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Ugboro et al. / IMPEDIMENTS ADMINISTRATION & SOCIETY TO/CONTRACTING March 2001 This article uses survey data to determine motivations and impediments to collaboration (i.e., contracting, merger/consolidation, and strategic alliance) among public transit systems in the United States. The results suggest that transit systems are more likely to contract out passenger service if they are involved in the initiation of the collaboration effort and if they are motivated by the possibility of increased resources and by government pressure. The impediments to contracting include resistance from other agencies and government funding agency restrictions. Mergers are motivated by cost savings and government initiatives (or pressure). Strategic alliances are motivated by the promise of increased service effectiveness but not so much by service quality, cost savings, or increased resources. An impediment to the formation of strategic alliances is size of required capital investment (cost of vehicles, equipment, and facilities). The article also examines the policy implications of these results.

MOTIVATIONS AND IMPEDIMENTS TO SERVICE CONTRACTING, CONSOLIDATIONS, AND STRATEGIC ALLIANCES IN PUBLIC TRANSIT ORGANIZATIONS ISAIAH O. UGBORO KOFI OBENG North Carolina A&T State University WAYNE K. TALLEY Old Dominion University

Even though private sector organizations engage in a variety of collaborative arrangements with significant regularity as a way of improving operational effectiveness and efficiency, the same cannot be said for public transit systems or organizations. When public transit systems AUTHORS’ NOTE: We thank the Urban Transit Institute at North Carolina A&T for funding the project that made this project possible. We would like to thank also the anonymous reviewers whose comments and suggestions were very helpful in revising the article. ADMINISTRATION & SOCIETY, Vol. 33 No. 1, March 2001 79-103 © 2001 Sage Publications, Inc.

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ADMINISTRATION & SOCIETY / March 2001

managers seek ways to improve their cost-effectiveness through some form of collaboration, questions about organizational structure and potential benefits of collaboration often arise. One major question is, Can the cost-effectiveness and performance of a transit system that provides a single service within a region be improved if the service is provided through some form of collaborative arrangement? Although there are transit collaborative arrangements, very few studies have been done to determine the motivation, impediments, benefits, and organizational structures for managing such arrangements. For example, what forces drive the desire to engage in some form of collaboration? What makes transit systems’ owners and managers resist collaboration proposals? How are costs and benefits shared? What agreement must be made to assure smaller participating firms or municipalities that their voices will be heard and their concerns and interests considered in major decisions? What mechanisms must be designed to resolve interfirm or municipality conflicts and overcome initial resistance by employees as a result of interorganizational cultural differences and the ever-present fear of “the unknown”? The purpose of this article is to investigate determinants (motivations and impediments) of collaboration and find answers to the above questions about why and how public transit systems collaborate, thereby providing important information for understanding the successes and failures of collaborative efforts. In this study, three types of collaboration are distinguished: contracting, merger or consolidation, and strategic alliance. Contracting involves a firm hiring another to provide services along a route or to perform such tasks as equipment and facility maintenance. Alternatively, contracting, just as load shedding and privatization, is a strategy to involve private firms in the production and distribution of publicly provided services (Perry & Babitsky, 1986). A merger or consolidation is an arrangement under which firms combine under single management and the merging firms lose their individual identities. Strategic alliance, on the other hand, is an agreement that combines services while the individual firms maintain their identities.

LITERATURE REVIEW Schneider (1989) suggests that bureaucratic budget maximization and rent seeking are the reasons why bureaucrats support cooperation among

Ugboro et al. / IMPEDIMENTS TO CONTRACTING

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and consolidations of public agencies. This view holds that bureaucrats favor consolidation when it increases their monopoly power and enables them to raise taxes and fees thereby increasing their budgets. Based on this suggestion, one would expect higher levels of inefficiency from cooperation and consolidation. Alternatively, one would expect efficiency from fragmentation of public agencies in metropolitan areas as argued by Boynes (1992) and DiLorenzo (1983). However, Durning (1995) argues against fragmentation of metropolitan services because in his opinion, it holds down prices, reduces the market for public goods, and causes inefficiencies. Similarly, he argues that county-level consolidation of services reduces efficiency, effectiveness, and responsiveness, and types of management and location in standard metropolitan statistical areas (SMSA) do not increase cooperation. Comparatively, Campbell and Glynn (1990) find that the propensity to cooperate depends on city size. Cooperative arrangements are also found in the public transit sector, although here, the subject has not been well researched and documented. The few accounts are in Shaw and Simon (1981), Topp (1989, 1990), and Hartgen and McCoy (1990). Topp’s study of German public transit systems distinguished between cooperatives and federations. In Germany, transit cooperatives are found in small cities providing service between towns and country. They do not involve establishment of a new company. Rather, the companies negotiate and work together. A federation, on the other hand, consists of firms that cooperate by establishing a new authority. Members of the federation divide revenues among themselves according to a predetermined formula. Cooperation may be mandated by legislation, as is the case of Los Angeles County. Here, a commission was established and charged with short-range planning, policy and program development, project selection, new system development, resource generation, and allocation. The legislation requires that “key decision makers sit together as a single policy board to discuss, decide and act in concert” (Shaw & Simon, 1981, p. 273). In the United States, voluntary cooperation exists in delivering transportation services for the elderly and the disabled, particularly at the local level (Lantz & Demetsky, 1981). At the regional level, cooperation is in the form of county, state, and local government compacts; councils of metropolitan planning organizations (MPOs); transportation management associations (TMAs); and state authorities (Hartgen & McCoy, 1990).

