You make a compelling case, and I agree that subsidizing the rider and expecting the transit agency to break even is a far better model of transit provision.
That said, I don’t think this would be viable in isolation.
First, as long as the bus is stuck on the same roads as other traffic, it cannot be faster than driving.
Second, as long as driving is intensely subsidized and full of sunk cost, driving will be/feel much cheaper for the middle class.
This leaves is where we are today, transit is not valuable to people with cars EXCEPT to get to places that are expensive to drive (which usually means either expensive to park or infeasible to park). So the only real purpose of transit is to provide some degree of mobility for people who can’t afford or can’t operate cars. That’s just not a big or rich enough market for a successful business to operate in.
If we dropped the gas tax and instead raised car tax (more fair in an era of electric cars) and adopted congestion pricing or a VMT based system, *then* I think your proposal could really work. But heavily subsidizing drivers is very popular, and efforts to make them pay what it costs to maintain the roads have largely failed politically, so I’m not very optimistic we can change this any time soon.
EDIT: I expanded these thoughts a bit to a note and re-stacked this -- I wish substack hadn't got rid of the button to both comment and re-stack at the same time! -- hope that gets more people to read your idea :)
I quibble with "transit is not valuable to people with cars EXCEPT to get to places that are expensive to drive (which usually means either expensive to park or infeasible to park)".
If we count cost in terms not only of money, but also travel time and aggravation, transit can still win. I used to work at a downtown office a couple blocks from the main train station; I could have paid for a parking stall below the building and driven in, and that would have been slightly cost-competitive to the costs of parking at the commuter-rail station and buying a return ticket. In practice, I never did this: the aggravation and difficulty of driving in peak-hour traffic kept me firmly on the train.
In an automated-driving future, we can expect congestion to get much worse, so trips will take longer, even as some of that aggravation of driving fades. Still, on net, I think rapid transit will remain competitive. Conventional feeder buses, on the other hand., will have a tough time.
More about this in the next two entries in the series!
That's fair! I agree that it's really more like "places that are a headache to drive to" which could be because of any mix of travel time (in the situations where there's an express transit option that doesn't sit in traffic), cost, or just headache. Looking forward to your future posts!
The argument for bringing the revenue/cost ratio up to 1.0 (plus a certain level of profit?) is fair, but transit (public and private) suffers from uncontrollable circumstances that make it extraordinarily difficult to "compete" for ridership with the alternatives. There are two ways to level the playing field (while holding other variables such as land use, density, socioeconomic conditions, geography, etc. constant): pricing ALL urban transportation similarly (in effect, road pricing or congestion pricing); and/or spending capital ($illions, with an M or a B) on dedicated transit infrastructure to make it time-competitive in particular corridors (subways, LRT lines, busways).
There is no operating cost recovery scenario in the world where transit service generates enough money to be able to build its own separate infrastructure, so governments will continue to have a role in building transit infrastructure (especially since the perceived political risk of blowback on road pricing is so high as to paralyze elected officials on that front). So creating a "transit infrastructure investment agency" that is separate from "transit service operating company" would be a necessary part of your strategy.
Hong Kong was often cited as a "profitable" transit agency, but that was a function of top-of-the-world population density, severely constrained road alternatives, and the transit company's function as a developer to both build apartments (demand) on their property/stations and to cross-subsidize operations from real estate profits. That particular scenario does not translate to very many other places in the world.
Nevertheless, the discussion might benefit from a comment on how "attracting maximum ridership" works in other parts of the world. In parts of Africa or Asia, for example, what is the mode split where there is essentially no public transit and a completely profit-driven free market reigns for urban transportation? And what is the operating revenue/cost ratio and subsidy situation in places like Europe and Japan where there is exemplary public transit and relatively high ridership?
The piece was already too long, so I left the question of capital expansion out; but you are right, those costs are too large to be paid for by an operator on a cost-recovery basis. Even if we granted operators the power to debt-finance expansion by borrowing on capital markets, it wouldn't be feasible, and would expose operators to too much risk. (Which is why we don't grant them that power.) I will say more about this in the next issue in this series.
I further agree that the answers to the questions you post at the end of your comment would be useful. Ferreting out those answers will not be a simple or quick piece of work; I will add it to the already-long agenda of future work I'd like to undertake.
