Action for Public Transport (N.S.W.) Inc.

Dear Mr Boxall,

Action for Public Transport NSW (APTNSW) is a consumer advocacy organisation seeking better public transport for existing and potential passengers.

This submission on the draft report issued in December 2014 acknowledges the changes to IPART’s approach to the external benefits of public transport since the Issues Paper released on 26 August 2014. Many of the issues we raised in response to the Issues Paper are however still of great concern.

The essence of our submission is that the practical outcomes of the approach IPART proposes could not be better calculated to undermine the stated aim of the whole exercise:

… the purpose of subsidising public transport services is to increase the use of public transport by lowering its price (relative to not having a subsidy) in order to realise greater benefits for society¹.

IPART asserts that it is leaving decisions about transport planning, investment and service levels to government, along with land use and urban development. But in fact IPART is deeply engaged in transport planning, using a highly contestable theoretical model and a mode of analysis that is unable to account for external benefits IPART acknowledges do exist.

Some of the external benefits of public transport IPART intends to ignore because its methodology is unable to capture them are:

• Social inclusion
• Wider economic benefits like workplace participation and productivity

APT NSW suggests that the whole process has become needlessly complex because it stems from on an "a priori" cost recovery formula, which has not proven itself to be practical or useful. We have somehow lost sight of the task at hand, which is surely fairly straightforward: to set fares at a level that recovers as much as possible for operators, while remaining affordable and encouraging people to use public transport.

All that is needed for that purpose is an exploration of the question of elasticities, dealt with in Chapter 9 of the draft report.

1. Cost allocation

(p.1)

The draft report begins with the proposition that, because the Government pays the bulk of the cost of the public transport services it provides, IPART’s "key decision" is:

How much of the total cost should be paid by the people who use public transport (through fares) and how much by the NSW community as a whole (through the Government subsidy)….

For the past five years, we have made this decision by estimating the value of the ‘external benefits’ associated with each mode of public transport, as well as the efficient costs of providing the services. We then set the Government subsidy broadly in line with the estimated value of the external benefits, and set fares to generate the difference between the Government subsidy and the estimated efficient costs.

Comment: The a priori allocation approach is inappropriate. It can and in the past has produced savage theoretical price rises that would inflict hardship on passengers and decimate patronage. Consequently they cannot responsibly be adopted in practice.

This is alluded to in footnote 4, p.10, which says that even with higher external benefits figure proposed, fare increases included in IPART’s current determination “would still not reach the point where fares are high enough to recover passenger’s full share of costs during the determination period in NPV terms”.

The benefit of continuing with this elaborate theoretical approach eludes us. The aim of the exercise is surely fairly straightforward: to set fares at a level that recovers as much as possible for operators, while remaining affordable and encouraging people to use public transport.

All that is needed for that purpose is an exploration of the question of elasticities, dealt with in Chapter 9 of the draft report. Specifically, Transport for NSW could advise on whether the expected loss of patronage due to any proposed fare rises could be reduced or avoided by simultaneous service improvements, and whether it is in a position to introduce those improvements.

We are aware that passengers more readily desert buses than trains in response to price increases; such differences between modes would need to be considered by TfNSW.

2. Scale and crowding

(1.1.1; 1.1.3, 10.4)

The Issues Paper canvassed the possibility of considering “scale effects”, which were described as the benefits or costs associated with higher or lower public transport patronage and the resulting change in either the frequency of public transport services or crowding on existing services.

The Issues Paper said that the extent of scale benefits depends on the interactions between fares, patronage, service frequency and cost. IPART’s preliminary view was that it should attempt to take these benefits into account in fare setting by considering the likely impact of an incremental change to fares.

APT NSW welcomed the idea and suggested that Transport NSW do some empirical testing and alert IPART to instances where there is already evidence. We mentioned the Airport Line experience of dramatic patronage increases following the removal of prohibitively high fares at some stations.

Unfortunately, what has emerged in the Draft Report (2.1.2) is a proposal to revise the current approach to:

… focus on estimating the external benefits associated with an extra passenger using an existing service (that is, based on the current network, scope and frequency of services)

The explanation of the proposal suggests that if additional passengers cause current passengers to be crowded, this is an external cost which would be set-off against the external benefit of additional patronage.

This approach looks like it could have a perverse outcome. External benefits increase if extra services are provided, so that passengers are not crowded; this presumably is reflected in lower fares. But if government fails to provide extra services and passengers are crammed in, their fares for a worse service will rise.