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MOTIVATIONS

The motivations for cooperation include service improvements and generating more revenue (Topp, 1990, p. 307). Others are better integration of highway transportation and public transit, to improve decision making, to make effective use of resources, and to involve municipalities and agencies in the transportation decision-making process (Shaw & Simon, 1981). Additional reasons are getting social service agencies out of the transportation business and ensuring greater vehicle use (Lantz & Demetsky, 1981). When cooperation is used by counties, its purposes are to increase efficiency and provide better quality services at costs lower than each county would incur separately in providing the service (Durning, 1995). Still, a reason for cooperation is to pool together individual expertise to develop and deliver high-quality services. When firms providing the same services merge, a motivation is cost savings that arise from consolidation of scale or the provision of a greater level of service. Similarly, when firms with different services merge, the motivation is cost savings that arise from consolidation of scope. Here, although the modes may be distinct, there are potential cost savings from centralized functions (e.g., scheduling and the payroll). The less distinct are the modes, the greater the potential for economies from consolidation of scope. Another motivation is government pressure and the accompanying funding restrictions. In Virginia, the Tidewater Transportation District Commission (TTDC), under pressure from the U.S. Department of Transportation, is the coordinator and provider of special transportation services and fixed-route services. The TTDC has taken over the provision of special transportation services from human service organizations whose roles are now limited to hiring and controlling drivers, finding out an individual’s eligibility for service, and securing $1 million in liability insurance for the service. A further motivation is to reduce risk by spreading it over the assets of a combined system versus the assets of a single agency (Contractor & Lorange, 1988). Also, a large public system can take advantage of greater government support (e.g., subsidies) provided to the larger but not smaller systems. IMPEDIMENTS

Although these motivations are important, there are impedances or costs to collaboration, including capital outlays for the provision of service by the system and transaction costs (Gegax & Tschirhart, 1984;


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Hennart 1991; Hill, 1990). System transaction costs are the costs of extensive decision making for negotiating, operating, and enforcing the provisions of the system. The negotiation cost, in particular, may be high because it is time intensive. Enforcement costs are those of ensuring compliance with system agreements or arrangements by the merged or cooperating agencies. Other impediments to collaboration are how to respond to other agencies in the region that have transportation planning responsibilities (Hartgen & McCoy, 1990) and the joint determination of system goals and objectives by participating agencies and governments. Still others are the joint determination of system cost and revenue allocation rules (or methods), the integration of different services into a multimodal system (Cottrell & Demetsky, 1981), government funding restrictions, and regulations. Yet another is the lack of technical, evaluative, and planning skills of agencies. Given these motivations and impediments, it is important to know which are applicable when transit systems collaborate. Such knowledge is useful to transit management in service planning and expansion.

HYPOTHESES AND MODELS CONTRACTING

Contracting in transit systems generally affects passenger service, facility maintenance, and equipment maintenance, among others. In the early days of transit contracting, most efforts were concentrated on passenger service. Today, transit contracting is diversified and includes other functions previously performed internally, such as information systems. We hypothesize that contracting is positively related to the areas covered by the contract (Z1). However, a negative relationship is possible because the more areas contracted out, the higher the level of resistance within the organization, and that can reduce the contracting effort. Contracting is also positively related to the benefits (Z2) from it. Conversely, higher costs or impediments (Z3) will reduce the level of contracting. Thus, we expect the relationship between contracting and impediments to be negative. We also expect that contracting will be positively related to the roles of the government (Z3) in initiating it because this is an indication of pressure on transit systems to contract out service. When most collaborations are funded by the government, the desire to reduce government funding is

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enough pressure in firms to contract out portions of their operation to save cost. However, government involvement can have negative impact on the probability of contracting if management feels it is being forced to do so. Contrariwise, the probability of contracting is expected to be higher when it is initiated by transit systems (Z4). Therefore, we expect the relationship between transit system involvement in the contracting process and contracting to be positive. Similarly, we expect a positive relationship between contracting and system size (Z5). That is, large firms are more likely to contract out services and functions than small firms, possibly to shed services they can no longer provide efficiently. We investigate the above hypothesized relationships regarding whether a transit system will choose or not choose to contract out service using a probit equation. Specifically, Y = F(Zi),

(1)

where Y equals 1 if the transit system chooses to contract out service and 0 if it does not choose to contract out service. Z i is the above set of (I = 1, 2, . . . j) variables or factors hypothesized to affect the contracting-out decision. MERGER/CONSOLIDATION

The desire of transit systems to merge also depends on similar factors as the desire to contract out service. A merger or consolidation, however, may be a result of economies of scope and even economies of scale. Economies of scope allow merged firms to realize cost savings from producing a variety of services particularly if the same resources are used to produce different products. When firms merge, they can produce a large output (if they produce the same or similar services), and this may lead to lower average costs. Therefore, we hypothesize a positive relationship between the desire to merge or consolidate service and the cost savings (X1) to be realized. Other motivations for merging are increased effectiveness (X2) in providing the service, improved service quality (X3), and government pressure (X4). Here, too, we hypothesize positive relationships between mergers/consolidation and these variables. We also hypothesize that lack of adequate resources (X5) will negatively affect the desire to merge. Let M represent the choice a transit system faces about a merger; that is, M equals 1 if the transit system chooses to merge and 0 if it does not choose to merge. Furthermore, M may be expressed as a function of the


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above set of Xi(I = 1, 2, 3, . . . k) variables hypothesized to affect the merger decision. M = G(Xi).