I do like the idea of a cost recovery model for all modes of mobility and transportation. I do think we have the ability to not only do congestion pricing but also charge per km driven with respect to roads. To try to do cost recovery on one mode of transport without the others is futile. However, I would also point out that we need to have carbon pricing in these models. That's a cost imposed by all modes of transport, but some more than others. So an electric vehicle still pays road pricing, but not the same carbon price that an ICE vehicle pays. Bikes too need to pay a road charge equivalent to their impact.
So the question really becomes how do we create political buy in ti the concept of user pay?
I appreciated the entire series. Thanks for publishing it!
I appreciate this deep thinking on transit finance, but I think there is a flaw in the logic here. Transit agencies are not regulated monopolies, and never will be, because in most cases they are not actually monopolies.
The good that consumers are buying is mobility, not public transit. And for many people, there are alternatives to public transit -- driving, walking, cycling, ride share, ...
Plus, the increase in fares required to achieve cost recovery, even just on operations, is prohibitive. In Ottawa, we are currently considering a transit budget where fares pay $2 of every $8.50 in operating expenses. For full cost recovery, a one-way bus ticket would have to go from $3.85 to over $16.
A regulated industry need not be a monopoly; airlines and airfare are regulated, despite the fact that there are other ways to travel between cities.
If the farebox recovery ratio in Ottawa is that bad—23%, by your figures—then moving to cost-recovery would indeed require more than raising fares; operating expenses would also need to be cut significantly for the service to remain viable. But this is my point; if the service really costs this much to deliver now, relative to what users are willing to pay, then the current service offering isn't really viable at all.
It’s even worse. The Ottawa transit authority reports that the average fare paid is only $2.15. Interesting point about reducing costs. No idea how that would happen without slashing and burning routes.
I guess the issue I am having with your argument is the concept of "subsidy" in the context of a public service. Municipal and provincial services range along a spectrum of finance from 100% user pay (e.g. water supply, garbage collection) to 100% community pay (e.g. fire protection, police, schools, parks, libraries). In between, there are those that have a shared financial model, with some portion paid by the user and another portion by the community as a whole. In this case, the argument has to be made that there is a benefit to the community that goes beyond that of the users themselves. Public transit is obviously in this category, although the % user vs. community varies widely, as you point out. Other obvious municipal services with a shared financial model are non-toll roads, parking on public property, some recreational and community services , etc.
The suggestion you make is that public transit should be considered 100% user pay. I would agree with that if the transit system would receive the equivalent of a full adult fare for each trip - i.e. the difference between the actual fare paid by the user and the full adult fare should be covered from a non-transit budget. In many cases, that might come close to covering 100% of operating costs and there would still be a "subsidy," but the transit system would be better able to manage its costs and revenues.
I admire how clearly and efficiently you describe the situation in the first paragraph of your comment, Michael!
I'm slightly less clear on the thrust of your argument. If I were to rephrase, I'd put it as "because communities (i.e., non-riders) benefit from the provision of transit service, they should pay for its provision to an appropriate degree. Granting this, having a separate budget into which the communities pays, presumably from taxes, and from which the agency may draw a fixed amount per boarding, would be more equitable".
If this is what you mean, then I agree!
I'd flag that such an arrangement requires a taxing authority to commit to an open-ended liability. In my experience working at such places, they HATE that, which means the commitment might be unstable.
But if it could be credibly made, I'd support it: it keeps agency motives firmly aligned with the right things while making it slightly easier to attract riders.
One of my thoughts is that if transit systems had full control of their budgets and did not have to suffer reduced income due to fare concessions or free rides for people who were deemed eligible by political decisions (i.e. if they received payments in lieu from the municipal or provincial budgets), they would come much closer to covering their costs. I'm not sure this would require a separate budget, but simply a transfer to the transit system equivalent to the foregone fare revenue for every passenger carried that does not pay a full adult fare.
Can we resolve the asymmetry with roads by subsidizing tickets (that is, the transit company gets x$ per rider/rider mile?) it still gets some political issues/permacrisis, but it'd be an improvement over the status quo without completely abandoning transit to unfair competition with an implicitly subsidized competitor.
(Alternatively, the japanese model of enabling cheap infrastructure loans and letting transit companies capture some of the upside from real estate near stations can be good, but it goes back to giving messier incentives).
There's a lot to this idea: a permanent or long-term subsidy of $X per rider-mile would help align incentives, and would also help prioritze system expansion. But one needs to go further: the subsidy would apply not only to the transit operator, but for every passenger-movement company: Uber, Lyft, taxi companies, bikeshare.
