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4. Transport network pricing is the best solution

Our research shows that the design and implementation of transport network pricing across roads, public transport and parking is the most effective way to ease congestion. A new pricing model should be underpinned by five key principles.

  • These principles lead to a pricing system that effectively manages congestion and doesn’t create additional demand.
  • Transport network pricing also improves fairness for vulnerable people by providing incentives to choose off-peak services or cheaper modes and extends discounts.
  • The community is also open to change, under the right conditions. Our community consultation and work with former decision makers has helped identify specific conditions to help build community acceptance for changing how we pay for transport.

To get the most out of Victoria’s transport network, we need to consider new ideas. This means changing the way we pay for travel in Melbourne and changing the way we travel.

Although the international examples show transport pricing reform can gain public acceptance, be implemented and effectively reduce congestion, each is limited or context-specific in some way. It is worth digging deeper and wider for guidance on how to design and implement transport network pricing in Victoria.

To support the analysis of how to design the reforms, Infrastructure Victoria has reviewed the deep and extensive research base around transport pricing. To support our analysis of how to gain public acceptance for these reforms, we have drawn on our consultations with a community panel and the reflections of former decision makers.

Our aim is to propose a set of features that would fit any transport pricing reforms aimed at reducing congestion, providing more travel choices and improving the speed, comfort and reliability of travel across the city, as well as features that have the best chance of winning community support.

Five pricing principles

To be successful, transport pricing must be efficient and fair.

Infrastructure Victoria has developed five pricing principles – distilled from the Australian and international economics literature on pricing – that would set a strong foundation for transport network pricing in Victoria. These principles are stated and described below.

Adopting these principles would ensure that prices are set to create an efficient outcome – where people travel at times, to places and by modes that provide the greatest benefits relative to the costs – while also meeting important objectives around fairness that are essential to gaining community support.

Principle 1: All modes, routes and parking are priced

Prices should be the central tool for allocating trips (including for parking) within the transport network. A trip that isn’t priced is effectively underpriced, distorting the choice made by travellers to take that trip instead of a more efficient one. This principle also implements the beneficiary pays equity principle.[7]

Principle 2: All costs are priced

Congestion, pollution and contribution to road trauma are all included in the price. This principle ensures that prices include the social marginal costs linked to externalities related to each mode and trip.

Principle 3: Provide choices but not too complex

There should be a range of products that provide choices to consumers. It should be possible to use the transport system without it being too hard to choose.

Principle 4: Different prices for different products in different markets

Prices should reflect demand and cost conditions, and permit different prices to be charged in different locations where possible. Prices can differ by mode, peak versus off-peak and by local demand and cost conditions.

Principle 5: Equity

This principle implements vertical equity (where different groups of people are treated differently) and also permits different prices to be charged in different locations where possible. Lower prices are set for groups of people identified as less able to pay and in places where demand from low income users is higher.

[7] This principle states that those who use (or benefit from) a service should pay the full cost of using that service. Conversely, those who do not benefit should not have to pay

Pricing can manage congestion across the whole network – and other problems

Most academic and policy analyses of transport pricing look at public transport, road use and parking in isolation. We have analysed the pricing of each mode of transport and parking simultaneously for three reasons.

First, public transport and road use are substitutes for one another, and road use and parking complement each other. So the price of each mode affects demand for the others. Second, choices about each set of transport products are linked with externalities, so an efficient outcome in each market requires getting the prices right in all of them. Third, because there are relationships across the different modes, this means that relying on prices in only one market is unlikely to be effective and may distort outcomes in other markets.

Congestion is the key market failure affecting the travel experiences of Melburnians. The absence of a price mechanism to ration access to road, public transport and parking assets

means they are overused. This inefficient congestion, whether on roads or public transport, means people are travelling when the costs, including the costs placed on other travellers, exceed the benefits.

