Contracting for buses

The Ministry of Transport is consulting on the Public Transport Operating Model.

Sounds boring as all heck, right?

You can submit on it via a survey, and boy are there some worrying questions in there. 

Let's step back a minute and consider the problem first. 

Wellington in particular screwed up its bus service. I have not seen the RFP or contracts that Regional Council put out for the bus service, but it's easy to diagnose the problem from the symptoms.

Here are the symptoms:

• Bus services that are frequently cancelled for want of drivers;
• Complaints about driver pay;
• Concerns about there not being enough drivers. 

Any doctor can tell you the most likely cause of those symptoms. 

If the contract for service imposes low penalties for missed services or poor standard of service, relative to what the bus company would have to pay in higher staff costs to avoid having missed services or poor standards of service, then the bus company will optimise by running a lean staffing model. 

Bus companies compete to provide the service. Given the terms of the contract, the one able to deliver the desired service, and desired here means "follow the terms of the contract and respond to the incentives it provides in ways that are utterly predictable to the person writing the RFP if the person writing the RFP isn't an idiot", will be the one doing so at lowest cost. 

This isn't a problem of greed, or of the bus company putting profits over people, or of the bus being privately run rather than publicly owned - it's none of that. And it isn't a problem either of choosing the lowest-cost bidder either. 

The problem the contracts had to have set very low penalties for missed services. Just think about it for a minute. If it were cheaper for the bus companies to hire on more staff so there'd always be someone ready to take on a shift if a driver came up sick, that's what they'd be doing, right? Because they care about their bottom line. If it's cheapest to eat the fines and pay less, that's what they'll do. If the fines were higher, they'd eat the higher staffing cost instead. 

Now an important consequence of that higher-fine model would be that the bus company would have to make more on the route - whether through higher fares or higher council subsidy for running the route. How do we know that? We know that because the cost to the bus company would go up. 

So my diagnosis is that council was contracting on the cheap, not wanting to wear the higher costs either in fares or in route subsidies required for levels of service consistent with community expectations, and then foists blame on the contracting model, on the bus company, or on neoliberalism. 

Given that diagnosis, the potential solutions offered up in the MoT work are a bit wanting. 

They're looking at going back to public sector ownership, living wage mandates and the like. 

It misses the point. 

A living wage mandate might be a nth-best solution to the problem in that the bus company would be able to hire as many staff as the company would want at that wage, but it wouldn't solve the problem of the bus company not wanting to roster staff in case of staff not showing up. It would make that problem worse, unless the fines for dropping a service went up. Why? Because the cost of keeping extra staff around in case relievers are needed would be higher. So you might have fewer no-shows, because staff would be more worried about having to shift to some other job that pays less well, but you'd have fewer relievers ready to deal with no-shows, and there will still be an optimisation on how many relievers to keep on in case of sickness days. 

And public sector ownership doesn't solve anything either if the underlying problem is Council not wanting to stump up enough for a reliable service. 

Then there's a bunch of other stuff in the document about making it mandatory to run electric buses, despite transport being in the ETS, and about whether Councils should own and provide the bus depots to facilitate electrification. 

If this thing follows the fashionable direction of travel, we're going to wind up higher cost public transport without the desired improvements in service. 

The cell phones hypothesis

Are cell phones to blame for the uptick in New Zealand's crash rates? I don't know, but I have a potential way of checking - an exercise I'll leave to the committed reader, or whoever MoT hires as their new data analyst.

Get maps of cell phone coverage going back as far as the data goes. Not all uses of cell phones while driving require signal, but phone use should be increasing in signal availability. Here's a map of towers, but you'll need a time series and you'll need dead zones.

Get maps of accidents.

See whether expansions of cell phone coverage predict increases in the number of accidents in the places getting more cell coverage.

Confound: endogeneity where cell companies will put up towers in response to demand. But that demand should lead the accident rate rather than lag it, unless the cell companies are real good at predicting where people are going to start wanting to drive more. If the towers are more likely to come after the increase in traffic, then it should be fine.

A tweak for road user charges

New Zealand's road user charge system, in which petrol excise is a level rate but diesel charges vary with the weight of the vehicle, seems likely due for a rethink in the next few years. The bigger change will be needed as electric and hybrid cars take up a greater proportion of the fleet.

