The costs and trade-offs of free public transport in Auckland

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!

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.

Share this