Public transport policy for central-city travel in the light of recent experiences of congestion charging

Research in Transportation Economics 22 (2008) 179–187

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Public transport policy for central-city travel in the light of recent experiences of congestion charging Jan Owen Jansson ¨ping University, Linko ¨ping, Sweden Linko

a b s t r a c t Keywords: Public transport Zero-fare policy Central city travel Congestion charging Charge collection costs

Excellent public transport which makes the private car a minority mode of central-city travel is a necessary condition for a political process towards the introduction of congestion charges. However, the charging system costs in London and Stockholm have proved to be unexpectedly high. Therefore, before these costs come down to an affordable level, zero-fares for central-city travel and stricter parking policy would be a first-best combination in many cities, always provided that the public transport is really competitive. A bold venture in public transport development is consequently the top priority irrespective of the transport pricing policy direction. Ó 2008 Elsevier Ltd. All rights reserved.

1. Background, problem and purpose The considerable success of recently introduced congestion charging in London and Stockholm – some 30 years after the pioneering achievement in Singapore – is heartening news for transport economists who for decades have advocated this solution to one of the worst problem of modern times. However, at closer scrutiny the success is not undivided. Two main new lessons have been learnt. The good news is that where public transport is dominating, like in the central cities of London and Stockholm, a majority of the people find a system of congestion charges acceptable when they can see that it works, and when the revenue is used for improving the public transport. The bad news is that in the absence of an in-vehicle unit as an integral part of the charging system, foolproof urban road pricing seems to be much more expensive to run than expected. This raises a new challenge. In blackboard demonstrations of the efficiency gains obtainable by ‘‘optimal’’ road pricing, the charge collection costs are typically underplayed. This will not do any more. Besides increased efforts to develop the technology and administration of congestion charging systems, there are also good reasons for taking a new look at the traditional ‘‘second-best’’ remedies for urban traffic congestion and environmental degradation. These include pricing of the main complement to road use by private car, that is parking, subsidization of the main substitute, that is public transport, as well as various traffic and parking regulations, which economists seldom favour, but which are widely applied in practice. The effectiveness of these indirect methods is imperfect, but they are often inexpensive in terms of real resource use. In this paper central-city-

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bound public transport expansion and subsidization to make a zero-fare policy possible will be discussed on the basis of the new experiences of congestion charging in London and Stockholm. The paper starts by taking a closer look at these two ‘‘success stories’’.

2. Salient features of the congestion charging in London and Stockholm The two cases are quite similar in some respects, but there are also differences. Starting with the similarities, the built-up area in the congestion charging zone was almost the same. Before the extension in 2007 the London charging zone was 21 km2, and as seen in Fig. 1a and b which are drawn on the same scale, the Stockholm charging zone minus water and the extensive eastern parkland, where there is very little car traffic, is of a similar size. The total traffic within the charging zone before the charging started was 1.6 million motor-vehicle-kilometers per day in London, and about 2 million motor-vehicle-kilometers per day in Stockholm. Traffic conditions in central London used to be notoriously bad, and it is said that the average speed of trips by road across London before the introduction of the car in the beginning of last century was higher than hundred years later. By 2002, the allday average travel speed in central London was just 14.3 km/h, compared to an uncongested (night-time, or ‘‘free flow’’) average speed of 32 km/h (Leape, 2006, page 157). Casual observers of the traffic in Stockholm used to agree that it was less congested than in London. There seems to be much more cars around in central London. It is then a little paradoxical that in an area (and road network) of similar size, 2 million vehicle-kilometers could be produced by the central-city network of Stockholm and only 1.6 million vehicle-kilometers by the

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Fig. 1. (a) The London charging zones; the darker area east of Hyde Park was the original zone, which was extended to the whole marked area in February 2007; (b) the Stockholm charging zone where Essingeleden to the left is free of charge for through traffic (Va¨gverket, 2006).

central-city network of London (before the congestion charge). The explanation is, of course that, it is the product of speed and number of cars which produces the traffic volume (vehicle-kilometers), and as the density of cars increases beyond a critical level, still more cars produce very little or nothing but congestion. Much fewer cars in off-peak than in peak in Stockholm produce a relatively large number of car-kilometers, so the main difference between the

traffic in central London and central Stockholm is that while the level of congestion in London is remarkably constant throughout the day, the Stockholm congestion problem is concentrated to 3–4 rush-hours. During the rush-hours the congestion was just as bad in central Stockholm as in central London, and for travel by car into or out of the central city, the traffic conditions were even worse. On the

