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Open Access Publications from the University of California

Estimating the Potential Cost Savings of Transit Service Contracting


The continued financial problems of the public transportation industry have motivated a search for more cost-effective ways of delivering transit services. Service contracting--the contracting of public transit services to private providers--has emerged as one of the most promising alternatives. Existing evidence suggests that service contracting could reduce public agency cost by 10 to 50 percent. If service contracting were implemented throughout the public transit industry, services currently provided by public agencies would be shifted to private provision. However, little is known about how such service shifts would affect transit service costs, and whether significant cost savings would occur. 

This paper presents an assessment of the cost savings potential of transit agency service contracting. A cost model based on the concept of avoidable cost is used in a series of case studies to generate estimates of potential cost savings resulting from contracting various quantities of transit service. Research results showed average cost savings of 23 percent for the contracted service. These savings are equivalent to about 4 percent of the transit agency's total operating cost. Cost savings depend on a number of factors, but are roughly associated with the size of the transit agency. Cost savings for small agencies are insignificant and can be negative, while savings for agencies larger than 250 vehicles typically range between 5 and 7 percent of total operating cost when 20 percent of existing service is contracted.

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