But it should be *paired with* a VKT and/or congestion charge for dense areas, so that each actor has roughly the same incentives.
A semi related question for you BTW - one thought I've had is that self-driving rideshare can enable transit to focus on maximizing ridership by being good at closing coverage gaps for low-traffic areas. Does this seem plausible?
Not only does it seem plausible, but valuable. I'll have a fair bit to say about this soon... keep an eye out for the last entry in this series, coming in two weeks!
One historical event highlighted in the latest version, which covers through 2023, is the impact of the Covid-19 impact on ridership, and the response of the Trump and Biden Administrations to provide massive operational support dollars, that were spent in different ways by the agencies, meaning the "fiscal cliff" is now worse for some agencies than for others. This report also makes clear that transit in America is dominated by the systems operating in New York Metro area and seven other big cities.
Here is the summary statement on farebox recovery of operating expenses:
"The farebox recovery ratio is the percentage of a trip’s operating costs recovered through passenger fares. This ratio varies by mode. In 2023, for each dollar spent on operating costs per trip across all modes and all transit systems, 17.2 cents are recovered through fares. This is a 46 percent decrease from the 2019 fare recovery ratio of 32.1 cents per dollar spent on operating expenses. However, as the transit industry is recovering from the COVID-19 public health emergency, the farebox recovery ratio has increased by 35 percent from 2021 (12.7 cents per dollar). "
You posted CUTA's chart showing 39% U.S. transit farebox recovery in 2019. So FTA is reporting for the U.S. transit industry that the 2019 number was 32.1%, perhaps including more small agencies than CUTA included. But recovery dropped down to 12.7% in 2021 and "recovering" to 17.2% in 2023. There's that fiscal cliff... not enough ridership recovery. In fact the fiscal cliff is showing all through the report I'm suggesting you look at for a deeper understanding of the "Endless Emergency" in U.S. transit.
You make a compelling case, and I agree that subsidizing the rider and expecting the transit agency to break even is a far better model of transit provision.
That said, I don’t think this would be viable in isolation.
First, as long as the bus is stuck on the same roads as other traffic, it cannot be faster than driving.
Second, as long as driving is intensely subsidized and full of sunk cost, driving will be/feel much cheaper for the middle class.
This leaves is where we are today, transit is not valuable to people with cars EXCEPT to get to places that are expensive to drive (which usually means either expensive to park or infeasible to park). So the only real purpose of transit is to provide some degree of mobility for people who can’t afford or can’t operate cars. That’s just not a big or rich enough market for a successful business to operate in.
If we dropped the gas tax and instead raised car tax (more fair in an era of electric cars) and adopted congestion pricing or a VMT based system, *then* I think your proposal could really work. But heavily subsidizing drivers is very popular, and efforts to make them pay what it costs to maintain the roads have largely failed politically, so I’m not very optimistic we can change this any time soon.
EDIT: I expanded these thoughts a bit to a note and re-stacked this -- I wish substack hadn't got rid of the button to both comment and re-stack at the same time! -- hope that gets more people to read your idea :)
https://substack.com/@burlesona/note/c-77900684
I quibble with "transit is not valuable to people with cars EXCEPT to get to places that are expensive to drive (which usually means either expensive to park or infeasible to park)".
If we count cost in terms not only of money, but also travel time and aggravation, transit can still win. I used to work at a downtown office a couple blocks from the main train station; I could have paid for a parking stall below the building and driven in, and that would have been slightly cost-competitive to the costs of parking at the commuter-rail station and buying a return ticket. In practice, I never did this: the aggravation and difficulty of driving in peak-hour traffic kept me firmly on the train.
In an automated-driving future, we can expect congestion to get much worse, so trips will take longer, even as some of that aggravation of driving fades. Still, on net, I think rapid transit will remain competitive. Conventional feeder buses, on the other hand., will have a tough time.
More about this in the next two entries in the series!
That's fair! I agree that it's really more like "places that are a headache to drive to" which could be because of any mix of travel time (in the situations where there's an express transit option that doesn't sit in traffic), cost, or just headache. Looking forward to your future posts!
The argument for bringing the revenue/cost ratio up to 1.0 (plus a certain level of profit?) is fair, but transit (public and private) suffers from uncontrollable circumstances that make it extraordinarily difficult to "compete" for ridership with the alternatives. There are two ways to level the playing field (while holding other variables such as land use, density, socioeconomic conditions, geography, etc. constant): pricing ALL urban transportation similarly (in effect, road pricing or congestion pricing); and/or spending capital ($illions, with an M or a B) on dedicated transit infrastructure to make it time-competitive in particular corridors (subways, LRT lines, busways).