J.O. Jansson / Research in Transportation Economics 22 (2008) 179–187

arterials into the central city of Stockholm during the morning peak (7:30–9:00) the average travel time was 180% higher than under free flow conditions, and the variation between sub-periods (quarters of an hour) within the peak period was very considerable. The travel time of the best decile of the observed quarters was about 100% longer than the free flow travel time, and the travel time of the worst decile was 280% longer (Algers, 2007). It is therefore logical that the London congestion charge is a flat rate per day, whereas the Stockholm congestion charging is a pronounced peak-load pricing system. On February 17, 2003 London imposed a £5 daily charge for driving or parking a vehicle on public roads within the congestion charging zone between 7:00 and 18:30, Monday to Friday, excluding public holidays. The total revenue counted on an annual basis was about £185 million including penalty payments in 2004– 2005 (Leape, 2006, page 169). The daily charge was increased to £8 in July 2005. The Stockholm trial started in January 2006 and ended in August the same year. The peak-load pricing for passing (both ways) one of eighteen control points set up in a ring around the central city (see Fig. 1b) involved the structure of charges shown in Table 1. This structure of the charges was retained when the congestion charging was reintroduced in August 2007. Every passage of a control point by a particular vehicle from 6:30to 18:30 is registered, and a daily total charge is calculated and debited to the registered owner’s account, which should be cleared within a fortnight. The average debiting (daily charge on a particular vehicle) was found to be just 26 SEK (£2) during the trial, yielding a total revenue of 720 million SEK (£55 million) on an annual basis. On a particular day in May during the trial, 371 300 passages took place, resulting in 115 100 debitings. Of these only 100 were investigated by the Swedish tax authority, and five were appealed. The customer service of the agency of the Swedish Road Administration responsible for the trial received 2200 calls, which was less than a tenth of what the call-center was dimensioned for (Algers, 2007). The system seemed to work very well from the customer’s point of view, well beyond expectations. This was probably an important contributory reason why the voters of the City of Stockholm in a subsequent referendum, two months after the trial was over, with a narrow majority gave their consent to reintroducing the charges on a permanent basis. Before, the trial opinion polls had shown that a majority was against the idea of congestion charging.

2.1. Effects on traffic and travel times In London the overall effect on the volume of traffic in the congestion charging zone (excluding motorcycles and bicycles) was a 15% reduction. This average hides an appreciable substitution effect, which is clear from Table 2. The private car traffic volume decreased by more than one third, while vehicles exempted from

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Table 2 Traffic before and after the congestion charge in the charging zone of London, thousand vehicle-kilometers per day Type of vehicle

Before 2002

After 2003

Percentage change

Cars Vans Trucks Taxis Buses Motorcycles Bicycles All vehicles

771 287 73 256 54 129 69 1640

507 273 68 312 65 137 89 1451

34% 5% 7% 22% 21% 6% 28% 12%

Source: Leape, 2006.

the congestion charge – taxis, buses, motorcycles and bicycles – increased by one fifth. The effects on traffic of the congestion charges tried out in Stockholm in 2006 is best described by the traffic development month by month during the 7-months trial periods. In Fig. 2 the upper curve applies to 2005, the year before the trial, and the lower curve shows the development path of the number of vehicles crossing the cordon of the charging zone per day from January 2006, when the charging started, through July, when it ended, as well as in the following two months. The dip of the curve in July (the last month of the trial) is explained by the fact that July is a month of vacations in Sweden. As is seen, after some months the traffic across the cordon stabilized at a level 22% below the level of the previous year. After the trial period the level of traffic seems to rise again, back to the 2005 level, but when the congestion charging was introduced anew in the autumn of 2007, a whole year later, it has been observed that the reduction in traffic compared to the previous autumn, when the charging was off, is so far about 18%. It is too early to tell why the full 22% reduction has not been obtained, but the general trend in population and car ownership growth, and a new rule for deductions of professional expenses including congestion charges are likely contributory causes. During the trial the reduction of traffic within the zone – total vehicle-kilometers – was just 13%, that is, less than two thirds of the reduction of the traffic flow across the cordon. This is natural enough. When congestion charges were applied, cars which are not required during the workday have tended to be left at home to a higher degree than cars used also during the workday. The whole point of the congestion charging systems of London and Stockholm alike is to reduce the travel time for motorists, so the focus of the empirical studies before and after were on the changes in travel time in different periods of the day in different sections of the road network (not just within the charging zone). This is certainly a considerably more difficult task than recording traffic

Table 1 Congestion charging in central Stockholm Time of the workday

Charge per passage, SEK

6:30–7:00 7:00–7:30 7:30–8:30 8:30–9:00 9:00–15:30 15:30–16:00 16:00–17:30 17:30–18:00 18:00–18:30

10 15 20 15 10 15 20 15 10

£1 ¼13 SEK.

