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2. Three big problems that are getting worse

We see three major problems with Victoria’s transport system.

  • The first problem is congestion and crowding, with Victorians experiencing significant congestion on roads, trains and trams. This means trips take longer, are less comfortable and less reliable, which costs people and businesses time and money.
  • The second problem is that the accepted solution of building new infrastructure to ease congestion won’t solve congestion unless we take other steps. To make the most of existing and new assets and services we need a complementary pricing system with inbuilt flexibility around time and mode of travel.
  • The third problem is that there are no incentives in the current system for people to change their behaviour. Our current pricing system is simple enough, but it doesn’t encourage people to make different choices about the time, route, mode or quality of their trip. This means that even as congestion worsens, people are not motivated to change their behaviour.

Our road and public transport network has three major problems that are likely to get worse as Victoria and Melbourne continue to grow rapidly.

Problem 1: Longer and more variable travel times due to congestion and crowding

As more and more people and goods move around the city, we’re seeing more congested roads along with more crowded trains and trams. This congestion means travel takes longer, is uncomfortable and unreliable, and costs businesses and the community money. It also means that small shocks, such as a freeway crash or cancelled train, quickly affect thousands of travellers throughout Melbourne.

Infrastructure Victoria’s 2016 report The Road Ahead documented congestion in Melbourne then and in the thirty years to come. Cars in 2016 were crawling through morning peak hour traffic at an average speed of 38kph. With most major arterial roads in metropolitan Melbourne operating at close to or above optimal capacity, over 30% of all car trips included travel through congestion.

Congestion is likely worse by now, with continued population growth. We have projected that by 2046 conditions would deteriorate even further, with more than 50% of car trips in the morning peak including travel through congestion. The city’s western suburbs would be as congested as inner Melbourne is today, and the northern suburbs would be even worse.

Infrastructure Victoria’s 2018 report Five-Year Focus provided more details of the problems we can expect even by 2030. For example, in the outer areas of Melbourne, the peak would effectively expand by about five hours a day.

We also demonstrated how road congestion affected buses and trams. Across the city, bus services in 2016 were becoming less reliable and fewer services were running on time. Average tram speeds, especially during peak periods, were declining.

Public transport was also projected to get more crowded by 2046, with more than 30% of public transport trips being undertaken in crowded conditions. Poor public transport performance can mean that more people choose to travel by car, which, in turn, creates even more congestion.

Because on-street parking in Melbourne is generally cheaper than off-street parking, drivers cruising for cheaper parking spaces also make congestion worse. Compared to other countries, Australia’s on-road car parking spaces also take up a significant amount of road space (Terrill et al, 2019a).

Overall, using large amounts of Melbourne’s street space for parking adds significantly to congestion while only benefiting a relatively small number of people (City of Melbourne, 2019).

As the city’s population grows, failing to tackle congestion and crowding means that – even with a number of planned major road and rail projects – most Melburnians can expect to spend more time sitting in traffic, travelling on crowded trains and trams, and waiting longer for buses.

Problem 2: Traditional solutions are not enough

One option to support a growing population is building more transport infrastructure. This has been the solution traditionally taken by government and supported by Victorians.

The right additional and upgraded transport infrastructure is needed to support the efficient transport of people and freight around Victoria. This is especially the case given Victoria’s population is likely to grow substantially over the next 30 years.

However, economic theory and evidence reported in Duranton and Turner (2011) confirm that expanding roads and public transport (especially roads) only relieves congestion temporarily. This is because providing more transport capacity attracts extra demand (known as `induced demand’). While the extra capacity improves travel times at first, eventually travel times increase as more people use the new infrastructure and congestion increases again.

This has been the experience in Melbourne, where each new major road has eventually become regularly congested during peak times. Road projects are mostly justified on the congestion benefits lasting a certain amount of time as well as providing other efficiency benefits. But in many instances in Victoria those efficiency benefits have not been fully realised because the new or upgraded roads have become too congested at peak times too quickly.

When the population of Victoria, and especially Melbourne, continues to grow into the future we will not get the most out of new infrastructure unless it is combined with transport network pricing and behaviour change.

Building more roads causes more traffic

Extensive research has found that traffic expands with road capacity. However, a question remains as to which way the causality runs. Are roads built to match demand or does demand expand to meet supply?