There is no operating cost recovery scenario in the world where transit service generates enough money to be able to build its own separate infrastructure, so governments will continue to have a role in building transit infrastructure (especially since the perceived political risk of blowback on road pricing is so high as to paralyze elected officials on that front). So creating a "transit infrastructure investment agency" that is separate from "transit service operating company" would be a necessary part of your strategy.
Hong Kong was often cited as a "profitable" transit agency, but that was a function of top-of-the-world population density, severely constrained road alternatives, and the transit company's function as a developer to both build apartments (demand) on their property/stations and to cross-subsidize operations from real estate profits. That particular scenario does not translate to very many other places in the world.
Nevertheless, the discussion might benefit from a comment on how "attracting maximum ridership" works in other parts of the world. In parts of Africa or Asia, for example, what is the mode split where there is essentially no public transit and a completely profit-driven free market reigns for urban transportation? And what is the operating revenue/cost ratio and subsidy situation in places like Europe and Japan where there is exemplary public transit and relatively high ridership?
The piece was already too long, so I left the question of capital expansion out; but you are right, those costs are too large to be paid for by an operator on a cost-recovery basis. Even if we granted operators the power to debt-finance expansion by borrowing on capital markets, it wouldn't be feasible, and would expose operators to too much risk. (Which is why we don't grant them that power.) I will say more about this in the next issue in this series.
I further agree that the answers to the questions you post at the end of your comment would be useful. Ferreting out those answers will not be a simple or quick piece of work; I will add it to the already-long agenda of future work I'd like to undertake.
I do like the idea of a cost recovery model for all modes of mobility and transportation. I do think we have the ability to not only do congestion pricing but also charge per km driven with respect to roads. To try to do cost recovery on one mode of transport without the others is futile. However, I would also point out that we need to have carbon pricing in these models. That's a cost imposed by all modes of transport, but some more than others. So an electric vehicle still pays road pricing, but not the same carbon price that an ICE vehicle pays. Bikes too need to pay a road charge equivalent to their impact.
So the question really becomes how do we create political buy in ti the concept of user pay?
I appreciated the entire series. Thanks for publishing it!
You're welcome!
Regarding user-pay, I have some ideas which I'll be discussing in the New Year. Watch this space!
I appreciate this deep thinking on transit finance, but I think there is a flaw in the logic here. Transit agencies are not regulated monopolies, and never will be, because in most cases they are not actually monopolies.
The good that consumers are buying is mobility, not public transit. And for many people, there are alternatives to public transit -- driving, walking, cycling, ride share, ...
Plus, the increase in fares required to achieve cost recovery, even just on operations, is prohibitive. In Ottawa, we are currently considering a transit budget where fares pay $2 of every $8.50 in operating expenses. For full cost recovery, a one-way bus ticket would have to go from $3.85 to over $16.
A regulated industry need not be a monopoly; airlines and airfare are regulated, despite the fact that there are other ways to travel between cities.
If the farebox recovery ratio in Ottawa is that bad—23%, by your figures—then moving to cost-recovery would indeed require more than raising fares; operating expenses would also need to be cut significantly for the service to remain viable. But this is my point; if the service really costs this much to deliver now, relative to what users are willing to pay, then the current service offering isn't really viable at all.
It’s even worse. The Ottawa transit authority reports that the average fare paid is only $2.15. Interesting point about reducing costs. No idea how that would happen without slashing and burning routes.
I guess the issue I am having with your argument is the concept of "subsidy" in the context of a public service. Municipal and provincial services range along a spectrum of finance from 100% user pay (e.g. water supply, garbage collection) to 100% community pay (e.g. fire protection, police, schools, parks, libraries). In between, there are those that have a shared financial model, with some portion paid by the user and another portion by the community as a whole. In this case, the argument has to be made that there is a benefit to the community that goes beyond that of the users themselves. Public transit is obviously in this category, although the % user vs. community varies widely, as you point out. Other obvious municipal services with a shared financial model are non-toll roads, parking on public property, some recreational and community services , etc.
