One perennial discussion in transport circles is whether we shouldn’t just do away with public transport fares completely and make the whole network free of charge. Why not fully subsidise the network as a public service using public monies as we do with most education, healthcare and other social benefits? I wish to use this post to explore the idea. A word of caution though, I am a dilettante when it comes to economics so by all means feel free to enter into debate!

Obscure but relevant Sci Fi/economic theory reference. Bonus points for the first to work it out.

So, why would we want free fares anyway? Promoters of free public transport suggest various benefits, which from what I can see generally boil down to three main concepts. I think it is worth picking these apart a little.

Freedom for all?
First of all there is the idea that making PT free would make it universally and freely accessible, a benefit to individual mobility that can be enjoyed by everyone regardless of their financial situation. This is what we might call the social equity argument.

Universal public transport access is a worthy goal, however I am not convinced that free fares is the way to go about it. My main retort is that the number of people that can’t afford public transport in Auckland is actually quite small, and giving everyone a literal free ride along with the small needy minority is probably not the best answer. There are presumably much more effective ways of targeting improved transport access for those that truly need it.

In this regard I’m drawn to the concept of the “middle 80%”. This suggests that we should strive for a public transport system targeted to the needs and means of most of the general public, but not waste resources on chasing the patronage of either the 10% of the wealthy elite nor the 10% of the most vulnerable poor. The argument is that you will expend increasingly excessive funds on rapidly diminishing returns trying to attract CEOs out of their Mercedes and onto public transport. Yet similarly trying to design a public transit system that works for the very least privileged is also a quixotic exercise in subsidy and economic inefficiency, one that can undo the whole enterprise. However if you aim for the majority between those two extremes you are targeting the bulge in the bell curve, rather than the little asymptotic tails.

Put simply, it would cost a lot to provide free fares for everyone and that would most likely come at the expense of good service (more on this below). In that regard it seems that targeted financial benefits are a better way to serve the transport needs of our very poor, rather than making it fully subsidised for 100% of users to meet the needs of 10%.

Increased patronage?
Secondly there is the subsequent argument that if you make public transport free it would be very well used, and therefore result in all the benefits of well-used public transport like reduced traffic, lower emissions, reduced fuel consumption, etc. Basically, this idea is you make it free and lots more people use it, which is a good thing for the city and society and worth the cost.

If you unpack the logic of this argument you can arrive at two statements worth testing. Effectively the argument suggests one of two things:

A) There are plenty of people who would use public transport, except the ticket price prevents them from doing so. In other words, price is the major reason more people don’t use public transport in Auckland. …or

B) Price may not be the major factor preventing people using it, but if you make it free people would be willing to overlook all the other reasons and use it anyway.

I think proposition A is clearly false and could be easily demonstrated so. Ask folks why the don’t take public transport and cost is not a major response. Normally you hear things like “it’s takes too long”, “it doesn’t go where I want to go”, “it doesn’t run at the right time”, “you have to wait ages and the bus is always late anyway”. For that middle 80% of the population the cost of the ticket is far down the list, and it is practical things like timing, connectivity and reliability that keep people away.

So proposition B, if we make it free will people see it as good value despite the other problems and be willing to foresake their time and convenience to save a buck? Again I think not, well maybe for the poorest sectors of our society but not for the general public. If the bus can’t get you to your workplace, then a free bus that still doesn’t get you to work isn’t going to make you switch. Likewise an unreliable service that makes you late for your appointments isn’t going to get more timely if it’s free, nor are you going to use the free ferry that still doesn’t run on the weekends when you want to go out for a night on the town. You get the point I’m sure.

It seems free PT would probably just benefit existing users with a cash windfall. I’m not convinced there are particularly significant amounts of people who don’t use public transport now, but who would start using it if it were free.

