Apply cost benefit analysis for the provision of public transport both for decision on investments and operation.
Cost Benefit Analysis (CBA) seeks to guide decision-makers to policies which lead to an economically efficient social use of capital. There may also be legal requirements for CBA in capital expenditure schemes. CBA expresses both sides of a benefit-cost ratio in financial terms. This therefore requires the “monetisation” of the quantified effects. For basic techniques see ► Background information:Cost benefit analysis.
Private car use generates negative externalities in the form of environmental degradation (including air and noise pollution), accidents and congestion. By increasing the number of people that use public transport relative to private cars we effectively reduce these costs. Hence some of the external benefits of public transport arise from a reduction in the external costs of private car use, see ► Background information: External, private and social costs. In brief, the external benefits of public transport include (but are not restricted to) reductions in:
Compared to private transport options, public transport generally provides more environmentally and socially sustainable solutions and contributes not only to pure economic benefits but also to social benefits for the community. Besides the effects generally considered in financial appraisals of public transport schemes, public transport can be argued to contribute to:
Increased competitiveness and growth
Enhanced personal security (actual and perceived)
Increased physical activity, e.g. walks to the bus stop and consequently improved health
Increased quality of life and social inclusion
Increased accessibility to work and essential services (such as education, food and healthcare)
However, providing an accurate measure of the social benefits is not always straightforward. Instead, in order to display the total benefits of a public transport scheme, the social benefits (not only to users but to the wider society) could be presented by a verbal presentation. The benefits of public transports also provide arguments for public financial support, see ► Background information: Public financial support of public transport.
The foundation of cost benefit analysis is welfare economics which says that all effects should be considered in order to decide whether a project is socially economic efficient or not, i.e. whether the benefit outweighs the costs. For a Public Transport Authority it is essential to carry out cost benefit analyses since profit-maximising public transport systems may lead to an economically inefficient social use of capital. One example is increased frequency; a profit maximising firm will only increase frequency if the increased revenue exceeds the costs. A welfare maximising system will also include the benefit for the existing passengers, i.e. reduced travel time, in the calculations as well as the external costs of car use and the benefit of transfer from cars to public transport. For further information see ► Background information: Economic efficiency / profit maximising.
It is unclear to what extent authorities and operators conduct cost-benefit analyses. 59% of the cities analysed by PROCEED indicated that cost-benefit analyses are conducted – usually as part of plans for investment in infrastructure. However, it is questionable, if these results refer to “true” cost benefit analysis including e.g. travel time savings for existing passengers and external costs.
The main weaknesses of using cost benefit analysis are the assumptions required to value attributes like noise and accidents, the difficulty of appraising impacts on future generations, and the fact that the final value appears to determine the decision, rather than encouraging discussion. It is also possible that important effects are left out due to difficulties in giving them a monetary value. ► Background information:Public financial support of public transport
Decisions and actions leading towards social economic efficiency often find resistance from contractors fearful of revenues being reduced. The contract must therefore clearly stipulate the principles and conditions for the contractor.
All comparisons dealing with public financing levels and cost coverageare subject to uncertainty because of differences in how the public financing level for public transport is calculated. This means that some cities refer to subsidies while others provide subsidies but do not call them subsidies.
UK: Full CBA is carried out in the UK for major publicly-funded public transport investments, such as: FTR - bus rapid transit scheme in Swansea or Fastway - bus rapid transit scheme in Crawley / Gatwick. The CBA is carried out in accordance to standard government evaluation procedures. This suite of procedures is known as TAG (Transport Analysis Guidance).
Sweden: In order to apply for partial public funding of public transport investments PTAs have to carry out cost benefit analyses. The evaluation method is developed by SIKA (Swedish Institute for Transport and Communications Analysis) SIKA decides on method of calculation and the values to be used for various effects such as reduced travel time, reduced number of accidents etc. The calculation method and values applied are revised every forth year.
