The economics of fare policies, part 3

For those that don’t read Transportblog on a daily basis, this is the third part of a series I’m writing on the economics of public transport fare policies. Part 1 discussed a key rationale for public transport subsidies – lower fares keep people from clogging up already-congested roads. Part 2 considered the case for distance- or zone-based fares to ensure that people taking longer (and hence more expensive) trips pay more.

In the comments on those posts, several sharp readers asked about the relationship between fare levels and ridership, and whether there are any opportunities to improve outcomes by targeting lower fares to highly price-sensitive groups. These are excellent questions to ask!

In this post, I’ll take a look at the first question: In the aggregate, how does ridership respond to changes in fares? Hopefully, this will give us the theoretical tools to take a look at the second question in the next installment of the series.

In economic terms, we are asking about the “price elasticity of demand” for public transport. Fare elasticities measure how responsive people are to higher (or lower) prices. They’re usually estimated empirically by analysing data on changes in fares, patronage, and other control variables (e.g. per capita income or GDP) over time.

There are many studies on fare elasticities from around the world, some of which are summarised in the Australia BITRE elasticities database and this useful summary paper by Todd Litman. NZTA has also commissioned research into the structure of demand for public transport – see e.g. Wang (2011) and Allison, Lupton and Wallis (2013).

These studies don’t always arrive at precisely the same result, but they agree on one key thing: Demand for public transport is relatively “inelastic”. All else being equal, a 10% reduction in fares will increase ridership by less than 10% in the short and long run.


Some odd bloke demonstrating the concept of elasticity

The implication of this is that if a public transport agency reduces fares, it will tend to collect a smaller amount of money from users and hence require a larger subsidy. And, conversely, raising fares can increase overall revenue, albeit at the cost of unintended consequences for increased traffic congestion.

Here’s Litman’s best-guess estimates of elasticities for public transport. The key figures are in the first row – “transit ridership with respect to transit fares” for the overall market. Litman’s estimates a long-run fare elasticity between -0.6 and -0.9. This means that a 10% increase in fares would be expected to reduce ridership by 6-9% in the long run.

Notice that short-run elasticities tend to be smaller, indicating that people take a while to fully respond to changes in prices. For example, if someone’s fares for their bus to work went up significantly, they may tolerate it for a little while but choose to buy a car (or rent a parking space) six months down the line.

Litman (2014) recommended transit elasticities

Personally, I wonder if Litman’s estimates are a bit on the high side. Figures from Wang (2011) suggest that long-run fare elasticities (in the second row of the following table) are -0.46 in Wellington and -0.34 in Christchurch. This would indicate that a 10% increase in fares would reduce ridership by 3.4-4.6%.

Wang (2011) NZ bus demand elasticities

Both of these tables also contain information on how people’s demand for public transport changes in response to other price changes and service changes, which is another interesting topic. Without going into a great deal of depth, I’d note two things:

  • First, increasing petrol prices do tend to increase public transport demand, but this effect may be relatively modest. Car ownership, on the other hand, can have a big impact, as people who have already paid the fixed costs to own a car have strong incentives to get as much use out of it as possible.
  • Second, improved service quality – meaning better frequency and reliability of buses and trains – has a stronger impact on ridership than lower fares. This has important implications for transport agencies, who are often better off putting their marginal dollar towards upping frequencies.

Lastly, it’s worth considering how this might play out in practice. Let’s assume, for a moment, that fare elasticities of demand are at the low end of Litman’s range, i.e.:

  • Short-run fare elasticity = -0.2
  • Long-run fare elasticity = -0.6.

Now, let’s consider a hypothetical scenario in which public transport fares are $2 and there are 1,000 daily riders on a given bus route. The public transport agency collects $2,000 in fares every day ($2*1,000 riders).

Now let’s consider what would happen if the agency chose to reduce fares by 10%, from $2 to $1.80. This is obviously great for people who are already on the bus, as they can pay less to get the same service. Daily revenue collected from them drops to $1,800 ($1.80*1,000 riders).

However, the lower fares also attract new riders. In the short run (0-2 years), we predict that a 10% reduction in fares will lead to a 2% increase in ridership (-10%*-0.2). This means that an additional 20 people (1,000 riders*2%) will take the bus and pay a total of $36 in fares every day ($1.80*20).

So far, this is not looking great from a financial perspective. The transport agency has lost $200 in fare revenue from existing riders and gained only $36 from new riders.

Things aren’t much better in the long run, where a 10% reduction in fares is expected to lead to a 6% increase in ridership (-10%*-0.6). This means an added 60 riders who pay $108 in fares every day. Again, this is not enough to cover the loss in revenue from existing riders.

Does this mean that fare reductions are never worth it? Not necessarily – if the reductions in congestion from fewer people driving are sufficiently large, then we should be willing to pay a bit more in subsidies.

singer subsidy cartoon

A second factor is that different people and different types of journeys respond to higher prices in different ways. In principle, we may be able to increase patronage at a relatively low cost by targeting fare discounts to price-sensitive people. But that is a topic for next time!

What do you make of the data on fare elasticities of demand?

The economics of fare policies, part 1

A few months back, Auckland Transport put out its new fare policy for consultation. The draft policy, which they call Simplified Fares, has two main elements:

  • Standardised fare zones that ensure that journeys within or between zones cost the same regardless of whether you’re travelling by bus or rail [ferries are excluded]
  • No transfer penalties between services, which is a key element in enabling a frequent connective network.

Those are indeed simple principles, but developing and implementing a fare policy is seldom simple. So the whole thing got me thinking: Why do public transport fares work the way they do? And could we do things differently?

As I’m curious, I figured that I should take a quick look at the economics of fare policies. Part one of the series looks at the biggest-picture question: Why do we subsidise public transport?

First, some background. In most developed-world cities, public transport systems are subsidised by taxpayers. Users pay some of the operating costs – ranging from as low as 10% to as high as 80% – but seldom all. In New Zealand, the national farebox recovery policy requires all regional transport agencies to cover 50% of their public transport costs from fares. However, data from the Ministry of Transport suggests that some agencies are closer than others to this target:

MoT farebox recovery rates 2013-14

Is 50% the right number for all regions? I don’t know – and the answer depends in part on what other goals we’re trying to accomplish with public transport pricing. But it’s clear that some level of subsidy must be provided in order for the entire transport system to work efficiently.

