Richard Anderson - ADFERSIT

Funding Sustainable Mass TransitRichard Anderson

Managing Director

Railway & Transport Strategy Centre at Imperial College London

ADFERSIT, February 2011

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Presentation Structure

1 Introduction

2 Mass transit cost and revenue structures

3 The importance of fares policy in funding

4 Public Private Partnerships and other mechanisms

5 Conclusions

CoMET Community of Metros

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1 – Introduction

The Railway and Transport Strategy Centre at Imperial College London

Three key research themes: Benchmarking & performance measurement Urban public transport operations Transport economics & policy

RTSC undertakes applied and academic research, consultancy, teaching

Independent, comparable benchmarking For 28 metro operators including ML 10 suburban rail ways 13 large bus operators (including Carris)

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Why is public transport funding and fare regulation and so important?

Without stable fares and funding:

Long-term planning for investment will be difficult (for rail in particular)

Quality will fail to meet the rising expectations of the public

Many operators risk a spiral of decline in quality of service due to falling real fares and insecure funding regimes

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Source: BSISource: MTR

28 metro systems compare performance to identify & share best practices

Mexico City

Moscow

Shanghai

Hong Kong

Santiago

New York

Paris Milan

Naples

Lisbon

TorontoMontreal

Bangkok

Singapore

Buenos Aires

Delhi Taipei

Newcastle

Barcelona

Rio de JaneiroSao Paulo

MadridBeijing

London Berlin

CoMET metros

Nova metros

Sydney

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Chicago

Brussels

New Nova metros

New Suburban Rail Benchmarking Group: Phase 1 Members

CommittedParticipants

LondonRail

LIRR(New York)

Metro-North(New York)

NSB(Oslo)

CPTM(Sao Paulo)

Metro Trains (Melbourne)

DSB S-Tog(Copenhagen)

S-Bahn(Munich)

JR East(Tokyo)

BART(San Francisco)

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2. Sustainable metro funding through the farebox

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The evidence from 27 metros, over 15 years: in aggregate an extra 47% has been spent on reinvestment in the existing system.

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Total Metro Expenditure and Income from CoMET and Nova Metros (Using Available Data, 1994 - 2008)

Administration

Investment in Existing System

Service Operations

Fares

Maintenance

Non Fare Commercial

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0.4

0.6

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1.0

1.2

1.4

1.6

Expenditure Commercial Income

Tota

l Ope

ratin

g Ex

pend

iture

= 1

.0

Operating Expenditure

Capital Investment Expenditure in Existing

Network

Asian metro: “replacement to

maintain customer satisfaction costs 2 to 3

times more than assumed depreciation”

30%: Average reinvestment rate, counting each metro once regardless of size

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Total Metro Expenditure and Income from CoMET and Nova Metros (Using Available Data, 1994 - 2008)

Administration

Investment in Existing System

Service Operations

Fares

Maintenance

Non Fare Commercial

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0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Expenditure Commercial Income

Tota

l Ope

ratin

g Ex

pend

iture

= 1

.0

Operating Expenditure

Capital Investment Expenditure in Existing

Network

47% in aggregate, weighted

20% newer metros (post 1975)

35% older metros (pre 1975)

Big old metros like have had very high levels of reinvestment, resulting in the higher figure or 47%.

Conclusion:Opex +40% is a reasonable estimate of the

necessary long-term reinvestment rate, considering investment has been too low in

many cases

What is needed to secure economic sustainability for rail and metros?

Fares that grow in real terms with agreed formulae

Sensible network growth & design for low opex

Continuous growth in labour productivity & energy efficiency

Contracts + correct level of autonomy from government

A sophisticated & whole life approach to asset management

Sufficient income for a long-term re-investment rate of > 40% of opex (metros) that allows for enhancement as well as replacement

Communication with and understanding of these facts with Government Source: BSI

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More metros are „profitable‟ than are commonly reported

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As As AsAm As

Am Am Am Eu AsAm Eu Eu Am Eu Eu As Eu Am

Lisbon Eu As Eu

Fare Revenue

NA = American (North/South)

Eu = European

As = Asian

Revenue per Total Operating Cost (2009)

Average Metro Reinvestment Rate

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Additional Income from Non-Fare Commercial Revenue

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1.0

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2.0

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As As AsAm As

Am Am Am Eu AsAm Eu Eu Am Eu Eu As Eu Am

Lisbon Eu As Eu

Non-Fare CommercialRevenueFare Revenue

NA = American (North/South)