Litman, Todd (2009) Evaluating Public Transit Benefits and Costs. Best Practices Guidebook. Version 12 April 2009. Self-published by Victoria Transport Policy Institute. Download: http://www.vtpi.org/tranben.pdf
Teknologirådet (2006) Perspektiver ved indførelse af gratis offentlig transport – vurderinger og anbefalinger fra en arbejdsgruppe under Teknologirådet. (= Prospects on the introduction of free public transport - assessments and recommendations of a working group of the Danish board of Technology.) Teknologirådets rapporter 2006/16. København (Denmark): Teknologirådet, 2006. Download: http://www.tekno.dk/offentligtransport (in Danish, English abstract available)
Urban transport, like any other activity, generates an array of costs and benefits, both private and social. The difference between the purely private costs of an activity – those borne exclusively by the person undertaking it – and the wider costs becomes important when those generating the costs (and enjoying the benefits) are not faced with the full costs of their actions, i.e. there are external costs. The full social cost of any activity will be the sum of both the private and the external costs involved. With passenger transport the presumption in most large urban centres is that the social (internal plus external) costs exceed the social (largely private) benefits of car use.
In carrying out a cost benefit analysis money is used as the comparator. Changes in amounts of travel, travel time, and external costs such as accidents and the environment are assigned monetary values, based on observations of the choices which people make.
One may also consider wider economic benefits and health effects etc. Some of these effects may be difficult to put a monetary value on, but since they do imply a benefit they ought to be regarded as well.
When assessing the benefits of Public Transport both existing consumers and new ones have to be considered. For instance, if increasing the frequency of buses, this will increase the quality for all passengers.
In the analysis, costs and benefits are each calculated, relative to ‘doing nothing’, for each future year. The net benefit is then discounted to the present day and summed over all years in the appraisal period to give, as a single indicator of performance, a net present value of the benefits. The appraisal period will normally be longer than the plan period, to allow for longer-term impacts. A scheme with a positive net benefit is worth implementing; the option with the highest net benefit is the best.
Besides decisions on investments, cost benefit analysis should also be used for decisions on operation, e.g. the level of service supplied.
There is a contrast between the economic and market-efficient solution, which considers the user benefit of increased frequency, and the production-efficient solution, which does not.
Market efficiency, however, disregards the external costs of car use and does not give weight to costly transfer of peak hour trips from cars to public transport, which the economic-efficient solution does.
Basedon welfare economics grounds there are arguments for public financial support of local public transport. One reason to support public transport is that road traffic gives rise to external costs such as traffic congestion, death and injury, noise, and environmental problems. If travellers can be transferred from cars to public transport, these negative effects are reduced. Thus, public financial support of local public transport may generate more benefits (for all users) than the cost of the support, and provide value for money. The use of public financing also contributes to social benefits for the community, such as the social inclusion of groups that have no direct access to a car (e.g. youth, low income groups, disabled) and contribute to equality between women and men in the transport system.
The level of public financing and fare box revenues depends on the density of the population and the market share of public transport. It is however difficult to say whether a high level of public financing is a condition for or leads to HQPT in small and medium-sized cities. There are successful cities with a fairly low level of public financing (and a corresponding rather high cost coverage from fares). This indicates, and similar to politics overall that there is no such a thing as a general optimal level of public funding of local public transport.
There are examples of cities with HQPT that have a very high level of public financing (e.g. some examples in Belgium of upwards of 80%, or as much as 100%). There are also cities where no public financing is paid to the operator at all, e.g. some in Greece and in the UK. In the cities analysed by PROCEED, the average cost coverage is 52% (cost coverage = share of fare box revenue in relation to the total incomes from fares plus public financing). This level coincides in many cases with the prevailing level in many European countries for local and regional public transport. It also coincides in many cases with the socio-economically optimal level according to cost benefit calculations (Ljungberg 2007).
Few cities in Europe apply public transport for free (‘zero tariff’): one example is Hasselt (Belgium). Another example is Kristinehamn (Sweden), although this reintroduced fares after a period. The general finding is that there can be a large increase in the number of trips – for instance in Kristinehamn trip numbers doubled). Generally, the increase in trips consists of new trips and of passengers that would otherwise have walked or biked; only about 20% are previous car users. It has been shown that a free fares policy might be an interesting option especially for smaller cities. Transaction costs are substantially reduced (no need for ticketing machines etc.). For larger cities free fares lead to higher fixed and variable costs, since additional vehicles are needed. A comprehensive study has been conducted on the consequences of free public transport in Denmark (Teknologirådet 2006).