(2)

STRATEGIC ALLIANCES

Transit firms may collaborate to ease passenger transfer by issuing through tickets, or they may form alliances to purchase equipment or lobby Congress for legislation favorable to them. We hypothesize that the desire to form strategic alliance is positively related to cost savings (X1), increased service effectiveness (X2), improved service quality (X3), and increased resources (Y1). On the other hand, the size of required capital (Y2) such as the costs of vehicles, equipment, and facilities; difficulty agreeing to goals (Y3); cost and revenue allocation methods (Y4), and disagreements between elected officials and potential members (Y5) are impediments to the formation of alliances and, therefore, negatively affect their desire to form alliances. Successful alliances may also depend on who initiated them (Y6) and the types of firms involved (Y7). For example, if transit systems initiate alliances, they are more likely to commit to their success. However, when governments initiate alliances, they do so for different purposes or to achieve goals that may conflict with those of transit systems managers. Under those circumstances, the interests of transit systems managers in the alliance will be low, suggesting a negative relationship between the government initiating the alliance and its success. If the government and management agree to the goals, for example, when transit systems lobby the government to pressure other transit systems into an alliance, the relationship is expected to be positive. From these possible outcomes, the sign of the relationship between government initiation of the alliance and the desire to form it is an empirical issue. The desire to form an alliance also will be affected by the functional areas affected (Y8). Firms may form alliances for specific purposes. If a functional area is that mostly affected by alliances, a positive relationship is expected between the two. If not, the relationship could be negative. Let the letter A be the choice a transit system faces about an alliance, that is, A being 1 if the transit system chooses to form an alliance and 0 if not. This choice may be expressed by the relationship below: A = A(X1, ., ., X3, Y1, ., ., Y8).

(3)

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METHODOLOGY THE QUESTIONNAIRE AND SCALES

To test the hypotheses above, a questionnaire was prepared targeted at top-level management in public transit systems. In the United States, public transit systems may be privately owned, city owned, or set up by special state legislation. Transit systems that are set up by state legislation may have taxing powers (e.g., transit districts in California) or may not have taxing powers (e.g., Southeastern Pennsylvania Transportation Authority). When transit systems are publicly owned, they may also take two forms: They may be publicly managed or they may be privately managed, that is, they have contract management. Perry and Babitsky (1986) analyzed these types of ownership and management arrangements in public transit systems and found that transit systems set up by special legislation were the most common followed by city-owned and -managed systems. Publicly owned transit systems purchase transportation services from private companies. In 1996, approximately 644 U.S. public-owned transit systems were directly operated compared to 425 whose services were based on contractual agreements (Federal Transit Administration, 1996). Using the 1996 directory of the American Public Transit Association, we randomly selected 400 systems whose general managers had agreed in previous contacts to participate in the study. The general managers were requested to indicate their levels of agreements and disagreements to statements regarding contracting, alliances, consolidation, or mergers and to answer other questions about impediments and motivations for collaboration. Background data about the transit systems also were obtained in the questionnaire and were supplemented by secondary data from the bound National Urban Mass Transportation Statistics for 1997, that is, the Section 15 national database. The statements in the questionnaire were designed to evaluate the performance and the dynamics of cooperative arrangements among public transit firms. Top managers were asked to check all applicable motivations and impediments from a list we provided. They were also asked to write in their motivations and impediments if they were not on the list. Furthermore, transit managers were asked to indicate the levels of their agreements to statements about the processes and outcomes of their collaborations based on a 5-point Likert-type scale, that is, strongly agrees = 5, agrees = 4, neither agrees nor disagrees = 3, disagrees = 2, strongly


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disagrees = 1. Specifically, the instrument elicited information on top managers’ perceptions of and experiences with collaborative arrangements, their motivations, costs, impediments, and benefits. In this article, we focus on the aspect of the study that dealt with the motivations and impediments of the collaboration. (A sample of the relevant questionnaire items is provided in the appendix.) If a transit system has been involved in the three areas of collaboration (i.e., contracting, mergers/consolidation, and alliances), the manager was asked to answer the questions for each type; otherwise, the manager was asked to complete the questionnaire only for the type of collaboration that is applicable to his or her transit system. The motivation items came from Topp (1990), Shaw and Simon (1981), Lantz and Demetsky (1981), Durning (1995), DeHoog (1985, p. 429), and Contractor and Lorange (1988). On the other hand, the list of the items in the impediments came from Gegax and Tschirhart (1984), Hill (1990), Hennart (1991), Hartgen and McCoy (1990), and Cottrell and Demetsky (1981). The questionnaire was pretested, modified, and then mailed with prepaid return postage to the top executives (general managers) of 400 participating firms. To improve the response rate, we followed the mailing with two telephone calls at 3-week intervals. Of the 135 completed questionnaires returned, 115 were usable. This gives an effective response rate of 36%. Although this percentage is large, it is a concern because it is only 12.8% of the 1996 membership of the American Public Transit Association. Nevertheless, the data are good enough to carry out the analysis. STATISTICAL METHODS