Operational benefits?
Thirdly, there is the idea that there are operational benefits to doing away with fare collection. Namely passengers can simply hop on and off any transit vehicle without stopping to pay or use a card, such that dwell times are minimised and staff time spent on revenue collection is done away with entirely. This would then result in either lower staff costs and cheaper operations, or better service delivery from the same staff and operating expenditure.

Personally I think this is the most concrete of the three arguments, but also the least significant. In Auckland we are now in a position where smart card ticketing and prepayment on the rail network have already minimised the impact of ticketing on operations to the point where getting rid of ticketing entirely would only have a small marginal effect. Furthermore, at particular problem points we still have some scope to improve without dropping fares, for example by fitting all our bus stations and city centre stops with HOP machines and making them card or prepay only. I believe the effect of no fares over a well used HOP system would be minimal, and not a good return on the large costs required to cover the farebox take.

What would it actually take to make It free?
Surprisingly this is a question that doesn’t get asked very often. How would you actually make PT free, what would it require and how much would it cost?

The first question is whether it is actually possible to prevent operators collecting fares. Under the previous contracting regime I would have said no, operators were entitled to run any route they like and charge whatever they wanted and it was illegal for local government to ‘interfere’ with their business. Under the new PTOM model I would say maybe, effectively it would mean every route would be a fully subsidised contract.. I think. Someone with better knowledge might care to comment.

For now let’s assume the contracting arrangements can be taken care of, so what of the cost? Here it is important to lay out a few known facts. Fares revenue in Auckland isn’t something that is published publicly. However by picking through NZTA reports we can estimate it amounts to roughly $150m a year, and we do know Auckland has a farebox recovery rate of a shade under 50%. Using those estimates this means the cost to run all the existing buses, trains and ferries amounts to about $300m each year, with something like $150m of that covered directly through passenger fares and the other $150m covered by ratepayer subsidy. Take away the fare revenue and we are left with a $300m operation cost with only $150m in revenue, in other words a $150m shortfall per annum.

With these fiscal facts in hand we can see there are only two fundamental options for making PT free in Auckland: either we drastically slash the network so it can be funded with half the current budget, or we need to find $150m extra per year to keep transit operations at the existing level.

Free PT option 1: Halve the network to meet existing subsidy levels
Looking at the first option, to go fare free we would need to halve the service delivery costs to keep funding at the existing level of subsidy from ratepayers. Halving the service delivery cost means halving the network effectively (in fact it’s a bit worse than that because you would lose some of the economy of scale of running a large PT network). That means half the frequency of service, half the operating hours, half the peak capacity, or rather some combination of the three. Halving the service budget would be a tricky exercise in prioritisation. My guess is you would see some peak capacity cut so that people would be literally left standing, with a larger cut in interpeak frequency and bigger cuts to evening and weekend. Your bus that only comes once an hour during the day would now be once every two hours, buses and trains that run late at night would have to end around 7pm, and you would probably have to stop most weekend service entirely.

That is the price of halving revenue: half the funding for service delivery means a massively less useful transit network. Say goodbye to any chance of a frequent, all-day every-day, connected network. With half the funding all you could achieve is a rudimentary ‘network of last resort’ as a basic public welfare service. Rather than increasing patronage, such a move would kill off all but the most captive of trips sending the system productivity into a death spiral.

So the ‘cut service to meet the budget’ option seems like a non starter. Needing to cut half of the service out of the network would never achieve any of the claimed benefits of free public transport. Instead of growing patronage we would lose much functionality and most customers.

Free PT option 2: Double subsidy to run existing network
This second option has a little more currency I think. To make fares free in Auckland without cutting service and halving the network, you would need to double the subsidy income to cover the shortfall. For this Auckland Council ratepayers or New Zealand taxpayers would need to step in with an extra $150m of operations budget per annum. In the scheme of the national transport expenditure that’s not an enormous sum. However to be perfectly clear, that’s an extra $150m each and every year just to keep things exactly the same. Twice the operating subsidy for no extra services, no extra buses or trains, no longer hours, no faster trips or easier rides.

