Cost issues in public transport operation
- TAS Partnership - technical advice
CfIT report: Cost issues in public transport operation
Acknowledgements:
We would like to thank all the members of CfIT's Cost Issues Working Group for many insightful comments regarding the evidence we presented to them over the course of this project. In addition, we would like to thank the numerous stakeholders who informed the evidence review carried out for this work.
Disclaimer:
Although the technical advice provided by the TAS Partnership Ltd was commissioned by the Commission for Integrated Transport (CfIT), the findings and recommendations within the TAS Reports are those of the authors and do not necessarily represent the views of CfIT. CfIT does not guarantee the accuracy, completeness, or usefulness of that information; and it cannot accept liability for any loss or damages of any kind resulting from reliance on the information or guidance those documents contain.
Summary
1. Introduction and policy background
2. Methodology
3. Results
4. Policy issues
a. Overall traffic levels, congestion and modal efficiency
b. Policy issues by sector
i. Buses
ii. Some changes in the relative advantage of bus, heavy rail, and light rail
iii. Rail to air
iv. Increases in costs which specifically derive from Government initiatives at local, national and European level
v. The special case of concessionary fare scheme
5. Conclusions and recommendations
Summary
- While acknowledging that trends do vary across modes, the general scenario offered within the analysis is of a public transport sector that is under pressure from increasing real costs running at 2% or more over the rate of inflation, and therefore getting more expensive in real terms to users.
- There are a number of policy interventions that can reduce the costs of operation - namely policies that cushion public transport operation from the worst effects of congestion, through priority systems (e.g. bus lanes), and allocation of road capacity that promotes efficient operation (e.g. road pricing). Their implementation seems more important than ever.
- On a more positive note, rail travel has increased by over 50 per cent over the last 26 years, following high levels of investment. The number of bus journeys has also shown an increase over the past 7 years. Some of this growth will be due to increased bus use in London and more recently the introduction of free concessionary travel for older and disabled passengers.
- Nevertheless, outside of London there are significant pockets of success. For instance, Stagecoach announced in December 2007 that its bus operations have grown year-on-year by 3.9%, citing fleet investment, innovative marketing, and improved partnership arrangements with local authorities as key factors in its success.
1. Introduction and policy background
In recent years, Government policy for the public transport industry has relied heavily on two objectives: the need for an expanding role, better quality services and affordable fares in order to help reduce the increase in car traffic levels; and the need for mostly private sector companies to do so with the minimum public expenditure consistent with value for money.
This reflects the importance of transport in the economy, and also its great (and increasing) contribution to carbon outputs, and other social costs such as congestion, accidents, and health.
In general, CfIT has taken the view that the prices people pay for transport services should correspond reasonably closely with the full costs of providing those services, except where there are strong reasons for departing from this principle. Consequently, much attention has been paid to the problems that arise when the prices of transport do not fully reflect important external costs like congestion or pollution.
Within the commercial sector however there are also important issues that arise from the financial costs of investment and operation. The success of companies in passenger and freight transport in holding down their costs has important direct and indirect effects on travellers and the economy as a whole. Thus bus services often respond to increasing costs by raising fares or cutting services, especially the unprofitable marginal services such as on Sundays or late at night, and this can in turn reduce the attractiveness of public transport and make policy objectives more difficult to achieve. In cases where there are reasons of policy to justify public expenditure for social or other objectives, these are undermined if cost escalation reduces the value for money of such support. On the freight side, cost increases have consequent effects on prices generally, and therefore on the economy as a whole.
It is against this background that CfIT commissioned work on cost trends within public transport operation to identify (i) what should be the DfT planning assumptions about unit costs, and (ii) what can be done about rising unit costs. The work also addressed similar trends in the freight transport sector, where the policy issues are somewhat different, but where trends in costs also do have consequences on the efficiency of transport as a whole.
2. Methodolgy
In July 2006, CfIT commissioned TAS to undertake an analysis of cost trends in the transport sector, the effects of those trends on various stakeholders in the transport industries, financiers and government, and the implications for policy. TAS provided six substantial reports and a detailed summary presentation (available from the CfIT website: www.cfit.gov.uk).
The work relates to costs within five industry sectors: Bus; Rail; Underground and Light Rail; Road Haulage; and Aviation. Some information is provided on private motoring costs for comparative purposes, but not as a main topic in its own right. Road construction and maintenance, and road traffic operations and control, are not included.
