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Is the 9% increase in public transport fares…fair?

Fare revenue per passenger kilometre for selected cities ($)

Many people are outraged that the Government has dared to increase public transport fares in real terms. From 1 January, fares in Melbourne will rise by around 9%, well in excess of the rate of inflation (3.6% for the 12 months to the September Quarter).

From what I can make out, I don’t think anyone is questioning the need to increase revenue for public transport. For all its virtues, the system needs billions spent on things like improved signalling, track upgrades and duplications, more train sets, new rail lines, improved security, and much more. Patronage has grown at around 5% p.a. and that increases costs. Indeed, spending more to improve the system is the key to sustaining increasing patronage.

So the issue is not about the need for more money, but rather about where it should come from i.e. who should pay. Additional revenue for higher capital and operating purposes can only come from a limited range of sources. The main possibilities are:

  • From passengers via fares;
  • From taxpayers generally (by foregoing expenditure elsewhere in the Transport portfolio or beyond);
  • From efficiency improvements e.g. reduced fare evasion, less restrictive work practices;
  • From the beneficiaries of the public transport system e.g. land value capture, levies on city centre businesses;
  • From other transport activities with undesirable side-effects e.g. congestion pricing; levy on car registration.

Each of these sources might be able to contribute something, but the revenue task is huge and there are practical and political limits to how much each can put in.

Fares are an important tool because they directly link supply and demand and they have history. Paying for service is a well established principle in public transport – there are very few public transport systems around the world that don’t charge fares.

Melbourne public transport users already get a pretty good deal – their fares recover none of the capital costs and only 44% of operating costs. Moreover, judged against some other cities, Melbourne’s fares aren’t especially high compared to the cost of providing the service (see exhibit).

The key market for the system is CBD workers who on average are reasonably well paid relative to their counterparts in other parts of the city. Further, a significant proportion of public transport users already benefit from concessional fares.

Those who argue that funding should come from general revenue rather than from passengers don’t always think about what would have to be foregone. They often implicitly imagine it would be at the expense of something they personally see as valueless or negative (new freeway construction is a common target).

But there’s nil guarantee of that. Any such decision would be made by the Government of the day according to its priorities and values. It might come at the expense of a very worthy transport project or it might come at the expense of another portfolio, perhaps a highly emotive one like education, health or community services. This attitude just shifts the problem to somewhere else where it might possibly impact others with less capacity than CBD workers.

In the short term – and this increase will take effect within four weeks – there are really only two choices: raise fares or fund the increase from elsewhere in the budget. In the longer term however there are possible alternatives to future fare increases.

One of those options is clawing back evaded fare revenue, but I doubt it is the goldmine many imagine. I don’t find the argument that the private operators and the government are too inefficient to prevent evasion very persuasive.

A more plausible explanation is that the cost of prevention exceeds the revenue likely to be recovered – winning back the marginal dollar gets harder and harder. There’re probably more cost-effective methods that could be used but as a community it’s doubtful we’d tolerate them e.g. draconian policing, Dickensian penalties.

Some opponents of fare increases (e.g. see letter from Brian Buckley, Carlton Nth) reckon hordes of travellers will abandon public transport and start driving, leading to higher social costs i.e. more congestion, more accidents, more emissions, more pollution and more oil consumption. They argue the social cost of this mode shift would exceed the cost of paying for the increase out of general revenue. There are a number of points that need to be made here.

First, the great bulk of public transport users are “captive” and simply don’t have the option of driving. They either can’t drive or they work in the city centre where motoring is simply too expensive due to high parking costs and existing traffic congestion. Rather than abandon fare increases, it would be smarter to deter any shifts to driving by policies such as higher parking charges.

Second, the cost of driving has also risen. For example, the price of petrol has increased much more in real terms over the last ten years than fares. Third, to the extent that the increase in fares might lead to more driving, it’s important to understand that the social costs are an economic cost – while that’s important, economic costs are not the actual cash the public transport operator needs to pay the wages of all those public transport workers.

There are good arguments for taxing the beneficiaries of public transport rather than passengers, but these are complex and politically difficult ideas. Congestion pricing is an essential initiative in Melbourne and I believe it will inevitably happen. But like the idea of levying land uses that benefit from public transport, it won’t be any time soon.

In any event, these sorts of ideas don’t necessarily mean passengers shouldn’t pay higher fares. As argued by the Independent Public Inquiry into Sydney’s long-term public transport needs, a range of sources will be required to assure funding for public transport in the long term. And initiatives like congestion pricing, when they happen, won’t have lower fares as their key purpose.