To see why, we need to take a look at what economists call “second-best pricing”. According to Wikipedia, it can be desirable to impose a subsidy to “offset” for an uncorrected market failure elsewhere:

In an economy with some uncorrectable market failure in one sector, actions to correct market failures in another related sector with the intent of increasing economic efficiency may actually decrease overall economic efficiency. In theory, at least, it may be better to let two market imperfections cancel each other out rather than making an effort to fix either one.

In transport, we have a situation where people have multiple options for getting around. They can drive, take the bus (or train), cycle, etc. In this situation, a price change in one market – say, a fare increase for public transport – can encourage people to switch to another mode instead of paying more.

As I argued in a recent post on congestion pricing, road space is usually not priced “efficiently”. All road users pay fuel taxes or road user charges based on the total number of kilometres driven or litres of petrol used. But they don’t pay more to drive on busy roads, where they impose delays on other drivers. As this diagram from a 2012 UK study on the external costs of driving shows, the last 10-20% of car trips impose significant costs on society.


Public transport can play a useful role in smoothing off the big spike at the right hand side of that chart, by providing a more space-efficient option for travelling on popular, congested routes. Another way of saying that is that in the absence of congestion pricing (and in the presence of other subsidies for driving, such as minimum parking requirements), higher public transport fares can result in a perverse outcome – additional congestion and delays for existing road drivers. This is shown in the following diagram:

PT fares and congestion diagram

Effectively, a failure to price roads efficiently means that we have to provide subsidies for public transport to prevent car commutes from being even more painful than they currently are. Public transport subsidies are, in that sense, subsidies for drivers. By making your neighbor’s bus fare cheaper, they in turn make your drive to work a bit easier.

Finally, it’s worth considering how we got into this situation. 80 or 100 years ago, public transport systems tended to cover their operating costs with fares. For example, Auckland’s tram system was profitable, if in need of maintenance and refurbishment, up until its removal in the mid-1950s. (Mees ref?) This changed, in large part, due to the introduction of subsidised motorways.

This article by Joseph Stomberg at Vox describes how the US interstate highway system was developed in the 1950s as an explicitly subsidised – i.e. not tolled – transport mode:

The first step was changing how roads were funded. In the 1930s, there were already privately owned toll roads in the East, and some public toll highways, like the Pennsylvania Turnpike, were under construction. But auto groups recognized that funding public roads through taxes on gasoline would allow highways to expand much more quickly.

They also decided to call these roads “free roads,” a term that was later replaced by “freeways.” Norton argues that this naming shift was essential in persuading the federal government — and the public — to shift away from tolls. “It started with calling the roads drivers pay for ‘toll roads,’ and calling the ones that taxpayers pay for ‘free roads,'” he says. “Of course, there’s no such thing as a free road.”

In other words, the “original sin” of transport subsidies was the construction of non-tolled highways paid for out of general tax revenues. This choice led in turn to a situation in which we must adopt “second best pricing” in public transport, and offer an offsetting subsidy. I’m not necessarily opposed to this… but it does mean that I am skeptical to complaints that buses and trains are subsidised.

What do you think we should do about public transport pricing?

The costs and trade-offs of free public transport in Auckland

One perennial discussion in transport circles is whether we shouldn’t just do away with public transport fares completely and make the whole network free of charge. Why not fully subsidise the network as a public service using public monies as we do with most education, healthcare and other social benefits? I wish to use this post to explore the idea. A word of caution though, I am a dilettante when it comes to economics so by all means feel free to enter into debate!

Obscure but relevant Sci Fi/economic theory reference. Bonus points for the first to work it out.

So, why would we want free fares anyway? Promoters of free public transport suggest various benefits, which from what I can see generally boil down to three main concepts. I think it is worth picking these apart a little.

Freedom for all?
First of all there is the idea that making PT free would make it universally and freely accessible, a benefit to individual mobility that can be enjoyed by everyone regardless of their financial situation. This is what we might call the social equity argument.

Universal public transport access is a worthy goal, however I am not convinced that free fares is the way to go about it. My main retort is that the number of people that can’t afford public transport in Auckland is actually quite small, and giving everyone a literal free ride along with the small needy minority is probably not the best answer. There are presumably much more effective ways of targeting improved transport access for those that truly need it.

In this regard I’m drawn to the concept of the “middle 80%”. This suggests that we should strive for a public transport system targeted to the needs and means of most of the general public, but not waste resources on chasing the patronage of either the 10% of the wealthy elite nor the 10% of the most vulnerable poor. The argument is that you will expend increasingly excessive funds on rapidly diminishing returns trying to attract CEOs out of their Mercedes and onto public transport. Yet similarly trying to design a public transit system that works for the very least privileged is also a quixotic exercise in subsidy and economic inefficiency, one that can undo the whole enterprise. However if you aim for the majority between those two extremes you are targeting the bulge in the bell curve, rather than the little asymptotic tails.

Put simply, it would cost a lot to provide free fares for everyone and that would most likely come at the expense of good service (more on this below). In that regard it seems that targeted financial benefits are a better way to serve the transport needs of our very poor, rather than making it fully subsidised for 100% of users to meet the needs of 10%.

Increased patronage?
Secondly there is the subsequent argument that if you make public transport free it would be very well used, and therefore result in all the benefits of well-used public transport like reduced traffic, lower emissions, reduced fuel consumption, etc. Basically, this idea is you make it free and lots more people use it, which is a good thing for the city and society and worth the cost.

If you unpack the logic of this argument you can arrive at two statements worth testing. Effectively the argument suggests one of two things:

A) There are plenty of people who would use public transport, except the ticket price prevents them from doing so. In other words, price is the major reason more people don’t use public transport in Auckland. …or

B) Price may not be the major factor preventing people using it, but if you make it free people would be willing to overlook all the other reasons and use it anyway.

I think proposition A is clearly false and could be easily demonstrated so. Ask folks why the don’t take public transport and cost is not a major response. Normally you hear things like “it’s takes too long”, “it doesn’t go where I want to go”, “it doesn’t run at the right time”, “you have to wait ages and the bus is always late anyway”. For that middle 80% of the population the cost of the ticket is far down the list, and it is practical things like timing, connectivity and reliability that keep people away.

