Public transport subsidies are a perennially controversial topic. In this post I quickly summarise the case for subsidies before highlighting why Steven Joyce is pretty much wrong about public transport subsidies in Auckland.
Public transport subsidies are basically motivated by “externalities.” These externalities arise because individuals do not factor in the full benefits and costs of their travel decisions, which in turn results in outcomes that are economically inefficient. In the case of transport, the big externality is congestion: Drivers simply do not consider the cost of the delays that they impose on other road users, hence more people drive than is ideal.
So by subsidizing public transport we can reduce the numbers of people who choose to drive and thereby reduce congestion on the road network (for a given level of development). As highlighted in Josh’s earlier post, the cost of congestion is significant: The net economic benefits of Auckland’s public transport system exceeds the subsidies by 3:1 (based on data from the NZTA), i.e. PT subsidies generate benefits three times greater than their costs.
Congestion is not the sole externality that causes too much driving; the cost of parking is another. Parking is not paid for by users and as a result more people chose to drive than should. Because of minimum parking requirements, this demand has to be reflected in increased supply, creating costs that must then be subsumed within the wider economy.
So the general motivation for public transport subsidies is fairly simple: They correct for externalities (or market distortions) that result in more people driving than would in a situation of accurate pricing. But what does Steven Joyce mean when he suggests that public transport subsidies are increasing too fast? I think what he means is that the fiscal “input” (i.e. subsidies) is growing faster than the public transport “output” (i.e. trips).
This frame of thinking is illustrated in the figure below, where the black line (input in dollars of subsidy) is rising more rapidly relative to the blue line (output in trips).
This conclusion is misguided for several reasons. First, it focuses on financial, not economic, outcomes.
Put another way,the role of government (in the long run) is less about fiscal impacts than it is about economic outcomes. To highlight the difference, let’s say that the period from 2005-2011 saw increased congestion on Auckland’s road network (which it did). Intuitively we can appreciate that this should justify higher subsidies than in the past. But the economic costs of congestion figure nowhere in the above graph. Thus the above graph is economically meaningless and not worth the pixels it is written on (at least in terms of public transport’s effectiveness).
But there is a more obvious flaw in Steven Joyce’s analysis of subsidies. That is, the number of public transport trips is not an appropriate measure of the system’s “output”. Instead, a much better indicator of output is the total amount of kilometres travelled by public transport, which is equal to the number of trips multiplied by the average trip distance. Kilometres travelled is a better measure of output because it is more closely linked with congestion.
And because Auckland’s public transport network is attracting more long distance travellers, the total number of kilometres travelled has increased much faster than the total number of trips. This can be seen by considering the figure below, where I have plotted the (indexed) growth in subsidy per trip (blue) and subsidy per kilometre (red). The latter has increased about 16%, whereas the former has increased about 32% – so subsidies per kilometre travelled have increased only half as fast as subsidies per trip.Despite using a poorly specified measure of output, Steven Joyce might look at the red line in the figure and conclude that his original conclusion still stands, because the subsidy per kilometre in 2011 is 16% higher than it was in 2005. But again he would be wrong – because this analysis is still not complete.
The key reason it is incomplete is because the red line is not a true measure of output efficiency over time. The problem is that “subsidies” have not been adjusted for inflation. So to get an real idea of how the efficiency of Auckland’s public transport system has changed over time you need to adjust down future subsidy levels in line with inflation.
And in this period inflation actually ran at between 20-30% (depending on whether you use general CPI or just the transport sector). When this is factored in the subsidy per kilometre travelled (i.e. the red line above) does not increase at all, as illustrated by the dashed red line below (which is in constant 2005 NZD).So if the per kilometre benefits of public transport increase (because of worsening congestion) while the per kilometre costs decline (or at least remain stable), then the only conclusion we can draw is that Auckland’s public transport system is in 2011 more effective than it was in 2005. Stated differently, Joycey baby is a) mixing up fiscal and economic implications b) using the wrong measure of output and c) failing to adjust for inflation.
I want to focus on the positive. It’s worth re-stating that Auckland’s public transport system has actually performed reasonably well over the last six years, in both financial and economic terms. To make trends in subsidies clearer, the graph below shows the percentage change in rolling 12-month average subsidy. You can see that subsidies were increasing up until about July 2006, after which time they seem to have declined in real terms.
This figure also highlights the impact of the Northern Busway, which attracted large numbers of long distance trips with relatively little increase in subsidy (NB: Although the actual impact has probably been accentuated by the linear interpolations used between data points). This suggests the “peak” in public transport subsidies (on a per unit of output basis) was reached long before Steven Joyce waltzed onto the scene wearing a self-proclaimed hat of fiscal restraint (unless you’re talking about RONs – then his wallet is positively wide open).
It also seems likely that public transport subsidies per kilometre travelled will continue to decrease at about 1-2% per annum (in real terms). By extension, it would also seem that Auckland’s PT system is experiencing economies of scale, which means that the marginal cost of new users is lower than the average cost of existing users. This is good news because it means average efficiency will increase as the system grows – something that we would intuitively expect.
Of course, that’s not to say that Auckland could not look for further efficiencies from its public transport system; some potential opportunities include:
- Charge for park and ride at Albany and Constellation – both raises revenue and pushes NEX passengers back onto local buses. Would probably raise a cool $1 million (assuming $3 per day for 1,000 car-parks over 48*5 = 240 weekdays, with 250,000 trips per year shifted to local buses @ $1.50 revenue per trip).
- Target subsidies to price sensitive demographics – such as students and beneficiaries. A peak/off-peak differential should also be introduced, encouraging peak spreading and higher utilization at off-peak times.
- Maximize revenue from peripheral activities – install advertising and vending machines on trains and at stops. Yes I know it’s ugly, but it’s a price I’m prepared to pay if it helps us fund a better public transport network.
- Improve competition for bus contracts – NZ Bus appears to have market power. It’s not helped by the “net” contracting model. Replacing this with a gross contract would shift benefits and revenue considerations to the council, while leaving the bus companies free to focus on managing costs (something they do fairly well).
Despite these opportunities I suspect the big efficiency gains will come through changes to the current network. The reduction in subsidy levels shown earlier is an aggregate response to reasonably well-targeted capital investment, such as Britomart, the Northern Busway, and HOP ticketing. These projects have driven sustained growth in long distance trips. Bus corridor improvements out west and east seem to offer similar opportunities for efficiency gains, as perhaps does the City Rail Link (although I’m not yet sure as to when it should be delivered).
In the long run time-of-use road pricing and parking reforms are probably needed if we are to push the public transport network towards the point where it is financially self-supporting – which would allow us to ignore characters like Joyce altogether. These are, ironically enough, the very externalities that justify subsidies in the first place. There’s a nice symmetry if market prices for roads and parking would result in PT become operationally self-financing.
I suppose on one level Joyce may be right: Market pricing may well deliver a reasonably efficient transport outcome, assuming that they correct for externalities. But it’s very unfortunate that Joyce has put the financial cart before the economic horse – he should focus on internalising these externalities (i.e. “making markets” more efficient) before he tries to squeeze subsidies for services and infrastructure that are already efficient, and increasingly so.
His current approach to subsidies is amateurish and more likely to deliver false economies than efficiencies. And for that he deserves a serve.