Monday, March 13, 2006

'Free' transport: a threat to the 'virtuous circle'?

Recent 'Age' articles have suggested that public transport should be free (or nearly so) with more funding coming from taxes.

'Free transport' is a populist mantra that sometimes gets headlines but doesn't solve very much at all. Though there are cases where fares are dear (eg Glenhuntly to Patterson costs $5.20, only slightly cheaper than a taxi), the overwhelming problem is a lack of service rather than the fare.

This is particularly so for the 60-70 % of the metropolitan population whose only service is a bus route, nine-tenths of which operate limited hours unsuited to modern lifestyles.

How is this fixed?

The solution is to establish the conditions for a virtuous circle that build more attractive and usable services. Because fares bring in revenue, these can usefully be employed to make it a sustainable cycle of improvement, rather than a one-off boost. The revenue benefit is amplified if a disproportionate number of new passengers are those who previous drove, ie 'choice passengers', many of whom will be paying full fare.

The ingredients of the 'virtuous circle' in public transport are:

1. More/better service (cheapest improvements first)
2. Increased service attractiveness (especially to full fare-payers)
3. More patronage
4. more revenue (especially more passengers paying full fares)
5. even better services

And so the cycle repeats in an upward spiral.

Allowing some costs to be recovered by charging fares assists security of service. Indeed service security probably increases with higher cost-recovery. For example, when a system recovers 60% of its costs, it's much harder for a politician to save money by cutting services (as happened under Kirner when buses were severely pruned) than if it recovers only 30% of costs. A 'free' service that returned 0% of costs would be an even 'softer' target, and the biggest losers would be those with no alternative (the rest can just drive).

With service-driven patronage increases, PT would become a sort of 'sacred cow' that politicians daren't meddle with because its constituency is so large. This is much like neither Liberal nor ALP governments will touch veteran's entitlements as they fear the RSL (remember Bruce Ruxton?). It's the same story for negative gearing, private school subsidies and other things, but there is no reason why public transport shouldn't be on this list as well.

With a stronger public transport system meaning that more passengers and dollars are at stake, it will be easier to dismantle the road lobby's control of our roads. Finally the old paradigm of 'maximising throughput of car traffic' will have to play second fiddle to accessibility, bus/tram priority, pedestrian amenity, cycleways, etc. This further improves public transport's attractiveness and thus patronage.

My biggest objection is that making PT free or very cheap (eg a $365 yearly ticket) kills this virtuous circle and returns us to a stalemate of bad service with no improvements. The only difference is that crowding might be a bit worse.

As mentioned earlier, being able to take fares represents a leverage opportunity that can be used to magnify the benefits of service improvements.

How so? If transport was free (or very cheap), service improvements would not cause revenue to increase. Yet if fares were charged, $10 worth of service improvements might return $3 of increased revenue. If it's particularly high-value improvements (eg co-ordinating timetables, fixing bad connections and removing route duplications) benefits might be nearer $10, ie an elasticity of 1. And so you've got an extra $3 (or $10) which could go towards even more improvements.

In contrast, with free or very cheap PT, the financial returns drop to zero. Hence the business case for service improvements diminishes. Even fewer will be attempted. And if some are done, it will only be possible to get half the improvements for a given sum since returns are zero.

Eventually (i) service will deteriorate due to lack of improvement (and mounting road congestion in the case of trams), and (ii) those who persist taking PT will complain about all the begging vagrants. Then people will start calling for fares to be reintroduced, politicians will think 'that's a good idea' and the deed will be done (possibly manufacturing a financial crisis to justify it).

After a few years have been wasted then maybe it's time to return to the substantive issues, like creating the virtuous service - patronage - revenue circle mentioned above, which is what should have been done in the first place!

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