So proposition B, if we make it free will people see it as good value despite the other problems and be willing to foresake their time and convenience to save a buck? Again I think not, well maybe for the poorest sectors of our society but not for the general public. If the bus can’t get you to your workplace, then a free bus that still doesn’t get you to work isn’t going to make you switch. Likewise an unreliable service that makes you late for your appointments isn’t going to get more timely if it’s free, nor are you going to use the free ferry that still doesn’t run on the weekends when you want to go out for a night on the town. You get the point I’m sure.

It seems free PT would probably just benefit existing users with a cash windfall. I’m not convinced there are particularly significant amounts of people who don’t use public transport now, but who would start using it if it were free.

Operational benefits?
Thirdly, there is the idea that there are operational benefits to doing away with fare collection. Namely passengers can simply hop on and off any transit vehicle without stopping to pay or use a card, such that dwell times are minimised and staff time spent on revenue collection is done away with entirely. This would then result in either lower staff costs and cheaper operations, or better service delivery from the same staff and operating expenditure.

Personally I think this is the most concrete of the three arguments, but also the least significant. In Auckland we are now in a position where smart card ticketing and prepayment on the rail network have already minimised the impact of ticketing on operations to the point where getting rid of ticketing entirely would only have a small marginal effect. Furthermore, at particular problem points we still have some scope to improve without dropping fares, for example by fitting all our bus stations and city centre stops with HOP machines and making them card or prepay only. I believe the effect of no fares over a well used HOP system would be minimal, and not a good return on the large costs required to cover the farebox take.

What would it actually take to make It free?
Surprisingly this is a question that doesn’t get asked very often. How would you actually make PT free, what would it require and how much would it cost?

The first question is whether it is actually possible to prevent operators collecting fares. Under the previous contracting regime I would have said no, operators were entitled to run any route they like and charge whatever they wanted and it was illegal for local government to ‘interfere’ with their business. Under the new PTOM model I would say maybe, effectively it would mean every route would be a fully subsidised contract.. I think. Someone with better knowledge might care to comment.

For now let’s assume the contracting arrangements can be taken care of, so what of the cost? Here it is important to lay out a few known facts. Fares revenue in Auckland isn’t something that is published publicly. However by picking through NZTA reports we can estimate it amounts to roughly $150m a year, and we do know Auckland has a farebox recovery rate of a shade under 50%. Using those estimates this means the cost to run all the existing buses, trains and ferries amounts to about $300m each year, with something like $150m of that covered directly through passenger fares and the other $150m covered by ratepayer subsidy. Take away the fare revenue and we are left with a $300m operation cost with only $150m in revenue, in other words a $150m shortfall per annum.

With these fiscal facts in hand we can see there are only two fundamental options for making PT free in Auckland: either we drastically slash the network so it can be funded with half the current budget, or we need to find $150m extra per year to keep transit operations at the existing level.

Free PT option 1: Halve the network to meet existing subsidy levels
Looking at the first option, to go fare free we would need to halve the service delivery costs to keep funding at the existing level of subsidy from ratepayers. Halving the service delivery cost means halving the network effectively (in fact it’s a bit worse than that because you would lose some of the economy of scale of running a large PT network). That means half the frequency of service, half the operating hours, half the peak capacity, or rather some combination of the three. Halving the service budget would be a tricky exercise in prioritisation. My guess is you would see some peak capacity cut so that people would be literally left standing, with a larger cut in interpeak frequency and bigger cuts to evening and weekend. Your bus that only comes once an hour during the day would now be once every two hours, buses and trains that run late at night would have to end around 7pm, and you would probably have to stop most weekend service entirely.

That is the price of halving revenue: half the funding for service delivery means a massively less useful transit network. Say goodbye to any chance of a frequent, all-day every-day, connected network. With half the funding all you could achieve is a rudimentary ‘network of last resort’ as a basic public welfare service. Rather than increasing patronage, such a move would kill off all but the most captive of trips sending the system productivity into a death spiral.

So the ‘cut service to meet the budget’ option seems like a non starter. Needing to cut half of the service out of the network would never achieve any of the claimed benefits of free public transport. Instead of growing patronage we would lose much functionality and most customers.

Free PT option 2: Double subsidy to run existing network
This second option has a little more currency I think. To make fares free in Auckland without cutting service and halving the network, you would need to double the subsidy income to cover the shortfall. For this Auckland Council ratepayers or New Zealand taxpayers would need to step in with an extra $150m of operations budget per annum. In the scheme of the national transport expenditure that’s not an enormous sum. However to be perfectly clear, that’s an extra $150m each and every year just to keep things exactly the same. Twice the operating subsidy for no extra services, no extra buses or trains, no longer hours, no faster trips or easier rides.

So maybe some government might step in with the money, but that wouldn’t really change much. A few people would get a break, students might bus around a bit more often, but on a whole the city would be paying twice as much for a network that is only as useful and accessible to most people as it already is today.

Alternative investment options: the double down?
This leads us to a subsequent question. If council or the beehive did step in with an extra $150m a year, every year, would free fares be the way to spend it? That’s a big stack of cash to pump the budget each year, more than the entire HOP card system cost for example. In other words the opportunity cost of free fares amounts to over a hundred and fifty million a year, what other opportunities do we have for that money?

We could, for example, go the other way: spend it to boost service delivery by 50% across the network. That sort of funding would allow us to extend the frequent network to just about every route in the region, and run that frequency an extra few hours a day. Consider what might happen if we could guarantee every bus route in Auckland ran at least every fifteen minutes, from 6am to 10pm, seven days a week.

Another option would be to take the core of the proposed Frequent Network routes and run them at a minimum of five minute headways all day instead of every fifteen minutes. This would be doubling down on where we know PT already works well. Surely that would be a lot more useful to more people that free-but-mediocre service?

There is another way to think of this too, turning extra revenue into capital expenditure. With an extra $150m a year we could build an extra billion and a half worth of busways and rail lines in the next ten years. Plus if you use that funding stream to service debt over twenty-five or thirty years, you could fund perhaps three or four billion worth of projects in the same time. Again, what would do more, what would create the better outcome for the people and the city?

Conclusion: fare-free public transport is an expensive answer to the wrong question
It appears to me that having fare free public transport in Auckland would not result in very good outcomes. Dropping fares would either require slashing the public transport network to half it’s current level, guaranteed to decimate patronage, or it would require an extra $150m a year in new subsidy just to keep running what we have today. If we did have an extra $150m each year to spend it would be far more effective to spend it on extra services or infrastructure instead.