Eu = European

As = Asian

Revenue per Total Operating Cost (2009)

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+ Concessionary Fare Support: Governments sometimes compensate for lower fares for the elderly, children and poor

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As As AsAm As

Am Am Am Eu AsAm Eu Eu Am Eu Eu As Eu Am

Lisbon Eu As Eu

Concessionary FareSupportNon-Fare CommercialRevenueFare Revenue

NA = American (North/South)

Eu = European

As = Asian

Revenue per Total Operating Cost (2009)

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0.0

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1.0

1.5

2.0

2.5

As As AsAm As

Am Am Am Eu AsAm Eu Eu Am Eu Eu As Eu Am

Lisbon Eu As Eu

Contractual FeesConcessionary Fare Support

Non-Fare Commercial Revenue

Fare Revenue

Operating contracts in some European metros to remove subsidy uncertainty

NA = American (North/South)

Eu = European

As = Asian

Revenue per Total Operating Cost (2009)

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Grants and subsidies (or debt) to meet the funding gap in many European and North American metros

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As As AsAm As

Am Am Am Eu AsAm Eu Eu Am Eu Eu As Eu Am

Lisbon Eu As Eu

Non-Fare Commercial RevenueOther Grants & SubsidyContractual FeesConcessionary Fare SupportFare Revenue

NA = American (North/South)

Eu = European

As = Asian

Revenue per Total Operating Cost (2009)

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Urban bus operators generally require higher levels of public support

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<30% >30%<50% >50%<70% >70%

No

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in B

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Thresholds of performance (fare revenue / operating cost)

Bus Benchmarking Group: Distribution of Performance: Fare Revenue / Operating Cost

3. The importance of fares policy in funding

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Metro fares and funding policy: Common problems also experienced by bus and rail sectors

Fares charged are politically sensitive and directly affect the burden on taxpayers Government usually sets fares but inconsistently / often no long view

Fares are falling in real terms for 60%* of metros

Unit labour & energy costs are rising faster than inflation..

but labour productivity is falling for most metros (75%* Eu N. America)

Cost recovery from fare income falling for 70%* of metros, but subsidy is inherently unstable

Poor fares policy has had a corrosive effect on metro funding and long term sustainability

19* Of the 27 Metros in CoMET and Nova, over the last 5 years

Even adjusting for affordability, metro fares vary by a factor of 10. ML average fare is particularly low

Fare Revenue per Passenger Journey (2009) (2009 US$ PPP and as a % of Net City Wage per Hour)

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

Eu AsAm As

Am As As Eu Eu Am Eu AsAm As

Am Eu As Eu Am Eu Eu Am As

Lisbon Eu Eu Am

US$

PPP

0%

5%

10%

15%

20%

25%

% o

f Net

City

Wag

e pe

r Hou

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US$ PPP % of Net City Wage per Hour

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Fare Revenue per Passenger Kilometre (2009) (2009 US$ PPP and as a % of Net City Wage per Hour)

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

Eu AsAm Eu As Eu Am Eu Eu As Eu Am Am Am

Lisbon Am Eu Am As Eu As As Eu As Eu As

Am

US$

PPP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

% o

f Net

City

Wag

e pe

r Hou

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US$ PPP % of Net City Wage per Hour

ML metro fares per passenger kilometre are average, adjusting for affordability

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A decline in real fares in some cities has contributed to budget crises

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Average Real Fare Revenue per Passenger KilometreUsing an Inflation Index (1994 = 100)

HK Ln NY

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HK London NY

London – good practice until 1997, now contemplating significant increase in fares to catch up with costs

New York - service reductions

Average real fares (adjusted for inflation) in 3 citiesFare revenue per passenger km, index 1994=100

Recent Academic Research using all CoMET and Nova data: Graham, Crotte, Anderson, 2009

Conclusion: Quality of service improvements, rather than fare reductions, may be more effective in increasing metro patronage

This agrees with any strategy of increasing fares in line with wages to fund service frequency / capacity improvements on the existing network

Demand with respect to.. Elasticity

Income +0.18

Fares -0.33

Service Capacity (Frequency, train capacity)

0.51

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Basis of good practice price regulation employed in rail, water, gas, electricity, but rarely in urban transport

Balances the interests of government, taxpayers, consumers, the industry and shareholders