But here's a little one that could be bundled in at the same time.

Currently, every diesel owner has to report mileage and pay their road user charges. Smaller vehicles have a low per-km charge; large ones have a larger charge. It would be trivially easy to impose excise on diesel equivalent to the costs that small diesel vehicles impose on roads - the same as the petrol levy. Then, exempt small diesel vehicles from having to pay road user charges while lowering the tariffs for larger vehicles' road user charges.

You'd maintain the appropriate link between vehicle weight and road user charges while saving a pile of smaller diesel vehicle owners the hassles involved with road user charges. And as more smaller vehicles switch over to diesel, it seems a simple change worth making.

Update: the comments section has helpfully pointed out the substantial issue with this scheme:

1. Because much diesel is used off road, we'd have a trade-off between the hassles of RUC for small diesel vehicles and the hassles of running an untaxed stream of diesel that could leak back into the road market. When I was a kid in Canada, petrol for on-farm use had purple dye in it, and vehicles that were not registered for farm use were forbidden from using it; they had occasional checks, and a purple tinge in your carborator could be used against you.
2. The actual hassles of paying RUC for small diesel vehicles is smaller than I had been led to believe by the diesel owner who pointed me in this direction. So it seems highly unlikely that the overall scheme is hassle reducing.

I consequently withdraw the suggestion.

Road hog (or at least pork)

Were I teaching my undergrad Public Choice class again in two weeks instead of heading off to Wellington to join up with the NZ Initiative, this would have been Assignment 3. It couldn't have been the first assignment, because that comes after they've gotten basic constitutional political economy and social choice, but before they've gotten the basics of their own electoral system and the mechanics of pork barrel politics. It couldn't have been in Assignment 2, as the kids then wouldn't have yet gotten the economics of bureaucracy. It could have been Assignment 3, or on the take-home exam.

In theory as developed and discussed in lectures and in your readings, we found that First-Past-the-Post systems tend towards geographic-based pork-barrel policies while PR and MMP systems tend instead to demographic-based pork.  

During this year's election campaign, National announced a substantial set of roading projects to be funded outside of the normal NZ Transport Agency funding process. Normally, roading projects are chosen by a process largely outside of politics: collected petrol excise and road user charges in the Land Transport Fund are used for road maintenance and for new roading projects, where the projects are ranked in importance by bureaucrats rather than politicians. These ones were chosen by the National Party and funded from revenues outside of the Land Transport Fund.

a) Explain the basics of pork-barrel policies and why they might differ between electoral systems.

b) Why might a government agree to leave roading decisions to an arms-length body?

c) Was the roading announcement above surprising? Why or why not? Explain National's decision.

One secret in my assignments and exams: I often didn't really know what the answer was. All that grading rubrik stuff we were supposed to have done this year, well, that wouldn't have gone well for part c of this question as I don't have a great answer here. Students who could apply the theory well to the case at hand would do well, and those who came up with explanation that didn't demonstrate any understanding of the theory failed.

In Part a, I'd expect some discussion of the basics from Persson & Tabellini and from Stratmann & Baur.

In Part b, I'd expect some discussion of the benefits of delegation. In a FPP system, such delegation is more needed than in MPP, because every MP will be tempted to skew things towards their own districts. We might expect a delegation to a partisan committee that weighs up overall benefits to the governing party, but not to a neutral committee. Under MMP, you could get bipartisan sustainable agreement to leave it to a nonpartisan committee because the benefits of distributing geographic pork are more limited, as far as the Party's concerned, but individual district MPs will still try to push for it anyway.

In Part c, well, I haven't a great answer. Maybe National's doing it as a sop to the hinterland in general, reckoning that Auckland won't care enough to punish them for it. I wonder what my students would have done with it.

What's really irritating here is the precedent. Once we've broken the general user-pays nature of the National Land Transport Fund, all bets are off. When the system's working, the fees motorists pay are what pay for highway construction and maintenance, with some local Council contribution (half) toward local roads. If you want rail lines and other stuff, that comes out of general revenues: it can't come out of petrol excise, 'cause that's for roading projects. When you break that deal and run partisan allocation of funding for transport projects rather than leaving it to the Transport folks who are meant to be running things through a cost-effectiveness filter, well, who knows what messes might yet come.

