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Thursday, 24 December 2015

Public transport fares: do we need more than economics to make them efficient?

There are some recommendations in this week's draft report on public transport fares from the NSW Independent Pricing and Regulatory Tribunal (IPART) which make a lot of good sense.

But then there are the weird bits.

Let's be positive and start with the good recommendations.

The first is the proposal that journeys made with two or more modes should be priced as a single journey based on distance travelled. Most observers were scratching their heads when the Opal card was introduced with penalties for passengers who need to transfer between modes to complete a journey. Good on IPART for recommending a fix to this.

Changes to policy on week-end fares and seniors discounts are also fair and logical. 

By replacing the Sunday cap of $2.50 with a week-end daily cap of $7.20, the perverse incentive to delay a week-end ferry ride until Sunday will be removed. And let's face it, $2.50 for travel anywhere on a Sunday is overly generous and distorts demand with very detrimental effects on service, especially for ferries.

The changes to eligibility for the Gold Opal card, which mean Seniors who are not pensioners will need to pay fares at the regular concession rate, is another dose of common sense.

Recommendations I place in the category of Weird City mostly stem from IPART's understanding of the word "efficiency". The name of IPART's report "More efficient, more integrated Opal fares" is significant. Early on at university, economics students are taught a new meaning of the word "efficiency". "Economics", students are instructed, "is about the efficient allocation of scarce resources". The instruction must be effective, because when graduates find roles in cloistered academia, consulting firms and Government agencies (like IPART), they seem compelled to look for anything that looks remotely like a scarce resource which is in need of efficient allocation, preferably by a price mechanism. 

When the only tool you have is a hammer, everything looks like a nail.

This is why IPART is so fond of "pay as you go" fare structures, because if a user pays for each individual trip, they will feel inclined to "ration" their use of public transport. It explains their recommendation to lift weekly Opal card weekly caps from $60 to $75 in 2018 and to reduce the number of "free" trips for frequent users. And there is no recommendation to re-introduce a periodical or travelpass style of ticket.

Economics is not of course the only set of ideas relevant to efficiency in business or the business of government. There is another quite different tradition of operations research and systems science, with a lineage going back to the American philosophers CS Peirce and CI Lewis, the statisticians Walter Shewart and Ed Deming and notable advocates like Stafford Beer, Gregory Bateson, C West Churchman, Russell Ackoff and Fred Emery. Their understanding of efficiency is a practical one which sits more comfortably with the average business owner. Efficiency in business (or public transport) is about making process improvements to the system to provide better products and services to customers, at lower cost. 

This tradition is mostly concerned with the way a business (or system) operates as a whole, and less about its component parts, because the whole is not the sum of the parts. 

For a public transport operator, efficiency improvement can be achieved by many practical activities, including minimising the time the fleet is lying idle and maximising the time in their rosters when crews are driving boats (trains/buses). These should also be concerns of government, because efficient use of assets and labour by operators leads ultimately to lower costs to the taxpayer.   This is what real world efficiency is all about. 

An economist's idea of efficiency is more abstract. You need look no further than this week's IPART report to see how abstract and remote from the real world this can be. Here is a quote from page 36:

"In theory, a certain number of journeys on a public transport service will maximise the welfare (or net benefits to individuals and the wider community) generated by the service. In economics, this is known as the socially optimal level of consumption. Fares set to achieve this level of consumption are known as the ‘socially optimal fares’. Socially optimal fares encourage both efficient use of public transport and efficient delivery of public transport – our two ‘efficiency’ criteria.

At the socially optimal number of journeys, the cost of providing the service to the last passenger is equal to the benefit of the service to that passenger and to the wider community. This last passenger is known as the ‘marginal’ passenger, and the costs and benefits associated with serving the marginal passenger are known as the ‘marginal costs’ and ‘marginal benefits’. 

At the socially optimal number of journeys, the costs to society of any additional journeys would outweigh the benefits to society associated with those additional journeys"

Further on page 37: 

"We developed a mathematical optimisation model that we used to estimate the socially optimal fares for single journeys on each mode...

It aims to identify the fares that will balance the following two effects: 
1. Setting fares above the socially optimal level would lead to excessive use of private cars and underutilisation of existing and planned public transport capacity, leading to higher external costs associated with road congestion, emissions and road accidents. 
2. Setting fares below the socially optimal level would lead to excessive crowding on public transport, underutilisation of existing and planned road capacity, and excessive public transport operating losses which must be funded from taxation." 

In short, IPART believes there is an optimal number of public transport trips in Sydney - not too many and not too few - and by pulling the right leavers on fares, this optimal level of trips will be reached.  After all, according to IPART, we really don't want people travelling too much by public transport or else there could be "underutilisation of existing and planned road capacity". 

What the heck?

This is the first time I have heard anyone say that the existing or planned capacity of Sydney roads may be underutilised if too many people use public transport. When did that become a problem? The thrust of the NSW Transport Masterplan (which doesn't rate a single mention in IPART's 106 page report) is to promote a mode shift away from private cars to public transport so Sydney becomes a more vibrant, liveable and better connected city. 

The report doesn't state explicitly what IPART thinks the socially optimal number of public transport trips should be in Sydney, but it appears to be not too different from what it is now - about 120 per resident per year. By comparison with most European cities, this is woefully low.  It's about 400 in Zurich and 500 in Vienna. 

IPART needs to forget the idea that public transport can be made more efficient by rationing trips via the price mechanism. What actually needs to happen is the opposite of this. Sydney needs to have a fare structure which discourages rationing of public transport travel. This is achieved by offering heavily discounted periodical fares (weekly, monthly, quarterly and annual travel passes). If you already have a periodical ticket, you are more likely to use public transport for non work commuting travel - like going shopping or meeting friends. 

Travel for purposes other than commuting to work make up more than 80% of all trips by Sydney residents! Public transport must be made a more attractive option for these types of trips if a substantial mode shift is to be achieved. Unfortunately, IPART disparagingly refers to them as "discretionary" travel (as if we would all be better off staying behind closed doors at home when not at work).

What really matters is increasing patronage and lowering taxpayer subsidies. Most European cities achieve far higher levels of real world efficiency in their public transport systems because their utilisation of assets is higher.  This can be done by drawing on the fine practical traditions of operations research and systems science, not the abstract, "mind experiment" concepts of efficiency so loved by economists. 

Fares are not everything. If average public transport trips per resident were to lift to a modest 250 trips per year, then capacity would have to increase and networks designed better to provide for multi-destinational travel, not just commuting to work in the CBD. 

But fare structures are part of the overall public transport jigsaw puzzle that we need to get right in Sydney. Unfortunately IPART is leading us down the wrong path.

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