In practice, this means people take longer to get places, squeeze onto packed trains and trams or choose not to travel at all. Extensive economic analyses have been done looking at congestion on roads (for example, see Hau (1992) and BITRE (2015) for estimates for Melbourne). Congestion on and around public transport has been theoretically analysed (Turvey and Mohring, 1975) but not empirically.

Reducing congestion means reducing the amount of travel that takes place – particularly at certain times. Some Melburnians need to change the mode, time or maybe even the destination of their trips so as not to contribute to congestion.

Less congestion as a result of congestion charging does not induce demand back onto the roads (as happens when road or public transport capacity increases due to new investment or technology advances). This is because the congestion price is faced by all drivers, current and potential, and this price can be set to achieve a target road speed/level of congestion. In other words, the less congested roads don’t attract additional drivers as they have already chosen not to drive at that price.

Using prices to manage congestion is advocated not only by economists but also by government and private sector bodies such as Infrastructure Australia, the Productivity Commission and the RACV, and by the 2010 Henry Tax Review and 2015 Harper Competition Policy Review.

Using prices has an important advantage over subsidies or other methods used to change behaviour. These other methods often require government to find out who is making inefficient trips and who is able to change their behaviour for the least cost. This is extremely difficult for government to do as this information is usually private.

If too few people, or the wrong people, are targeted or subsidised the policy won’t be effective. If too many people are subsidised the program will take up resources that could be better used to deal with other problems.

One of the main advantages of using pricing as an incentive to guide travel choices is that the government does not need to specifically target or subsidise individual travellers or trips to change their behaviour. Each person can choose whether to continue to travel at congested times or not based on the costs (including the congestion price) and benefits of doing so compared with changing the time or mode of their trip.

Driving on the roads increases the probability of others on the road being involved in an accident (see Clarke and Prentice, 2009 for a review of this literature). Road pricing can take this – and other negative environmental externalities, such as air pollution – into account, and help to reduce them.

Pricing to reduce congestion, crowding and other negative externalities will be most effective if trips that contribute the most to these externalities are assigned higher prices. This is difficult to do with simple bulk tickets which, for a price, offer unlimited travel on all modes at all times. Such tickets are also less equitable if credit-constrained low income travellers cannot afford the upfront fee. Such tickets, like the Commuter Club ticket, may need to be reconsidered as part of public transport pricing reform.

Similarly, any road pricing component of transport network pricing reform will be more effective if a broader set of vehicles are included, such as taxis and ride-share vehicles. Optimal prices for road-based public transport would also incorporate road usage charges reflecting all costs and benefits associated with them.

Introducing road pricing that reflects congestion and other externalities, to complement public transport will be more efficient than attempting to reduce driving by increasing cheap public transport. Reducing driving by only increasing public transport will distort the public transport market (and possibly other markets), even if even if an efficient outcome is achieved in terms of driving. This is because while it’s likely that reducing driving will increase demand for public transport, it’s highly likely that an efficient outcome will lead to changes in other markets over time, such as markets for labour and different goods and services.

In other words, people respond to road pricing not only by increasing their use of public transport but also by changing the origin and destination of their trips and what they do in their trips. They don’t only swap a trip by private motor vehicle with an as close as possible trip by public transport – particularly in the long run.

While it may seem obvious, it’s important to state that Melburnians could not drive as much as they do if there wasn’t car parking at both ends of the journey. Driving and parking are complementary: you can’t do one without the other.

Parking is managed in Melbourne in different ways. We have focused on the high demand car parking provided by state and local governments, both on and off-street.

For the most part, this parking has time restrictions to ensure some level of turnover. But setting the price for parking to achieve other outcomes, such as reduced congestion, has generally not been considered.

Shoup (2006) reports on six studies for five cities that estimate the share of traffic cruising for parking and finds the share varies from 8 to 74%. There is strong evidence from San Francisco that dynamic parking prices — prices set and charged to achieve a minimum vacancy level – can reduce congestion linked to cruising. The implications are particularly important for Melbourne given the city’s many tram and bus routes that run along shared traffic streets with high demand for parking.

