“At the margin” is one of my favourite economic expressions.
Recently I’ve been thinking about how the City Rail Link (CRL) affects the financial performance of Auckland’s rail network “at the margin”.
- What is the impact of the CRL on patronage?
- What is the impact of the CRL on fare revenue?
- What is the impact of the CRL on rail operating costs?
- What is the impact of the CRL on cost recovery?
Now I don’t want to send the wrong message: Financial performance is not as important as economic performance.
But financial performance is important to some degree; as it defines how a given project impacts on the National Land Transport Fund (NLTF). And where a project’s operating costs exceed its revenues, then it will require on-going operating subsidies.
By extension investing in projects now that require on-going subsidies will reduce our ability to fund future projects. So if we invest in transport projects that require large on-going operating subsidies, then we are effectively making a decision to reduce the funding that is available to fund other projects in the future.
That’s why I think financial impacts are important.
It’s interesting how quickly political biases enter the discussion as soon as one mentions the words “financial performance”.
Many people on the right presume that roads are associated with good financial performance, whereas public transport – especially rail – is not. On the other hand, many people on the left presume that anyone who is concerned with financial performance is guilty of short-term “roads first” thinking. Both are presumptuous.
And I think the CRL provides a good example to challenge some of these biases. First let’s quickly make some guess-estimates in response to the questions posed earlier:
- Patronage impacts = The CRL is ultimately expected to generate ~20 million additional rail boardings p.a. (possibly more)
- Revenue impacts = 20 million x $4 per boarding = $80 million p.a. in additional rail fare revenue,
- Rail operating costs = let’s say we double service levels for circa $70 million p.a. in additional rail operating costs
- Cost recovery = Revenues / Operating costs = 114% (in a marginal sense).
Now I’m the first to admit that the numbers are a bit rubbery. While we won’t gain 20m boardings overnight, the same holds for the operating costs: We’re not going to need to double rail frequencies straight away either. We’re also ignoring capital costs of course, but that’s a different question.
Hidden in the numbers above is an interesting assumption that I’d like to discuss in more detail: That is the average fare of $4 per boarding. Why is that interesting? Well according to NZTA documents Matt has received in the past, the average fare on the rail network is currently around $2.70 per trip. So why have I assumed $4 per boarding?
This is a situation where I think it’s important to think “at the margin”. Or to put it another way, the CRL is not your “average” rail project.
Simply put, the CRL opens up vast swathes of the city centre. It seems fairly clear that the marginal passenger attracted to the rail network by the CRL is more likely to be paying a higher fare than the current network average, which is essentially dragged down by a relatively high proportion of concessionary travellers, which in turn is a function of the rail network’s extremely limited coverage of the city centre.
In contrast, trips to the city centre are far more likely to pay an adult fare. One way to get an idea of how much higher the marginal fare might be would be analyse average fares for people boarding/alighting rail services at Britomart. But I’ll leave that to AT …
Figures obtained in the past from Auckland Transport says that the average journey length on the rail network in excess of 15km. That means on average most people are travelling from outside of isthmus and based on the current fare structure would equate to a 3 or 4 stage fare depending on the line. Current adult HOP fares $4.05 for a three stages or $5.04 for a four stages. As such an average fare of $4 for passengers attracted to the network by the CRL seems about right.
On the operating cost side, it currently costs something like $90 million a year to run the rail network. A decent proportion of those cost are somewhat fixed or at least exhibit some economies of scale. One of the big advantages of electrification is that it should reduce the cost of running individual services and that means Auckland Transport will be able to run more of them than they do now for little incremental cost.
As such a doubling of future services due to the CRL should not result in a doubling of the total operating costs (please correct me if I am wrong on this).
For the purposes of this exercise I’m going to assume that the future electrified rail network costs $100 million a year to run and that adding services as part of the CRL will increase costs by $70 million per year.
Assumptions about average fare and operating costs aside, it seems the CRL actually performs relatively well from a financial perspective. In the long run it may even pay its way operationally, especially if AT can generate additional revenue from leasing space within/around the stations.
If this is the case then not only would we have significantly boosted rail patronage and accessibility across the city, but we would have done so while also improving the relative operational performance of the overall rail network.
The table below summarises these assumption in the context of the overall rail network, where farebox recovery improves by ~25% to what is a relatively high 79%.
To provide a point of comparison I have also crunched some numbers on cost recovery for Puhoi-Wellsford. These suggest that “cost recovery” for Puhoi to Wellsford is circa 50% (NB: This number is even more rubbery – I might do a separate post on this if people are interested in how the concept of cost recovery might be applied to roads).
Not that this is a post about the issues with that project, but it’s worth keeping in mind whenever anyone tries to convince you that new highways “pay for themselves” more so than new railways. While that may be true “on average” the story could be quite different “at the margin”. And it’s the performance at the margin that matters most.
The general message, however, is that the financial performance of the CRL is not too bad. To cut a long story long ;).