IPART estimates of marginal external cost vary according to mode and time of day. A peak- period rail trip is estimated to generate a marginal external benefit of $1.68 (the highest benefit reported). If we apply this figure to the c.29 million additional trips generated in a full year, the estimated benefit by way of reduced externalities is c.$49 million.
Against an annual cost of c.$350 million (i.e. foregone revenue), the implied benefit-cost ratio (BCR) is probably around 0.18.7
Note that this is before any allowance is made for (any) costs of additional services to support the higher public transport patronage (both operating costs and capital costs, which can be significant if extra vehicles are required). In addition, the disadvantages of any material increase in onboard congestion also need to be considered and are not included in the BCR above.
Social Considerations
As a cost-of-living initiative, $0.50 fares have been welcomed by all public transport users, particularly lower income groups not entitled to use concession fares.
There is limited publicly available data on changes in spatial and temporal trip patterns following the introduction of $0.50 fares. The available data suggests that strong increases have been achieved year-on year in all South-East Queensland (SEQ) local government areas, with Gympie achieving a year-on-year increase of almost 50%3. These increases in patronage will warrant further detailed evaluation in due course.
Specifically, have we seen higher than average increases in public transport patronage in suburbs with relatively low household incomes? Have we seen disproportionate growth in longer-distance travel, which might imply that it has enabled lower socio-economic groups to travel further for social or recreational purposes? Finally, have these fares stimulated additional inter-peak or off-peak trips enabling the transport-disadvantaged to again access social and recreational opportunities – such as meeting friends for lunch or accessing services not available in their local communities
Discussion and conclusions
While a simpler fare structure and associated fare reductions are clearly and understandably proving attractive with long-term and new public transport customers, we need to consider the public policy dimensions of this initiative, notably the financial and economic considerations.
The financial cost of capturing additional public transport patronage through $0.50 fares is c.$12.50 per trip per new or incremental trip.
The question is then one of whether this investment in deeply discounted fares to drive public transport patronage growth can be justified on economic grounds.
The answer is clearly no. Each dollar invested to support the continuation of $0.50 fares generates an economic benefit of approximately $0.18 (i.e. a BCR of 0.18).
There is little question that an alternative strategy (e.g. investing in service levels and/ or service quality) would produce a better financial and economic return. The transport economics literature has consistently shown that investing in services is the preferred means of driving patronage growth.
In an earlier L.E.K. Consulting Executive Insights on fare discounting, we also offered two other policy options.
Firstly, carefully consider the target market for public transport. Additional support to manage cost-of-living challenges through targeted concessions is likely to be a superior approach to broad-based fare discounting.
Secondly, with the benefit of contemporary (account-based) transit fare collection systems such as that being delivered in Queensland, it is time for transit agencies to embrace a yield management approach to fare setting and grow both patronage and revenue simultaneously — as opposed to trying to defy gravity by broad-based general fare cuts.
We would also add that direct road user charging is the preferred means of providing the correct pricing signals associated with road use (i.e. to manage road use and congestion), as opposed to a ‘second best’ pricing approach of capturing the external costs of road use in public transport fares — noting that $0.50 fares go well beyond the appropriate level to reflect these benefits in any case, as reflected in the indicative BCR reported above.
Finally, there may well be some unintended consequences of this policy.
Firstly, fare policy reform, particularly initiatives that dramatically dilute the farebox, are extraordinarily ‘sticky’ and difficult to reverse unless they are pitched and managed as a limited trial with a clear sunset date. Although $0.50 fares were initially introduced on a six-month trial basis, the initiative is now permanent.
Secondly, it may make the task of securing investment in new projects more difficult given an expectation of recovering c.5% of costs through the farebox and the associated subsidy requirement.
While the $0.50 fare policy is unquestionably popular, when viewed through a financial and economic lens, it rates very poorly.
