IPART – an example of practical thinking outside the box

External costs/benefits in public transport fare setting

NSW’s Independent Pricing and Regulatory Tribunal (IPART) is a world leader in development of efficient public transport (PT) fare structures that recognize benefits and costs to service users and to the wider society, as well as service delivery costs. This leadership has been recognized, for example, in several Thredbo International Conferences on Competition and Regulation in Land Passenger Transport.

However, as noted at the Thredbo 14 Conference, a weakness in the IPART fare setting approach has been the neglect of agglomeration economies and social inclusion benefits flowing from public transport services (Stanley & Levinson, 2016). The new IPART Draft Report, Maximum Opal Fares until 2028 (IPART, 2024a) begins to rectify this weakness.

Both agglomeration economies and social inclusion benefits are important for improved PT fare structures and improved transport planning and evaluation more generally:

1. agglomeration economies because Australian cities would not be nearly as productive without their dense PT networks, particularly those mass transit services converging on the city centres, yet Australian transport planning and evaluation guidelines have been wary of counting these PT benefits, almost denying the reality that is agglomeration; and,


2. social inclusion benefits because the social safety net role of public transport services has been long recognised in policy terms but Australian transport planning and evaluation practice and guidelines have ignored the societal benefits from reducing social exclusion. ITLS research has shown these benefits to be considerable (Stanley et al., 2022).
   

IPART is now proposing that agglomeration economies be handled in the fare setting process by excluding some costs of PT vehicle ownership from the efficient cost quantum to be recovered through user fares. The IPART Technical Paper says:

We have excluded costs of ownership of public transport vehicles from the marginal cost. Our reason is that we consider the costs of fleet ownership, along with costs of owning dedicated public transport infrastructure (such as railway lines, train stations, bus stops and depots, ferry wharves and light rail track) to be costs that are incurred in order to secure agglomeration benefits. (IPART, 2024b, p. 9)

In the draft proposal, half these ownership costs are excluded. In taking this implied cost approach to reflect agglomeration benefits, IPART argues that agglomeration benefits should (at least) equal this cost quantum at the margin. This seems a useful starting point for discussion, at a time when the relative contributions of physical proximity and virtual proximity to agglomeration economics are in flux, thanks (for example) to COVID and its influence on hybrid working arrangements (Hensher, Weisbrod & Christensen 2023).

For social exclusion, the IPART Technical paper (IPART 2024b) recognises the importance of buses for social inclusion and proposes a cost-based (proxy) approach to benefit recognition. In addition to fare concessions for selected user groups (as at present), which can support social inclusion, the Technical Paper proposes that a significant proportion of bus service costs be excluded from the cost base to be recovered from user fares, totalling around $470m annually. The relevant costs are part of the bus costs that vary by number of bus kilometres travelled, as an estimate of the marginal costs of additional bus service provision beyond the service level that might be optimal if there were no inclusion benefits. The reason that actual bus timetables include services that are lightly patronised is that there are social benefits to more frequent services in the urban fringe areas (IPART 2024b, p. 9).

Rather surprisingly, however, the provision for inclusion benefits in setting optimal fares does not carry through to the IPART fare proposals, for unexplained reasons. There is sufficient information in the various IPART papers, particularly the pricing worksheets¹, to explore the implications of this somewhat tentative in/out approach to inclusion.

Figures 1 and 2 show optimal fares with and without the inclusion discount of $470m. Figure 1, which is important for the IPART fare proposals, shows that short (2 km) bus trips cover their peak and off-peak costs (estimated efficient prices are less than current prices) but longer bus trips do not, particularly very long trips.

Figure 2 shows that recognising social inclusion benefits of ~$470m substantially reduces estimated efficient prices, as compared with Figure 1, and results in estimated prices for peak and off-peak bus trips of both 2 and 5 kms being higher than current prices with the efficient price shortfall much less than in Figure 1 for longer trips. Which set of bus costs should provide the basis for efficient fare setting?

Social inclusion benefits

ITLS researchers and colleagues from The University of Melbourne have shown that an additional trip is worth around A$22.75 (2019 prices), based on the trip’s contribution to reducing social exclusion, with this value increasing in inverse proportion to declining household income (Stanley et al., 2022). Similar (currently unpublished) trip values have been found in recent research by economists at the Singapore Land Transport Authority, supporting the ITLS findings.

The mean trip value of A$22.75 includes generated traffic benefits (to new trip maskers) plus an inferred value for the reductions in the wider societal costs of exclusion, that follow from increased trip making by at-risk people (e.g., lower costs of crime, lower health system costs, improved productivity). These inferred societal (external) benefits account for about three quarters of the $22.75/trip benefit.

The IPART Technical Paper’s ~$470m provision for inclusion benefits of bus can be tested against these ITLS trip values. Using these values, around 20 million annual bus trips would need to be attributable to the additional bus services that result from the ~$470m bus service support. In the absence of this support, these 20m trips would have to have either not been made, required a lift-giver or required an expensive modal choice (e.g. a taxi). This is about 10% of total bus trips, which seems a conservative estimate of the proportion of bus users who will be at risk of mobility-related exclusion. Stanley & Hensher (2011), for example, estimated that around one-third of Melbourne bus trips are in this exclusion risk category, so a 10% proportion for Sydney looks very conservative. Building a $470 cost discount into the optimal fare setting process seems very conservative on this basis. Ignoring that provision, as IPART has done in its final proposal, seems to deny the reality of mobility-related exclusion.

Conclusion

IPART has a well-deserved reputation for PT fare setting that is best practice in terms of economic efficiency. Its latest proposals reinforce this reputation by some thinking outside the box to recognize agglomeration benefits and social inclusion benefits, taking account of the former in the fare-setting process. Refinement in the way IPART handles inclusion benefits is now needed too, with fare structures that take account of a discount for social inclusion benefits being a better reflection of the societal benefits and costs of bus services than the proposals recently put forward by IPART, (which excluded these benefits). 

Footnote

[1] https://www.ipart.nsw.gov.au/documents/spreadsheet-model/spreadsheet-model-fare-optimisation-model-review-opal-fares-2028?timeline_id=17398

References

Hensher, D., Weisbrod, G. & Christensen, I. (2023). Value creation through physical and virtual agglomeration. https://www.sydney.edu.au/business/news-and-events/news/2023/09/04/value-creation-through-physical-and-virtual-agglomeration.html

Independent Pricing and Regulatory Tribunal (2024a). Maximum Opal fares until July 2028: Draft Report. August 2024. Draft-Report-Maximum-Opal-fares-until-July-2028-August-2024.PDF (nsw.gov.au)

Independent Pricing and Regulatory Tribunal (2024b). Maximum Opal fares until July 2028. Modelling socially optimal fares. Technical paper. August 2024. Technical-Paper-Modelling-socially-optimal-fares-August-2024.PDF (nsw.gov.au)

Stanley, J. & Hensher, D. (2011). Economic Modelling. In Graham Currie (Ed.), New Perspectives and Methods in Transport and Social Exclusion Research, (pp. 201-219). United Kingdom: Emerald Group Publishing.

Stanley, J. & Levinson, D. (2016). Workshop 3 report: Sustainable funding sources and related cost benefit measurements. Research in Transportation Economics, 59, 143-150.

Stanley, J., Hensher, D. & Stanley, J. (2022). Place-based disadvantage, social exclusion and the value of mobility. Transportation Research Part A, 160, 101-113.