The data from the questionnaire were analyzed using various statistical tools. Because the impediments and motivations are not ordered responses but true or false, we did not conduct reliability tests on them. Descriptive statistics were used to provide general conclusions about the responses of top management to the statements. Then, we used probit regression to estimate the equations specified in functional forms above for contracting, mergers/consolidation, and strategic alliance.

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TABLE 1

Types of Collaborations and Motivations Type of Collaboration

Percentage of Firms

Consolidation/merger Merged/consolidated Under consideration Strategic alliance Formed an alliance Under consideration Contracting Contracted out service Under consideration Motivations for collaboration Cost savings Government pressure Increased effectiveness in providing service (i.e., meets the needs of choice and captive riders) Improve service quality Increase resources

a

18.6 7.8 27.5 3.9 37.2 4.9 39.5 12.4 32.6 23.3 14.7

a. Because firms checked more than one, the percentages do not add to 100.

RESULTS SURVEY STATISTICS

The participating transit systems can be described as medium size (on the average, operating 485 revenue vehicles), with operating costs of $76.3 million and revenues received of $33.9 million from its passenger service operations. Additionally, the average transit system operated 698 miles of routes in an urbanized area with a population of 4.9 million. In addition to these characteristics, Table 1 shows the proportion of responding firms that collaborate and the motivations for collaboration. Clearly, contracting is the most dominant form of collaboration in transit systems. Of the firms responding to the survey, 37.2% are involved in some form of contracting, compared to 27.5% and 18.6%, respectively, involved in alliances and consolidation. The major areas of collaboration are equipment and facility maintenance. Approximately 57.6% of the firms collaborate in these two areas. Next in order of importance are equipment purchases (8.4%) and passenger service (8.4%). Collaboration is most often initiated by transit systems. In about 69.7% of the firms, this is the case, but in 22.7% it was initiated by the govern-


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ments of the participating cities. State and federal governments play very minor roles in initiating collaboration. Only in 4.5% and 3.0% of the firms do we find that collaboration was initiated by a federal mandate or by a state legislature. The parties to the collaboration are generally transit systems and private firms. Approximately 36.1% of the collaboration involves transit and private firms. This is not a surprise because it reflects the wave since the 1980s to contract out portions of transit operation to private firms. Other parties are transit systems collaborating with social service agencies (15.7%), counties and transit systems (13.3%), adjoining transit systems (13.3%), overlapping transit systems (8.4%), and counties and cities (4.8%). In addition, 1.2% of the collaboration involves counties, whereas 7.2% involves social service agencies or counties and social service agencies. When collaboration occurs, demand-responsive modes are generally those involved. Approximately half the collaboration involved demand-responsive transit systems. Bus modes account for 33.7% of the collaboration, whereas 10.9% and 1.9%, respectively, involve van pool and rail. Other transit modes such as ferries are involved in 4.3% of the collaboration. The public transit literature suggests that contracting results in cost advantages for agencies’ efforts. Because this literature lacks studies on collaboration in general, the motivations behind collaboration are unknown so they cannot be compared to the outcomes. From Table 1, cost savings are behind many collaborations according to 39.5% of the respondents. Increased effectiveness in providing service and improved service quality, however, are also some of the important reasons for collaboration. Furthermore, the table shows that almost the same percentage (32.6%) of the respondents indicated increased service effectiveness in collaborating, whereas 23.3% indicated improved service quality as their reason for collaborating. Increased resources and government pressure were indicated by 14.7% and 12.4% of the respondents as their reasons for collaborating. The motivation to collaborate often is hampered or slowed by unforeseen factors or factors outside the control of the parties. Table 2 shows a list of the factors that impede most collaboration in transit systems according to our survey. Three factors–cost of daily service, resistance from other agencies, and difficulty in agreeing to combined system goals–are important impediments to collaboration. Of these, resistance from other agencies, perhaps because of competition, is the most important. Transit agencies also are afraid that cost increases may result when they collaborate.