We now doubt there is any benefit to proceeding with this proposal. Higher patronage clearly does not of itself change the level of service. There is no mathematical rule. Someone has to decide to add services, possibly in response to complaints from people left behind, but ideally because they are closely following the progress of new developments and anticipate the demand. They can only do so if adequate resources are made available.

Detailed examination of the ability of service improvements to affect price elasticity, as suggested above, would be a better way to proceed.

3. Relevant external benefits and costs
(1.2, 2.3)

IPART has now reduced the previous four criteria for inclusion of an external benefit to three:

1. It needs to be external – not a private cost or benefit that goes directly to the user, as those are already taken into account when making a decision on how to travel.
2. It needs to be measurable – we need to be able to estimate the value of the benefit; it would be enough that we could determine a reasonable range.
3. It needs to change materially in response to changes in public transport use, brought about by changes in fares – the value of the net benefits of public transport use to society (external benefits + fare revenue - the cost of providing the services) should change in response to changes in fares.

We do not agree that an external benefit ceases to be relevant to the making of a decision if its value is not easy to express numerically.

Conventional cost–benefit analysis is notoriously biased against public transport investment, because it is unable properly to account for the negative externalities of road transport and the positive externalities of transit alternatives.²

We also reiterate the worrying conclusion reached by Litman (2009) about this mode of analysis:

The result is decision-making biased in favor of easy-to-measure impacts at the expense of more difficult-to-measure impacts.³

4. Consideration of value of external benefits in setting fares
(2.1)

The draft report adopts the position that in general, the existence of external benefits justifies government subsidy of public transport only if:

• The subsidy leads to an increase in the use of public transport and thus an increase in the external benefits, and
• The value of this increase in external benefits exceeds the net cost of providing the subsidy

The second proposed criterion (external benefits must exceed net subsidy cost) will produce perverse consequences and needs to be deleted.

Its practical outcome would be that the higher the proportion of trips made by private vehicles on an average weekday, the higher public transport fares should be. Given the elasticities outlined in chapter 9, patronage will be lost and the proportion of trips made by private vehicles will increase. This, of course, is how we got to where we are today. And this is how the Western Sydney Regional Organisation of Councils has described where we are today:

      Western Sydney chained to roads

Decades of under-investment in public transport has left Western Sydney struggling to adequately cater for the needs of its residents.

The region’s rail network has remained largely unchanged since the 1930s, and as a result the region is heavily car dependent with resulting impacts on air quality, health and household budgets.

Western Sydney’s rapidly expanding population and sprawling development have exacerbated transport issues – building transport infrastructure to reach these far-lying suburbs is far more expensive than a centralised network.

For those who can’t drive (particularly the young, ill or elderly), car dependence results in decreased mobility and increased social isolation in many parts of Western Sydney.

Limited public transport options on the urban fringes lock disadvantaged groups into expensive car dependence, directly impacting employment options and opportunities4.

Western Sydney is swimming in a stagnant pool of toxic gas and smog.⁵

5. Avoided vehicle operating costs and avoided reliability costs

These have been added and this seems sensible, although the inquiry would be unnecessary if the simpler approach to the setting of fares we recommend were adopted.

6. Avoided road accidents

We are pleased to see this category has been added, but it needs to include all the costs associated with road accidents, including the consequent burden on the court system. Not every accident results in charges for negligent driving or some other offence, but many do.

Again, the inquiry would be unnecessary if the simpler approach to the setting of fares we recommend were adopted. This same proviso applies throughout the remainder of this submission.

7. Health benefits of walking and cycling to access public transport
(7.2)

This is a bright spot in the evolution of IPART’s methodology. Almost every public transport user gets incidental exercise walking or cycling to and from the bus stop or station. This is very good for our health and translates to less cost imposition on the health and welfare budgets.

The inclusion of this category is entirely valid, very important and we welcome it.

8. Cost of raising funds
(1.2.4)

IPART proposes to regard as an “external cost of public transport” the costs of raising funds to subsidise public transport, described as the deadweight loss or excess burden of taxation.

The rationale for this is said to be that:

Taxes distort the economic decisions of labour, consumers, investors and producers by changing the incentives to work or invest, and influencing consumption and production patterns. These distortions reduce economic efficiency and lead to a loss in consumer welfare, referred to as the deadweight loss or excess burden of taxation.