Prevents price increases which are unaffordable to the public

Incentivises efficiency and productivity

Recognises the need to invest in capacity and quality

Fairly reflects changing price of inputs (notably labour, energy)

Automatic annual adjustments with an appropriate review period (5 years)

Free from political intervention between review periods

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Good Practice Fare Formulae

Annual ∆ Fare Adjustment = ∆ [Cost Index] - P + K

Where:

[Cost Index] is mainly a function of unit price of wages and energy

P = Productivity Factor: Recognises the need/ability to progressively reduce inputs over time through technology or other means

K provides a mechanism to invest in enhancements and capacity

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No “+K” in Hong Kong but otherwise a good practice formula that allows the metro to be a good asset steward

Poor fare and funding regulation reduces quality

If prices / funding are unstable, without a contract, formula or annual adjustment:

Management can only manage the short term (many European metros)

Asset management impossible, reduces service quality (America)

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4 – Public Private Partnerships and other mechanisms

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Public Private Partnerships – Key Principles and Facts

Commercial revenues will not be sufficient to wholly pay for urban rail construction costs (with one exception – HK)

At best, commercial revenues pay for opex + renewals where fares and/or densities are high

Purpose of PPP: to secure private sector innovation / efficiency / to raise financing to allow implementation today

PPP is a financing mechanism, not free funding–the fare / tax payer ultimately pays, tomorrow and with interest!

The heart of PPP is a contract that is enforceable, clearly allocates and transfers risks, provides incentives to perform, and encourages long-term decision-making (often poorly achieved), allows for flexible labour

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Public Private Partnerships in Existing Metros - Experience

Private operators –success in delivering customer facing railways / continuous improvement particularly where there is upside revenue risk

PPP for long term asset maintenance and renewal in UK has been unsuccessful

Renewals and maintenance: railways have benefited from a mix of outsourced and in-house contracts as a useful internal benchmark

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PPPs – stories of both success and disaster – private sector will not automatically deliver higher performance at a reasonable cost

There are examples of public sector bus operators and metros delivering strong efficiency growth and high levels of labour productivity

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Hypothecated Taxation Sources

The gasoline tax in the Toronto, Montreal and New York is dedicated to the funding of transportation infrastructure

Toronto & New York: Property Tax supports operating and capital subsidies

A dedicated employment tax, such as the Versement Transport in Paris has been successful in securing long term revenue

London – success with congestion charging

5. Conclusions

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Conclusions

Public transport funding regimes and the fares policies that underpin it will dictate long term economic sustainability and quality

There are many examples of long term decline in quality of service due to falling real fares and insecure funding regimes

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Conclusions

Required funding for sustainable reinvestment in railways far exceeds assumed depreciation

Revenue from advertising, retail etc. is no substitute for poor fares policy

Fares need to rise above inflation for sustainable funding – adjustment formulae are good practice

Hypothecation – success in Paris, London, Canada

PPP is a financing not a funding mechanism and requires good enforceable contracts with risk transfer to be successful

Contracts, incentives , regulation determine whether the public or private sectors can deliver efficiency

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Thank you for your attention

Contact: [email protected]

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Extra Slides

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Methods for fare adjustments and regulation

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Fare Formulae Applied

Fare Formulae is Not Rigidly Applied

Independent Regulator to Set Efficient Price

Principle followed (inflation adjusted)

Farebox Recovery Target

Net Cost Adjustment

AsAm

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No Explicit Principles Am

Eu Eu

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Bet

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Less than 500 million passengers p.a. More than 500 million passengers p.a

CoMET Community of Metros

CoMET and Nova are metro benchmarking groups

CoMET and Nova Objectives

To share knowledge and identify best practices in a confidential environment

To build systems of measures for use by management and to establish metro best practice

To provide comparative information both for the metro board and the government

To prioritise areas for improvement

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International Bus Benchmarking Group: 13 urban bus operators share data and ideas within a confidentiality agreement

Montreal

Vancouver

New York

London

Dublin

Lisbon

Singapore

Sydney

Barcelona

Brussels

Paris

IBBG Member

Milan

Los Angeles

If PPPs - essential that government objectives are clear

Reduce unit costs? Improve service quality? Put pressure on productivity and terms & conditions of

existing workforce? Whole-life costing? Innovation? Promoting domestic supply industry? Avoid up-front public borrowing? Hide public expenditure? Fetter freedom of future politicians?