Duranton and Turner (2011) apply sophisticated econometric methods to data to generate causal estimates of the effects of road construction on traffic. They find that for urbanised areas within the US, expanding the interstate highway system leads to proportional expansions in road traffic.

The expansion results from new traffic, not that diverted from local roads. The results for major urban roads show a lower correlation. These are just correlations though.

Duranton and Turner also estimate the causal impact of expanding public transportation (buses). They find that expanding public transport (buses) does not have any effect on traffic volumes, consistent with traffic expanding in a similar way to that following road expansion. It isn’t possible to build your way out of traffic congestion.

Research shows that for urbanised areas within the US, expanding the interstate highway system leads to proportional expansions in road traffic.

Duranton, Gilles and Matthew A. Turner (2011) “The fundamental law of road congestion: Evidence from US Cities”, American Economic Review, 101(6), 2616-2652

Problem 3: The current system provides few incentives and isn't fair

Today’s transport prices provide very limited incentives for Victorians to make efficient choices. They only offer a `one size fits all’ model.

This isn’t the case when Victorians travel in other ways. We’re used to making choices about travel – airfares, hotel rooms, Airbnb, Uber – that involve balancing quality, convenience and price. The outcome not only more closely matches consumer demand, but also achieves a more efficient outcome.

The current system of transport pricing tends to be cheap rather than fair. Victorians are used to vulnerable people and families receiving discounts on utilities like energy and water. Current prices on roads don’t offer this. Some road user charges are applied to all road users irrespective of their status and of when, how often or how far they drive.

More specifically, user charges for metropolitan public transport via myki tickets are only for access, with no change in fare for distance travelled or mode used. Fares are flat rates for two hours or a day across two zones with almost no variation by time of day. Travel wholly within Zone 2 is cheaper. There are also myki Passes which provide cheaper daily fares when bought for multiple consecutive days (up to a year).

Regional public transport fares are more complex. While there are distance-based, time-of-day fares for V/Line services, there are no common principles for how these fares are set. This results in inconsistencies, such as people in different places paying very different fares to travel the same distance.[2]

While there are concession fares for low income and vulnerable Victorians, this simplistic fare structure means people making short trips on less expensive modes are cross-subsidising other travellers – there is limited application of the `beneficiary pays’ approach.

hypothecated to investment in roads, so it is essentially a road user charge – similar to the GST on fuel but less transparent. It is also becoming less universal as a de facto road user charge.

The number of electric and hybrid vehicles on the roads is increasing and expected to become a larger share of the fleet every year. There is no allowance, in the fuel excise, for ability to pay, unlike charges for energy and water utilities. The fuel excise is also becoming less fair as electric vehicles and, to some extent, more fuel efficient vehicles are mainly purchased by Victorians with high incomes.

The Victorian Government sets or regulates a number of payments for travel in private vehicles. Most of these payments aren’t explicitly linked with using a service – they are effectively taxes (stamp duty) or tax-like fees (registration and licence fees, compulsory TAC charges). While there are concession rates in some cases, again, there is limited application of the `beneficiary pays’ approach. And sometimes the fairest thing to do is for those who don’t benefit not to have to pay for those who do.

The Commonwealth Government levies a fuel excise at 41.8 cents for every litre of fuel, charged as part of the price of petrol. This tax varies with road use, albeit based on the vehicle’s fuel efficiency. Revenue raised by the fuel excise is not

Car parking availability and prices are important to people’s travel decisions. Currently, most local government-provided on-street parking is free, although a significant proportion of parking spaces have time restrictions (with fines for breaching them). There is some priced parking in high demand areas. Parking spaces at public transport stations (trains and park-and-rides on high capacity bus routes) are free and in high demand.

So, again, travellers have limited choices to trade off price for convenience, or even availability. Much parking is allocated on the first come, first served basis. Making a product that is in high demand cheap doesn’t guarantee that it will go, in a fair way, to low income and vulnerable Victorians.

[2] See Infrastructure Victoria (2018) for further examples of anomalies in Victoria’s current public transport fares

What’s wrong with how we pay for transport now?