Many of the supposed benefits of free fares aren’t actually attributable to the lack of price itself, rather most are related to assumptions of increased patronage, faster travel times, reduced traffic congestion, etc, resulting from zero fares. These assumptions are tenuous, and all these factors are things that that Auckland can and will achieve anyway through good planning and design.

The one exception to this is social equity issue. Free fares would indeed make public transport truly accessible to anyone and everyone regardless of their means (although what they have access to might not be particularly useful if the price of free access is much reduced service span and coverage). However, making public transport free for everyone to address an equity problem for a small fraction of the population is clearly not an efficient or effective means to that end.

Rather, those few that legitimately cannot afford to travel because of the ticket price should be served with targeted subsidies or other interventions. Pensioners are already covered with the GoldCard scheme, perhaps there are grounds for something similar for Community Service Card holders and their dependants, or for increased discounts for children and students of all levels. That could take many forms: pure discounts on the cash price, discounted annual passes, two for one deals, bonus credit after the first trip, child travels free with an adult, etc.

Personally I like the idea of fare structures that give extra value for the same price, the kind of thing where you travel twice in a day and all further trips are free, or a price cap, or bonus days when you use it X many times a month. Hopefully with the proposed integrated fares system we will see some of that.

One final note. I think it is clear that free fares is not a good move for Auckland in the foreseeable future. However, this isn’t to say that the existing prices or fare structures are necessarily perfect. Perhaps cheaper fares will result in more people travelling at more times of day, in particular cheaper off peak fares could fill up empty seats leading to more net revenue without more costs. Greater occupancy means better revenue per kilometre run overall, so some tweaking may be appropriate. I think AT could do with another small discount on HOP fares, if only for marketing purposes, but in the long run holding fares constant as patronage and efficiency increases would result in real prices becoming cheaper over time. That said, we are far away from the conditions where reducing fares to nothing would be either feasible or effective.

The desperate need for a fares policy

There have been a lot of articles in the media recently bemoaning changes to public transport fares as the AT Hop card is progressively introduced. The latest relates to hikes in ferry fares which are coming in the near future:

Big fare hikes for ferry users could hit within weeks.

The North Shore Times has learned of the changes from an industry insider who says Auckland Transport has undertaken a “campaign of non-disclosure increases”.

When asked for a response to the claims, Auckland Transport directed the Times to its website.

The council-controlled group did not confirm or deny the increases were happening, whether tertiary discounts are again being cut or when the new fares will be implemented.

“Auckland Transport has an annual fare review process which is communicated to the media [as it was earlier this year] and to customers through our customer channels.”

But the industry source says changes are a result of the AT Hop card roll-out, taking place across Auckland’s public transport network.

A big increase in fares for some Green Bay bus users occurred recently. Plus it seems like the Discovery Day pass and the Northern Pass – the two existing integrated fare products in Auckland – are going to be phased out shortly. While the AT Hop card’s simplification of the current suite of fare products is a step in the right direction – it seems like there are going to be some really dumb changes to fares in the near future because of two key reasons:

  1. Auckland Transport not coming up with a much simpler zone based fare system ahead of implementing integrated ticketing.
  2. Auckland Transport not having a fare policy.

Unfortunately we also have the situation where Auckland Transport are aligning fares at the same time as rolling out the HOP card. This may be the technically easiest solution but it is only serving to give a lot of people a negative impression of the card itself. Had they done number 1 first, the roll-out of HOP would be much much easier.

Hop Card

We’ve discussed the importance of integrated fares and zone based fares many times before, so in this post I’m going to talk more about the need for Auckland Transport to have a proper fares policy.

Setting public transport fares is clearly a very complex balance between being low enough to attract people to use the service but also high enough to minimise subsidy requirements. The latter issue is also affected by NZTA’s completely arbitrary Farebox Recovery Policy – which requires fares to cover 50% of operating costs (Auckland currently manages about 44% recovery). In addition to this complex balance there are a number of other detailed considerations that need to be taken into account in the setting of fares. The list below is by no means complete but takes into account matters that need to be considered:

  • The extent to which fares rise with the length of the trip. At one end of the scale there are flat fares where you pay the same amount no matter how far you go – at the other end is something like a pure per kilometre charge. Longer PT trips generate more external benefits (e.g. congestion relief) so there’s a logic for having something in between a flat fare and a purely distance based fare.
  • The level of complexity or simplicity in the fare system. In pursuit of ‘optimal’ outcomes it’s very easy to create a fare system that’s mind-bogglingly complex and impossible to understand. Yet overly simple systems can lead to inequitable, illogical or inefficient outcomes: should a trip down the road cost the same as one from Pukekohe to the city centre, should children have to pay the same as adults, should someone travelling off-peak and not adding to peak capacity problems have to pay the same as someone at peak times? Once again a careful balance needs to be found.
  • Building on the above, the extent of concessionary fares is something that can be really complicated. Should a super-wealthy retired person really get free PT while a struggling working family have to pay full fares? Should university students get a discount when they’re pretty likely to catch PT already?
  • A further consideration is the extent to which the fare system should favour or encourage certain types of users. Should monthly pass holders get a particularly good deal because they’re the ‘best customers’? To what extent should smart-card users get a discount compared to people who pay with cash? And as above, is there value in providing a discount for off-peak travel? Or – dare I say it – should there be family/group passes?

As you can tell from the above, I have posed far more questions than I have answered – because this is a complex issue which involves significant value judgements and decisions to sit behind it. It needs some clear objectives, things like: maximising patronage, recognising the importance of a simple and easy to understand system, providing value for money (both for passengers and for public agencies picking up the subsidy), catering for those with fewer transport choices, encouraging people to use the HOP Card, encouraging people to make transfers where that’s an efficient outcome etc. It needs to be clear about the tradeoffs between different objectives – like how maximising patronage may conflict with maximising farebox returns.

In relatively recent times we have seen the mess which occurs when you don’t have a fare policy. The most recent fare rises saw the gap between HOP fares and cash fares narrow (contrary to efforts to get more people using HOP), saw monthly pass prices increase while single fare cash prices stayed the same (contrary to rewarding best customers and encouraging more people to use monthly passes) and saw fares for longer trips that generate the most external benefits increase while fares for short trips generally stayed the same. Plus the huge backlash against the fare zones proposed in the draft RPTP and the recent angst over fare changes as the AT Hop card is implemented.

