The bus system? Really? How could the capital of privatization-friendly Chile have botched buses?
The answer, though entertaining to an outsider, is a parable about the combustible combination of optimism and ignorance. Add a spark of "two hours late to work," and you have riots hot enough to match the sunset. Let's go over a bit of history.
With more than five million residents, and real economic growth averaging six percent over the last decade, Santiago is a boom town, the economic engine of Chile. Nestled in a broad basin of the Andes, Santiago has the density (21,800 people per square mile) and the wealth (banking center and headquarters to more than one hundred international corporations) to make a mass transit system work.
For a related EconTalk podcast on Santiago's bus system, see Munger on the Political Economy of Public Transportation.
And work it did. The underground, or Metro, was built in the early 1970s and had high ridership, more than 2.5 million per day. Like many municipal subway systems, it received government subsidies to operate, but, compared to Washington D.C.'s fiscal black hole, "Metrorail," Santiago's was a model of efficiency. (If you are keeping score at home, the D.C. Metro gets annual direct subsidies of more than $175 million and average construction subsidies of nearly $1 billion per year; Santiago's Metro gets about one third that much operating funds, and less in construction, in a metro area twice as large as metro D.C.)
But the real jewel in Santiago's transit crown, or so I would have thought, was the bus system. Hundreds of different bus lines, most of them entirely privately owned, operated freely throughout the city. Some of the lines ran on surface streets parallel to the Metro, adding transport redundancy in case the Metro was having mechanical problems or was simply overcrowded. Competition among bus lines kept fares low, and drivers were paid according to the number of passengers they transported. Other bus routes delivered riders to Metro stops, not because anyone had ordered them to do so, but because that is where passengers wanted to go. And there were several classes of service, ranging from posh express buses that charged high prices down to claptrap jalopies that charged pennies and stopped every few blocks.
There were two problems with the Santiagueño bus system, however—as a survey of newspaper articles in El Mercurio and La Segunda in this period illustrate. Both had to do with greed, or the public perception of it.
Problem one: dangerous incentives. Drivers were paid based on the number of passengers, rather than on time or distance driven. But a moment's thought reveals the problem: Take one bus stop with a crowd of passengers, and then add two buses with a lot of empty seats. The result is a 40-mile-per-hour bus race on streets full of cars and pedestrians. The drivers were taking tickets, making change, watching traffic, and reenacting the chariot race scene from the movie Ben Hur all at the same time. Not surprisingly, there were accidents, and more than a few deaths. The number of motor vehicle accidents had risen from about ten per 100,000 population in 1990 to nearly fifteen by 2005. Further, 700 pedestrians per year, nearly half of all traffic fatalities in Santiago, were killed by cars or buses, a number much higher than in many other cities in Latin America over the same period. Worse, both trends (motor vehicle accidents and accidents resulting in deaths) rose over the period 1990-2005, compared with falling rates in nearly all of Chile's neighbors.
Problem number two was a little hard for me to believe when first I heard it. But even a few moments of research proves that it was true: The private bus system was operated without any public subsidies, or losses. That's right: a major municipal mass transit system was operating in the black! And that's a problem... why?
Well, of course, that's not the way that detractors described things. For a privately owned asset to be operating "without losses" means that the owners were either breaking even (some years) or making actual profits (most years).
For more than a few members of La Concertacion, Chile's center-left ruling government coalition, having companies profit by providing a public service smacked of theft. And so a consensus started to build. Citizens were upset about the rude, aggressive bus drivers. And the "planners" who run city agencies objected (first) to having only routes people seemed to want, and (second) to the injustice of different levels of service. They preferred a comprehensive, "rational" transportation plan, one that treated everyone equally badly, like the DMV in the United States.
The result was the new "Transantiago" public bus system, rolled out on February 10, 2007, during the summer vacation period, when Santiago seems asleep. Nonetheless, almost overnight, the new "planned" system cut mass transit ridership, increased congestion everywhere in the city, and tripled average commute times from forty minutes to two hours. As President Michelle Bachelet later said in a speech, "It is not common for a president to stand before the nation and say 'Things haven't gone well.... But that is exactly what I want to say in the case of Transantiago.... The inhabitants of Santiago, especially the poorest, deserve an apology."
