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December 8, 2008


Brazilian electricity and New York buses

Nicole Gelinas

What can Brazilian power lines teach New York about introducing private-sector competition to its public-bus system?

In 1999, Brazil started to hold auctions open to both public and private sector players interested in improving the nation’s transmission grid. Brazil has to have a robust transmission grid, because electricity created by water power has to travel a long way so that a rainy season in one region can complement a drought in another.

Brazil thought power lines were a good place to introduce competition because the projects are highly capital-intensive, but easy to execute. That is: it takes a lot of money to build a transmission line, but it doesn’t take a genius to actually build and operate it. There’s little in the way of “bleeding edge” technology and the like.

Plus, power lines afforded a relatively straightforward, easy way to conduct an auction. Investors would simply bid on the lowest tariff they would require to run the lines. Also, if a winning bidder did somehow screw it up, the results wouldn’t be catastrophic. No winning bidder would have a monopoly on the whole system.

After nearly a decade of this system, although there have been a few problems, Brazil seems generally happy with the results (if anyone in the know thinks otherwise, let me know — being far from Brazil, I’m happy to crowdsource a bit on this one). Successful private and public bidders, sometimes a mix of the two, have increased transmission capacity by a third, and brought costs down.

OK — good for them. But what does that have to do with buses in New York?

Well, buses are just a form of transmission lines, really, and they share the factors that made Brazilian power lines a good place to experiment with competition.

Running a bus service is capital-intensive (sort of), in that a small company must first finance and buy a fleet of buses, which cost about $500,000 each, more if you want bells and whistles.

But it doesn’t take ingenious technological know-how or management to run the buses, just a reasonable level of competence and intelligence. That’s why a generation of Chinese-American entrepreneurs, without apparent management or transportation background, has been able to make such a success of the business on the Boston-New York route, raising the bar for older-line operators.

There are no hidden risks to screw up the bidding, as there are with underground transit projects. Underground, particularly on complex projects like signalling, private-sector contractors can’t really see what’s down there, and what the real cost will be, until they’ve signed the contract and started digging. Reality often requires expensive change orders after the contractor has already gained a monopoly on the work.

And, just like in Brazil, there’s no reason why contractors couldn’t bid on the lowest tariff they’d require to run, say, a fleet of express-service buses from Coney Island into Manhattan and back ten times a day. If the routes were profitable enough, the tariff could end up being negative, with the bus companies paying the state and city for the privilege of charging riders market prices for good service.

Short contracts would mean that if a bus company screwed up, it wouldn’t matter much. The company would simply lose his contract at its expiration, or earlier if warranted by the contract terms and performance.

And the mobility of the underlying assets — buses — would mean that the lenders needed to finance the buses wouldn’t be put off by that risk of contract loss. They could simply seize the assets and sell them to another operator.

 

 
 

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