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TABLE 2

Impediments to Collaboration Percentage Cost Cost of daily service Cost of overseeing collaboration Cost of vehicles, equipment, and facilities Resistance from other agencies Difficulty agreeing on combined system goals Difficulty agreeing on combined system cost allocation methods Difficulty agreeing on combined system revenue allocation methods Difficulty making personnel decisions Government funding restrictions Lack of citizen’s support Disagreement between elected officials Disagreement between potential members

12.84 12.84 0.92 4.59 15.60 12.84 7.34 5.50 6.42 6.42 1.83 5.50 3.37

Similarly, they are afraid that their operational goals may conflict with each other. Furthermore, collaboration may be thwarted because employees fear job losses that are more likely to occur in the cases of consolidation and contracting than in strategic alliances. Among the remaining factors in Table 2, none is a dominant impediment to collaboration. Importantly, only 0.92% of the respondents indicated the cost of overseeing the collaboration as an impediment, and 1.83% indicated lack of citizens’ support as an impediment to collaboration. However, it is notable from the table that government funding restrictions may thwart collaboration efforts. This may happen when local funding does not allow extension of service to outlying areas where collaboration with adjoining or overlapping agencies is possible. Similarly, it is notable that difficulties in agreeing to cost allocation methods may thwart collaboration involving alliances. Although government funding restrictions were indicated by very few firms as inhibiting collaboration, their roles in successful collaboration cannot be overemphasized. This is because the major sources of funding for most collaborations are government funds. More than half the respondents indicated the government as the major source of funding for collaboration. The next most important funding source is sales tax followed by contributions from member firms. Gasoline taxes and other funding sources such as passenger revenue, dedicated property, and utility taxes


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are used by very few firms to fund collaboration. Additionally, the data reveal that when the parties must contribute toward collaboration, few (8.5%) use a predetermined formula. This is the case, for example, when counties and cities collaborate to provide transit services. Collaborations in transit firms are both short and long term. For our purposes, collaboration spanning more than 5 years is considered long term, whereas all others are considered short term. The data show that 50.8% of the collaborations had been in place for more than 5 years, and the rest, 49.2%, had been in place for 5 years or less. The firms with long-term collaboration tend to be smaller compared to those that have short-term collaborations. On the average, long-term collaborations involve firms with operating costs of $20.19 million and revenues of $10.33 million and that provide service on 232.33 miles of route. On the other hand, the short-term collaborators on average have operating costs of $84.35 million, revenues of $37.39 million, and provide services on 768.17 miles of route. A 3- to 5-year collaboration was indicated by 35% of the respondents. Thus, collaboration is medium term and long term. This is not a surprise because these lengths of time are long enough to allow members to recoup the capital they invested; short-term collaboration does not allow members enough time to adjust to their new environment. Also, initial start-up cost may be so high that firms are unable to recoup their capital when the collaboration is for a short period, and this is the reason for entering medium- and long-term collaboration. CONTRACTING

The probit results of the contracting-out equation appear in Table 3. The asterisks beside the coefficients in the table show those that are statistically significant in explaining the decision to contract out service. These coefficients suggest that firms are more likely to contract out passenger service compared to other areas such as facility maintenance. Also, the results clearly suggest that the desire to contract out services is motivated by the possibility of increased resources and government pressure. Both variables have positive and significant coefficients, but their significance levels show that government pressure exerts more influence on contracting than cost savings. Surprisingly, and contrary to expectations, improved service quality is negatively related to contracting (although statistically nonsignificant), suggesting that transit systems do not consider improved service quality as the motivation to contract out their services. In fact, they

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TABLE 3

Factors Affecting Contracting, Consolidation, and Strategic Alliance: Probit Estimation Contracting Description Same service contracting Different services

Consolidation

Standard Coefficient Error

0.2334*** 0.1616 Combination of different services 0.4593* 0.1603

Motivations Cost savings

Description

Motivations 0.1910

0.1830

Cost savings

0.2822*** 0.1893

Improved service quality –0.1068 Increased resources

0.1693

Resistance from other agencies

0.2875

Government initiative or pressure

0.3055*** 0.1813

Improved service quality

0.1127

0.2825

Impediments –0.5061*

0.2303

Standard Coefficient Error 0.2019

Motivations 0.4600*** 0.2663

0.2741*** 0.1817

Impediments

Description

0.3077** 0.1949 Combination of same service 0.2170

Increased service effective- –0.1477 ness (i.e., meets the needs of choice and captive riders) Government initiative or pressure

Strategic Alliance

Standard Coefficient Error

Lack of adequate resources –0.2508 (e.g., labor)

Cost savings

0.3221

0.2544

Increased service effective- 0.7688* ness (i.e., meets the needs of choice and captive riders)

0.2771

Increased service quality –0.2496

0.2416

Increased resources

0.2114

0.1494

Impediments 0.3840

Cost of vehicles, –0.8840* equipment, and facilities

0.4396

Difficulty in making personnel decisions

–0.0249

0.3389

Government funding restrictions

–0.4743*** 0.3344

Others Passenger service contracting

Others 0.2634*** 0.1751

Route mile Intercept

City and county as parties–0.1182 to collaboration Transit system was included in the initial effort to collaborate

Disagreement between elected officials and potential members

0.4316

0.2517** 0.1325

–0.1015

0.3860

0.1208

0.1788

Others –0.0962 2.4626*

0.0921 0.5092

Government initiation of merger

Areas covered: equipment 0.3323***0.1937 maintenance Transit system was included in the initial effort to collaborate Duration: long term Alliance initiated by transit systems

0.0431

0.1574

0.3887** 0.1937 –0.1453

0.2433

Operating cost

0.0208

0.0415

Operating cost

0.0101

0.0507

Intercept

2.1567*

0.1793

Intercept

1.8120*

0.2813

NOTE: Pearson goodness-of-fit chi-square: contracting = 152.153, consolidation = 175.678, alliance = 137.094. Sample size: contracting = 114, consolidation = 116, alliance = 114. Significance of equations: contracting, p = .019; consolidation, p = .001; alliance, p = .069. *Significant at .01 level. **Significant at .05 level. ***Significant at .10 level.