Do read Transport Blog's excellent discussion:

Perhaps the most worrying thing about this announcement isn’t so much the projects themselves but that the government is getting more and more involved in picking projects rather than leaving it up to the NZTA to decide on spending based on merit. It started with the RoNS and last year we got the Auckland package.

When highways are ribbon-cutting triumphs for MPs rather than mundane bureaucratic decisions, I expect we get worse outcomes.

I also thank @zippygonzales for related discussion.

Update: Just remembered that I was in a Twitter argument last week about how we needed to keep highway funding separate from public transport funding because it's harder to go on dumb C>B roading sprees when you have to fund it from petrol excise and road user charges. Hmm.

Emissions and used cars

The National Business Review's print edition takes on the effects of the recent import restrictions on Japanese used cars.

I'm agnostic on job losses or the magnitude of any price hike consequent to the regulation change; I've done no work on it. I'd expect employment effects to be transitory rather than permanent: in a few years, the 2005 bar will become non-binding; even if it didn't, we'd get a lull in used car sales only until people get into the new and longer car replacement cycle, at which point it would level back up a bit.

I'd count the primary costs of the legislation as being the burden on consumers who are forced away from what would have been their optimal choice rather than employment effects. I doubt we'll see any environmental benefit from the regulatory change to offset this loss; we could even see a worsening in quality. As I wrote last year:

Green MP Gareth Hughes lauds the changes, saying it will help save lives by reducing emissions. I'm really not sure that's the case. It would be surprising if the price of used cars did not increase consequent to the change - knocking out a substantial proportion of the general supply flow does that. While the imports are a small fraction of the overall fleet, they're a large proportion of vehicles entering the fleet; prices are set on that margin. If prices go up, folks will hold onto their cars for longer rather than replacing them. Some will certainly shift into buying a 2005 or newer import, but others will hang onto their older car for longer. The net effect on particulate emissions is then at best ambiguous.

The NBR cites me (accurately, on emailed query, though they're the one who decided I'm an expert):

Canterbury University economist Eric Crampton, an expert on public policy who has also blogged on car imports, said it was basic economics that when supplies of something were restricted, the price would increase.

He too believes the government might suffer from the law of unintended consequences if this environmental policy meant drivers kept their dirtier cars for longer. Such unintended consequences were "rife in environmental policy," Dr Crampton said.

But, one of the copyeditors puts my name on a boldfaced quote that isn't mine; the body of the text attributes it to "Dog and Lemon Guide" editor Clive Matthew-Wilson, who says

"Ten per cent of New Zealand cars have no WOF or registration and making it harder for people to upgrade theri vehicles will lead to more unsafe cars and cars belching out pollution, which is the opposite to what the legislation was intended to achieve."

I don't particularly disagree, though I have no knowledge of compliance rates on WOF or on registration, and while I'd bet on that pollution goes up a bit with the rule change, I wouldn't say it's necessarily the case. It's just a likely consequence.

Gerry Brownlee cites Ministry of Transport data showing no correlation between old car scrap rates and vehicle imports as saying something useful about the likely effects of import restrictions. The same line was run by a commenter complaining of my prior analysis.

There are a few problems with the lines MoT fed to Brownlee.

First, I'm not sure that we've ever before put in a policy barring the import of vehicles that previously made up such a large proportion of the incoming used car cohort; whatever correlations between scrap rates and import rates may have held previously might not be reliable this far out of sample. The 2010 data shows we then imported a bit over 76,000 used cars manufactured 2004 or earlier and almost 92,000 new and used vehicles made since 2005. The 2011 stats aren't yet out, but if we just advance the calendar by two years on the 2010 data, we'd get 47,000 used imports manufactured 2004 or earlier and 120,000 made since 2005; about 28% of what we might have ballparked as an incoming cohort for this year are now barred entry.

Second, so long as some people are moving from single car to two-car households, we could easily get a decrease in the average fleet age weighted by driven kilometres even if there's no correlation with scrap rates; when you get a relatively newer car, your relatively older car goes into "second vehicle" use: almost-scrap. The scrap rates don't tell us much about this if we're not in steady state where every family wanting two cars has two cars.