I shouldn’t overlook the “public transport is a public good” argument, which contends that any increase in fares can’t be justified. As I’ve pointed out before, public transport is not a public good. It’s neither non-rivalrous nor non-excludable – it gets congested and users pay. Of course it has a social function but so do water and energy. As with these utilities, subsidies should be directed at eligible users, not bestowed on all passengers via the fare structure irrespective of income.

Under the new tariff structure, a daily zone 1 myki cap will rise by 52 cents to $6.56. Public transport needs more funding to improve service and grow patronage. Passengers already get a relatively good deal. In my opinion the increase is fair enough.

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  • 1
    Peter Hill
    Posted December 7, 2011 at 10:15 pm | Permalink

    Alan, you are spot-on.

  • 2
    Chris
    Posted December 7, 2011 at 11:12 pm | Permalink

    Bring back conductors and reduce tram fare evasion from 90% to 10%. Then get rid of zone two .then get rid of touch-off.

  • 3
    Matt
    Posted December 7, 2011 at 11:28 pm | Permalink

    Alan, as usual I agree with your assessment. And I agree that a price rise is acceptable though I think the chart you’ve shown (cost per km) is probably biased in favor of Melbournes sprawling network. For example I’d be curious to see comparisons of frequency of service, delays etc. Providing a higher quality of service is more costly and thus it’s justifiable to have higher ticket prices.

    And that’s why there’s such vitriol around the price increase. It’s perceived that Melbournes public transport has not significantly improved in many years despite promises of the contrary. Yet the price goes up.

    I don’t necessarily agree with that viewpoint but I can sure understand it.

  • 4
    Posted December 8, 2011 at 9:48 am | Permalink

    Hi Alan, great article!
    I remember there was a big spread in the Sunday Age a few years back dedicated to the argument that it would be more cost efficient to make public transport free so that our fares and taxpayer dollars weren’t spent on elaborate ticketing machines/systems, ticket inspectors and their gestapo uniforms and the whole administrative system around fining fare evaders.

    I’ve simplified the argument but I’m sure you get the gist.

    I’d be interested to hear your views on this line of argument (and apologies if you’ve already addressed this in a previous blog – I’m reasonably new here).

  • 5
    Posted December 8, 2011 at 11:32 am | Permalink

    I’m not too concerned by the fare hikes. You’ve pointed out plenty of good reasons to bring them in. I however do feel that some ticket prices should be reduced, mainly monthly and yearly tickets.

    The PTUA covered reasons why here, and Paul Mees has a fair bit of information in Transport for Suburbia that also makes a compelling case for heavily discounted periodical tickets.

    However I disagree completely that the operators and government are not too incompetent to deal with fare evasion. The trick to reducing fare evasion is to make it as easy as possible to buy a ticket and as difficult as possible not to. Removing station staff, and conductors made it much easier to get away with not buying a ticket. Coin only Metcard machines on board trams made it much harder to buy them on a tram. Finally soon enough buying short term tickets will be impossible, as will be purchasing a ticket/topping up on a tram!

  • 6
    Posted December 8, 2011 at 1:47 pm | Permalink

    I find it difficult to fully accept the need to fare hikes to have PT costs better met by revenue when no moves are being made to do the same for PT’s major competitor: private motoring (even with the rise in petrol prices, which hit the hip pocket but are very limited in meeting the costs to governments).

  • 7
    Peter Hill
    Posted December 8, 2011 at 2:50 pm | Permalink

    Introduction of a generalised wide area road pricing regime (“GWARP” or “WARP”) would be the best way to recover direct, deferred and external costs from the motorists in a way that sends a discouragement signal to travelers BEFORE they choose the car. A GWARP regime would incorporate the dimension of temporal-spatial traffic congestion, and would allow “variabilisation” of costs currently fixed and thus removed from the traveller’s chooser’s modal-choice decision point. For example, annual registration and vehicle/third party loss insurance fees. Part of this GWARP revenue should be used to fund PT operations in such ways as to attract drivers to switch to PT via a “loyalty” type of pre-paid credits redemption program.

  • 8
    Posted December 8, 2011 at 2:57 pm | Permalink

    Are you serious saying you don’t agree that “Melbournes public transport has not significantly improved in many years despite promises of the contrary”? If so, I’m curious what improvements you have seen that you’d count as ‘significant’!
    Frankly, the quality of PT service in Melbourne by international standards is pretty abject, and furthermore I’m not the least bit convinced that the reason is primarily lack of funding.

