time on planning and development of improved routes and new service implementation. It keeps a large portion of expenditures — for vehicles and transit facilities — directly under the control and oversight of staff, but lets private companies (with the ability to recruit, screen and hire employees faster than city government) handle the largest personnel function of recruiting bus operators, mechanics and other operations staff. The use of multiple operators and facilities means an improved response time to breakdowns in service and unexpected emergencies, with the impact spread out both regionally and organizationally. It even gives the city an opportunity to bring a fresh perspective to problems, by employing a new management company at the end of a contract. Considerable cost-savings can be had, too, when companies compete to create the most efficient bids.

For all its benefits, however, there are challenges that accompany a public-private partnership in transit. From a staff perspective, an entirely government-run transit system provides a measure of stability. City employees bring continuity in fluctuating transit situations. They are staff, generally with many years of experience, unaffected by slumping markets or corporate buy-outs. Additionally, working with the private sector can require extensive transition periods and extra expense when a longtime contractor is replaced. Since all of Phoenix’s bus service is provided by private companies, switching to different contracts can include lengthy negotiations as bus operators are brought into the new company, or as new management teams start their learning curve about maintenance and personnel functions.

The people at the bus stops, however, want simply to be sure their rides will arrive on time. Riders also expect easily accessed customer service, no matter who delivers it. They do not need to know ownership of some management functions resides directly with the contractor, while planning for new routes and additional service is done by staff. As an effective government agency, Phoenix Public Transit tries to make bureaucratic boundaries invisible. Under the shared name of Valley Metro, the region’s transit agencies collaborate to provide comprehensive service. Phoenix works diligently to relay concerns from customers, city council members and other stakeholders to staff and contractors. This back-and-forth can happen in everything from regular e-mails on route changes to systemwide meetings on collaborative marketing. It often requires negotiating service changes well in advance, to keep other cities aware and involved.

If the channels are built and open, strong communication systems can be the linchpin of successful public-private arrangements. Though its bus service is provided by many different organizations, Phoenix residents do not need to know how each one works individually. An effective partnership — like the city’s motto for customer care — is seamless service. If Phoenix Public Transit and its contractors each do their part, it should not matter how the buses arrive. The important fact is that they do. In the end, that is the reason Phoenix addresses its unique situation with contracted and staff service: to create the most flexible and responsive transit system possible. With more growth on the horizon, it is the best way to ensure Phoenix Public Transit has the tools to succeed now and in the future.

C. Mikel Oglesby is general manager of SunLine Transit Agency, Doran Barnes is executive director of Foothill Transit and Matthew Heil is the public information specialist for the Phoenix Public Transit Department.