Cross-mode impacts

As well as considering the externalities and other issues associated with each mode, it is important to consider cross-mode impacts. Depending on the trip, different modes can complement or be substitutes for each other.

Basso and Silva’s (2014) analysis of simulation models for London, England and Santiago, Chile featuring buses for public transport illustrates what can happen. As well as choosing a congestion toll for roads, the transport planner in these models must choose – for the sole form of public transport (assumed to be buses) – fares, capacity, frequency, number of stops and their capacity, and the share of the road that is bus-only. Travellers can choose which mode and route to use and whether to travel during peak or off-peak times.

Introducing a congestion toll results, in these models, in lower bus fares as increased demand for buses enables lower prices to be charged.

Another striking finding from this analysis is that rather than finding that public transport prices (in the absence of congestion pricing) increase during peak demand, they are lower in peak compared with off-peak. In other words, the efficient pricing system results in lower bus prices for peak services compared with off-peak services.

The possible reason for this result is that peak travellers respond to higher prices by changing mode rather than changing travel time. Peak public transport prices are low in order to reduce costly road congestion. Prices are high off-peak because if travellers substitute roads for buses it doesn’t matter, as there is no significant congestion.

This analysis shows two things. First, the coordination of road and public transport prices can yield better outcomes. Second, it is important to use evidence about how people actually respond to prices rather than assumptions about what seems reasonable.

Pricing can provide choices and improve fairness

Different prices for trips that differ by mode, distance and time provide travellers with opportunities to trade off each of these elements for a price that suits them.

For example, a traveller may find that taking an off-peak bus provides the cheapest fare, and change their plans accordingly. On some days, a traveller will prefer to pay a higher price to take a quicker and more timely trip. On other days, they will prefer to save some money.

As well as setting different prices by mode, distance and time, charging different prices for different types of consumers may also lead to improvements. Setting a lower price for lower income Victorians while maintaining full prices for other Victorians is not only fairer, it can improve economic outcomes. It means that more people can access transport than if one set of prices applies to everyone.

To prevent free-riding, a concession card must be necessary for travellers buying cheaper tickets. Alternatively, where incomes are lower in a geographically separate market, such as in regional towns, prices could also be set at a lower level.

Even without an official indicator of travellers’ willingness to pay, transport service providers can design products with different price-quantity-quality combinations to appeal to different types of travellers.

Quantity discounting (such as lower costs per trip when a greater number of trips are made) is probably the most relevant example, although others could emerge. For example, it may be optimal to provide more comfortable bus travel with guaranteed seating at a higher price on some routes. Looking ahead, it may be possible to embrace mobility-as-a-service with a subscription model that includes public transport, road transport and parking.

Differentiated pricing may also improve equity in other ways. Different prices by mode, distance and times can mean those who benefit from each component of the system make a greater contribution to its cost, consistent with the beneficiary pays principle of equity.[8]

[8] See Australia’s Future Tax System (2008) for more details

Pricing conditions can help gain community acceptance

While most economists agree on the need for transport network pricing, economic reasoning alone has not persuaded policy makers to adopt these reforms or communities to welcome them.

So we have looked closely at the conditions that need to be met before a government is likely to introduce transport network pricing, along with the conditions that will make it acceptable to the broader community. Unless these conditions are satisfied, it’s unlikely that transport network pricing will be introduced.

Economic theory suggests that introducing road pricing needs to be accompanied by some form of compensation for road users (Hau, 1992). This is because for all road users, the private benefits of travelling, even in congested conditions, exceed the costs (including private congestion costs). Although this surplus increases as a result of the introduction of efficient road pricing, current road users will be worse off:

  • Those who are priced off the road are worse off as they are travelling at a different time or by a different mode that was ranked lower than driving on congested roads.
  • Those who remain on the roads are paying more to do so.

