Follow us on Twitter

Getting more from our PT subsidies

Herald columnist Brian Rudman wrote a good article yesterday, highlighting the need to get better value out of the amount of money we spend on public transport subsidies. This was an issue touched upon at Tuesday’s transport committee meeting, specifically in the presentation by Auckland Transport CEO David Warburton. Of particular note is this graph:

The two black boxes with crosses in them indicate the level of net subsidy in 2005 compared to that in 2011. At a rough guess (and the graph is slightly misleading by starting at $50 million rather than zero) it looks like the subsidy went up from around $80 million to $140 million in the course of the last six years. While we have seen patronage increases in the last few years particularly, the rate of increase of subsidy seems higher than that of patronage – particularly in the mid 2000s.

Rudman picks up on this issue:

The Auckland public transport subsidy totals around $140 million, and the bus operators take the lion’s share.

In September 2007, with the decline in bus patronage finally flattening out, Mr Lee despaired that providing subsidies was “like pumping blood into the patient and getting the odd twitch”.

That came after three years in which subsidies had increased 89 per cent with nothing to show for it in terms of passenger growth.

Earlier in his article, he also makes the point of wondering whether – unlike Dr Warburton’s assumption that subsidies would match patronage increase – higher patronage should actually mean lower subsidies (especially on a per user basis).

I’m not an accountant, but it seems simple arithmetic to me that if a bus two years ago carried a handful of fare-paying customers, and required a subsidy to help cover the costs, and now that bus has people hanging from the straps, then perhaps the operator no longer needs the public subsidy he once did.

It might also be worth investigating the level of profits flowing from “economic” services on traditional unsubsidised main route services. If they were commercially viable before the recent surge of customers back to public transport, what sort of margins are the operators pocketing now.

I can certainly understand, to some extent, why rising patronage would need increased investment: to get more buses and trains running. But if those buses and trains are fuller than ever, surely their farebox recoveries should improve and less net subsidy should be required on a per passenger basis? In other words, one would imagine that the gap between the red dotted line and the black dotted line should increase over time as the system is used more efficiently.

During the mid 2000s patronage dipped while subsidies skyrocketed – so one would imagine that the opposite should be happening now. Rudman provides a bit more detail on what happened a few years back:

In July 2008, then Auckland Regional Council chairman Mike Lee observed wryly in a letter to Transport Minister Annette King, that “it would appear that the private bus companies in Auckland are much more interested in increasing bus subsidies than increasing bus numbers”.

He noted that at the time of writing “overall bus patronage is down nearly 5 per cent compared to four years ago” even though public expenditure on bus services had increased by 90 per cent between 2004-05 and then.

It took the war in Iraq and rocketing fuel prices to reverse the trend, bringing passenger numbers back to the 2005 total of 43.1 million.

Mr Lee, now chairman of the Auckland Council’s transport committee, noted in that letter, that between 2005 and 2008, despite a blip downwards in passengers numbers, annual subsidies to private bus operators in Auckland nearly doubled from $45 million to $93.3 million – shared between ratepayers and the Government.

It has long been my opinion that Auckland gets a pretty poor deal out of the way we operate and fund the public transport network. The Cabinet Paper on the new public transport operating model noted that there seemed to be very poor competition for bus tenders in Auckland, while the old legislation that public transport operated under made it impossible to know whether a route that the operator said wasn’t commercially viable actually wasn’t.

At Tuesday’s meeting Dr Warburton seemed confident that the new public transport operating model, known as “PTOM”, will deliver better value for money for how we contact and operate the bus system. I certainly hope so, and I certainly hope we do see a big fall in the level of subsidy per passenger as patronage increases. Maybe we do need the Council to buy up a bus company and act in a similar manner as Kiwibank has done so in keeping the other guys honest.

