Until the 1960s, most public transport systems were self-supporting. This is not surprising given that few people then had cars and public transport had a huge captive market as a result.

Nowadays, due to enormous investment in roads and neglect of alternatives, it is the road system that has a huge captive market, while public transport struggles to break even. Worldwide, the only self-supporting public transport systems are in cities with very high densities and low car ownership, such as Hong Kong and Singapore. Some operators in other cities claim to be self-supporting, but usually all that has happened is that the subsidy has been relabelled as a ‘community service obligation payment’ or a ‘concession fare recoupment’ to make it look like something other than a subsidy.

For a government to subsidise public transport is, in principle, no different to subsidising hospitals, or funding public or private schools. Like health care or education, transport is a ‘public good’: meaning that if it is rationed purely by price so that only rich people can make full use of it, we are worse off as a society. Medicare is no less successful because it is financed from the public purse; likewise, renowned public transport systems such as those of Zurich or Paris are no less successful because they receive public subsidies.

(At the same time, it is unlikely that making public transport completely free of charge is as socially advantageous as requiring a modest user contribution. We explain this on another page.)

Where public transport competes with a publicly-funded road system, the only alternative to subsidies is to cut costs either through fare rises or service cuts. Either of these makes public transport less competitive with cars, and sets up a vicious spiral of declining patronage, the outcome of which is a residual public transport system that ‘real’ people do not use, and a road system beset by intractable congestion. This is the state that many US cities find themselves in today.

In economies with a heavy dependence on private road transport, there is usually a hidden subsidy to motorists equal to or exceeding that to public transport users. As explained at length on another page, Australia’s road deficit is at least $24 billion a year; this represents an effective subsidy to motorists from general taxpayers. Divided among the 15 million-odd motorists in Australia, the subsidy is $1600 per motorist (and this is a bare minimum estimate). By comparison, dividing the $1.5 billion annual subsidy to Melbourne’s trains, trams and buses (payments to operators reported in the budget, less Myki fare revenue received) by the estimated 1 million people (excluding tourists) who use Melbourne’s public transport in any one year gives a subsidy of $1500 per public transport user in Melbourne.

But as we explain on our running costs page, the ample surplus capacity in our public transport system means that many additional passengers can be carried (especially outside peak hour) without substantially adding to costs. While each additional motorist imposes demands on the road system requiring an additional $1600 of spending, the subsidy per passenger on public transport reduces with higher patronage. Shifting car trips to public transport trips thus has a net benefit to society, because the reduction in the cost of providing the road system is greater than the increase in public transport costs. And of course public transport also has large non-monetary benefits in keeping our city liveable.

It has been noted (by John Legge in The Age, 26 December 2006) that if the entire operating cost of Melbourne’s trams is divided among the households living within 400 metres of a tram route, the cost comes to less than one-third the cost of a one-zone yearly ticket. Since the tram system has historically carried more people than it does today, it is hardly stretching credibility to expect it can do so again for around the same (very generous) sum of money we pay Yarra Trams now. It then only requires an average of one tram user per dwelling, paying half the current fare, for the tram system to generate a surplus (which can then be used to cross-subsidise trains and buses in areas where these do not break even). And since many of these hypothetical tram users now drive cars, there would also be a payoff in a reduced road deficit. Government action to increase public transport patronage really does make economic sense.

As with public transport operations more generally, the costs of subsidies can also be controlled through good planning. In most European and North American cities, subsidies for public transport were introduced in a planned fashion, as deliberate policy measures designed to achieve a targeted level of patronage at a reasonable cost. However, in many British and Australian cities, including Melbourne, there was no planned introduction of subsidies; instead deficits were simply allowed to appear in operators’ budgets as cost-cutting measures failed to improve the bottom line. The introduction of planned subsidies has generally proved more cost-effective: Melbourne’s unplanned deficit accounted for 57% of operating costs by the late 1980s, while in Toronto, Canada, the planned subsidy covered just 32% of costs.

On the whole, the way subsidies are applied is more important than whether there are subsidies or not. Simply throwing more money at transport operators to provide the same low-quality service, as the Victorian government did in the first decade after privatisation, will not rescue a poorly managed system, because on the whole it is convenience rather than cost that determines whether people use public transport. To be effective, subsidies have to be applied carefully within a competently planned and managed system that provides superior convenience. This helps explain why Toronto’s system – with strong central planning and a high quality of service – recovers as much as 80% of its costs from fares, while Melbourne’s system – despite its superior infrastructure – still fails to attract more than 10 per cent of trips and requires high subsidies as a result.

Last modified: 5 January 2019