So maybe some government might step in with the money, but that wouldn’t really change much. A few people would get a break, students might bus around a bit more often, but on a whole the city would be paying twice as much for a network that is only as useful and accessible to most people as it already is today.

Alternative investment options: the double down?
This leads us to a subsequent question. If council or the beehive did step in with an extra $150m a year, every year, would free fares be the way to spend it? That’s a big stack of cash to pump the budget each year, more than the entire HOP card system cost for example. In other words the opportunity cost of free fares amounts to over a hundred and fifty million a year, what other opportunities do we have for that money?

We could, for example, go the other way: spend it to boost service delivery by 50% across the network. That sort of funding would allow us to extend the frequent network to just about every route in the region, and run that frequency an extra few hours a day. Consider what might happen if we could guarantee every bus route in Auckland ran at least every fifteen minutes, from 6am to 10pm, seven days a week.

Another option would be to take the core of the proposed Frequent Network routes and run them at a minimum of five minute headways all day instead of every fifteen minutes. This would be doubling down on where we know PT already works well. Surely that would be a lot more useful to more people that free-but-mediocre service?

There is another way to think of this too, turning extra revenue into capital expenditure. With an extra $150m a year we could build an extra billion and a half worth of busways and rail lines in the next ten years. Plus if you use that funding stream to service debt over twenty-five or thirty years, you could fund perhaps three or four billion worth of projects in the same time. Again, what would do more, what would create the better outcome for the people and the city?

Conclusion: fare-free public transport is an expensive answer to the wrong question
It appears to me that having fare free public transport in Auckland would not result in very good outcomes. Dropping fares would either require slashing the public transport network to half it’s current level, guaranteed to decimate patronage, or it would require an extra $150m a year in new subsidy just to keep running what we have today. If we did have an extra $150m each year to spend it would be far more effective to spend it on extra services or infrastructure instead.

Many of the supposed benefits of free fares aren’t actually attributable to the lack of price itself, rather most are related to assumptions of increased patronage, faster travel times, reduced traffic congestion, etc, resulting from zero fares. These assumptions are tenuous, and all these factors are things that that Auckland can and will achieve anyway through good planning and design.

The one exception to this is social equity issue. Free fares would indeed make public transport truly accessible to anyone and everyone regardless of their means (although what they have access to might not be particularly useful if the price of free access is much reduced service span and coverage). However, making public transport free for everyone to address an equity problem for a small fraction of the population is clearly not an efficient or effective means to that end.

Rather, those few that legitimately cannot afford to travel because of the ticket price should be served with targeted subsidies or other interventions. Pensioners are already covered with the GoldCard scheme, perhaps there are grounds for something similar for Community Service Card holders and their dependants, or for increased discounts for children and students of all levels. That could take many forms: pure discounts on the cash price, discounted annual passes, two for one deals, bonus credit after the first trip, child travels free with an adult, etc.

Personally I like the idea of fare structures that give extra value for the same price, the kind of thing where you travel twice in a day and all further trips are free, or a price cap, or bonus days when you use it X many times a month. Hopefully with the proposed integrated fares system we will see some of that.

One final note. I think it is clear that free fares is not a good move for Auckland in the foreseeable future. However, this isn’t to say that the existing prices or fare structures are necessarily perfect. Perhaps cheaper fares will result in more people travelling at more times of day, in particular cheaper off peak fares could fill up empty seats leading to more net revenue without more costs. Greater occupancy means better revenue per kilometre run overall, so some tweaking may be appropriate. I think AT could do with another small discount on HOP fares, if only for marketing purposes, but in the long run holding fares constant as patronage and efficiency increases would result in real prices becoming cheaper over time. That said, we are far away from the conditions where reducing fares to nothing would be either feasible or effective.

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22 comments

    1. That’s one point. To win full points and a TransportBlog souvenir lapel pin and certificate of authenticity* you need the book title, author that coined the phrase and the 20th century economist who popularised it.