The solution to this mess seems incredibly obvious to me: Auckland Transport needs to prepare a cohesive fares policy, which gets into much more detail about the mechanics and trade-offs of the different fare options than the draft RPTP did. Auckland Transport then needs to consult with the general public and key stakeholders about the policy, get general buy-in, and then use that policy to guide what it does in the future about fares.

Seriously. Not that hard and it would save them a lot of angst.


On a slightly related note, the stupidity of the way our PT contracting works where Fullers are allowed to do whatever they want on the Devonport and Waiheke routes due to them being fully commercial has thrown up classic example of how dysfunctional things are. Recently Fullers decided to replace their ticketing system due to their old one getting a bit long in the tooth but rather than just hook fully into the HOP system, they have launched a separate system allowing them to offer ferry tickets not available to HOP users. With crap like this, it’s no surprise that the HOP usage on Ferries has been abysmal with less than 5% of all ferry trips being paid for using HOP according to the most recent stats produced by Auckland Transport.

Are Free Fares the white knight for transport in Auckland

The topic of free public transport is one that comes up every now and again and it has recently been raised by Mayoral Hopeful John Minto.

How about another hour at home with your family – every workday?

Heaven knows Aucklanders deserve a break from gridlock traffic.

I’ve lived in this city for 36 years and for the last 20 the quality of life has slowly ebbed away through traffic conditions no citizen should have to put up with. Despite the building of more motorways, express roads, adding lanes to existing roads, putting feeder lights on the motorways and all manner of expensive add-ons, the problem gets worse. With future growth we are looking at existing traffic congestion turning into hell on earth.

And there’s no end in sight. Prime Minister John Key says the Government will put $10 billion into funding for Auckland transport initiatives over the next decade but it’s really just more of the same – roads, roads and more roads with a smaller chunk for public transport in seven years’ time.

It also means we will be lumbered with wasteful spending on new roading projects which will NOT reduce traffic gridlock. Every Aucklander knows that when a new road is built it just gets you to the traffic jam faster.

The cost of just accepting it is too high. A report to the Government in March this year pointed to $1.25 billion in lost productivity every year from traffic congestion. And now Mayor Len Brown is telling us that we must find an extra $12 billion over the next 30 years to mainly fund more roading projects. His “consensus building group” is proposing petrol and diesel tax increases, congestion charges, network charges, rates increases and increased fares on buses and trains and we’ll almost certainly be lumbered with toll charges for both the second harbour crossing and the existing harbour bridge. And remember that none of this will end traffic gridlock. It doesn’t get much more stupid than that.

Isn’t it time we broke out of the dull mediocrity of policies designed for the middle of last century and looked at ending traffic gridlock in less than a year with free and frequent public transport?

Can we get an extra hour at home with our families every workday? Yes, we can, and at less than half the cost of John Key’s roads which would go on the backburner until the impact of this policy means we could plan with more certainty.

Imagine comfortable, modern, low-emission trains and buses, fitted with free wi-fi, providing free and frequent travel to all parts of the Auckland urban area.

That would get Auckland moving like never before. People will abandon their cars and enjoy faster travel to and from work. No cash, no cards – just jump on and go as far as you need to – checking your emails and the news on the internet as you go.

Everyone would benefit with the choice of either free public transport or travelling in their car on a gridlock-free roading network. Two great choices!

Sound too good to be true? It shouldn’t because it could be up and running within 12 months.

Based on present public transport usage the cost would be approximately $280 million annually (70 million public transport trips in 2012) although this would rise as Aucklanders flock to buses and trains. It would need an initial investment to increase the number of buses – approximately $400 million over three years to double bus numbers. Additional trains would come later as the inner-city link is completed and the rail system can more than double its capacity.

It would be funded from money already allocated for road building which would not be needed in the medium term – in other words no rates increases, no extra petrol or diesel taxes, no congestion charges, no fare increases, no toll roads and every Aucklander gets another hour at home with their family every workday.

It should also be seen as an economic stimulus package. Not only would it release the $1.25 billion in lost productivity each year but the extra money saved by those using public transport would be spent to give a substantial economic boost to the real Auckland economy.

The environment benefits as well. At present 56 per cent of Auckland’s greenhouse gas emissions come from cars and trucks. Public transport is far cleaner and greener and would significantly reduce Auckland’s carbon footprint. In fact this policy is probably the most important green policy New Zealand could undertake to reduce environmental harm.

I hope Aucklanders will give this proposal close scrutiny – question it carefully and support it enthusiastically when they see it stacks up. The alternative is too horrible to think about.

NEX Double Decker 7

Would our PT system be able to cope, even with double deckers everywhere?

Now there are some potential advantages to having free public transport, some are operational benefits while others less direct benefits. Let’s look at the operational benefits first

No cash handling

Handling cash can be a big issue for both bus companies and drivers. Companies obviously have to have processes and staff to reconcile all of the money and ensure that there is the right amount in the drivers cash boxes for the next day. Too little in them and staff might not have enough cash to be able to pay change – and we have seen some recent articles complaining about this. To much cash and the drivers can become a target for thieves looking to score some quick cash.

Being cash free removes these issues and means the drivers can hopefully focus on driving while the bus companies can hopefully focus on running their buses as efficiently as possible.

Faster Boarding

Many readers would have the experience of lining up to get on a bus but having to wait while someone in the queue ahead of you to fumbles around for loose change to pay their fare. This can not only be frustrating but on busy bus routes it can lead to delays as the bus gets slowed down. Not having to pay fares means that passengers can load on to a bus extremely quickly. This speeds buses up meaning that they can be more efficient and potentially allowing the same bus to complete more trips per day.

Some of the less direct benefits generally come from the fact that there is less cars on the road and can include:

  • Drastic decrease in emission of exhaust gases
  • Less noise
  • Less traffic jams
  • Better traffic safety
  • Enormous savings in energy and raw materials
  • Creation of new jobs
  • Efficient economical development
  • Considerably lower public and personal expenses
  • Empowering of social justice
  • Higher cultural dialogue
  • Creation of friendlier urban environment

However the key thing is that these benefits can be obtained simply by getting more people to use PT regardless as to whether it is free or not and as such should really be put to the side in the argument.

But of course there are also disadvantages to having free PT.