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vices. Additionally, cost saving has the correct positive sign but a statistically insignificant coefficient. Resistance from other agencies and government funding restrictions reduce the probability of contracting out services. These results suggest that government pressure increases the probability of contracting out services, and the probability increases when transit systems are included in the initial effort to collaborate. MERGER/CONSOLIDATION

The probit results for mergers also are in Table 3. Consistent with the hypotheses, the results suggest that cost savings, government pressure, and the involvement of transit systems in the collaboration arrangements increase the probability of firms merging their operations. Increased service effectiveness is not significantly related to the probability of merging, possibly suggesting that firms merge to realize economies of scope and economies of scale. This result is supported by the fact that the probability of a merger increases when the types of transit services involved are different. Also, improved service quality does not significantly affect the probability of merging. Examining the table, the coefficient of the impediment, lack of adequate resources, has the correct sign but is statistically insignificant. Thus, it is not a strong factor to consider in merger decisions. The probability of a merger reduces with network size though insignificantly. Also, the coefficient of route mile is negative but insignificant statistically. STRATEGIC ALLIANCE

The last three columns of Table 3 show the strategic alliance results. Clearly, many variables hypothesized as affecting the desire to form alliances have no statistically significant relationship to it. The results suggest that alliances are motivated by the desire to increase service effectiveness and not by service quality, cost savings, or increased resources. A major impediment to alliance is the cost of vehicles, equipment, and facilities. Although the coefficients of the remaining impediments have the expected negative signs, they are statistically nonsignificant. Furthermore, the results suggest that alliances are long term (more than 5 years), thereby allowing firms to recoup their capital expenses. This finding also suggests that transit systems are less likely to enter into an alliance that is short term. In the short term, transactions and capital costs cannot be recouped and increase deficits. Mostly, alliances are formed for equipment maintenance perhaps because of economies in purchasing materials


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and parts and in bargaining with potential contractors to perform the maintenance function cheaply. From Table 3, two factors are common to mergers and contracting and have the same coefficient sign. Government pressure increases the probabilities of a merger and contracting out services. Also, mergers and contracting generally cover the same services. Besides these common factors, the factors that negatively or positively affect alliances do not necessarily affect mergers or contracting. Although this is a result of the way we have modeled alliances, mergers, and contracting, it is still true that different motivations are behind the ways collaboration is done in public transit systems.

CONCLUSION This article used survey data to identify determinants of public transit collaboration (i.e., contracting, a merger/consolidation, or strategic alliance). The results suggest that transit systems are more likely to contract out passenger service if they are included in the initial effort to collaborate instead of being told to do so. The decision to contract out services is also influenced by government pressure, increased responsibility, and resources without an existing organizational capability to do so or, in the words of Deavers (1997), having capacity constraints that limit expansion. Sometimes, this increased responsibility is short term so the organization may not find the need to build up its capability in terms of labor and capital to provide the service in house; therefore, the organization contracts it out to an outside firm. At other times, the increased responsibility is long term and has potential to increase the scale of operation or increase output beyond the cost-minimizing level so contracting is adopted. The results of this article did not find cost savings as the bases for contracting out and do not support long-term contracting. However, the article found that the impediments to contracting include resistance from other agencies and government funding restrictions. If contracting out is to succeed, firms must find ways around these impediments. That cost saving is not a reason for contracting seems at odds with the prevailing view in the public transit literature that suggests contracting results in cost advantages because the contracted services are performed by private operators efficiently. Perry and Babitsky (1986), for example, note in their analysis of five types of ownership and management arrangements in public transit systems (i.e., private, government owned and

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managed, special authority owned and managed, government owned with private management, special authority owned with private management) that private firms produce a greater amount of output per dollar and use less public assistance thus saving cost. However, they found that contract-managed systems did not perform better than publicly managed firms. Some of the results of Perry and Babitsky, particularly cost savings from contracting in public transit systems, are also echoed in the findings of Teal (1988) and Tomazinis and Takyi (1989). Others such as ownership influence on cost are consistent with the findings of McGuire and Van Cott (1984). From our results, transit systems seeking contracting as a form of collaboration should limit it to passenger-related services rather than core functions such as facility maintenance. This is because of the need for better control of core functions that could cause major service disruptions. Passenger service contracting can be for the same or different services according to our results. When same-service contracting is used, its management implication is that the existing service (e.g., bus service) is too large to manage, thus resulting in diseconomies of scale. Therefore, contracting will result in cost savings by reducing the size of the service provided. On the other hand, contracting for services different from what the firm produces implies there are perceived diseconomies of scope; that is, there are cost increases by producing the services together. Regardless if same-service or different-service contracting is used, once the contracting decision is made, the funding entity should be asked to exact the necessary pressure to bring it about. This is especially needed when resistance from certain parts of the transit system, such as unions and other agencies, is anticipated. For any contracting arrangement to be successful, the transit agency must ensure that there are adequate resources to allow the contractor to effectively perform the contract. Additionally, whenever a transit system chooses contracting, it should lobby for the removal of government funding restrictions that prevent or prohibit it. Mergers are motivated by cost savings and a government initiative (i.e., political incentive or pressure). The likelihood of a merger increases if we combine different firms producing the same service, and this may be the reason for a part of the cost savings. Although we have not examined the nature of the cost savings, they may be a result of the ability of the consolidated firm to exploit economies such as those associated with inventory or purchasing or with a more efficient use of maintenance facilities. Alternatively, the cost savings may be a result of economies of scope. Such economies of scope have been found by Viton (1993) to justify