      *Not really. 😉

  1. I’ve thought about the issue myself, I hope you will forgive plugging my blog here: http://urbankchoze.blogspot.com/2014/05/should-transit-be-free.html

    Anyway, you are making a good reflection of this issue, but I can think of a few more points.

    1- Having transit be free to use makes any increase in service a contentious political battle

    In a transit service that is mostly self-funded, transit investment is a virtuous circle: you invest money to make transit better and offer more service, more people use that service, bringing new revenues which allow the the transit operator to pay for the cost of running the new service. If transit is profitable, it’s even better, because transit investments bring in additional profits that can then fund further investments. But in the case where transit is wholly funded from public subsidies, any investment to increase transit service will mean greater recurrent operating costs. Riders represent a cost to authorities, but no revenue, which means that transit services will be wholly dependent on political goodwill to keep functioning and expand. If that doesn’t make your gut clench in horror like it does me, you live in a very different context than me. Many politicians may then see reducing transit ridership as a legitimate way to cut expenses, making it a permanent battle to maintain service.

    2- Subsidizing transport, even in the form of free transit, subsidizes sprawl

    We all know that urban housing is more expensive than suburban housing, but this can be compensated by lower transport costs, so that overall there is some balance. But what happens when you subsidize transport? Well, then you take away the edge of urban living by depriving it of the advantage of lower transport costs. With transport free but suburban housing much cheaper than urban housing if only because of lower construction costs, urban areas will likely see much less development. However, just because transit is free doesn’t make the costs go away, it only means that costs are assumed by all of society, so people will make individual choices that lowers their own costs, but increase costs overall for society. Okay, as transit is slower than cars, the sprawl associated with it is less bad than that associated with cars, but it’s still sprawl. For a more sustainable, efficient society, people need to pay the full price of transport, to realize how expensive it actually is, so that they may make decisions to cut down on transport expenses. Deprive people of that signal and they may waste resources a lot more on transport.

    3- Free transit tends to cannibalize active modes of transport more than cars

    At least from a few sources I’ve seen, it appears that all cases of free urban transit did result in higher transit mode share, but mostly at the expense of walking and biking. As cars are faster, people are still tempted by them even if transit is free. However, the main advantage of walking and biking for individuals is that they are largely free to use, but if transit becomes free, then a lot of people will opt for transit instead of walking or biking. Biking may resist a bit more because bikes are faster than buses, at least in urban areas, but buses don’t require efforts to travel.

    1. Excellent points Simval, No.1 is especially relevant for this discussion centred on fiscal efficiency. On any moderately well functioning system investment in infrastructure and services should lead to an improvement in patronage, efficiency and farebox recovery.

      Take away the revenue stream and you are left with a situation where any expenditure or growth in patronage increases net subsidy and makes the fiscal performance worse. You also cut out the price signals to good investment, when an empty bus route costs the same per kilometre as one that is always full of people you could get communities arguing “why don’t we have a frequent bus in Kaukapakapa, they have one in Mt Eden, it’s only fair!”

  2. There is of course the problem in the Free Fare argument that if it is the cost that is keeping people away, then the moment fares are free then the system will be inundated and desperately need massive new investment in and increased subsidy to cope.

    Except that as Nick argues above it is pretty clear that cost is not the biggest barrier. As Jarrett Walker puts it; free fares on a poor system like ours only changes the appeal and usefulness for the time rich/cash poor. And there are plenty of both time and cash poor people too; those holding down several jobs, shift workers, etc, who still can’t use an infrequent, slow, short hour network no matter how cheap it is. These people would benefit more by the service improving. Which takes investment.

    Gerry Brownlee often repeats we have to spend to catch-up on 30 years of underinvestment in transport in NZ. Considering the Public Transport systems in Auckland the only fault I can find with that statement is the the period is actually 60 years of almost zero investment. Yet bafflingly the National Party transport policy came out yesterday and it plans to not fund a single new Public Transport project in Auckland over the entire forecast period. Instead nearly every penny of new building is for massive duplicate Highways, and a small amount for lesser local roads.