Fig. 2. The number of vehicles per weekday crossing the cordon of the congestion charging zone in Stockholm in daytime. Source: Stockholm Stad (2006).

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changes. It would have been unsatisfactory just to make model calculations of travel time changes based on traffic counts. In view of the importance of travel time savings in cost-benefit analysis of the congestion charges, speed and travel time changes should also be actually measured. One could not measure speed changes on every single road inside, let alone outside the charging zone – some model calculations will have to do – but on the main roads, where most of the traffic is, actual measurements were deemed necessary. Bearing in mind that the traffic intensity changes more or less continuously, and that there is an important random element in the speed-flow relationship, it is difficult to summarize the result of the measurements. Table 3 gives a condensed summary of the main effects of the congestion charging on speed and travel time in the two cases. It is not possible to give perfectly comparable results for London and Stockholm. The measurement strategies were somewhat different, because congestion is an all-day problem in London, and mainly a peak period problem in Stockholm. As regards speed increases within the charging zone, the figures for Stockholm may seem large relative to the London figure, but it should be remembered that the latter is an average of both peak and off-peak periods. Similarly, a speed increase of 27% on the radial arterials in Stockholm may seem large, but for most commuters travel on the congested sections of the main arterials is just part of the complete journey to/from work in the central city. It probably reflects a total time saving per trip not greater than the 14% reduction in total trip times recorded for car commuters in London in the rush-hours. Nevertheless, it may seem somewhat puzzling that the Stockholm trial has produced about the same positive effect on traffic speed as in London for only 40% of the London congestion charge, bearing in mind also that before the congestion charging the degree of congestion was higher in London, which should mean that a given reduction in the traffic volume would have a greater effect on speed. The main explanation, I think, is the previously mentioned substitution effect: in the charging zone in London the private car traffic volume decreased by 34%, which is more than twice as much as in Stockholm. This is consistent with more than a double charge in London, and when it comes to judging the effect of the reduction of traffic on speed, it should be remembered that total vehicle traffic decreased by just 12% in London, because the number of taxis, buses, motorcycles, and bicycles increased quite substantially. In terms of passenger-car-equivalent units, the traffic volume decrease was just 11%. The latter figure is the most relevant one for predicting the effect on speed, so the observed 17% increase in all-day speed in the charging zone in London seems after all reasonable enough. 2.2. Effects on public transport In terms of trips or person-kilometers the most important mode of transport for serving central London is public transport by road

Table 3 Changes in speed and trip time following the congestion charge Network section

London All days

Speed increase within charging zone 17%  Whole network  Major roads  Streets Speed increase on arterials 9% to/from charging zone Travel time decrease for complete journeys to/from the charging zone and an outside origin/destination Sources: Leape (2006), Algers (2007).

Stockholm Peak hours

Peak hours

25% 10% 27% 14%

and rail. A large majority of more than one million travellers to central London go by public transport, predominantly by rail. Over half the evicted car travellers have transferred to public transport, following the introduction of congestion charging. However, the expected increase in rail trips did not materialize. The number of underground trips even fell due to some exceptional factors like the prolonged closure of the Central Line and the war in Iraq. It was thus the minority mode for feeding central London – the buses – which took care of most of the previous car travellers. The input of new buses was a main supplementary measure to the congestion charge. As seen in Table 2 above, bus-kilometers in the congestion charging zone have increased by 21%, and the number of bus passengers has increased by no less than 38% reflecting the fact that the actual increase in demand surpassed the predicted increase. Also in Stockholm additional public transport capacity was part of the overall strategy for relieving the traffic congestion: 16 new, mainly direct bus lines were set up, and 197 additional buses were put in. The total capacity of park-and-ride facilities was increased by 25%. According to surveys before and after the trial, half the evicted car travellers made trips to school or work. Practically all of these trips, roughly 50 000 per workday became public transport trips (Algers, 2007). 2.3. Cost-benefit analysis of congestion charging in London and Stockholm Both the London congestion charge and the Stockholm full-scale trial are thoroughly evaluated in different ways including costbenefit analysis (CBA). In Table 4 the CBA in Leape (2006) for London is summarized just as it stands. In the Stockholm case all transfer payments are excluded from the CBA for convenience and comparability with the London case, and, as seen, three alternatives are given, which will be discussed below. After the Stockholm trial in 2006 the consultancy firm Transek was commissioned to carry out a CBA, addressing in the first place the question of the net benefits of a continuation of the congestion