34 comments to Getting more from our PT subsidies

  • Matt L

    The bit in his piece that really highlights how bad things were was the claim that in 2005 Stagecoach (now NZ Bus) won the tender for a whole pile of routes then a year later claimed they couldn’t run 13 of them commercially so ARTA had to pay $8m in subsidies or the routes would have been cut. Not only was it probably a clear ploy by the bus company to extract subsidy out of ratepayers but also showed that ARTA probably didn’t write its contracts well and/or didn’t have the backbone to fight the bus companies. If the bus company couldn’t meet its end of the bargin then they should have been striped of the routes, have them put out to tender again and that company be barred from reapplying.

    Hopefully the PTOM will help sort this kind of thing out but I guess only time will tell.

  • The graph on page 5 of 19 looks pretty dramatic. I’ve looked briefly at the PTOM

    “Complete units can be registered as ‘commercial’ and not receive a public subsidy. New units, not encompassing existing units can be registered as commercial, by operators who see niche business opportunities.”

    I don’t understand what the purpose of this is. This sounds a lot like “privatise the profits, socialise the losses”. How is this better/worse than just using gross contracting and having Auckland Transport collect all the revenue and pay the bus operators based on how many route-km they did, regardless of patronage carried. TransLink in Brisbane does this.

    • Bris, yes indeed it is absolutely privatise the profits, socialise the losses. However, it’s still a step in the right direction as at the moment the operators can register any service as commercial – so they could take the 8.20am 267 along Dominon Road, but not the 8.25am bus on the same route if they chose.

      At least under this scheme if they want to operate the route commercially they will need to operate all the services in such a manner – 24/7. In short, apart from perhaps the airport buses I doubt there will be any commercial services so we’ll probably end up with something like a gross contracted model by default.

      • Thanks. This sure sounds like a bizzare way of “reducing subsidy”.

        Routes are going to come packaged up as one unit- basically “diluting out” the profits so that pretty much there is no profit in anything.

        Sounds like gross contract model by default… would probably be much simpler to just go straight there, rather than take such a roundabout way. Oh well.

        • Well I think that’s how it’s going to work. You can read the cabinet paper yourself and see what sense you make out of the whole thing:

          http://transportblog.co.nz/wp-content/uploads/2011/04/PTOM-Cabinet-Paper-November-2010-FINAL.pdf

        • Swan

          There will be more incentive however to maintain a good service and increase patronage with the proposed model as opposed to gross contracting. In a gross contracting model passengers are an inconvenience. A profit sharing arrangement could be a good middle ground though.

        • Matt L

          A unit can be more than one route so it really depends on how AT want to divide things up. I can see them having one unit per route in the areas closer to the city like on Dominion Rd but have multiple routes in areas further away i.e. there might be a couple of routes combined together as a unit around Henderson.

          One thing I don’t think has been addressed is the lack of real competition out there. NZ Bus have 80% of the market but because they also own most the depots it would be extremely hard for any other bus companies to come in an take a route off them. Buying a bus company to compete with them might be quite difficult politically as companies like Infratil would lobby hard against it however if AT were to own the bus depots and just lease out space in them a set rate it would make it much easier for other companies to enter the market when contracts come up for renewal.

  • Luke

    Really need a Commerce Commission investigation into bus services in Auckland, very difficult for new entrants.
    Would be good to see Howick Eastern and Birkenhead expand out of their traditional areas to win contracts.
    Also with integrated ticketing small operators like Urban Express will be less of a pain in the neck, so I hope they can expand. Also Go Bus which did very well at winning most of the school bus routes out of nowhere, maybe they could try the same in Auckland.

    • It would be interesting to see what Melbourne does— see the contract out the entire train and the entire bus networks as a single unit. Instead of competition WITHIN the market, you just get a gigantic box, lump everything into it and open competition FOR the entire market.

      That’s how the trains and trams are done in Melbourne. So Auckland Transport’s job could be ridiculously simple- get every single bus route in Auckland, lump them all as a single unit, and then open competition for that single unit.

      Problem solved.

      • * sorry, my mistake! I meant to say “contract out the entire train and entire TRAM networks”

        • Auckland Transport would have to figure out how to control the route planning and how contract will mesh with that– this strategic level stuff should be controlled by the public agency. It’s not entirely clear what happens if you want to modify a route, or abolish it etc…

  • Stu Donovan

    Yes I agree with y’all. There is obviously a lack of competition here that is likely to reflect barriers to entry. Public transport operations are likely to exhibit quite strong economies of scale, hence are always likely to deliver imperfectly competitive outcomes. The access to depots is a valid point, as is the benefits of a gross contract complemented with profit sharing.

