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Fair Move: 05 Improving how fares are set

Recommendations
  1. Set public transport fares transparently, using clearly defined objectives.
  2. Fare setting objectives should be to make the best use of the public transport network, take equity into account and ensure people are provided with informed travel choices.
  3. Immediately appoint an independent body to advise on and monitor transport prices.

Our approach to fare reform focuses on achieving three aims: balance multiple outcomes to make the best use of the transport system, improve equity and provide informed choice to users. A fare structure that achieves these aims ensures that the public transport network provides the most benefits to all Victorians.

Balance multiple outcomes to make the best use of the transport system

Price is an effective way of sending public transport users information and providing incentives for making decisions about when and how they travel, taking into account not just their private costs, but also the costs and benefits they might impose on others.

Public transport fare setting needs to balance multiple outcomes to set the right price. Too little use of public transport results in congested roads and high environmental costs. Too much use creates overcrowded and unreliable public transport services as networks struggle to manage demand.

While new infrastructure can be built to accommodate extra demand, this must be balanced against the costs of adding the infrastructure and the alternatives available to meet people’s transport needs.

Overall, our approach is to set public transport fares so that they take account of the many different social impacts from public transport use and balance those impacts to ensure the best possible use of Melbourne’s entire transport system.

Our focus on balancing multiple outcomes is important because public transport is not a goal in and of itself; rather, it is a means that provides people with travel choices to access employment, social connections and services that they want and need. Fare setting approaches that focus on individual targets alone (such as cost recovery or patronage growth) come at a cost to other important factors, and will always be open to criticism as they prioritise one outcome above others. What is needed is an approach that balances multiple objectives.

Our goal is to recommend a fare structure that maximises the use of the public transport network so that it generates the most benefits to Melburnians, whether they use public transport, private vehicles or active transport. Fares should reflect the costs to society of the different transport options, and then allow individual travellers to choose the best fit for them – implicitly taking into account the costs on society through the fare.

Accordingly, our research uses an approach that balances a full range of outcomes to determine what fare levels should be. Our approach is similar to that used by the New South Wales Independent Pricing and Regulatory Tribunal (IPART, 2015) and seeks to balance the following costs and benefits:

Benefits of additional public transport use:

  • Reduced road congestion
  • Reduced environmental costs
  • Reduction in road accidents
  • Increased walking

Costs of additional public transport use:

  • Costs of adding public transport services
  • Infrastructure costs
  • Public transport crowding
  • The impact of taxation on people and businesses to provide subsidised fares

The process used to balance all these costs and benefits is the measurement of the social cost of additional public transport use (known as the social marginal cost pricing approach).[5]

The social cost is made up of the financial cost of providing an extra public transport trip (new services or new infrastructure needed to provide the trip), minus the benefits to society generated by an extra trip on the network (such as reduced congestion, lower pollution and reduced road accidents).

The gap between these two is the optimal fare, which represents the net cost to society to provide the additional public transport trip (as shown in Figure 5).

This method ensures that the fare level encourages the best use of the entire public transport network. If people are willing to pay the fare (because their personal benefit from the trip is greater than the fare price) then that trip makes everyone better off. If they are unwilling to pay the fare (because their personal benefit from the trip is less than the fare) then they will find an alternative, and society is better off.

This is a fair way to price public transport as people are paying the cost they impose on society. It also makes the best use of the entire transport system across roads, public transport and active transport.

Our analysis takes into account not just the network as it exists today, but also the pipeline of committed works. Our modelling (2031) and social cost analysis (2026) incorporates future infrastructure such as the Metro Tunnel, West Gate Tunnel and the Cranbourne-Pakenham Line Upgrade.

Why is it so important to make the best use of the public transport network?

Making the best use of the public transport network is vitally important because public transport is a very significant investment by Victorians. For example, in the 2017-18 financial year operating costs alone for the Victorian public transport network totalled over $3.25 billion, $2.61 billion of which was specifically for metropolitan Melbourne.

When the capital costs of the network and rolling stock used by the network are factored in, estimates suggest the amount is around $4.91 billion per annum (based on annual depreciation and a weighted average cost of capital of 5.5%).