The roll-out was not a total disaster, however. The new planned system did solve one of the major problems it had targeted: profits were eliminated overnight. Where the old system had made $60 million a year, the new planned system immediately began to lose, and has continued to lose, more than $600 million per year. Mission accomplished.
It's always easy to criticize, with hindsight. But optimism about planning and ignorance about the information provided by markets nearly always imply bad outcomes, and people should be able to see that in advance. Check this list of "reforms," and I think you'll conclude that Transantiago was predictably a choice of planned chaos, rather than orderly market, from the outset.
1. Bus routes that paralleled Metro rail routes were eliminated. Planners ignored the information embedded in those route choices: commuters wanted to travel those routes, and not some other route preferred by the planner.
2. Nearly all the new routes were feeders into, or from, Metro stops. Commuters who had ridden straight from home to work, and back, now had to wait, take one bus to the Metro, wait, board the Metro, wait a third time, and then board another bus to their workplace. Commute times tripled, causing thousands of commuters to drive cars instead. Worst of all, the Metro, which had been near capacity before the reform, was operating at ten to twenty percent above its designed capacity. No money had been allocated for handling this additional load—and the maintenance it required. The system barely operated at all at peak rush hour, again leading commuters to use private single-passenger surface transport to avoid being fired from their jobs.
3. The ten companies licensed by the city to operate bought hundreds of huge accordion-hinged "bendy buses" and put them into service on the streets. Each company operated monopoly routes prescribed by the authorities and had no latitude in level of service, frequency of service, or fares. The old competitive system, with many small and nimble buses, was entirely replaced. But the narrow lanes on many roads in the old city and mountain foothills simply could not handle the new behemoths.
4. Drivers were paid hourly, and could be fired if they didn't keep on schedule. The old system, in which drivers were paid by number of passengers, was proudly scrapped. The new system, rather than 'rewarding greed,' was planned to improve public service. And it should surprise exactly no one that this system was even worse than its predecessor. For one thing, the long hinged buses had four doors. Of course, passengers were supposed to enter at the front door, and to exit through any of the rear three.
But the drivers had no reason to care about the number of paying riders, and it was very time-consuming to go back and throw non-payers off the back of a crowded 30-meter-long bus. So, many drivers would simply drive their routes, operating on something close to the honor system: If you wanted to pay, you got on through the front door, and otherwise you used the rear doors. A dishonor system.
Then, things got even worse. The streets became clogged by increased private traffic, confusing new routes, and huge buses on tight corners that looked big only on planners' maps. The on-time performance of drivers deteriorated. And the drivers recognized that they didn't need to stop at all. Some drivers, by no means all but a disturbingly large number, would simply pass large groups of passengers, some of whom had been waiting for an hour or more.
As I noted above, with hindsight anyone can criticize. The question is what should have been done, instead? There were problems, real problems, with the old system. I will take up the "problem" of profits in the next section. But it is true that under the old private system, the buses were poorly maintained and spewed pollution. Drivers raced each other for passengers, sometimes injuring pedestrians or occupants of cars as they "overfished" what was, in effect, a commons of possible passengers and stops. Although Chile had fewer traffic accidents than most Latin American nations, it had a rate of pedestrian injuries and deaths as high as Brazil's or Mexico's, well-known pedestrian death traps. And it's true that the streets were congested.
A remarkable book, Curb Rights, by George Mason University Economics Professor Dan Klein and two coauthors (Adrian Moore at Reason and Binyam Reja at the World Bank; hereafter KMR), analyzes the problem of urban transit more deeply than any other source I have seen. KMR point out that there are two key problems with many private bus services, especially in areas where property rights may not be defined or defensible. The first is the problem of congregation, or coordinating on a stop location where a sufficient number of passengers are conveniently massed. The second problem is timing since no one makes money from a passenger waiting for a bus.
Now, monopoly public bus service "solves" the first problem by having well-defined bus stops, with (in some cases) attractive well-lit shelters. The road can be modified to make a pull-off lane for the bus, in some locations. Public bus systems solve the second problem by having schedules.