  • 9
    Chris Sager
    Posted December 8, 2011 at 3:12 pm | Permalink

    My biggest concern is to do with the demise of single-trip tickets with the cut-over to Myki. This follows on from the dropping of ‘short trip’ fares allowing a cheaper fare for a 2-station short journey, and perpetuates the ongoing erosion and ‘benign nelect’ perpetuated against the system by successive State governments.
    Living in Spotswood and working in St Kilda, will the increase in fares reduce the number of public transport trips i personally make? No. Will it have a negative financial effect on me? No.
    Does it reinforce my dissatisfaction with either of the two ‘major’ parties? Absolutely.
    It would all be fine (sic) if the increased fares were contributing towards the improved running of the system, or (heavens!) the necessary expansion of the system (how about a focus on getting a rail / light rail line to the Airport?).
    Chris.

  • 10
    Posted December 8, 2011 at 4:10 pm | Permalink

    The real issue is that the fare rise was factored in to fund the various projects in the Victorian Transport Plan which have now been scrapped. The Coalition Government needs the money because it made under-costed promises and is raiding the VTP Reserve to pay for them. For example their much touted $380 m level crossing program is entirely funded from the money set aside for level crossings in the VTP

  • 11
    Posted December 8, 2011 at 9:51 pm | Permalink

    That’s my point – bringing back station staff and conductors might help recover evaded revenue, but it costs money.

  • 12
    miles
    Posted December 9, 2011 at 12:09 am | Permalink

    “the system needs billions spent on things like improved signalling, track upgrades and duplications, more train sets, new rail lines”

    “their fares recover none of the capital costs and only 44% of operating costs”

    It seems a bit disingenuous to suggest that a hike in fares might help pay for much needed upgrades when you yourself suggest that fares do not and will not cover these costs. As I understand it, and I am happy to be corrected if this is not the case, the fares are almost or entirely collected by metro and all capital costs are borne by the government .

    “public transport is not a public good”

    Though I understand that technically speaking public transport is non-rivalrous (i would argue the non-excludable bit as I have not been asked for my ticket for nearly 18 months ;) , there are precious few public goods that satisfy this definition when taken to the extreme. All non-rivalrous public goods I can think of are only non-rivalrous only by virtue of their ubiquity. Taken to an extreme, obviously clean water is out, sewerage, legal representation, clean air is questionable, policing, roads… Who exactly pays for roads? All transport is a public good in as much as access to you property is bought, paid for and policed by public money.

    It would be quite possible to fund a good, reliable, and broad public transport system – making it virtually non-rivalrous. The main reason public transport is on this continual high-wire act of funding and defunding is because liberal governments love cars and cheap land on the fringe and labor governments love trains and industry. Both governments love roads.

    There is just no way in hell that a liberal government will ever put in a congestion charge, will ever discourage car usage. The truth of the matter is this ticket hike is just another part of liberal strategy 101 – cars + poor education + fringe dwellers = votes.

  • 13
    Posted December 9, 2011 at 8:35 am | Permalink

    In broad terms, the more revenue that’s collected by fares, the less the Government has to pay out to subsidise operational costs. I don’t think the mechanics of collection are the central issue.

    The term “public good” is often invoked to lend an air of intellectual inevitability to the idea that public transport should be free or fares should be minimised. Many things that are claimed to be public goods aren’t. The fact that a service might historically have been paid for by government does not mean it’s a public good – that’s not what the term means.

    I don’t accept that the fare rise is a “Liberal” thing. The Brumby Government said back in 2008 that it would increase fares in real terms by 5% in each of 2012 and 2013 i.e. by 10% real. That suggests we’ll get another 5% real increase from Mr Mulder in 2013.

  • 14
    Posted December 9, 2011 at 4:16 pm | Permalink

    The problem is the incompetent thing to do was removing them and replacing them with more expensive options, that also had the problem of causing fare evasion in the first place.

    Lets imagine that Metcard was never introduced and we take your figures from the conductors post a few weeks ago. Metcard started full operation in 1998. All figures are “back of the envelope calculations” but the numbers are so far off demonstrating “competence” that its laughable.

    Taking your “today figures” for conductors required we could have 1,300 conductors @$50,000p.a. plus 50% on costs from 1998 until 2020 for $97,500,000. By 2020 the wages might be more than 50,000p.a. but that would have likely been high in 1998 so it would roughly level out.

    Similar numbers for the stations 200 suburban stations, 2 staff per station, plus 30% extra (as per your connies figures) @50,000 plus the on costs from 1998 until 2020 = $34,500,000. Again the wages would vary but should roughly even out.

    We could also assume some kind of ticketing vending machines and barriers would have been needed so to be on the very conservative side we’ll assume that a whole 1/4 of Metcards cost could serve that purpose (remember we’re not talking about validators on trams here). There’s an extra $100million

    A total of $232million for the 22 year period.

    Instead we’ve spent $400million on Metcard and Myki will have cost at least $1.35billion on Myki in the same time (total $1.75billion).