The vast majority of this expenditure is paid for by taxpayers, not public transport users. Fares cover 30% of metropolitan operating costs (29.7% in 2017-18) and even less when taking into account the cost of capital (20.8% in 2017-18). The cost recovery for regional services is lower still. Over time, taxpayers have paid a higher and higher proportion of the costs of public transport use, with cost recovery from fares falling significantly over the past decade.

As outlined in Problem 3 on page 15, subsidised fares are on average benefiting those on higher incomes. If Victorians are willing to continue making such a large investment in public transport, government should be making the most of this investment so it produces the greatest overall return to society.

The high level of public transport subsidy is funded through general taxation, and is often justified on the grounds that public transport provides benefits not just to the users of public transport, but also to road users (primarily through reduced congestion), and because it provides a basic level of transport access to people who have limited private transport options.[6]

Our proposed reforms balance the costs of additional public transport with the benefits, while also improving the ability of the network to serve those with limited private transport options (by making it cheaper on average for those on low incomes, and lowering the fares of local tram and bus trips).

[5] As measured in analysis performed by CIE and Jacobs for Infrastructure Victoria, which modelled the impacts of a fare change and then valued the impacts of the change using accepted transport impact valuations (CIE, 2020).

[6] How does public transport benefit New Zealanders, The NZ Transport Agency and public transport, 2013 https://www.nzta.govt.nz/assets/resources/public-transport-information-pack/docs/public-transport-information-pack.PDF.

Consider equity

While the fare setting approach outlined above encourages public transport use that provides the most benefits to all Victorians, there are also equity implications that must be considered. Additional analysis has been undertaken to determine if the overall benefit from optimal fare setting comes at a high cost to more vulnerable groups.

Each proposed change in fares has undergone analysis that shows which groups of people, by income, are most affected from reductions and increases in fares.

The results are somewhat surprising. We found that in almost every case, a move to a fare that makes the best use of the public transport system is also a fare change that is more equitable. Our research shows existing metropolitan fare levels are much less equitable than they should be, and changes that make the best use of the public transport network will also better serve the needs of most low-income Melburnians.

Provide informed choice

The final consideration throughout our research was regarding how people might react to a different set of fares.

Prices are only as good as people’s ability to understand and use them for decisionmaking. If people don’t understand the fares, they will not use them to make decisions. Fares can then no longer help people to make the best travel decision for themselves and society. Fares must be set in such a way that they provide an informed choice to users and do not create confusion.

To understand the effects of different fare structures on people’s choices, Infrastructure Victoria commissioned SGS Economics & Planning (SGS) and The Behavioural Insights Team (BIT) to conduct a study examining how people responded to complexity in public transport fares (SGS-BIT, 2020).

We have relied on this research in considering various fare options and in making our recommendations. This is discussed further in the How will users respond to variable fares? section.

Transparent fare setting

Infrastructure Victoria’s view is that fare setting should be transparent and have clear objectives.

Our approach is an example of how we believe fares should be set. Public transport fare setting currently lacks clear objectives and transparency, and we believe an independent body should be appointed to advise on and monitor transport prices.

Fares can help manage transport use in the short term and should change as circumstances change. Having an advisory body that regularly monitors, researches and advises the government on transport fares would keep information and research up to date, as well as provide a transparent process for fare setting similar to that facilitated by IPART in NSW.

An advisory body that regularly monitors, researches and advises on transport fares is particularly important in a world that is experiencing significant change due to the ongoing effects of COVID-19. Fare setting can be a powerful tool to help make the most out of the transport system we have today, but further research and analysis is required to apply our proposed approach to the specific circumstances of each location and point in time (see COVID-19: a new set of problems for public transport, section .05 Improving how fares are set).

The way forward

The next two sections of this paper cover the two primary components of our proposed reforms to public transport fares:

(1) fares that vary by mode and (2) fares that vary with the time and place of travel. We focus on these two reforms for two reasons. First, they are the changes that are going to make the greatest improvements in system performance towards achieving the aims outlined above.