Basic economics tells us that the cheaper the price of something, the more that people will use it. Removing fares from PT is likely to lead to much heavier use and while that can be a good thing, it can also have negative consequences. The primary one is that many buses/routes would simply be to crowded for many people to get on. Even putting more buses on is not likely to solve this issue leaving us with the issue of simply having shifted the congestion from our existing roads to the PT network. I suspect people are going to be much less keen to put up with consistently crowded PT services than they do with congested roads. Further because there is unlikely to be any form of ticketing system agencies like Auckland Transport will find it difficult to actually know where the capacity problems are making them difficult to address.


Leading on from the overcrowding issue, people would quickly start demanding much greater services to ease the pressure. Now that in itself isn’t a bad thing but it doesn’t come cheap. John does mention that more money would be needed to help address this but the amount suggested is simply not enough. We are likely to be talking about needing to triple – or more – our peak bus fleet and that alone would eat up the funds he suggests and that is before even talking about actually running them. To keep the number of buses moving we would also need a vastly more substantial bus priority network, just to keep the buses flowing and again that wouldn’t be cheap.

Bus Congestion

Like we found with the City Centre Future Access Study, another major issue would be bus congestion. Already this is forecast to at very high levels in and around the city centre and adding huge amounts of new buses isn’t going to help things. In fact it is much more likely to push forward the need for ever more expensive projects to increase PT capacity, much like we are seeing with roading proposals right now. While the PT advocate in me sees some positives in this, it also becomes very hypocritical.

I guess overall I think that there are some merits but that those are outweighed by the costs. There are cities that have rolled out similar schemes however as far as I’m aware almost all are much smaller in size and complexity than Auckland is. Most already have fairly well established PT systems that are much more easily able to manage the loads. Our network would need substantial investment to get to that kind of level and in the interim I suspect we would be looking at some very grumpy passengers.

Much of the benefits, including patronage increases, can come from simply getting more people to use PT and use it with HOP – which addresses most of the cash handling and faster boarding issues. That doesn’t mean that we shouldn’t address fares though and use them to target additional patronage. Addressing wider social issues – like how accessible the network is to poorer people – then that is something that could be dealt with through special fares or concessions. Similarly off peak patronage could be improved price differentials and/or group passes.

I guess I simply don’t think that now is the right time to even consider such a proposal, we need to wait until at least our PT system has matured a little and we have fixed the current problems that exist with it. But I’m keen to hear your thoughts. I’m sure there are both benefits and issues that I have missed. I’m sure you economists out there will definitely have something to say.

Are the fares too damn high?

For most of the last year we have found ourselves somewhat puzzled by the stalling and even declines experienced by rail patronage in particular – but more recently general public transport patronage. This can be seen in the dip in 12 month rolling patronage totals up to November last year:
Auckland Transport have provided a multitude of excuses for the patronage dip over the past few months – some more plausible than others (they blamed the World Cup for some of the declines in August and November, even though the World Cup was only in September & October 2011). Some of the decline may be due to higher rail fare evasion than we think (anecdotal evidence on this is pretty strong) but I wonder whether public transport fares are really starting to hurt some people and put them off catching the bus, train or ferry. With inflation at near-zero, wage growth stagnant seemingly forever and petrol prices still below the peaks of a few years back the fare increases for rail in particular over the past few years may be starting to bite.

A benchmarking study of public transport in Auckland and a number of comparator cities prepared a couple of years ago highlighted that Auckland’s PT fares – on a per kilometre basis – were higher than all other cities analysed:Yes, the graph does show that Auckland’s fares are on average around twice those of the Australian cities and much higher than Wellington’s. This is despite (or perhaps a cause of) Auckland generally having one of the poorest and least used systems when compared to these other cities.

There are lots of ways that we can improve our fare system, like the introduction of free transfers, zone-based fares, greater incentives for people to use the Hop Card, pricing differentials between peak and off-peak, better deals for monthly pass holders and so forth. Those are all great, but I wonder whether they miss the fundamental point of still assuming the same general level of contribution by users to the cost of public transport provision. Certainly Auckland’s farebox recovery rate (which has increased to about 43% from what’s shown below which was in the benchmarking study referred to above) is certainly higher than a lot of Australian cities:Fortunately a lot of work has gone into creating a more efficient PT network over the last while, with the new bus network likely to generate a lot more patronage without extra service requirements. Hopefully the PTOM contracting system will also generate cost efficiencies. This work should hopefully mean that the public money spent on public transport is being utilised far more efficiently than in the past – effectively we are getting more bang for our buck.

But the next question is around how to use those savings – to reinvest in extra service, to bank the savings or perhaps to lower some fares? I’ve wondered for a while whether the strategic lowering of certain fares would generate a big patronage gain and the benefits which arise from more patronage would easily outweigh the revenue foregone in the lower fares. There are a number of ways this could happen:

  • The lower fares could end up with more passengers paying and theoretically this could mean more revenue overall. Generally patronage is seen to be relatively inelastic to price (though this varies hugely for different trips) so ending up with more overall revenue is relatively unlikely.
  • The patronage gain could generate significant external benefits, such as in the form of decongestion benefits – which for rail are particularly significant at around $17 per peak time passenger.
  • Lower fares could mean that some people end up ditching their family’s second car and shifting to the bus or train as it’s now clear that catching PT makes financial sense to them. As many of the costs of car ownership are relatively hidden (e.g. depreciation) they may end up in a much better financial position in the longer run.

There are lots of messy details to work through around the most effective way to target fares to maximise benefits created and that’s not really the intention of my post. I guess I’m just interested in understanding whether we’d be better off if PT fares were a bit lower generally – certainly a lot of other cities seem to think so.

Improving our Farebox Recovery

Whether you support improved public transport or not, one thing that everyone probably agrees on is that we need to improve the efficiency of our PT services, particularly in regards to the level of subsidies required. Long time readers of the blog may remember a policy change the NZTA made a while ago called the Farebox Recovery Policy which set an arbitrary limit as to the amount of operating costs that need to be paid for by passengers. That limit was set at 50% and didn’t really seem to have been set based on any evidence but rather seems more like it has been set at that level for political reasons. Agree with the policy or not, it is now a requirement that Auckland has to meet it so I was wondering just how much impact the draft RPTP would have on us doing so. Thankfully the plan has an appendix dedicated exactly to that for us to look at (appendix 4, starting at page 115).