This work has three objectives:
- To understand the trends in cost inflation in the transport sector, and the reasons for them;
- To examine the impacts of these trends on behaviour of operators, financiers, local authorities, government; hence on transport policy objectives (congestion, pollution, accessibility, social inclusion); and
- To identify possible solutions (and their impacts).
The approach used has been to provide a breakdown of the main categories of cost for each of the modes - wages, employment-related overheads, fuel, maintenance costs, training, pensions, etc - with a description of how these have changed in recent years. TAS has then used its judgement to suggest what the future trends might be of each of these separate categories of costs, and then a spreadsheet approach has been used to say what the overall trend in costs will be. For example, a small increase in wages can have a bigger effect than a larger increase in fuel, because wages are a bigger proportion of total costs than fuel is. These assumptions have been discussed with panels of experts from each industry sector, and the forecasts adjusted to take experts' comments into account.
The strength of this approach is that alternative assumptions about the individual elements can be easily accommodated in making different forecast projections. The weakness is that the results are not 'forecasts' as such, but simply reflect the assumptions made.
These strengths and weaknesses are both evident in two key elements of the forward projections, namely the treatment of potential changes in productivity, and the treatment of 'risk' factors.
Concerning productivity, the approach used is to start from current levels of productivity, and only modify them where there are specific, known or anticipated initiatives expected to make a difference. This includes some allowance for potentially negative impacts from regulation (e.g. working hours, health and safety) or employment practice (e.g. training or holiday requirements). There are also sensitivity tests which explore the potential effects on productivity of operating conditions, especially speed (e.g. as affected by road traffic congestion), which has a substantial effect especially for buses as discussed below. However, there is no direct allowance for major factors which might change the structure of costs, such as (for example) changes in bus deregulation, patterns of industry and company ownership, or traffic priority, or the marketing strategies of cheap airlines, or security concerns, or changes in logistic patterns, or legal constraints on vehicle size, power or speed.
Concerning risk factors, there is obviously interest in the possibility that fuel prices might change in future substantially differently from the past, with most of the risk being 'upside' (i.e. the possibility that fuel will cost substantially more in the future). The study does not include this in the form of alternative worked-out scenarios, but does carry out sensitivity testing whose results simply demonstrate the importance being proportional to the size of fuel in the total cost burden.
Thus, the transport industries are treated as broadly being the same scale, operating conditions, technology and ownership structure as today, but facing costs that are incremental changes for the specific reasons under consideration. Radical cost reductions due (for example) to new technology are 'outside the box', as are radical changes in the conditions of the market due to (for example) carbon abatement policies.
TAS has consulted with a range of stakeholders across the various industries studied and with the Department for Transport. The cost composition has been checked against databases of published industry cost data. However, this has not been at a level to gain access to commercial data, or through joint working leading to a consensus. Therefore, it would not be true to say that there is widespread 'buy-in' to the results, and it is known that on some issues the analysis or inferences are contested. We accept there are limitations to the approach taken.
However, CfIT feels that there are some strong qualitative conclusions of the work, which raise important policy issues. It may well be that the trends identified might proceed at a different pace, and their direction may be modified by policy or commercial intervention, or technical change, or the pressures of globalisation. However, we feel that it is right to discuss the issues that will be on the agenda even without such major shifts. They raise some difficulties for the success of the Government's transport objectives.
3. Results
Overview
If we take the analyses at face value, the overall picture given by TAS is one where the transport industries all face cost increases at rates greater than inflation, and therefore become more expensive in real terms over the planning horizon of 25 years. The details vary from mode to mode, as discussed below, but the headline figure is about 50%.
Breakdown of cost components
There are some differences in the relative importance of different cost components in the different modes of transport. Thus fuel, for example, represents 9% of total costs for buses, but over 20% for road freight and air transport. But overall, transport is a rather labour intensive industry, either directly (as in the case of buses where labour costs are over two thirds of the total), or indirectly (as in the case of rail, where staff costs are only a quarter of the total, but there are substantial labour costs involved upstream in the provision of rolling stock and infrastructure). Air transport labour costs are less, especially for the cheap airlines.