Returning the proceeds of road pricing to the original road users would compensate them for the change. But we need to make sure this compensation is delivered in a way that does not distort the incentives provided by network pricing to use transport at particular times in particular locations. For example, reducing tolls or fares would weaken the incentives and worsen congestion. We will discuss specific examples of compensation in sections 5 and 7.

But is compensation the only issue preventing widespread support of road pricing and public transport fare reform? To identify the potential barriers to gaining public acceptance for transport network pricing, Infrastructure Victoria did two things. First, we convened a panel of community members to explore the conditions under which they would be willing to accept transport network pricing. Table 3 in section 4 shows the eight conditions required for public acceptance based on the work of the community panel.

Second, BehaviourWorks Australia (BWA) convened a forum of former politicians, bureaucrats and political advisors to discuss how to make the proposed reforms more attractive to the community and current decision makers. It also discussed alternative policies or modifications that might make the proposed policies more acceptable. Forum participants agreed to take part on the basis that their affiliation and identity would remain anonymous to accommodate and frank and meaningful discussion. This panel will be referred to as the BWA forum.

Over a three-hour structured forum, participants highlighted implementation strategies, policy refinement tools, and public education and promotion techniques. Concepts discussed ranged from clear messaging, staging the reform, and allowing the community to familiarise themselves with proposed changes.

Participants also highlighted several considerations around the degree of leadership required and the sensitivity of Victorians to how change is implemented. The BWA forum discussed perceptions of `winners and losers’, and identified that appropriate messaging may help people to accept or understand that any `loss’ may only be short term.

We discuss transport network pricing implementation in Section 7.

Infrastructure Victoria has organised the community panel’s conditions into three groups: pricing, transition and governance (see Table 3 below). In some respects these groups reflect the five economic principles we gave the panel. Both recommend that transport network pricing provide choices but not be too complex. Both also call for consideration of equity.

The community condition that is likely to create the most tension with the economic principles is the first one: locality must not be a disadvantage. The economic principles imply that if costs increase with distance or differ across locations or modes (the availability of which may differ by location) this should be considered when setting prices. The community condition doesn’t necessarily rule out distance-based charging.

If distance-based charging results in some benefits or is compensated for in a way that means people in particular locations are no worse off, distance-based charging would be consistent with this condition. But there would be tension with the economic principles if, under the previous, non-distance-based system there had been substantial cross-subsidisation of travellers from particular regions and the compensation or benefits don’t cover the increase in charges.

This paper focuses on the community conditions around pricing and the transition to transport network pricing. Infrastructure Victoria is currently doing further work around Transport Network Governance which will respond to and incorporate these conditions. For now we would like to note that we also see a very important role for an independent regulator of transport pricing. IPART in New South Wales provides an ongoing example of some of the type of work that a Victorian regulator of transport pricing could do.[9] This will be analysed and discussed more extensively in future work.

[9] www.ipart.nsw.gov.au/Home

Seeking community views on transport network pricing

Changing the way Victorians pay for transport is a major reform that requires extensive planning and community input. To inform our research, we convened a community panel in 2019 to get input on the things that need to be considered before any proposed change to the way we pay for roads and public transport.

The panel of 38 Victorians worked together over four weeks to consider the question: Under what conditions, if any, would the community accept a change in the way Victorians pay for roads and public transport?

Panelists were independently recruited through a process that combined random selection and stratification to ensure we included a cross-section of the community.

Throughout the consultation, panelists met three times and attended two webinars. They were provided with background information on current transport system operations, funding and charges and heard from a range of speakers on various aspects of transport network pricing.

At the final session the community panel provided a report which identified eight conditions under which they would accept a change to the way they paid for roads and public transport (see Table 3).

The panel’s conditions highlighted the importance of fairness, equity and transparency when considering such a complex reform.

Read the community panel report here.

Table 3: Community conditions for transport network pricing

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