Finally, the scrap rate is less instructive than changes in the curvature of the scrap-age profile. In 2010, used NZ vehicles hit peak scrap rates for model years 1986-1987; 18% of vehicles of those model years that were registered at the start of the year were no longer in the fleet at the end of the year. If everything's working properly, that peak scrap age should be moving forward in time a bit faster than calendar years advance if we're getting relatively richer. It'll be interesting to see what the 2012 data winds up showing.

Prior posts on the used car regs:

- Average fleet age increasing
- Proportion of vehicle imports that would be barred under the 2005 limit
- A lengthy discussion through the comments thread on this one with a fan of the regulations.

Trusting used car dealers

A loyal anonymous reader, likely employed at the Ministry of Transport, seems aggrieved by my prior post. Here's his comment, and my attempt at an answer. I'll let y'all do the grading of the question and the answer.

Ok, I think we can accept that the government decision is beat you over the head with a stick stupid and that all bloggers are mensa graduates with perfect information so answer me the following please:

1) If MOT data shows no correlation between the volume of used vehicles being imported and the volume of vehicles being scrapped why does this change on 1 January? 

2) If stats NZ CPI reports that the average used car price shows no correlation with used vehicle import volumes why does this relationship change on 1 January?

3)If Mr Vinsen has said that imports will halve and prices double virtually every year since 2005, and they have not, why is he right this time? 

4)If the new rule only requires imports of newer vehicles, how much more expensive does that make the vehicles already in the fleet?

5)If the average age of the fleet is 13 years, how much younger does it get from importing yet more 12 year old vehicles? 

6)When did you start trusting used car sales men for advice on anything?

You have three hours.

I lost the first 90 minutes of the challenge as my computer doesn't boot up before 9 am. But here goes anyway. In reverse order.

6) I never said that I trusted his numbers, just the sign of the number. I said I was agnostic about magnitude; it's not something I've looked into. From the initial post:

I have no sense of whether Vinsen's estimate of the price effects are correct. He is undoubtedly correct about the direction of the change. I'm agnostic about magnitude.

5) That'll depend on how much more expensive relatively newer vehicles get. If a bunch of folks with 18 year old cars become less likely to switch up to 15 year old cars because the folks with 15 year old cars aren't trading up to 12 year old cars, the mean gets pushed back, right? If the price rise for 12 year old vehicles is big enough, then the fleet can age substantially. If the price rise is small, so too will be the effect on fleet age.

4) It can have big effects at the margin, but will depend on relative elasticity of supply and demand. It's easy for the effects to work their way all the way down the line though, right? If the cohort who'd usually purchase 10 year old Japanese imports and sell off their 15 year old Japanese imports hold off trading in for a few years because the price of newly imported used vehicles has gone up, then the supply of domestic older used cars goes up, etc. As for magnitude, that's something I could set up as an honours project for a student but not something I'm going to try doing now. Especially not under a time constraint.

3) Again, I'm agnostic on magnitude. But not on sign. See above.

2) My first cut answer would be that the supply curve is near-horizontal over the relevant range. NZ demand is a small part of the overall market. As soon as there's any price pressure here, increased imports keep things in line. We'd then see no correlation between domestic price and used vehicle import volumes.

1) I'm having a hard time reckoning how there's no relationship between imports and scraps prior to 1 January; I'd have to understand that prior to working through the comparative statics. Surely every car that is imported eventually is scrapped - we don't export our low value castoffs to anybody else given shipping costs. Or at least I'd be really surprised if we did. The only way there's no correlation then between imports and scrap is if we're still in disequilibrium - that there are lots of individuals who want to have a second car where the price is low enough but haven't yet acquired that second car. In equilibrium, the guy importing the 10 year old Honda sells his 15 year old Honda to a guy who sells his 20 year old Honda to a guy who sells his 25 year old Honda to a guy who scraps his 30 year old Honda. In disequilibrium, there's a market for those 25 year old Hondas as second cars that are rarely driven. If that's the world, and the price of the 10 year old Hondas rises, a lot of those 25 year old Hondas remain the daily drivers for poorer folks rather than turning into the second car for slightly less poor people. Mileage adjusted fleet age rises.

I haven't access to the MoT data cited. But if the commenter does, and is interested in providing some of it for an honours project two years from now (roughly long enough for effects to start working their way though), I'd be more than happy to supervise an Honours project using that data to examine the effects of the regulatory change. As mentioned, I'm agnostic on magnitudes. But I'd love to find out!