Second, the behavioural economics research conducted by SGS and BIT suggests that travellers can respond to these changes in a way that supports achieving the aims. The implications of a forum of former politicians, bureaucrats and decision makers convened by BehaviourWorks (Monash University) for Infrastructure Victoria[7] suggests simply presented and understood reforms are more likely to be socially and politically acceptable.[8]

The SGS-BIT research suggests this will be the case for a combination of peak charging and mode-specific fares. In addition, Victorians will be familiar with these types of fares if they have used public transport in Sydney or several major cities across the world.

COVID-19: a new set of problems for public transport

COVID-19 has changed the social costs of using public transport – and those social costs will continue to change as we transition back to a world either without the disease or a world in which we need to continue to manage the virus because there is no vaccine.

This means that fares should also change with the circumstances when necessary. This kind of ongoing analysis would be a key tasks for an independent transport pricing advisory body.

Actions taken as a result of COVID-19 could put persistent downward pressure on public transport and the demand to travel to previously crowded destinations like the Melbourne CBD. This is largely because the costs of working from home, including communicating between widely dispersed workers, have fallen substantially.

Workplaces have adopted technology that enables staff to access work resources from home and staff have learned to collaborate using video conferencing and other online communication tools, making remote work more viable than it has ever been. The change was also rapid and co-ordinated, with a large proportion of workplaces switching to remote working at the same time, making working from home arrangements more acceptable across industries. Even if COVID-19 is eliminated, various surveys showing increased employee productivity and reduced business costs point to a greater proportion of work taking place remotely for the foreseeable future.

For example, the Australian Bureau of Statistics’ census showed in 2016, only 4.2% of people worked from home in metropolitan Melbourne. By early June 2020, 25% of paid workers reported that all their work had been performed remotely. The rate is higher for CBD workers, with 41% reporting that they performed all work remotely (BehaviourWorks, 2020). According to a national survey taken by the NBN in late April, 81% of respondents said the experience of working from home has positively changed the way they think about managing work/life flexibility (NBN, 2020).

During the transition to the post COVID-19 economy it is likely there will also be a shift in demand across transport modes and travel time. Before COVID-19, some components of the network operated assuming significant crowding for considerable lengths of time. This isn’t compatible with social distancing. Travellers who are concerned about the risks of COVID-19 will choose modes and times where it is easier to socially distance. Some of these travellers could shift from peak to off-peak travel and/or shift from public transport to private transport (active transport or motor vehicle). This increases the social benefits from reducing congestion.

Analysis by WSP shows that applying strict social distancing would reduce trams to 13% and trains to 20% of their respective total capacity – and buses to 16% of their seated capacity. This has serious implications for management of the network. Unless prices are used to spread peak demand, trains will be `full’ by the time they reach inner urban

areas, with those living closer to the CBD unable to board without breaching social distancing guidelines. This means that both demand and supply side measures are likely to be needed, along with operational changes (such as different boarding and alighting procedures, floor markings, new timetables and extra staff).

In addition, travellers can’t be relied upon to sufficiently socially distance on public transport. Even if travellers are concerned about their own risk of catching the virus, they won’t take into account how changing their travel plans could reduce virus risks for other travellers. This means additional incentives are needed to get the right level of distancing. A mix of restricted numbers and fare surcharges/ discounts could be the best mix to achieve this.

As restrictions ease, people return to work and patronage increases on public transport, governments around the world are exploring ways to maximise levels of social distancing by encouraging people to travel off-peak.

In July 2020, the NSW Government announced that it would halve public transport fares for three months for Sydney commuters who travel outside peak periods.[9] The move was designed to encourage commuters to `retime their day’ after capacity on public transport services was cut due to social distancing. Peak travel times were also extended by an hour and a half in both the AM and PM peaks.

[7] This was part of the research for Good Move: Fixing Transport Congestion (Infrastructure Victoria, 2020)

[8] (Kunstler et al, 2019)

[9] https://www.transport.nsw.gov.au/news-and-events/media-releases/new-off-peak-travel-savings-start-today

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