Anthony Ling on private buses

A guest post from Market Urbanism’s Brazil correspondent, Anthony Ling, who blogs in both Portuguese and English at renderingfreedom.blogspot.com

For a long time I’ve been thinking about why collective transportation is a synonym to public transportation. Is there anything special about the activity of taking people from one point to another that makes it valid to prevent competition, prohibit entrepreneurship and end with different types of services in a city according to passengers’ needs? Public transportation in Brazil is known to be inefficient, and it is the poor, the most dependent on this service, that ends up being harmed.

How could a company enter the market or technologically innovate in collective transportation? Far beyond the basics that are missing in the Brazilian bus lines, such as a route identification system, both online and on the bus (in Porto Alegre you have to know what codes like T1 and T5 mean as a route), knowing which buses pass in each bus stop would already be a start and a great comparative advantage to a new company on the business. While we depend on the inefficiency of the public sector, the group from Porto Alegre Shoot the Shit has started a collaborative initiative to find out which bus passes at each stop, action that was initially seen by the EPTC as an act of vandalism.

Another strategy would be the identification of which routes are overloaded with passengers, trying to profit with one more bus to be used by people that aren’t being served on the margin. Or do just the opposite: try to find out if there is demand to nonexistent routes through market research. Still, a much simpler way would be what many schools use for the transportation of their students, but in different types of establishments. A company could go to commercial buildings of a specific neighborhood and ask their users which neighborhood they are coming from and if they are willing to hire a service to transport them without stops. If only this last alternative was viable and would come to reality in a generalized manner throughout the city, a lot of people would be able to get rid of their cars, since regardless of where they work, it is very possible that a specific way of transport would exist to supply the route demanded by each person.

A current example of innovation would be the mobile app recently published on TechCrunch called Sidecar, that connects passengers going to the same place, transforming virtually every car into a small vehicle of collective transportation. Here each passenger decides how much he’ll pay the driver, making his decision with information on how much previous passengers have payed. A brilliant invention, but it would take away from the city its existing regulated monopoly on collective transportation, being exactly this kind of regulation which prevents the app from entering the market.

With that in mind, I took my question about the restriction of entrepreneurship on the collective transportation system to Manuela D’Ávila and José Serra, mayor candidates for Porto Alegre and São Paulo, respectively, in the event held by INSPER on cities, which had as a guest (unfortunately through the internet) the urban planner Edward Glaeser.

Manuela told me that she found my question weird, since she considers collective transportation in Porto Alegre a private business in which each route is operated by a private firm. Her response surprised me even further, considering that we all know that it is almost impossible to obtain a license and that all companies that operate in Porto Alegre are highly regulated state concessions, which must follow the standards of Carris, the government’s transportation firm. I tried to continue the conversation by asking via Twitter “how can I innovate on the collective transportation system which has limited licenses, loads, tariffs and controlled routes?”, but unfortunately I didn’t get an answer.

Serra argued that transportation, as well as some others infrastructural public services, can’t have the risk of stopping, since many people depend on it. However, these public services are more susceptible to labor strikes than private corporations, causing the chaos on transportation that we saw a few weeks before the event. If there is an open market, with many firms competing against each other and with easy ways of entering this market, there is no reason for this service to ever stop. These are the same reasons by which it is hard to imagine a shortage of food on the food industry, as said recently on the article by Leandro Narloch on Folha de São Paulo in which I gave a small collaboration.

The most recent experience with a collective transportation system that isn’t monopolized is Chiles’, which allowed free competition and free price setting by companies on this sector from the late ‘70s to the early ‘90s, when the industry once again began to be regulated. After listening to a series of podcasts, reading articles and hearing testimonies about this experience, it seems to me that there are three major criticisms about this system.

The first and foremost criticism of a possible deregulation is similar to the criticism that is commonly made to any sector that has this risk: the establishment of a cartel and the raising of tariffs in a system ruled by private firms, preventing the poor from using this service. According to Gómez-Lobo, the average tariff in Santiago practically doubled in price on the period of 1979 to 1990, but this analysis only sees the problem on its surface.

This amount does not take subsidies into consideration, funds collected through taxation, used to keep this tariff low. According to economist Mike Munger, Santiagos’ bus system, which is regulated by the state nowadays, has an annual loss of Ch$600 million, and even though I don’t have the numbers for the period prior to 1979, it is expected that there was a huge state subsidy to keep tariffs low. In Porto Alegre, the city’s company Carris had an annual loss of R$1,8 million due to tariff prices, and in São Paulo Capital the money loss gets to almost R$800 million to maintain tariffs at R$3,00. This basically means that people who don’t use collective transportation end up paying for those who use it. There are people who defend this as a social policy, since usually people who use this type of transport are part of the poor segment of the population. However, what really happens is that many of the users are also from middle and upper classes, ending up receiving subsidies from those who are poorer, but who also pay taxes. Still, in my opinion, collective transportation shouldn’t be limited to the poorer sectors of the population, with the possibility of existing alternatives that are either cheap or expensive depending on the value each citizen puts on his personal transportation. At last, I see a great problem on trying to fix social inequality and low incomes through the distortion of the whole public transportation network. If the problem is low income, then the same subsidies could be given directly to the poorer citizens so that they could choose by themselves which kind of transport they would like to use.