Main cost components by mode
However, when it comes to projected cost increases, labour costs are a recurrent theme, with average wages expected to rise faster than inflation over the long term. This means that wages increase faster than prices (or the real wage rate increases), and with a rather stable proportion of wages in the total cost bill, transport becomes more expensive. This may only be at a rate that is broadly similar to the increasing wealth of society as a whole, but the result is that value for money appears to be reducing.
For the specific modes, the picture given is as follows:
Bus: substantial upward pressure on costs, resulting in lower profit margins. Wage costs are under pressure from shorter working hours. Pension costs are getting more expensive. Traffic congestion is getting worse, which in turn increases total operating costs. Implementation of the EU Driver Training Directive will add costs. Costs per kilometre run, in real terms, is likely to increase by 30% to 100% over the next 25 years.
Rail: main pressures are from track renewal and maintenance, also wages, fuel, overheads notably management and track access, insurance, and accident claims. Further increases expected in cost of Employers' Liability insurance. Cost to Rail Operating Companies per kilometre run, in real terms is likely to increase in the order of 50% over next 25 years. These cost pressures may be off-set by rising patronage and revenue trends.
Underground and light rail: varied picture, influenced by same factors as bus and rail. No forecasts made but most components expected to increase at 1.5% to 3.5% per year, say an average of about 2.5% a year.
Road haulage: cost increases due mainly to wages, fuel, and insurance (and traffic congestion). No forecasts were possible given data limitations but components of cost expected to change by -1% a year (depreciation) to +4% a year (fuel) in real terms, again suggesting about 2.5% a year.
Aviation: cost increases mainly due to fuel and security. No forecasts made but 'ordinary' cost components increase as above, or a little less, say 2% a year. The work does not yet reflect recent discussions on possibly major costs in operations due to security.
Private motoring: for comparative purposes the analysis noted that the overall cost of private car use has been declining over a long period. Fuel costs account for the highest proportion of costs and increase further for owners of second-hand vehicles. While insurance and maintenance costs have risen, purchase costs of new vehicles have fallen significantly in real terms since 1996 so that the overall cost of motoring has remained fairly constant.
Sample breakdown of annual motoring costs (2005)
Trends in aspects of motoring costs
Overall results for the transport sector as a whole
Although specific details vary, the scenario offered by the TAS analysis is of a transport sector of the economy that is under pressure of increasing real costs running at 2% or more over the rate of inflation, and therefore getting more expensive in real terms to users. Some sub-sectors might see cost increases as much as 100% over the next 25 years, and the average might be 50%. There is no suggestion of widespread and easy methods of increasing efficiency that would offset this.
Projected real-term train operator costs
Projected real-term bus operator costs
At the same time, there is a pervasive concern (though no detailed analysis) that if trends in motoring costs continue as they have been in recent decades, public transport would be operating in progressively worse competitive conditions. It is suggested that there is increasing pressure on profit margins (which could then cause instability or collapse of some companies).
4. Policy issues
a. Overall traffic levels, congestion and modal efficiency
The big issue relates to surface transport as a whole, with the suggestion that bus, rail and freight transport will all be subject to increasing costs, while private car use - on historic trends - may continue to get cheaper or at least not increase in cost. This would cause major difficulties of implementing government objectives of encouraging a shift from car use to more sustainable modes, and of reducing congestion. This would in turn also put extra pressure on freight movement, with added costs in economic inefficiency.
Without repeating well-established arguments, this means that the government's plans for the timing and scale of implementation of road pricing will become critically important. These effects are network-wide, not confined to city centres or the most congested sections of motorway, and therefore present a challenge that will not wait for small-scale slow implementation of initiatives in 10 or 15 years time. In other words, unless this issue is tackled, the cost trends will cause pressures to move away from the Government's desired trajectory in mode use, not towards it.
TAS also raises the possibilities of some sectors, or companies, faced with cost increases at a level that would put their commercial viability under threat without large increases in fares/rates and/or cuts in output. While the profitability of specific companies has not traditionally been part of the CfIT brief, it is nevertheless clear that the uncertainties and delays caused by major financial strain to commercial companies could put the smooth implementation of any policy in doubt. Commercial operation of public transport requires an economic context where adequate profit margins are maintained in order to sustain investment. This will mean either fares increases significantly greater than inflation (putting objectives of demand expansion in doubt) or greater public support (which Government has not recently tended to favour).