The definitions of costs and revenues used to calculate FRR are set out in NZTA policy guidelines. Some costs, such as rail rolling stock capital servicing charges, station and bus stop facilities maintenance, and the Total Mobility scheme, are not included. Costs associated with providing passenger information, planning, and contract administration are also excluded.
Using these definitions and NZTA funding claims, the Auckland FRR was calculated at 44.3 per cent for 2011/12. This takes account of the true operating costs for rail in Auckland, including rail track access charges and rail rolling stock maintenance costs. The 2011/12 FRR was used as the starting point for the development of FRR targets in this RPTP.

At 44.3% it suggests that on average fares would need to be about 13% higher with the same level of patronage however Auckland already has what is considered one of the highest costs per km out of many of the cities we compare ourselves to.

Increasing fares further would potentially also have the negative impact of reducing patronage making things worse still and this seems to be the path that Brisbane is taking as they have been increasing fares are a rate of about 18% per annum and people are starting to stop using services as a result.

The other alternatives are to grow patronage or reduce costs and thankfully that seems to be exactly the path we are taking. Based on the current costs patronage would need to be about 13% higher than it is today assuming that our costs stayed the same. I think that not only can we achieve that, but probably greatly exceed it. Over the next few years we will see our PT network become a lot more attractive and efficient for a number of reasons, here are some of the big ones:

  • The bus network will become a lot more efficient with the proposed new network which uses exactly the same number of buses and vehicle kilometres to achieve a much more extensive high frequency network.
  • The new PTOM contracting environment should mean that Auckland Transport is able to to have much better control over bus operating costs (a post with more detail about this will be up in the next few days).
  • The full rollout of the HOP card should help to make PT trips easier and even buses faster due to quicker dwell times which should help to make them more attractive.
  • The new fare structure will contribute to making the PT system more attractive and should be revenue netural
  • The electrification of the rail system will improve operating costs, make it more attractive and drive a lot of additional new patronage.

Auckland transport have investigated the impacts of these and other options to determine if we will meet the requirements and here is what they say:

To explore these issues, a number of alternative scenarios (involving fare increases, cost reductions, and service improvements) were evaluated and then provided to the Auckland Transport Board in May 2012.
The evaluation suggests that it is possible to achieve a 50 per cent FRR within the next three years without damaging the recent momentum in patronage growth. In the short-term, however, the policy will need to focus on ensuring that the FRR does not fall below current levels. This should be achieved by continuing to regularly review operating costs and fare levels, increasing fares (where necessary) by at least the rate of inflation, and achieving savings in unit operating costs through improved efficiencies – such as savings from implementation of the PTOM.

Beyond this period, a target FRR of 50 per cent or better should be achievable, provided that continued cost savings and patronage growth associated with rail electrification and service improvements can be delivered, and fare levels continue to keep pace with operating costs.

So with only fare increases at the rate of inflation, not only are we expected to meet the policy but it is quite possible that will will exceed it. They also break down how they expect the recovery rates to change by mode and as you can see the biggest mover is the rail network which sees its recovery rate improve by 50-70% due to the improved costs and increased patronage brought about by electrification.

I actually think AT have tend to be over conservative with their projections on patronage so I suspect that we will not only meet the 50% target but well exceed it. That would then allow for more money to be spent on further improving the services we provide helping to reach our target of doubling PT usage over then next decade. In some ways we lucky that we are in the position where we will see these vast improvements that means we can avoid things like fare increases although I’m sure we can all agree that pretty much all of the projects should have been done a long time ago.

Better value for money from rail

While it’s certainly essential for Auckland to have a well functioning rail system, as we’re a growing city with little ability to squeeze more out of our roads particularly easily, the ‘turning around’ of Auckland rail system over the past decade has undoubtedly been an expensive – but necessary – task. I won’t go into the capital costs of the projects in this post, because I don’t have much of an issue with them – all the money we’ve spent so far on upgrading the rail system has been on projects that make pretty good sense. What I’m particularly interested in is the ongoing operating cost of the rail system, and how we might be able to reduce that.

In the 2009/2010 financial year (recent data is probably available but this is easy to find), we spent around $69 million on operating the rail network, and got in around $20 million in fares – meaning a subsidy of just under $50 million was required: I’m not going to do the normal thing of dividing this amount by the number of trips to work out a “per trip” subsidy cost and then go and compare it to buses, because that’s silly as your average rail trip is much longer than your average bus trip – therefore generating much greater congestion relief benefits and also meaning that trains need to be operated much longer distances, adding to the cost.

However, overall I think it’s pretty clear that in the longer term we want the rail system to fund itself to a greater degree than the current 29% farebox recovery level the table above suggests.Fortunately, much of the recent capital expenditure, including ongoing projects like electrification and integrated ticketing, is aimed at improving the efficiency of the network. Integrated ticketing should do away with the need for so many on-board staff (as an aside, there were two people selling tickets on the platform at Henderson station around lunch-time earlier this week when I was catching a train, meaning that on-board staff were able to sit around not having to do much) while electrification should help save significantly on the $10 million a year currently spent on diesel, and the $15 million or so a year spent on maintenance.

In short, it seems logical to me that as these two projects in particular start to roll out, we should be able to run a much leaner rail system, reducing the cost of many aspects of providing rail service. Yes, we will have longer trains once electrification is completed, but we won’t have more peak time trains (thanks to the Britomart bottleneck) so it should be possible to significantly reduce the rail network’s operating cost. In fact, I’m pretty sure that the business cases for both integrated ticketing and electrification relied upon such savings.

I do wonder though whether this will happen. There doesn’t seem to be much competitive tension in getting a good contract price out of Veolia providing rail service, and we have learned from analysing PTOM that the bus market is pretty uncompetitive when it comes to tender prices. I think it’s essential that, over the next few years, Auckland Transport works really hard to show how investments in the rail network are helping it become much more efficient so we can get that farebox recovery rate up and start proving to a sceptical government that rail investment is good value for money.

Auckland’s PT: expensive and poorly used

An Auckland Council report on various aspects of our transport system makes a number of comparisons of Auckland’s public transport system with various cities in Australia, Canada and the USA – as well as Wellington. The cities used to compare Auckland against, including their population and what different technologies their PT system includes, is shown in the table below: These are a good range of cities to compare Auckland’s performance against, in my opinion. We have a number of cities with fairly similar population densities to Auckland (Sydney, Vancouver) cities with a similar population (Portland, Calgary, Adelaide) and cities with a variety of PT systems. On the key statistic of boardings per capita, it’s clear to see that Auckland is the very bottom city on this list. The per capita boardings of the Canadian cities are pretty amazingly high.

