Index of subsidy per household and selected CityRail weekly tickets (including inflation). Source: IPART

Public transport travel in Australia’s capital cities gets a massive, growing financial subsidy (see exhibit). Passengers don’t pay for any of the capital costs and on average only pay for around a third of operating costs. Yet in spite of the subsidy, public transport only accounts for around 10% of all motorised trips.

The single largest group of beneficiaries are those who work in the CBD. They’re the main reason transport authorities have to provide enormous capacity to meet demand in the peaks. They don’t however tend to use public transport in the off-peak when there’s plenty of spare capacity – they prefer to drive.

A key question is why CBD workers – or any traveller who doesn’t qualify as disadvantaged – warrants such a massive subsidy.

One of the traditional justifications is equity. Yet most passengers aren’t on low incomes – indeed many are on quite good incomes. In fact most passengers aren’t even entitled to one of the many and varied concessions offered by transit authorities (not that even these necessarily indicate need – for example, in Victoria anyone aged 60 years or more is entitled to a generous Seniors concession, whether they’re working or not).

Other essential services like electricity, gas and water recover their full financial cost, both capital and operating, from customers. They target concessions to those who actually need them. Public transport however subsidises everyone who uses it irrespective of their means.

The irony is public transport isn’t actually very good at transporting those who really do rely on it. The key requirement of travellers who’re wholly dependent on public transport is for off-peak and cross suburban services (these are the 90% of motorised trips that everyone else uses cars for), yet what’s offered to them in Australian cities is of very poor quality.

And that’s primarily because governments chronically under-invest in public transport. It shouldn’t be a surprise of course, since governments have to provide all the capital and then fund an ongoing operating subsidy. For example, CityRail in NSW recovers none of the capital cost in fares and only 22% of operating costs.

Contrast this with major road projects. Many of the freeways constructed over the last twenty years in Australia’s capital cities were built and operated with private finance. The direct cost to government in terms of current outlays is small, so it’s no wonder they’ve historically favoured freeways at the expense of public transport.

The paradox is those who most need public transport suffer a grossly inadequate level of service in large part because public transport is so heavily subsidised. That subsidy is ostensibly intended to help them but arguably has the opposite effect. The main beneficiaries of subsidies are travellers who by any fair or reasonable measure don’t warrant it.

Another traditional justification for subsidising public transport is negative externalities, particularly traffic congestion and the environmental impact of cars. Neither of these hold up well to closer examination.

We already know new public transport projects do no more to mitigate traffic congestion than building new freeways do. Traffic congestion needs to be tackled by the combination of road pricing and more and better public transport services, but that doesn’t require it to be subsidised. All that matters is the relative price to the traveller of driving versus public transport.

The environmental justification is also weak because in many cases cars aren’t a substitute for public transport. The vast bulk of CBD travellers are “captive” to public transport – driving is not an option for them because the journey’s too far and the cost of parking is too high. And those who’re entirely dependent on public transport – like students, the handicapped and the poor – by definition don’t have the option of driving.

There’s also a “public goods” argument that mercifully is trotted out with decreasing frequency. It’s now pretty widely acknowledged that public transport isn’t a public good in the economic sense. It’s neither non-rivalrous (just ask a passenger on a crowded peak hour train) nor excludable (just ask someone whose negotiated a turnstile or been bailed up by a ticket inspector).

This line of argument gets mixed up with the fact some forms of public transport in Australia have historically been provided by government. There’s an argument for public sector delivery, but it’s got very little to do with whether or not public transport should be subsidised.

I think there are very good reasons to seek to recover a greater proportion of the cost of providing public transport from those who benefit directly from it. That would provide more revenue to build a better system, lower the disincentive to governments of ongoing subsidy, and be less regressive.

Business is one candidate. For example, CBD businesses and landowners are prime beneficiaries of public transport’s ability to deliver large numbers of workers to a very small area within a remarkably short time frame.

At present, the cost of ennabling those agglomeration economies is mostly borne by taxpayers and to a limited extent by employees. Some of that cost could instead be recouped by, for example, taxing businesses directly or by taxing property. There are a number of options that come under the rubric of “value capture”.

Another option is to increase the proportion of costs recovered through fares, especially in the peak. Provided it’s matched by a commensurate increase in the cost of driving – for example via some form of road pricing or by way of a reduction in road capacity – it should not lead to a decrease in public transport patronage.

Most importantly though, concessions should be targeted directly and precisely at those who need them and no one else. The rest of us should start to pay more. We already pay the full financial cost of other essential infrastructure, so we should pay a higher share of the real cost of providing public transport.

We need to start paying more of the real cost of driving too. It’s surprising how little independent research there appears to be on this subject, but my best guess is drivers probably pay in taxes and charges the equivalent of their full financial cost. What they don’t pay however is their full economic cost i.e. negative externalities.

I have no issue with subsidising public transport in those cases where it really does avoid the negative externalities of cars. However I think it’s always a better principle, where practical, to charge (or regulate) motorists directly for their negative impacts.

The scale of investment required to establish a high quality public transport system along the lines of what I proposed here is massive. It’s not likely to happen for generations unless sources of revenue to build the infrastructure are found. And it’s going to be hard to get up while ever operating subsidies give governments a continuing disincentive to invest in public transport.

The key obstacle to more efficient and equitable pricing of both cars and public transport is political. The opposition would be diabolical – look at what happens when fares are raised marginally above CPI.

Any changes along the lines I’m suggesting will realistically be incremental and take some time. Of course increases in the cost of public transport have to move in lockstep with increases in the cost of motoring.

However it makes good sense to get the direction right. There’s considerable value in understanding conceptually that some deserving users of public transport should be subsidised but not the system as a whole.