    So Auckland is scratching around to fund desperately necessary upgrades, minor and major, bus, train, ferry, footpath, bike lane, in a fast growing population and Transit demand context, with virtually no funding from our own taxes because of a monomodal m’way obsession by the government. Can this work do without the fare income? Hell no.

    Additionally this policy is even more illogical because it assumes Transit ridership growth and therefore increase in subsidy but has zero sums for capital investments that will lead to efficiency increases and therefore drops in subsidy whether per user, per vehicle journey, or even in total. A policy which sees no value in Transit, only cost. Truly nutty.

    1. Perhaps the only saving grace might be that John Key needs to rely on NZ First to form a government and Winston Peters gets a policy win on his transport plans:
      $300 million diverted from big gerry’s Roads of National Party Significance to the Railways of National Importance program over 10 years (still reeks of too much political interference in decision making, but thats the world we live in).

      Funding 75% of the City Rail Link construction from central government and for the project to start as soon as possible and by 2016 at the latest.

      http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11315681
      Winny does seem to be pretty good at getting expensive policy wins from the big parties to form governments… so fingers crossed!

  3. certainly an interesting article and the old chest nut of free public transport has been trotted out before but while it would result in an increase in public transport use there would be a huge increase in the cost to the ratepayer /taxpayer as the present subsidies would have be more than tripled to make up for the loss of fare revenue and the present system of cash/HOP CARD/monthly passes /gold card gives transport planners an idea of passenger flows /destinations /times of travel etc and of cause there are people who because of destinations/time of travel would not be able the free system .I think we would be better to lower fares on hop cards cheaper maybe free fares for community card holders and maybe look at monthly pass holders being able to get a tax rebate on there annual cost of travel

  4. Free public transport is bad because, as well as the points you’ve made above:
    – it removes the incentive for government to improve the service. More patronage would just mean more subsidy.

    Public transport supporters want to be in a space where they can say to government: ‘If you improve the service, patronage will increase and this will *reduce* the required operating subsidy.’

    I know we should account for externalities as well, but if you’re in a space where you can put the above argument to short-sighted Treasury types, so much the better.

    1. Not necessarily; more people using PT means more complaints when it doesn’t work and more pressure on the government to fix it.

  5. I agree that free fares are not the best approach and have found that people appreciate and value a service more when they pay for it. When they do not, the level of appreciation is significantly reduced and can potentially lead to increased social issues also. By paying a fare, even a small one is investing in the experience you are about to receive. It comes with heightened expectations about service levels and customer experience – and rightly so!

    One idea I do wish to see debated around fares is the idea of better incentivising school students to use PT. I have previously suggested a $1 flat fare irrespective of distance travelled (same in Perth with a 50c fare). If we could increase school student usage by 25-50% over 3-5 years this could significantly reduce some of the traffic with parents choosing to drop their kids off (especially in the key morning peak). The increase patronage and new user revenue would offset the partial loss from dropping to $1 fares for current users.

    This also provides a great ‘feeder stream’ into the tertiary and adult worker segments – leading to long term change towards PT.

  6. Robert Heinlein – The moon is a harsh mistress. Popularised by Prof. David R. Henderson.
    The graphic is a bit more interesting, is it advising not to aim for the stars?
    Personally, I am more than happy to pay for public transport if it is efficient.

    1. Correct, ten points 🙂 I would have also accepted Milton Friedman, I believe both used the “no such thing as a free lunch” to popularise the concept of opportunity cost.

      The graphic is the flag of the lunar rebels as described in the novel, I felt obliged to put at least one picture in the post!

    2. “a cannon or, on field sable, crossed by bar sinister gules of our proudly ignoble lineage” – the original request by Prof de la Paz doesn’t say anything about stars. The brass cannon is the punch line of a story about the man who used to work for the government polishing brass, until he saved up to buy his own cannon then he went to work for himself. Just as much work but much more satisfying.