    Fare evasion went rampant after the introduction of Metcards and I think it is safe to assume it will increase again once single use tickets are removed and it becomes harder again to buy tickets (as it will be impossible to buy them on buses or trams).

    If spending roughly $1.5billion or roughly 750% more than was necessary on ticketing systems that provided little benefit, whilst also cutting jobs that reduced fare evasion, deterred vandalism and most importantly provided a valuable service to the public isn’t incompetence then what is?

  • 15
    miles
    Posted December 11, 2011 at 1:54 pm | Permalink

    Under the cold light of day I see my closing rant was a little misguided / one sided. Though I would like to point out that one key difference at least between governments in terms of the fare rises is that Labor was actually intending to spend more on the system. Not that I believe Labor’s targeting of its spending was particularly good, but at least there was a return for some PT users.

    “The term “public good” is often invoked to lend an air of intellectual inevitability to the idea that public transport should be free or fares should be minimised.”

    Not at all what I was saying. I was simply pointing out the gross inadequacy of the economic definition of public goods to determine the viability of public services. I would favor a litmus test for public services based on the effectiveness of centralised control and based on who it benefits – public services should be limited to those which benefit most people directly or (particularly) indirectly.

    “I don’t think the mechanics of collection are the central issue.”

    I think they are a central issue in that they relate directly to the funding of the system. For every additional dollar in fares, what proportion does the government actually receive to offset operating costs? Also, what proportion of this money actually goes back toward improvements in the system. ie. what is the relationship between increases in fares, increases in patronage, funding and spending?

    From what you have said and what I have read there is no correlation at all between spending (improvements) and fares / patronage. The only cause to direct payment towards the user base rather than who benefits is to better adapt to shifts in usage. If there is no direct correlation between payer and funding, there is no reason to structure payments in this fashion. A broad based tax would be more efficient, and more fair, benefiting both road users and PT users equally.

  • 16
    Dudley Horscroft
    Posted December 12, 2011 at 6:02 pm | Permalink

    There is a major hole in the arguments – cost. You show a lovely comparison of revenue per passenger-km for selected cities – fine, but what about the cost per passenger-km of providing the service? Estimates I have seen from the USA and Canada have some cities where up to 90% of the cost of travel is covered by fares (San Diego Trolley, Toronto and WMATA rail at various times) whereas in others it is as little as 11% (names withheld to protect the guilty).

    Figures from the USA FTA apparently generally indicate that in the same city, heavy rail costs less per p-km than light rail which is considerably cheaper than bus. So if this is the case in Melbourne (where are the figures?) should not the cost of bus travel be increased more than the cost of tram travel, with increases on train least of all.

    And all metropolitan travel should be tag on-tag off – and cost varied by distance and time of day. Provision of peak transport is very expensive, provision at off-peak is low cost. So, VR fares should be perhaps 25% more expensive at peak times, 10-15% more expensive at shoulder times and no change for off-peak. Same with the trams and buses, but bus fares should be perhaps 50% higher because of the higher cost per p-km.

    Certainly short distance fares should be cheaper than they are now – why charge the same for a 15 km journey as for a 1 km journey. Theoretically, 15 passengers could each occupy a single space for 1 km each, while one passenger could occupy it for 15 km – and the fifteen would in total pay fifteen times as much.

    Fare evasion? If you don’t check, you will get evasion. Checking should be increased till the additional cost of checking equals the additional cost of evasion prevented. On-board fare machines should be automatically stopped when a group of RPOs board – better to go entirely to pre-pay and have validating machines at each stop – no money collected there so little vandalism and robbery of machines.

    Can be done, should be done. And yes, user-pays should be applied to road travel as well.

  • 17
    Posted December 22, 2011 at 12:20 pm | Permalink

    G’Day! Melbourneurbanist,
    Interesting Post, There can be few countries in Europe that have a public transport system as comprehensive and easy to use as that of Barcelona – which is just as well because it’s certainly not the easiest place to drive around. Indeed, unless you plan to spend a lot of time visiting other places, and in a hotel outside the city centre, hiring a car to navigate your way around Barcelona is probably not a good idea; the roads are crowded, the one-way system is, at its best, idiosyncratic, the drivers are impatient and the parking is a nightmare!
    BTW great blogpost

2 Trackbacks

  1. By TRANSPORT | Fare’s Fair « placeblog on February 1, 2012 at 6:40 pm

    ...] incomes on transport. While many regard public transport as a public good, not everyone agrees e.g. Alan Davies in The Urbanist blog argues so, offering his perspective on Melbourne’s fare rises. Efficient and accessible [...

  2. ...] transport is, of course, political. The opposition would be diabolical – look at what happens when fares are raised marginally above [...

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