The suggestion you make is that public transit should be considered 100% user pay. I would agree with that if the transit system would receive the equivalent of a full adult fare for each trip - i.e. the difference between the actual fare paid by the user and the full adult fare should be covered from a non-transit budget. In many cases, that might come close to covering 100% of operating costs and there would still be a "subsidy," but the transit system would be better able to manage its costs and revenues.
I admire how clearly and efficiently you describe the situation in the first paragraph of your comment, Michael!
I'm slightly less clear on the thrust of your argument. If I were to rephrase, I'd put it as "because communities (i.e., non-riders) benefit from the provision of transit service, they should pay for its provision to an appropriate degree. Granting this, having a separate budget into which the communities pays, presumably from taxes, and from which the agency may draw a fixed amount per boarding, would be more equitable".
If this is what you mean, then I agree!
I'd flag that such an arrangement requires a taxing authority to commit to an open-ended liability. In my experience working at such places, they HATE that, which means the commitment might be unstable.
But if it could be credibly made, I'd support it: it keeps agency motives firmly aligned with the right things while making it slightly easier to attract riders.
One of my thoughts is that if transit systems had full control of their budgets and did not have to suffer reduced income due to fare concessions or free rides for people who were deemed eligible by political decisions (i.e. if they received payments in lieu from the municipal or provincial budgets), they would come much closer to covering their costs. I'm not sure this would require a separate budget, but simply a transfer to the transit system equivalent to the foregone fare revenue for every passenger carried that does not pay a full adult fare.
I agree; this approach aligns well with my argument to subsidize the riders (or the routes), not the agency directly
Can we resolve the asymmetry with roads by subsidizing tickets (that is, the transit company gets x$ per rider/rider mile?) it still gets some political issues/permacrisis, but it'd be an improvement over the status quo without completely abandoning transit to unfair competition with an implicitly subsidized competitor.
(Alternatively, the japanese model of enabling cheap infrastructure loans and letting transit companies capture some of the upside from real estate near stations can be good, but it goes back to giving messier incentives).
There's a lot to this idea: a permanent or long-term subsidy of $X per rider-mile would help align incentives, and would also help prioritze system expansion. But one needs to go further: the subsidy would apply not only to the transit operator, but for every passenger-movement company: Uber, Lyft, taxi companies, bikeshare.
But it should be *paired with* a VKT and/or congestion charge for dense areas, so that each actor has roughly the same incentives.
A semi related question for you BTW - one thought I've had is that self-driving rideshare can enable transit to focus on maximizing ridership by being good at closing coverage gaps for low-traffic areas. Does this seem plausible?
Not only does it seem plausible, but valuable. I'll have a fair bit to say about this soon... keep an eye out for the last entry in this series, coming in two weeks!
Andrew, I suggest that your thinking on public transit in USA would be deepened with some perusal of the U.S. DOT Federal Transit Administration's annual summary of the data required to be turned in by all PT agencies for the National Transit Database, NTD. The most recent summary is at https://www.transit.dot.gov/sites/fta.dot.gov/files/2024-10/2023%20National%20Transit%20Summaries%20and%20Trends_1.0.pdf
One historical event highlighted in the latest version, which covers through 2023, is the impact of the Covid-19 impact on ridership, and the response of the Trump and Biden Administrations to provide massive operational support dollars, that were spent in different ways by the agencies, meaning the "fiscal cliff" is now worse for some agencies than for others. This report also makes clear that transit in America is dominated by the systems operating in New York Metro area and seven other big cities.
Here is the summary statement on farebox recovery of operating expenses:
"The farebox recovery ratio is the percentage of a trip’s operating costs recovered through passenger fares. This ratio varies by mode. In 2023, for each dollar spent on operating costs per trip across all modes and all transit systems, 17.2 cents are recovered through fares. This is a 46 percent decrease from the 2019 fare recovery ratio of 32.1 cents per dollar spent on operating expenses. However, as the transit industry is recovering from the COVID-19 public health emergency, the farebox recovery ratio has increased by 35 percent from 2021 (12.7 cents per dollar). "
You posted CUTA's chart showing 39% U.S. transit farebox recovery in 2019. So FTA is reporting for the U.S. transit industry that the 2019 number was 32.1%, perhaps including more small agencies than CUTA included. But recovery dropped down to 12.7% in 2021 and "recovering" to 17.2% in 2023. There's that fiscal cliff... not enough ridership recovery. In fact the fiscal cliff is showing all through the report I'm suggesting you look at for a deeper understanding of the "Endless Emergency" in U.S. transit.