      Worth noting that Heinlein’s lunar rebels far out-Rand Ayn Rand in their libertarianism. But once they run their own show they fall back into the trap of Government.

  7. Not sure I agree with your assessment of operating costs:
    1) There will always be a significant cost to administer HOP
    2) There will always be a significant cost involved with keeping HOP up with latest technology
    3) There will be cash fares for the foreseeable future so all of the costs involved with handling cash still apply
    4) There is still a very real delay to buses (about 20% my guess) due to people paying. If people could enter and exit a bus by either door without having to pay or tag on/off they would be significantly quicker.

    I can see all of this adding up to a significant percentage of each fare; combined with the $100 million plus already spent on HOP, if you could go back in time you may well consider scrapping fares altogether.

    1. HOP as a system will probably be operated for about a fifteen year design life then be replaced, so in that regard it has cost about six or seven million a year of its useful life in terms of capex. The costs to administer it day to day aren’t particularly significant. There won’t be any cost in keeping it up with the latest technology, rather there will be another lump cost when it comes to replace it. The cost of scrapping fares is around $150m every year, or $2.3b over the life of HOP, so some twenty times more expensive.

      Cash fares are already well down and could go a lot further. We have no cash fares on the rail system, we could easily do the same across the ferries, busway and main bus stations and city stops. Some cash handling cost will remain, but no way near what it was before HOP was introduced. Certainly not all the costs involved. We could go no-cash quite easily too if we wanted to, Melbourne has just done that.

      1. I think there will need to be changes to HOP in the next 15 years; maybe not to the cards and machines, but to things like the web site, payment gateways, etc.

        I’m not sure we could get rid of cash fares in a hurry; until we get significantly better services (not likely soon), the majority of Aucklanders will not own a HOP card but may still want to make the odd PT journey. The reason other countries can get rid of cash fares is because PT is the norm. Maybe if we encourage HOP cards by giving them other uses (e.g. parking) it would help…

        I was wondering with BRT’s, is there a possibility of having people tag on/off at the bus station rather than on the bus? People could freely get on and off using either door which would significantly improve journey times. Or do we already have this on the NEX? The more you can make buses behave like trains the better!

        1. Doesn’t happen atm, would be good to get AT to trial it though, especially Smales and Sunnynook would be very easy to gate as well.

        2. There is already all door boarding on the NEX at peak times in the city, would be very simple to extend that. I time the boarding times on the NEX, even the double decker has never taken more than 45 seconds to load from empty at Britomart in the afternoon peak. Three tag posts plus the driver working in parallel is fast. Dwell time is a non issue going forward IMHO.

          Can easily have no cash at bus stations, or on certain services. Sydney has not cash on its busiest routes and they have a disintegrated ticketing system.

  8. Nick I think you are looking at the cost of PT from a position of relative affluence. I have recently heard of people in South Auckland going back to using their clapped out car because PT was too expensive. Perhaps a reduced HOP card for community service card holders and students would be a better route.
    Good article though and good to see the the niggling attraction of zero fees making PT so much more efficient it saves more than it costs in lost fares – put to bed.
    Cheers

    1. That is correct Peter, as you can read above I am concerned with “the middle 80%”, rather than the most vulnerable 10%. So yeah, I am really aiming at ‘middle’ New Zealanders who have a liveable income and some discretion over how the spend their money, rather than those that spend everything they have just to get food on the table. I suppose that might be the definition of relative affluence. As you note, I’ve proposed the best way to serve that sector of the population is with targeted assistance, and fare products that effectively cut the marginal costs of extra trips or longer distances to something close to zero. We could go so far as to make it free for 10 or 20% of the population to solve that problem, without making it free for the remaining majority who can afford it and losing all the revenue that makes the system work.

        1. The Child Poverty Monitor puts the figure at 1 in 10 children in NZ suffering from lack of household income preventing access to necessities.

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