If we just compare with the Australian cities (and with Wellington) we can also see that while Auckland’s patronage has grown over the past decade, it hasn’t increased as much as many other Australian cities, particularly Melbourne and Perth: It’s interesting to remind ourselves that Melbourne has a railway link tunnel fairly similar to what’s being proposed in Auckland, and the ability to get heaps of people into Melbourne’s CBD by train has played a major role in the revitalisation of downtown Melbourne over the past decade, obviously contributing significantly to its rising patronage.

If we look at modeshare comparisons, once again Auckland lags behind the other cities – although it must be remembered that this is 2006 data and undoubtedly things will have changed in Auckland since then. It’s a shame that the Canadian data wasn’t able to be broken down by PT type, but for many Australian cities it’s notable that generally rail has a similar, or greater, modeshare than buses for peak time travel. Auckland is very much the exception to that rule, which probably highlights a PT system that is a bit too dependent on buses (due to our historic neglect of the rail network).

So why are things so bad for Auckland? Setting aside the obvious historical reasons, it’s clear by comparing Auckland with these various overseas cities that we provide a lower quality and quantity of services than elsewhere, but we charge the highest price on a per kilometre basis. Firstly, the quality & quantity: In short, we’re providing a pretty rubbish service compared to all the other cities used in the comparison. But what are we charging compared to all these other cities: So despite having the lowest quality PT service out of all these comparative cities, we then go and charge passengers the highest fares out of any of the cities. Not content with that, we are also then one of the few cities not to have a properly integrated ticketing/fares system. The reasons for our low patronage levels are starting to become pretty obvious I think.

Another element to consider is the cost-effectiveness of our service delivery. Obviously the cost of providing our rail system is pretty high, because we’re running incredibly old trains and use an incredibly outdated, overly labour-intensive, ticketing system. Our bus service seems relatively normal to provide on a per kilometre basis: While our services don’t seem particularly expensive to provide on a per kilometre basis, because we have the lowest average loadings of our PT vehicles, Auckland then stands out as close to the most expensive city to provide public transport on a per-person basis: Looking at the graph above it seems fairly obvious that the key way for Auckland to improve the cost-effectiveness of its public transport network is by increasing passenger loads and thereby reducing working expenses per passenger kilometre. Nevertheless, because our fares are so incredibly high on a comparative basis, Auckland’s farebox recovery level actually isn’t bad when compared to many of the other cities: There are quite a few pages of pretty good analysis and suggestions about how we can improve Auckland’s situation towards the end of the document, but for me the information above is extremely helpful in outlining quite a few things:

  • Despite an improvement to Auckland’s PT system over the past decade, we’re still doing very poorly compared to comparative cities in Australia, Canada and the USA. Furthermore, most of those cities have been increasing their patronage at even faster rates to Auckland.
  • Compared to other cities, Auckland’s PT service quality is considered to be extremely low, while quantity of service provided is also fairly low (although somewhat understandably given our low use). Improving service quality (better reliability, faster speeds, value for money etc.) is likely to be the most effective way of increasing use.
  • Compared to the other cities, Auckland’s fares are incredibly high – particularly as we don’t have integrated ticketing. Making fares for unlimited daily, weekly or monthly travel quite a bit cheaper is likely to be quite effective at boosting patronage and making PT seen as better value for money. Peak/off-peak pricing splits are also likely to be a good idea.
  • Compared to Wellington in particular, we are paying too much for the provision of services on a per kilometre basis. Compared to all cities we’re paying too much on a per passenger basis. This suggests that we’re running too many empty/underloaded buses or trains around, particularly during peak times when it’s most expensive to get a vehicle on the road. I also wonder whether this makes a good case for a publicly owned bus company to do what Kiwibank has done to the banking industry and keep prices a bit sharper.
  • Our farebox recovery levels are actually quite high compared to many overseas cities, suggesting that efforts to improve cost-effectiveness should come from boosting patronage through service quality improvements, rather than by hiking fares.

This pretty much matches up with what I’ve thought for a long time (although I am surprised how comparatively high Auckland’s fares are). One hopes that now Auckland Transport and Auckland Council have all this information, it will become more obvious what interventions will be most useful. Things like better bus priority measures, a more efficient bus network, a more intensively used rail network and and improved ticketing system.

I hope that eventually we can get off the bottom of all these public transport statistics.

NZTA finally speaking some sense

There’s an interesting NZTA board paper passed on to me by Jon C of AKT, which discusses NZTA’s role in funding public transport – most particularly their role in helping to fund rail projects. This board paper came about as part of a solution to the $30 million rail funding gap that Steven Joyce has created. Here’s some background to NZTA’s role in funding rail projects:

One useful thing the Board Paper does is give a good analysis of why NZTA should be helping to fund rail. Remember that at the moment NZTA can help fund rail operating costs, but for some illogical reason they cannot contribute to rail capital costs. That’s the most amount of sense I think I’ve ever seen out of NZTA. Recognition that motorway corridors are finite and often can’t continue to be widened. Recognition that rail offers enormous capacity opportunities, recognition that electric rail can be operated independent of fuel price fluctuations. Wow, Steven Joyce would be furious if he saw this board paper!

Looking at things in more detail, there is a growing “crunch point” in the funding of rail in both Auckland and Wellington. At the same time as costs have been increased by improving infrastructure and service provision – in some cases leading patronage increases – we’re seeing the introduction of the mental 50% farebox recovery policy and the placement of limitations on the amount NZTA can spend on rail. The worry is that this ‘crunch point’ will lead to big increases in rail fares over the next few years. This is picked up further, later in the board paper (I’ve chopped together a few paragraphs that are separated by annoying withheld sections): The cynic in me suggests that perhaps the farebox recovery ratio has been deliberately imposed to limit patronage increases. After all, NZTA never undertook any research to determine whether 50% was the most appropriate number or not.

There’s a lot of withheld information later in the board paper, but the important thing is that the NZTA board did approve the allocation of $15 million as their contribution to helping to close the rail funding gap – this is recorded in the minutes: The paper is quite interesting in showing that there is an understanding of the importance of rail within NZTA, it just generally struggles to reach the surface of that organisation. It’s also good that NZTA are making a contribution to closing the rail funding gap – and ensuring that rail services can continue to be improved over the next few years.

I have a really big OIA request of NZTA due to be sent to me on March 7th. It should be quite interesting to see what’s in it.