19 February 2009

Setting Public Transport Fares

The two public transport operators, or PTOs, have decided not only not to seek a fare increase later this year, but also to reduce fares, in order to lessen the burden on the commuting public in these difficult economic conditions.

However, I wonder if the extent to which the PTOs are prepared to reduce fares may likely be limited by how the fare formula works.

The maximum annual fare adjustment is based on the percentage change over the preceding year in both the Consumer Price Index and the Average Monthly Earnings (Annual National Average).

Foregoing or reducing the fares now can be painful for the PTOs in the future.

Firstly, when the PTOs next seek to increase fares, the fare formula does not take into account the fare increase foregone of up to 5 per cent and/or the fare reduction in 2009.  Any increase in 2010 will be a percentage of the fares prevailing in 2009 (after reductions now being considered).  There is no provision for the PTOs in the future to claw back, recover or compensate for any fare increase foregone and/or fare reduction in 2009.  In other words, the fare increase foregone and the fare reduction in 2009 will continue forever, unless the formula is changed.

Secondly, part of the proposed fare reduction comes from cost savings the PTOs will derive from Budget 2009.  However, some of these cost savings are temporary.  For instance, the road tax rebate is for one year only.  But the fare formula is not a cost plus formula, so when the road tax rebate is withdrawn, the PTOs cannot pass on the resulting higher cost to commuters, even though the rebate is the very economic reason behind the reduction in 2009.

Thirdly, the fare adjustment formula uses lagging factors.  When the PTOs next seek to increase fares (say, in 2010), the applicable Consumer Price Index and Average Monthly Earnings will likely reflect the dismal conditions in 2009.  Indeed, the maximum fare adjustment in 2010 may possibly even be negative, before extracting (i.e., deducting) the fixed productivity factor of 1.5 per cent.  PTOs, like other businesses, operate in business cycles but in a regulated market, what are the longer term financial implications for the PTOs when they skip a substantial fare increase this year, especially since it will be foregone forever?

Perhaps, the fare formula should be made more flexible so that the PTOs can respond more flexibly.

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