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recommendations for consolidating all the transit systems in the San Francisco Bay area. There may, however, be other reasons such as equity considerations, but these are not examined here. However, we speculate that cost savings will still be important even if these other reasons were considered. This is particularly important because the promise of significant cost savings is a powerful tool when seeking the approval of funding agencies. Sometimes, however, cost savings may not be sufficient to convince all the participating agencies to agree to the merger, especially those who perceive their security to be dependent on the existing system ( DeHoog, 1986). In such a case, government pressure is needed to ensure that the consolidation or merger takes place. To help understand the intent of a proposed consolidation or merger, it is important to fully involve all the affected agencies in the consolidation process. This reduces fear and other uncertainties that usually fuel resistance from those threatened by the consolidation or merger. Because contracting sometimes may be viewed as a short-term solution to a problem and mergers a long-term solution, the time frame becomes important in determining whether to contract out or form mergers/ consolidations. The decision to form a strategic alliance by transit systems is influenced by the duration of the alliances. Transit firms favor long-term alliances (5 years and longer) over short-term alliances because they allow the participating firms to recoup their invested capital including transaction costs, that is, the cost of preparing the merger documents, administering the merger, assuring quality, information gathering, and so forth. An impediment to forming an alliance is the high cost of required capital investment (vehicles, equipment, facilities). Usually, alliances are for equipment purchase and maintenance. This strengthens the bargaining power of the alliance when negotiating the prices of operating equipment. Also, it eliminates unnecessary duplication of costly maintenance equipment. Because of the substantial capital investment, this type of alliance should last for at least 5 years—the longer the term the better. Most alliances break up because of conflicts caused by disagreement about cost sharing. Therefore, the terms of cost sharing should be clearly defined, negotiated, and agreed on by all members at the beginning of the alliance. In the case of alliances, the motivations are not the same as those that underlie the desire to contract out services. Similarly, these motivations do not underlie mergers or consolidations. From our results, the formation of an alliance is influenced by the desire to increase the effectiveness of the services provided (i.e., ability to provide transit service to choice and

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captive riders). For example, a desire to make transit services available to a large population may lead to the formation of a strategic alliance in which there is a collaboration between adjoining transit systems while each maintains its autonomy. In addition to equipment maintenance, strategic alliances may involve developing a common master plan for their networks with shared transfer points, quoting through fares, and firms pooling their core competencies to develop mutually beneficial programs. These examples are not specifically addressed in this article. The finding that government pressure affects collaboration is important and needs elaboration. Government initiatives may be in the form of increased funding for the transit system or a priority assignment in the government’s fund allocation process. The promise of funding, particularly if it is long term, is an incentive to collaborate, as when the consolidated system is given taxing powers. Government pressure, on the other hand, may be in the form of legislation and threats of funding cutoffs such as could result from a funding freeze. Another form of government pressure in the United States is contained in Circular A-76 provisions that require government and private firms to bid against each other for the right to provide services (Dudley, 1990). During the Reagan administration, this provision was greatly expanded on and used as a strategy to reduce the role of government in the provision of public transit services. Such government pressures have been noted by Kettner and Martin (1986) as motivations for making decisions about service contracting. These authors also noted political concerns as motivations for purchasing contract services. Similar findings of political pressures for contracting are expressed in the work of DeHoog (1985). Thus, our finding of the influence of political pressure in collaboration is not only consistent with the literature but with government initiatives. LIMITATIONS

The results reported in this article are constrained by the data and the questions to which we sought answers. Our sample of 115 firms or 12.7% of the members of the American Public Transit Association may give inconsistent results from a larger sample. Similarly, our data limit most discussions to economic reasons for collaboration and may not have adequately accounted for equity and other reasons. These limitations are noted and are issues for future research.