In general, it is known that if the political barriers to entry the market are really eliminated, there will always be pressure from competitors to increase efficiency and lower prices to attract customers in the market. Furthermore, differences in capacity, routing flexibility, age and quality of vehicles, passenger density per bus and, also, efficiency of management of each company would influence the price of each route, creating a wide range of choices in transportation.

The second issue raised from the Chilean experience, which I heard for the first time from the Urban Mobility Secretary of Porto Alegre, Luís Afonso Senna, is the competition between bus drivers to pick up passengers at a certain bus stop. Since the stops remain public and drivers are rewarded by their efficiency, the stories of Santiago’s locals are that bus drivers acted as if they were Ben-Hur in the racing chariot, rushing to pick up the group of passengers that was waiting. This caused an increase on the number of accidents and bad public perception of the system, where the search for profit increased the number of deaths on the streets. However, the problem existed because they had private companies acting on a public platform – bus stops which belonged to all companies together – which generated this distortion on the market. These perverse incentives were analyzed by Daniel Klein in a paper about “curb rights”, arguing that a simple way to solve this problem would be to establish specific bus stops for each company or group of companies, ending any sort of competition for a single stop and increasing traffic safety. Physically, these bus stops format could be similar to the BRTs that exist in Curitiba and Bogotá. Since waiting passengers in a bus stop have already bought their ticket, the ticket could be exclusive to a company or a group of companies, ending any sort of race for passengers and, at the same time, practically implementing a BRT privately, without burdening the government coffers.

The last criticism to the Chilean free-market buses was that, to reduce costs, companies stopped renewing and doing maintenance on their fleet, producing a great number of old, unsafe and polluting vehicles on the city. My first comment to this criticism would be that, for automobiles, the Brazilian incentive is precisely the opposite: cars older than 10, 15 or 20 years don’t have to pay IPVA (vehicle taxes), depending on the region. The reason behind this is a social one, since poor citizens that usually the owners of these vehicles. Repeating what I said before, it doesn’t seem efficient to encourage the usage of cars that are less safe and create a problem of urban pollution if the reason for that is income distribution: these issues must be resolved separately. Moreover, if a big chunk of the population that uses collective transportation has less financial means or cares less about the quality of buses, it would be natural, in a free market, to have companies with vehicles that supply these consumers. One can imagine some kind of municipal regulation to prevent private agents that are emitting toxic gases or threatening others with vehicles that are falling apart, but I believe that this regulation shouldn’t establish prohibitive standards to the poor nor be restricted only to buses or only to cars, since the damage both cause is the same. Anyway, I don’t believe that this argument alone could be reason enough to hinder innovation in the collective transportation sector.

Still, collective transportation continues to be confused with public transportation, restricting incentives to innovation that are brought by competition and possibility of bankruptcy, which never happens when you can cover up any inefficiency with more taxation. When people get bad service, or don’t have the routes they need, or have to put up with polluting vehicles, or the price is considered too high or route information is simple not there, one’s only option is to complain to the public power with very low chances of success, with no possibility of exchanging provider or venturing something better.

*Podcasts and Additional Articles:*

Munger on Private and Public Rent Seeking (and Chilean Buses)
http://www.econtalk.org/archives/2010/08/munger_on_priva.html

Munger on the Political Economy of Public Transportation
http://www.econtalk.org/archives/2008/07/munger_on_the_p.html

Privatisation and Deregulation of Urban Bus Services: An Analysis of Fare Evolution Mechanisms, J. Enrique Fernández e Juan Carlos Muñoz
http://ideas.repec.org/a/tpe/jtecpo/v41y2007i1p25-49.html

The Limits to Competition in Urban Bus Services in Developing Countries (Draft), Antonio Estache e Andrés Goméz-Lobo
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.162&rep=rep1&type=pdf

The Limits to Competition in Urban Bus Services in Developing Countries, Antonio Estache e Andrés Goméz-Lobo
http://captura.uchile.cl/jspui/bitstream/2250/2289/1/Estache_A.pdf

Planning Order, Causing Chaos: Transantiago, Mike Munger
http://www.econlib.org/library/Columns/y2008/Mungerbus.html