This burden or loss is a measure of the economic costs associated with these distortions.

The inefficiencies created by taxes can be explained mainly by the following two principles:

• The mobility principle - which recognises that the deadweight loss of a tax is higher, the more mobile its tax base. When a tax is applied to a highly mobile tax base, that tax base will shrink in response to being taxed by moving to jurisdictions where it won’t be affected. For example, in response to business taxes, capital may move to jurisdictions where the business tax rate is lower. This distorts economic activity.
• The narrowness principle – which recognises that the deadweight loss of a tax is likely to be higher, the narrower the tax base. A narrow tax base makes it easier to respond to the tax by switching to untaxed close substitutes. This adds to economic inefficiency and reduces revenue yield.

Still less is it clear why the cost of raising funds for roads, ambulances, police etc would not then be treated as an additional external cost of car use (and conversely as an additional external benefit of public transport). The cost of government raising funds to do anything is presumably “distorting” the economy, on this view.

9. Social inclusion
(11.2)

The Draft Report accepts that there are some benefits associated with improved mobility and social inclusion that are external. It recognises that these include benefits identified by Action for Public Transport and the Bus Industry Confederation, such as:

• Lower crime and welfare payments (because more people are employed)
• A potentially lower burden on the public health system resulting from greater health and well-being
• Other benefits including having access to education, which provides benefits to society as well as to the individual.

We can see no basis for the supposition that these benefits are “mainly private”. Societies marked by pockets or swathes of dysfunction, crime and unemployment shoulder a huge, shared, burden. If they are sensible enough to avoid that fate, the benefits are also shared.

Nor can we see any basis to claim that those benefits that are conceded to be public “either cannot be measured or are very small”. The report specifically declines to accept work that has been done (Stanley et al), assigning a value of close to $20 per journey to this class of external benefit. This work is referred to in Transport for NSW’s appraisal guidelines.

It may well be that there is “limited experience in valuing social inclusion for transport projects”, but that is a defect of current appraisal techniques, not a reason to assign a value of zero to social inclusion. To do so perpetuates a gross distortion.

We note that IPART is also relying on an argument in one submission that service level, rather than fare level, “may be” a more significant issue for mobility and service exclusion. Perhaps so, but this does not justify assigning a zero value to the benefit of social inclusion. Fares do have an impact on public transport use, as is evident in the estimated elasticities contained in the draft report (chapter 9).

10. Agglomeration benefits and wider economic benefits
(1.2.5, 11.1)

The draft report indicates that IPART continues not to include agglomeration benefits and wider economic benefits (productivity, jobs, education, lower welfare payments) in its assessment of the external benefits of public transport.

It takes this position despite accepting that “some portion of these benefits is external (although a significant portion is private)” (p.7). The reasons given are:

• The external benefit portion is difficult to measure with any degree of confidence;
• The external benefit is more closely linked with availability of services than with the level of fares… the necessary link between the value of the benefit and the level of fares has not been demonstrated.

APT NSW maintains the view expressed in our submission on the discussion paper: the results are systematically biased - this does not suggest a robust methodology.

11. Road user charges
(8.2)

IPART proposes to continue to deduct road user charges from the benefits of public transport use, and to accentuate the effect by adding all tolls. It also proposes to include all fuel excise, on the basis that that the marginal cost of an additional car on the road is “practically zero”.

Comment: We oppose this move. We do not disagree with the statement that “although drivers do not pay the full marginal external cost they impose, they do make some contribution”. That has never been in doubt. The argument here is simply that unless all the external costs of car use are captured in the methodology, road user charges should not be offset. What is proposed now is that the costs will still not be captured, but still more of the contributions will be offset. This will introduce still more systematic bias into the analysis.

12. Estimates of net external benefits
(1.4)

The consequence of the proposed changes is that IPART’s figure for the value of external benefits of the best-used form of public transport, rail, will be reduced significantly from previous estimates. This we presume will result in higher recommended rail fares.

On the other hand, the estimated value of external benefits of ferry travel will rise, but ferry fares will not fall.

In setting fares, IPART proposes to apply the “most up-to-date and consistent set of external benefits and costs based on a consistent set of patronage forecasts” (1.5). The patronage forecasts will however need to assume a particular level of fares, and apply the elasticity figures as discussed in Chapter 9. There seems to be some circularity in the proposal.