Fare view for public transport costs

THE line touted by those calling for more investment in Perth’s trains is that the major commuter rail lines running north and south of the CBD have had more users than was predicted. They are, we are told, victims of their own success.

Well of course they are. The average Transperth journey fare on road or rail is about $1 – that is about one third of the operating cost of that trip, or just one quarter of the cost, if capital is taken into consideration – and that is being very generous if you look at the numbers below.

The Public Transport Authority’s annual report for 2009-10 shows expenditure at Transperth, which is mainly metropolitan buses and trains, was $691.2 million (or $499.1 million if capital charges were excluded), while fare revenue was $141.7 million. Of the 132 million boardings, about 79 million were paid for, suggesting it costs $2 per journey for those who actually pay for the service.

The average Perth train journey is 17.7 kilometres, at a cost to the government of 41 cents per kilometre or $7.26 per trip, while the average metro bus trip is much shorter, at 5.6km a journey that costs the state 76 cents/km or in total $4.26 per trip.

It is worth noting that, in 2009-10, the average train ride was much longer than expected and the average bus trip much shorter, suggesting an unforeseen shift from buses to trains for those with longer commuting distances.

The problem with the overall cost-versus-fare equation is that ‘success’ to proponents of public transport equals exponentially higher costs to government. Every shiny new rail commuter equals more costs, if other things remain equal.

Of course they don’t remain equal, do they? Like any business, Transperth is trying to maximise the value of its infrastructure by fitting as many people as possible on existing trains and buses, especially when they are only crowded for small part of the day.

Any business would do the same. The difference is businesses try to operate profitably, so in the simplest of terms they tend to make capital investments to expand capacity when they see that their current infrastructure won’t continue to meet rising demand.

But, even in business, additional capital expenditure is not always possible due to funding restraints or viability.

An alternative available to any business with rising demand is to raise prices. In the case of the trains this could have two obvious outcomes: 1) some people can’t afford the less-subsidised service and find alternative arrangements, therefore relieving the pressure on existing infrastructure; or 2) demand remains strong and the higher revenue improves the case to increase capital expenditure.

I am not a big user of public transport so it might seem cheeky of me to suggest prices ought to rise. The fact is, road users may well be equally or more subsidised and simply don’t whinge about congestion in the same way train commuters have made themselves heard on the public airwaves. And I haven’t completely ignored the possibility that higher public transport prices might shift commuters onto the roads and therefore give me some real congestion to bleat about.

But as the call increases for more investment in public transport, including light rail, it is important to consider all the options available to government.

The lessons of the state’s electricity sector over the past decade show that there is good reason to wean people off subsidies if the services involved are becoming too expensive for the government to comfortably handle, let alone grow.

This is especially the case in public transport, where we have had decades of subsidies to encourage its use.

At what point does a subsidy switch from encouragement to unnecessary market distortion? Worse, what if the subsidy so undervalues a service that it is just a wasteful rort? When we undervalued electricity we made air-conditioners more affordable, which ultimately brought forward the peak power problems.

So undervaluing something does have consequences.

I don’t know what the tolerance level of public transport users is to price rises but I suggest the growth of Perth over the past 20 years, combined with the rising costs and hassles of driving a car, means that many people could accept double or triple the fare they pay today and still find it cost effective. In other words, we could well be giving the service away.

Of course, public transport is more than just about reliable commuting and has other less quantifiable benefits, such as lower environmental impacts.

In that case, the subsidies represent additional value that can’t easily be placed on a ledger.

But, like the argument around rooftop renewable power, the question is whether subsidising commuter services is the most cost-effective way of achieving outcomes such as reduced carbon emissions.

And that is even more relevant if we find that existing commuters can contribute more towards the cost of the service they use without seeing a big shift back to alternatives like cars. In fact, higher charges for public transport might reduce the burden on government and make expanding such services more attractive. Ultimately, that would better serve the environment than a poorly funded system where most commuters are simply getting a heavily discounted ride.

Core business

I WAS intrigued by news last week around the decision by local health mutual HBF to get out of the general insurance business.

There is no doubt that the general insurance business is extremely competitive and demands scale. There is also a risk in being regionally biased, as HBF discovered when the hailstorm last year affected a significant number of its customers. In insurance, the game is about spreading the risk, not having it concentrated in one particular city.

Oddly, health insurance doesn’t really carry the same risks. The Western Australian population should have no more reason to go to the doctor than someone in Sydney.

Nevertheless, HBF’s decision to jettison general insurance and concentrate on health also reflects growing competition in its core market.

Decisions like these take place in businesses all the time.

Another example is Chevron. Despite being a major energy player, Chevron has been a lightweight in the growing field of LNG. To date, its only experience in LNG is as a non-operating partner in the North West Shelf project.

That is set to change soon. The massive Gorgon project is its first foray into operating one of these plants and last week its proposed $25 billion Wheatstone project received a key environmental approval. It also has numerous other LNG developments on the boil around the globe.

To many of us, Chevron’s Gorgon development would not seem like that much of a step away from producing oil, yet, in reality, the technology, transportation techniques and even the markets are vastly different.

The choice from management’s point of view is whether the opportunity offered by diversification fits with some core business focus or just distracts from it.

• mark.pownall@wabn.com.au