    One of the smaller things that annoys me about our bus system fiasco is the inconsistent branding – that every individual company brands their buses differently. Compare that to cities overseas, where all public transport buses is branded consistently. The operators logo is simply placed on the front by the driver (eg “Arriva” in London).

    Visitors to Auckland an infrequent users must be confused by the hodge-podge of brands we have. With the advent of integrated ticketing, is there any need for individual buses to be branded differently? I’d suspect that there would be benefits from wrapping them all under the same banner, presenting a consistent face to the consumers.

    But at the end of the day, I do think that Auckland transport should grow an “operational leg” and just start operating some services – if only so that they have more information on costs etc.

  • Stu Donovan

    P.s. I should say that distinct branding makes sense for some services that have unique operating characteristics, eg Northern Express and Airport Express, which is fine because the distinction is based on what the bus actually does, not who operates it.

  • john

    Swan: ‘In a gross contracting model passengers are an inconvenience.’

    You can have mixed systems in which there is also a reward payment for increasing patronage.

    • But this is the problem: Driving a bus or train has very little to do with increasing the patronage. The job of growing patronage is actually the responsibility of whoever is doing the timetabling and network planning– which would be Auckland Transport in this case.

      Patronage depends on density, on quality, on speed of the service, on the frequency and scope of hours the service runs and where the route goes and how good the connections are. These are things are controlled by the public agency. It doesn’t make sense to provide “incentives” to grow patronage to operators when they have little influence on that.

      Operators are in control of how clean their bus is, how nice their drivers are, the maintainence of their fleet and the comfort level of their bus and the on time running, but these are so much weaker influences than the network planning and timetabling ones listed above.

      • rtc

        “on time running….but these are so much weaker influences”

        I’d say on time running is one of THE main influences as to whether someone catches a bus, that and frequency of service.

        • What matters is even headways.
          http://www.humantransit.org/2010/10/beyond-on-time-performance.html

          2. For high-frequency, high-volume services, actual frequency matters more. Suppose that a transit line is supposed to run every 10 minutes, but every trip on the line is exactly 10 minutes late. A typical on-time performance metric (e.g. the percentage of trips that are 0-5 minutes late) will declare this situation to be total failure, 0% on-time performance. But to the customer, this situation is perfection. re on this here.

          Much of the ability to run on time, or at even headways is also in the hands of the public agency. The bus operator is not going to have control over traffic light prioritisation, whether they are given bus lanes and proper separation and so forth.

          If patronage grows, the number of services put on would be expected to increase, and therefore the number of route-km done by that particular operator would increase also, so they would get paid more money would they not? So why is an extra “bonus” required here? If patronage increases due to factors that have nothing to do with the operator– such as a large spike in petrol prices — should a bonus be paid then?

  • Matt L

    I wonder how much subsidy is needed on routes like Dominion Rd. Tonight I was driving home from the hospital at 6pm and while waiting at the lights at Khyber Pass/Symonds St a 258 bus heading for Dominion Rd went past completely full. Pretty good for a Saturday evening.

    • I’ve heard that Dominion Road is largely commercial services.

      • Matt L

        Yes but would it be fully commercial under PTOM? It will be interesting to see how AT handles units seeing as they get to set the 24/7 timetable and the bus company has to adhere to that even if they register it commercially. Units that are likely to be run commercially would give them the opportunity to really bump up services, especially off peak.

  • Ross Clark

    Infratil’s latest take on things:

    http://www.infratil.com/media/Email/infratil_newsletter_april2011.htm

    … Improvements to Auckland’s public transport network, service and facilities, together with $2.20/litre petrol, is resulting in demand outstripping capacity on some peak-time, key corridor, services. Over the region there were approximately 250,000 additional bus boardings in March relative to the same month in 2010. Approximately 170,000 of the additional passenger trips were provided by NZ Bus services.