b. Policy issues in specific sectors
(i) Buses: The TAS approach suggests that buses may be the most seriously affected by the problem described above; labour costs are a high proportion of the total, the role of technical change may be more limited in reducing costs (and may actually increase them), they are more directly affected by increasing congestion, and there is no large scale infrastructure programme which can offer long term respite. Therefore, Government will need to confront the issue that it may take more public funds to deliver the specific policy advantages. On the other hand, the cost of bus operation, more than any other mode, can be assisted by good local traffic policies such as bus lanes, other bus priority, reserved track, favourable signal settings, access to areas from which other traffic is excluded, etc. CfIT has generally supported such policies, albeit for other reasons than the cost of bus operation: it now seems doubly important to accelerate the implementation of effective bus priority measures. (This will equally be the case if road pricing is formally rejected, or just delayed).
Therefore, it may be timely to raise the profile of short-term practical policy measures favouring bus operations especially in towns, as the major instrument available to public policy of countering increases in bus operating costs. (In practice of course the case would need to be made not only on cost grounds, but in terms of the overall balance of costs and benefits, which are, in this case, often very robust).
(ii) Some changes in the relative advantage of bus, heavy rail, and light rail: The case here is less clear-cut, but it may be that the changing cost relativities give some added relative advantages to certain types of light rail operation. We draw attention here to the observation that new tram systems in the UK appear to be more expensive than in some other countries, as has been found in other studies. The new work does not give us solutions to that problem, but it remains one of the reasons why construction of new tram systems in the UK has proceeded more slowly than other European countries.
(iii) Rail to air: At face value, there could be some shift in attractiveness from rail to air, if commercial costs change as projected while environmental costs continue to be undercharged. This would run counter to environmental objectives. There is no credible policy case for increasing air use at the expense of rail for short/medium distance journeys. However, the major developments in costs of air travel related to security which has developed recently is not reflected in the work done so far, and these may change the picture considerably.
(iv) Increases in cost that specifically derive from Government initiatives at local, national, and European level: These are subject to policy considerations and therefore more clearly relevant to CfIT, though it would not be the role of CfIT to oppose otherwise worthwhile changes in operations solely on the argument that it increased transport costs, such as changes related to employment legislation, pensions provision, education and training, health and safety, and regulation. However, there has recently been greater awareness of costs associated with tendering, contract administration, and financing costs associated with different funding and partnership arrangements, especially related to risk transfer. This area is complex and sometimes highly controversial. We suggest a general principle that cost increases due to specific objectives such as health and safety, security, training, and working conditions will stand or fall on the merits of the improvement, but there is no strong case for increasing costs solely due to forms of contract or ownership, and therefore these cases are particular causes for concern.
(v) The special case of concessionary fare schemes: Reimbursement arrangements for lost revenue and cost increases associated with concessionary fare schemes are now a major area of public funding and bus economics. After a rather stable position for some decades, there are now major and recurrent disputes requiring resolution at Ministerial level, with a technical and evidence base that does not handle cost effects well. We consider it is important to achieve a consensus based on independent advice in this area, which is not currently provided with a meeting ground or forum trusted by all sides in the arguments.
5. Conclusions and recommendations
The most important conclusion of the work is that Government and Local Authorities will have to accept the inevitability of some pressures to increase costs in public transport, especially those arising from core labour costs and from desirable improvements in safety, working conditions and (if this is decided) contractual and franchise arrangements themselves. Therefore, if current trends continue there will be an appearance of less value for money - it will be necessary to spend more to get the same result in terms of service improvements or special services.
In addition, the likelihood is that there will be further divergence in real terms of public transport fares and private motoring costs. This will drive travel choices in the opposite direction to that desired by Government. Road user charging and motoring taxes are key policy instruments that can help mitigate this undesired outcome.
There is at least one very important area where public policy intervention can actually reduce costs of operation, namely policies that cushion public transport operation from the worst effects of congestion, by priority systems, and allocation of road capacity which promotes efficient operation. DfT and local authorities need to work much more closely and intensively with operators to implement such policies than has often been the case: and operators need to ensure that the improvements in efficiency are reflected then in service quality and tender prices.
There is probably room for improvement in the forms of incentive produced by various systems of public support, especially when considering blanket policies such as public service obligation that could be enhanced by basing incentives on a per passenger basis.
Finally, while we do understand sensitivities about commercial information, we do feel that the quality of public discussion on these issues would be greatly improved by easier access to cost information, especially at a generic level, with trusted analysts, for purposes like this study.