KMR point out that there is nothing particularly "public" about either of these solutions. In fact, most public bus systems rely on government enforcement of their monopoly property right, so that no private buses can pick up or drop off passengers at public bus stops. But this would work just as well for private buses, provided government simply enforces private rights to exclusive local pick-up areas. All that is needed for competition is enforceable "curb rights:" If a bus company builds a bus stop and pays for a pull-off lane, then no other bus company can steal the passengers congregating there. Different bus companies, different bus stops, and a "no poaching" enforced by government.
There are other, obvious institutional features of well-functioning private markets in the urban transit setting, and they would flourish if government regulation allowed them to. Bus companies might have two-tiered pricing systems to ensure a reliable supply of customers throughout the city. An ad hoc rider, one who simply catches a ride from one point to another without a consistent pattern (someone going across town to shop for an electronic part, perhaps) might pay a high fare. But "monthly pass" cards give riders a sharply discounted average fare if they pay up front for a whole month. Once a rider purchases a monthly pass, he can ride as many times as he wants for no extra charge on that bus line, whereas he would have to pay on any other line. Monthly pass holders thus form a reliable, constant base of customers that cannot easily be "overfished" by another company. Routes could be run, with high ridership, from the same neighborhoods to the same workplaces on a predictable schedule.
Finally, one cannot emphasize enough the advantages of allowing competition over routes and level of service. The argument that bad service is "fair" because literally everyone suffers places the value of equality over every other public goal, no matter how desirable. In a large, diverse urban area, some people want higher-speed express service, with amenities and perhaps an attendant. Others want rock-bottom prices and are willing to accept more inconvenience and less service. Charging everyone the same price and providing only one state-mandated level of service ensures that nearly everyone actually wants something else, but can't get it.
See James M. Buchanan, in the Concise Encyclopedia of Economics for more information about Buchanan and public choice.
Here is the real problem with the "greed is always bad, public provision is always good" perspective. As James Buchanan pointed out in "Politics Without Romance," it makes no sense to assume that, under some circumstances (private buses), people are greedy, and under others (government buses), people are benevolent. The fact is that in both cases people behave purposively, pursuing their own goals filtered through the incentives and costs the system presents to them. Yet, the idea persists that removing profits and using government planning results in a kind of moral transubstantiation. Many planners think that profits are evil and would prefer a system that eliminates profits, even it means accepting substantial losses and no improvement in service.
No matter how many times this notion is killed off by experience and evidence, the hydra of planning grows another head, and political leaders trumpet the new reform in public service. Then, when the reform fails, commissions are formed, implementation is blamed, and budgets are raised.
The Transantiago bus reforms took an imperfect private system, operating without public subsidy and serving well over a million people a day, and "publicized" it. The expectation, almost pathetically naïve in retrospective, was that outlawing profits and demotivating drivers would change human nature. Worse, planners believed that they could dictate choices to commuters, who turned back to private automobiles instead. Why don't they ever learn?
Buchanan, James. "Politics without Romance: A Sketch of Positive Public Choice Theory and Its Normative Implications," Inaugural Lecture, Institute for Advanced Studies, Vienna, Austria, IHS-Journal, Zeitschrift des Instituts für Höhere Studien, Wien 3 (1979): B1-B11. In The Theory of Public ChoiceII, ed. James M. Buchanan and Robert D. Tollison (Ann Arbor: University of Michigan Press, 1984), 11-22.
"Transantiago's Underlying Problem", Libertad Desarollo, No. 852, December 2007. [PDF file]
Klein, Dan, Adrian Moore and Binyam Reja. Curb Rights: A Foundation for Free Enterprise in Urban Transit,1997, Brookings Institution. At amazon.com.
McCarthy, Julie. "In Chile, Commuters Sue City over Transit System" National Public Radio.
Peden, Margie, Richard Scurfield, David Sleet, Dinesh Mohan, Adnan A. Hyder, Eva Jarawan and Colin Mathers, World report on road traffic injury prevention, Geneva, Switzerland: World Health Organization. 2004.
Walter, Matthew. "Santiago's flawed new bus system takes toll on Chilean economy and president," International Herald Tribune, April 10, 2007