Public versus private economic activity: A new look at school bus transportation

Thomas Borcherding (1977), in commenting on the public-versus-private literature, offered the generalization that removal of an activity from the private to the public sector will double its unit costs of production. The results of this paper obviously are not consistent with Borcherding's ‘rule of two’ generalization. At the same time, however, the 12% cost-per-mile differential in favor of private ownership indicated by the results for the overall sample is not a trivial sum in absolute terms. The cost-per-mile differences in favor of private buses contained in the five trip groups are not trivial either, nor is the direct evidence from the 82 joint systems. In attempting to assess the results, much depends on the perspective against which they are judged. Several factors suggest themselves concerning the ‘smallness’ of the differential. First, school bus transportation is a part of the education budget. Despite the lack of incentives implicit in public ownership, competition within the educational bureaucracy for a limited budget can result in ‘abnormally’ low cost public ownership. Second, and related to the first, is the fact that public and private ownership are in close proximity to each other — sometimes within the same school district. This proximity may lead to additional competitive pressures on public ownership. That school district residents can relocate based on school transportation considerations adds to this competitive pressure. To the extent that these first and second factors account for the smallness of the differential, our statistical results are consistent with the hypothesis that it is not public ownership per se that produces more costly public operations but, rather, the lack of effective competition. Third, although the contracting system is administered through open, competitive bidding, the district administrator responsible for the process has no direct claim on a dollar saving realized by the process. One would think that actual bid prices might be lower if the administrator's incentive to secure a lower bid price were greater. Finally, note that school bus transportation is technologically simple. Thus, private owners have less room to be innovative and entrepreneurial, meaning a reduced differential between public and private ownership. On the other side of the ledger, it remains that private ownership appears less costly. To explain the estimated cost differences in this study in an economic sense is to explain where the lack of incentive effects in public ownership find their outlets in terms of higher costs. Two primary factors appear to be responsible for the ‘largeness’ of the cost differential. First, as stated earlier, district-owned buses in Indiana are newer than contractor-owned buses. Capital costs related to public ownership — forgone interest income and economic depreciation — are, therefore, greater than these costs for private ownership. To the extent that this newer age structure is not indicative of higher quality output, it follows that school district officials, who do not have a direct claim on the benefits of economizing on capital, are providing higher capital cost transportation. Second, trip lengths for district-owned buses are shorter than the trip lengths of contractors. With declining cost per mile as trip length increases, shorter trip lengths imply higher cost per mile. Again, district officials and public bus drivers have less incentive to efficiently design bus routes served by district-owned buses; whereas one would expect the input of private contractors to impact favorably on the design of private routes. Even though the results of this study do not support the Borcherding generalization, they are still strong enough to have important public policy implications. The fact that almost 70% of school buses in the United States are district owned and to the extent that Indiana cost experience approximates that of the other states, substantial dollar savings could result from privatizing the provision of school bus transportation. Copyright Martinus Nijhoff Publishers 1984