Commuters face higher fares

This is going to be a laugh! For those of you not from Sydney (or NSW), news that rail fares will increase is not going to be taken well. At all.

Sydney commuters are facing rail fare rises, following an application by RailCorp to the NSW pricing body for increases of up to $3 for a weekly ticket.

In its submission to the Independent Pricing and Regulatory Tribunal (IPART), RailCorp is seeking an increase of between 20 cents and $1 for a single ticket and between $2 and $3 for a weekly ticket.

There are 2 things going on here. One,

NSW Transport Minister John Watkins said RailCorp had a reasonable case for a fare rise with record investments including new and upgraded infrastructure and new trains to extend the network, increase capacity and improve passenger comfort.

“Currently, CityRail customers only pay a quarter of CityRail’s $2.1 billion annual operating costs,” Mr Watkins said.

Our rail system is privatised – kind of. CityRail is a part of RailCorp. CityRail is the metropolitan part of the state’s rail network.

cityrail map

Beautiful, isn’t it?

A relatively recent ministerial report was not all that laudatory:

According to an inquiry report, “The interaction of metropolitan, suburban, intercity and freight lines and services has resulted in an overly complex system.” This complexity has contributed in part to the organisation being widely criticised for poor reliability and safety. CityRail is also enormously expensive. RailCorp requires a government subsidy of close to $1.8 billion a year—approximately 5% of the state budget and more than three times what it collects in fares.

“There is an overwhelming sense,” the report concluded, “that CityRail does not promote a real commitment to quality, customer focus and a service culture.”

Those are the 2 key points: (i) our state government subsidises the private system like mad, (ii) commuters, travellers and newspaper readers will never be convinced that CityRail is more than a jobs-for-the-boys clusterfuck of privatisation and government corruption. So the argument that a lot has been spent on infrastructure (which actually has just meant trackwork and mass inconvenience since I was an undegraduate (1997-2000), so we don’t have a great perspective on the matter), and needs to be compensated won’t work. Why? It’s a bloody train network. It’s expensive to own and operate, which is why the government had it in the first place. We don’t appreciate privatisation for exactly this reason (more on that in a later post, possibly).

The second argument is ‘fairness’ and equity. Mr Watkins:

“The vast majority of CityRail’s operating expenses are funded by all taxpayers, who don’t necessarily access the service.

“With the rest of the community paying around 70 per cent of costs, and that share is increasing, there’s a strong case for commuters to pay a slightly higher percentage of the services they rely on.”

Not to be Socratic about it (because look at what they did to him), but is the Transport Minister suggesting a user-pays approach to Fire, Ambulance, etc. services? We find it hard to believe the government who gave us the execrable cross-city tunnel is going to start lecturing us on who should pay for a transit service.

Moreover Sydney is, geographical, enormous, and highly suburbanised. If the Transport Minister wants everyone to hit the Motorways in disgust at the train service, he’s going the right way about it (those are privately-run, also). And that really will be a nightmare.

The economics of this are reasonably straight-forward. The costs, fixed and variable, of owning and operating a train network this extensive are very high (which RailCorp knew going in, and which the state government knew going in, which is why the idea that consumers and residents are the ones making the mistake now is so insulting).

Again, from my current undergraduate economics textbook:

Regulation of a natural monopoly

The Natural Monopoly: high costs of production, with market power. In an unregulated market the firm would charge the price PM, supplying only QM, which would maximise profit. The Allocatively Efficient price (the amount of quantity and price optimal for society as a whole) would be PE with the greater quantity QE. In this case a lower ticket price, and more people taking the train, but less profit for RailCorp. So much less that they lose money (the intersection of Marginal Cost MC and Average Revenue – the demand curve – is below Average Total Cost, meaning RailCorp loses money. This is what I mean by very large fixed/infrastructure costs).

The Productively Efficieny price and quantity, meanwhile, is the intersection of Marginal Cost and Averate Total Cost – technical efficiency, or minimum cost production, exists outside the demand curve. In the case of CityRail I think the optima are farther out, but the principle still applies. The regulated price and quantity PR, QR give the producer a little bit of profit – keeping them in the market – while getting quantity as high as it can, benefitting consumers (or in this case, commuters)

Today’s announced price increases with take PR a little higher, and QR are a little to the left (or a lot – it depends on the slope of the dark blue line for rail travellers in Sydney). The argument we’re given is that the dark orange ATC curve has moved up, because of all the investment paid in by RailCorp. Economically this makes sense. The missing piece of the puzzle is that the market for CityRail doesn’t actually look like this. PR is still loss-making to the tune of nearly AUD2bn per year. Essentially for CityRail the ATC curve is higher than the AR/demand curve at nearly every point. Meaning they will never make a profit, because to do so would mean charging higher prices than any of us will pay, and we won’t ever take the train.

Which is exactly why the Transport Minister is wrong. Taxpayers will always subsidise train travel by CityRail customers. Moreover, the marginal impact of that subsidisation per state taxpayer is insignificant, far less than the marginal impact of lumping the price hike on commuters, who are much smaller in number.

Which is also exactly why train networks like this don’t work when privatised. If the Average Revenue lies below the Average Cost, there isn’t a profit to be made – unless you can bid low and take the state government itself for the ride. Which is pretty much what is happening. People will and do say private equals more efficient. With different operators of different networks, profit-making at every level of improvement in infrastructure, and the need for independent regulation and oversight? I disagree. And I reckon every one taking a CityRail train today will agree with me.

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