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APPENDIX Please circle the appropriate answer or answers to each question. Use separate questionnaires if your transit system is involved in more than one type of collaboration. We have included three copies of the questionnaire for your use. For the purposes of your answers, please use the following definitions for the types of collaboration. Alliances—An agreement that consolidates services while systems maintain their individual identities. Consolidation—An agreement that combines services under one management. Systems lose individual identities. Contracting—An agreement whereby a firm hires another company to provide services along routes or to perform maintenance and other tasks. Collaboration—A generic term used in this study to refer to alliances, consolidation, and contracting arrangements. 1. Merger/Consolidation: Have you merged or consolidated your operations with another transit system? a. Yes we have done so..................................................................................... b. We are thinking about it................................................................................ c. We have not done so..................................................................................... 2. Alliances: Have you consolidated some services with other transit systems while each system maintains its own identity? For example, offering through fares, designing your networks to complement each other, pooling maintenance, and purchasing services. a. Yes we have done so..................................................................................... b We are thinking about it................................................................................ c. We have not done so..................................................................................... 3. Contracting: Have you contracted out service to another agency or private firms? a. Yes we have done so (Please provide a copy of the contract)......................... b. We are thinking about it................................................................................ c. We have not done so..................................................................................... 4. This was a proposed combination or contracting of: a. Same service................................................................................................ b. Different services......................................................................................... c. Same and different service........................................................................... 5. What were the motivations for your collaboration? Check those applicable to your system. a. Cost savings................................................................................................. b. Government pressure...................................................................................

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c. Increase effectiveness in providing service................................................... d. Improve service quality................................................................................ e. Increase resources........................................................................................ f. Other (specify)............................................................................................. 6. What were the impediments to the collaboration? Check those applicable to your system. a. Cost i. Cost of daily service .............................................................................. ii. Cost of overseeing merger/consolidation .............................................. iii. Cost of vehicles, equipment, and facilities .............................................. b. Resistance from other agencies .................................................................... c. Difficulty agreeing on combined system goals ............................................. d. Difficulty agreeing on combined system cost allocation methods ................ e. Difficulty agreeing on combined system revenue allocation methods .......... f. Difficulty in making personnel decisions ..................................................... g. Government funding restrictions ................................................................. h. Lack of adequate resources (e.g., personnel) ................................................ i. Lack of citizens’ support .............................................................................. j. Disagreement between elected officials ....................................................... k. Disagreement between potential members .................................................. 7. Who are the parties to the collaboration? a. County and county ....................................................................................... b. County and city ............................................................................................ c. County and transit agency ............................................................................ d Transit agency and social service agency ..................................................... e. Adjoining transit systems ............................................................................ f. Overlapping transit systems ......................................................................... g. Tr a ns i t ag e n cy and p r iva t e fi r m s ................................................................... h. Others (please specify) ................................................................................ 8. Who initiated the collaboration? a. Governments of participating cities ............................................................. b. State governments or legislature (Please provide a copy of the legislation) c. Federal government mandate ....................................................................... d. Citizens of participating cities ..................................................................... e. Transportation agency/authority ................................................................. 9. How long has your collaboration existed? a. One year or less ............................................................................................ b. Approximately 2 years ................................................................................ c. Approximately 3 years ................................................................................ d. Approximately 4 years ................................................................................ e. Approximately 5 years ................................................................................


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f. More than 5 years (please specify) ............................................................... 10. Which of the following areas is covered by your collaborative arrangement? a. Equipment purchase..................................................................................... b. Facility maintenance.................................................................................... c. Passenger service......................................................................................... d. Equipment maintenance............................................................................... e. All areas of transit operation......................................................................... 11. How many modes does your collaborative arrangement involve? (Please circle all that apply) a. Rail.............................................................................................................. b. Bus............................................................................................................... c. Demand responsive...................................................................................... d. Vanpool........................................................................................................ e. Other (please specify) .................................................................................. 12. How long is your collaborative arrangement designed to last? a. One year ...................................................................................................... b. Two years .................................................................................................... c. Three years .................................................................................................. d. Four years ................................................................................................... e. Five or more years (please specify) .............................................................. f. Long term (no specified duration) ................................................................ 13. How is the collaboration funded? Check those applicable to your system. a. Sales tax ...................................................................................................... b. Gasoline tax ................................................................................................ c. Specified contribution from participants ...................................................... d. Federal/state/local funds ............................................................................. e. Other (specify) ............................................................................................ 14. How was the management team selected? a. Seniority basis ............................................................................................. b. Experience and expertise ............................................................................. c. A formula based on equal representation of participants .............................. d. Other (specify) ............................................................................................ 15. Is there a cost-sharing formula? a. Yes (Please specify or provide a copy) ......................................................... b. No ............................................................................................................... Name of Transit System ___________________________________________ Fleet size________________________________________________________

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Total operating cost for the last fiscal year (1995) $ ______________________ Total revenue for the last fiscal year (1995) $ ___________________________ Miles of route operated____________________________________________ Population of service area __________________________________________

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Isaiah O. Ugboro is an associate professor of management at North Carolina Agricultural and Technical State University in Greensboro. His research interests are in organization and management theory, business strategy, and organizational behavior. Kofi Obeng is a professor of economics and transportation/logistics at North Carolina Agricultural and Technical State University where he holds the title of UPS Professor of Transportation. His research interests are in studying cost, productivity, subsidies, and management issues in public transit systems. Wayne K. Talley is a professor of economics at Old Dominion University in Norfolk, Virginia. He holds the designations of Eminent Scholar and the Frederick W. Beazley Professor of Economics. He is an internationally recognized transportation economist, and his research interests are costing, safety, urban transit, and maritime transportation.