    In response to this demand, NZ Bus is working with Auckland Transport to immediately lift capacity through the acquisition of additional larger buses. While it is better to have too much than too little demand, it can result in slower services and passenger discomfort. In 2006 a surge in petrol prices resulted in record boardings on Wellington buses, complaints about the resulting drop in service quality and a sharp fall in public transport usage when petrol prices later fell. Auckland Transport and NZ Bus are aware that increased capacity is an urgent need if a similar series of events is to be avoided this time.

    NZ Bus management are also working with Auckland Transport on longer-term improvements so that by the time the Rugby World Cup opens Aucklanders will be experiencing significantly better services on at least the central area bus network.

    In the year to 31 March 2011 Auckland’s total public transport use rose 8% to 64.5 million boardings while NZ Bus’s patronage in the region was up 6%.

    I also wanted to comment on the view that more passenger volumes should be reducing Infratil’s demand for subsidies.

    The real answer is, “maybe not”; because it depends on when the growth in demand is happening. If it is occurring offpeak, then yes, the extra passengers can be carried at little additional cost to the operator. However, if it is happening at the peak, then it is another matter. Peak services are quite expensive to run, at the margin, because you have to provide a bus for only three hours/day. Net earnings of $29m on a business for which they paid $252m is not that strong
    (refer here, http://www.infratil.com/media/PDF/ift_ar2010.pdf, p36 of the .pdf), and this needs to be borne in mind in any discussion on profitability.

    Also, the 2009 Annual Report (p28 od the .pdf) shows how much they have spent on fleet renewal in the last few years: http://www.infratil.com/media/PDF/ift_ar2009.pdf

    • Luke

      its not Auckland Transports fault that Infratil may have paid too much for a company, especially one with clapped out buses.

  • Jon Reeves

    I would like to see Auckland Transport set up a council owned bus company to tender for routes. If on certain routes operators ask for too higher subsidy then by default the council bus network operates them. At least being actively involved in operating buses AT would be able to ensure it receives good value for money.

    Council operating buses? Wow… something hundreds of cities or thousands of cities do around the world, why not AT?

    • James B

      Because in NZ the market rules all.

    • Ross Clark

      At least being actively involved in operating buses AT would be able to ensure it receives good value for money.

      Something its predecessor did not manage to do in the period prior to the 1991 reforms.

      The trouble in NZ is that we adopted the British model of bus privatisation but did not realise that it would not apply in New Zealand cities as we simply don’t have the bus passenger volumes. More precisely, the British model can work where everything is contracted out (=Christchurch) or where nearly everything is commercial (most UK cities). What it does not manage well is the ‘middle ground’ we have in Auckland and Wellington.

      • We ought to be careful with British models as London is the only successful PT area there. The contracting out has led to a vicious cycle of declining services and decline patronage in the UK, except London, which of course is more than a special case.

  • tochigi

    the fact that Infratil were able to buy all the previously council-owned depots is disgusting and has obviously led to a monopolistic situation.

    • rtc

      NZBus are themselves slowly selling them off, or attempting to redevelop them, e.g. their Wynward Wharf site where they are hoping to build the convention centre, perhaps the council should step in and buy them and lease space on them all back to bus operators.

      • That land is far too valuable to park buses on, that’s why they’re selling/developing it. Depots should be at the edges of town where land is cheaper and at the start of the AM run…

        • rtc

          I agree regarding the Wynward Wharf site, although if the land around there is good enough (at the moment) to park cars (as large areas are currently used for) then it’s good enough for buses. However, NZBus are also hoping, last I heard, to sell off their Mt Roskill depot site amongst others. There is a need to have buses parked downtown to start runs in the mornings, having to drive them all the way downtown from say Albany just acts to increase costs.

          • That’a how it’s done in London. No bus stops in or starts in the centre, routes are through routes. If the first bus from Britomart is needed at 5am it just means the happy souls of Albany [or similar] get a nice fast empty-ish one at 4:30am… which then goes on out somewhere on the other side of town….makes sense to me.

Leave a Reply