There are several problems with the way we currently pay for transport:

  • Metropolitan public transport fares provide very little opportunity to trade price for mode quality/trip time/route as fares are largely identical across mode/time/route, even though there are significant differences in cost and demand.
  • Some regional public transport charges are inconsistent for different types of travel and users.
  • There are few incentives for people to change their travel behaviour to reduce congestion. Some charges are not clear to people when they use the infrastructure.
  • The wide availability of free and cheap parking, irrespective of the cost of providing it, is an incentive for people to drive, rather than use public transport.
  • The fuel excise makes no allowance for people’s ability to pay. This will become increasingly unfair as more people start driving high price electric or fuel efficient vehicles.
  • Road charges, like registration, stamp duty and TAC, are fixed rather than linked to how much transport infrastructure people actually use or how far they travel. Arguably infrequent users pay too much and frequent users not enough.

`Cheap’ doesn’t equal `fair’

Making things cheap for everyone doesn’t necessarily benefit vulnerable people if the transport system is crowded.

Unless a product is supplied to meet the demand at zero price, access to that product will be rationed in some way. The question is whether the way the zero priced product is rationed is fairer than that resulting from being charged for it. Charging means the beneficiary of the product pays and the result is, at least, economically efficient.

When it comes to transport, we can’t ensure equity through low or zero priced fares. First, unless supply is expanded to meet the demand at low or zero prices then access to the infrastructure will have to be rationed another way. Congestion and crowding on our transport networks suggests we are not close to meeting peak demand.

If the way we currently ration access favours low income/vulnerable Victorians, then this can help to create a fair outcome.

For example, if congestion makes travel times longer and lower income/vulnerable Victorians have a relatively lower value of time, they will make greater use of transport than if we use prices to ration access.

But whether this happens can vary depending on time, location and transport mode. For example, if congestion makes travel more physically demanding, this may mean vulnerable Victorians travel less than they would if there is pricing. Similarly, if parking is allocated on a first come, first served basis, train station parking may be more likely to be taken by workers without dependent children than those with children who don’t or can’t leave home as early.

These examples suggest that keeping prices low for all Victorians doesn’t automatically result in a fair outcome: first come, first served isn’t necessarily fair when it comes to transport.

Public transport pricing reform

The last major reform to public transport pricing in Melbourne occurred over about a decade between the 1970s and 1980s.

Before the late 1970s, Melbourne train fares included peak and off-peak fares and were set according to a detailed schedule based on distance. Tram fares also varied with distance. This shows that Melburnians have successfully used sophisticated public transport pricing before.

In under ten years this was all replaced with the much simpler Metro card system, which evolved into today’s zonal system. The new system had the advantage of covering multi-modal travel but removed many incentives to make better use of the system – incentives widely used around the world as shown in section 3.

So why did these changes take place? Annual reports for the Victorian Railways Board and Melbourne and Metropolitan Tramways Board (MMTB) suggest they were in part a response to declining patronage and a way to support the introduction of ticket machines.

But the decline in patronage doesn’t necessarily mean that the system had become too complex or that Melburnians had become unable to cope with the pricing structure. It’s more likely the decline in demand for public transport was linked with the rise of cheap cars, the building of major highways and limited investment in public transport in the rapidly growing suburbs. The MMTB reports even include television as a culprit!

Whatever the primary reason, responding solely with simpler public transport pricing was unlikely to be the most efficient and effective approach.

Are there still good reasons to have a very simple ticketing system? With electronic tickets replacing physical tickets, the incentive to save money on printing physical tickets has disappeared.

Electronic tickets also enable different prices across modes (as well as by distance and time) in a flexible way not possible with the paper tickets of the early 1980s.

The next version of myki can escape the constraints associated with paper tickets. We need further research to see the effects on demand, by mode and time of day, of introducing a more sophisticated ticketing system. `Mobility as a service’ apps, such as RACV’s Arevo product for Melbourne, can make travel decisions much easier if the pricing system is more sophisticated.

Introducing road pricing along with more sophisticated public transport prices will encourage the most efficient use of all modes of transport throughout the day. It could also facilitate travellers making a more substantial and sustainable contribution to funding public transport.

Introducing road pricing, along with more sophisticated public transport pricing, will encourage the most efficient use of modes of transport throughout the day.

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