A fair fare?

The recent move to cap public transport fares in Queensland at 50 cents per trip has led to calls for other Australian cities to follow suit. The Tasmanian government has halved fares until mid-2025, WA is offering free fares over the summer and the rail union (RTBU) in NSW has put lower fares on its wish list of policy demands.

Right now, offering cost-of-living relief has strong political and community appeal – the incoming Queensland government clearly felt it had little choice but to match the commitment that former Premier Miles had made - but that doesn’t make it good long-term policy given both the questionable benefits, opportunity cost and other unintended consequences.

Some contextual information is helpful. In Australia’s big cities public transport carries 1.5bn passengers per year, or about 4m trips every day. It plays a central role in lowering road congestion, reducing transport emissions but also provides mobility for people without a car. Public transport delivers a significant proportion of people to work or study in Sydney (27%) and Melbourne (18%), with somewhat lower levels (10-12%) in Brisbane, Adelaide and Perth.

All over the world public transport is highly subsidised by governments and, in a small number of cities, it is free. There is a strong policy logic for significant taxpayer subsidies given the broader societal benefits. Likewise, there is a strong logic for providing concessions for students, pensioners and others given their lower incomes and ability to pay.

In Australia, fares from customers typically cover 15-20% of public transport operating costs, or about 20 cents in the dollar. This however excludes the substantial capital costs that have been invested, (particularly in rail networks), over many decades, and the huge cost of current investments in projects like Sydney Metro, Cross River Rail (Brisbane) and the Suburban Rail Loop (Melbourne) - these three alone accounting for c.$100bn in capital expenditure. Taxpayers foot the bill for the c. 80% of operating costs not covered by fares, as well as the capital costs.

So given public transport is so heavily subsidised why bother with collecting fares at all? Why not discount it further or even make it all free? There are at least 6 good reasons not to:

• Opportunity cost: While small as a percentage of costs, fares still generate hundreds of millions of dollars per annum to fund transport operations. Queensland’s 50c fares policy will cost $250-300m per annum in revenue forgone, which is money that can’t be spent on schools, hospitals, police and other services. The fares collected in Sydney (c.$900m) and Melbourne (c.$600m) both make a very meaningful contribution to public transport operating expenses at a time when Government’s finances are stretched.
• Questionable benefits: Public transport is still bouncing back from COVID-19 across every city, so double digit growth rates have been the norm for some time. Following the trial period for 50c fares, the Queensland Government reported an uplift in patronage of 16% between 4th August and 30th October 2024. However, Melbourne and Sydney reported 11% and 10% growth respectively in their most recent reporting periods. In Queensland it is far from clear that the benefits of fare discounts actually justify the significant cost.
• Poor targeting: Multiple studies show that service quality (particularly frequency, but also speed, reliability etc.) have the biggest impact on growing public transport patronage. Dropping already heavily subsidised fares is much less impactful. Furthermore, the market response to lower fares (price elasticity) is much greater in off-peak periods; in peak periods consumers are generally much less price sensitive. Dropping fares across all time periods (especially peak periods) sacrifices a lot of revenue for very limited benefit.
• Knock on capital costs: Growing public transport is far from free but rather comes with significant capital costs in terms of vehicles and infrastructure. The revenue forgone from cut priced fares, underestimates the long-term cost as passenger growth (particularly in the peak) requires more vehicles, drivers, power etc.
• Weaker business cases: Taking away an important source of system revenue immediately weakens the business cases for all future investments in public transport, that are so critical to managing the growth of our cities and making it harder to persuade state Treasuries to invest in growth projects.
• Effective permanency: Once a consumer discount has been offered it is nearly impossible (politically) to remove. Cash back schemes on toll roads and discounted fares for over 60s (many of whom have significant savings/valuable property) are good examples of similar benefits that once offered, can effectively never be withdrawn.

What could the Queensland Government have done instead? Limiting the fare discounts to off-peak periods only could have generated a material uplift in patronage without the significant loss of revenue or the risk of causing knock on capital costs. Alternatively making the discount time limited (six months as originally proposed, or one year), would have been a much better way to deliver short term cost of living relief while limiting the longer-term impacts.

But debate over fares ignores an even more important issue for Queensland that deserves focus by the new government. By national (and international) standards the SE Queensland public transport sector is very inefficient. Costing some $2.4bn per annum in operating costs, the system carried 168m passengers last year. This compares a spend of $2.8bn for 452m passenger journeys in Melbourne. i.e. for only 1.1 times the operating spend, Melbourne’s system carried 2.7 times as many passengers as SEQ. Or put another way, SEQ spends $14 on each passenger journey versus $6 in Melbourne. Addressing even a small part of this efficiency gap could re-coup the impact of fare discounts several times over.

Clearly people throughout Australia are experiencing cost of living pressures through rising rents, interest rates and inflation. It is entirely understandable that governments are motivated to provide cost of living relief. There has also been an understandable desire to get people back into CBD areas post COVID. But permanently discounting fares is a high cost and inefficient way to generate public transport growth, that will inevitably cost more than just the revenue lost in the long run. Other states would be wise to tread carefully.

Simon Barrett is a transport advisor with L.E.K. Consulting