The peak industry body, Tourism and Transport Forum Australia, got itself into hot water with the media last week. The Forum suggested in a new report, Meeting the funding challenges of public transport, that eligibility for concession fares should be drastically restricted.

The brouhaha was unfortunate because the Forum’s underlying contention – that public transport in Australia should be operated on a full cost-recovery basis – is worthy of closer examination. Closer examination, that is, provided we’re talking about recovering full costs from those who can afford it!

At present, fares only account for approximately 36% of public transport operating costs across Australia’s five largest cities according to the Forum’s consultant’s, LEK. They say the rest comes from Government subsidies and is low compared to an international average of 60%.

The challenge facing governments in Australia is simple enough. Public transport capacity has to increase enormously to deal with expected higher demand driven by issues like peak oil, climate change and unprecedented population growth. For example, patronage has already grown 5% p.a. over the past five years in Brisbane and Melbourne.

It’s easy to say that this can be addressed by increased funding, but the same issues driving higher public transport demand will also put pressure on a range of other portfolios – like health and education – at Federal and State level. In addition, the ageing of the population places greater demands on funding and we now have an entrenched political culture of low or zero deficits.

But there are other issues besides finding the money that the Transport Forum could usefully have examined. As I noted here, if every new project increases the operating subsidy, governments are likely to chronically under-invest in public transport. A subsidised system will also have fewer funding options – it will be less likely, for example, to attract the sort of private sector investment that has funded new toll roads in Melbourne, Sydney and Brisbane.

And subsidised fares are also inequitable. The main market for public transport – peak hour commuting to the CBD – is on average made up of relatively high income workers. In contrast, travellers who are wholly reliant on public transport often contend with low frequencies and restricted hours of operation, especially those living in outer suburbs.

The key arguments for subsidising public transport are that it will lower traffic congestion, minimise the energy security and environmental issues associated with car travel, and promote greater social inclusion.

I don’t buy the congestion rationale. Congestion is evidence of why public transport is needed in a particular location but it’s not an argument for subsidising it. Public transport is essential for delivering workers to the businesses who benefit from the very high density of the CBD (even though they don’t pay for it!), but it hasn’t eliminated traffic congestion on the approaches to Sydney’s and Melbourne’s CBDs – or Manhattan’s for that matter – any more than freeways have.

Energy security and environmental costs are more compelling arguments. Public transport should only be operated on a full cost-recovery basis if cars are also required to pay their full costs (as I’ve argued here). That’s a neat synergy because in most situations public transport will only be competitive with cars when the latter’s inherent technical advantages are nullified by higher costs from, for example, road (including congestion) pricing.

Road pricing is also a potential source of revenue for public transport, although its significance shouldn’t be over-stated. Managing congestion to maximise social welfare doesn’t necessarily maximise revenue.

A key purpose of public transport is to provide mobility for those who do not have an alternative mode of travel. Some of those travellers warrant concession fares because of their limited ability to pay. However that subsidy should be funded from the general budget rather than from the transport system (and in some cases is).

The Transport Forum wants a review of concessions and I think that’s reasonable. I cannot see why student concession fares, for example, shouldn’t in-principle be means-tested.

It’s worth contemplating the possibility that subsidising all fares might actually make many of those who are on the lowest incomes and who are most dependent on public transport, worse off. This could be the case if entrenched under-funding leads to institutionalised under-provision.

Off-peak services will have to be cross-subsidised by those that are better patronised. That simply means those who have the capacity to pay – like the aforementioned CBD peak hour commuters or, better still, their employers – should pay fares that make a bigger contribution to recovering system-wide costs.

A lot of the public transport discussion is focussed on management arrangements. That’s a pertinent issue but it’s not the main game. I think it’s time for a new debate about public transport that’s centred on moving toward full recovery of internal and external costs from both transit and cars. You can’t make policy on one without the other.

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