Table 4 Cost-benefit analysis of congestion charging and supplementary public transport addition, £ millions Costs

London Stockholm Transek (2006)

23 Charging system investment costs per year (interest and amortization) Charging system operation costs 90 per year Charge-payers compliance costs 30 Total costs 143 Benefits 185 Travel time savings and reliability benefits of private road transport Disbenefits of deterred drivers 25 Net benefits of public transport riders Reduced accidents CO2 emissions Other savings Total benefits

a

SIKA (2006)

b

JOJc

4

20

20

17

21

21

0 21

7 48

7 48

46

38

38

1

5

5

22

9

4

9

15 3 10 210

10 5 2 71

10 1 2 42

10 1 2 55

Sources: Leape (2006), Transek (2006), SIKA (2006). a This CBA is addressing the question of continuation of the congestion charging. b The figures of this CBA represent the most pessimistic alternative conceivable of a continuation, which as regards the charging system costs coincides with the alternative of starting from scratch. c These figures are fully comparable to the London figures; the costs of introducing congestion charging is the concern, and the net benefits of public transport are treated alike.

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charging. Transek had been closely involved also in the planning and monitoring of the trial, so they could deliver their report rather quickly. Like in the case of London, Remy Prudhomme has produced a CBA for the congestion charging, this time in cooperation with Pierre Kopp. Their study was Partly financed by SIKA, a governmental agency responsible for coordinating CBA use and development in the road and rail investment planning in Sweden. A main problem of the study by Prudhomme and Kopp (2006) is that their estimation of the most important item on the benefit-side, the time savings of the remaining car trips, was based on a model calculation, and their estimate as regards these time savings was only a fifth of that in Transek (2006) based on actual measurements of travel times before and after introducing congestion charging. The very negative result of the study by Prudhomme and Kopp caused some debate last year, which had the good effect of inducing more thorough scrutiny of Transek (2006) by among others SIKA. In their review of Transek (2006) it is argued that the uncertainty is great in some important respects, and moreover, that some negative effects (for the result) are overlooked. Making up for the omissions, and taking the most cautious, but not entirely unreasonable, position as regards the more important uncertain benefit and cost items, it is concluded in SIKA (2006) that the large positive net benefit in the original CBA in Transek (2006) at a much more conservative estimate could be changed to a small negative net benefit. As seen in Table 4 there is a dramatic difference between the results in the two Swedish reports, which should not pass unnoticed. Some comments on the wide differences are from top to bottom as follows:  It should be borne in mind that the CBA of the Stockholm trial was in the first place made to examine whether or not the congestion charging tried out is worthwhile resuming permanently. Therefore, Transek (2006) considers that the total expenditure of 1.9 billion SEK (£146 millions) on the preparations for the trial before the charging started to a large extent represents non-recurrent development costs, which are irrelevant for the future net benefit of the scheme. SIKA (2006) on the other hand, means that in a changing world with technical progress there will be considerable costs corresponding to the initial investment costs also in the future, partly continuous development costs, partly reinvestment costs occurring, say, every tenth year, and not only the wear and tear of the present equipment, which is included among the operation costs in Transek (2006). This means that with the hardened view on the investment costs in SIKA (2006), there is no difference between the annual costs of continuation of the congestion charging system, and the total annual costs of the system as seen before its introduction. Therefore the annuity of £20 millions given in SIKA (2006) is passably comparable to the annual investment cost figure presented in Leape (2006) for London.  Charge-payers compliance cost is represented by quite a substantial item in the CBA for London, which seems realistic. In the CBA for Stockholm no such item was included in Transek (2006). That omission is criticized in SIKA (2006), where a tentative addition of 90 millions SEK (£7 millions) per year is suggested.  When it comes to the benefits of the remaining motorists, the difference between Transek (2006) and SIKA (2006) of 105 millions SEK (£8 millions) is due to the remark in the latter report, that the observed reduction of car travel might to some extent – a fifth is mentioned – be explained by other factors than the congestion charge.  One part of the benefits of public transport riders is time saving for existing bus passengers, and another part is the net effects of the additional public transport. The question is how the costs

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of additional public transport should be dealt with in the CBA? In my view these costs should not appear at all in the expression for the net benefits of those who shift from car to public transport. If the costs of additional public transport were included the car cost savings of travellers not using their cars any more for travel to/from the central city should also be counted in. The latter cost savings are a benefit of a comparable size. It is consequently the net transport vehicle costs of the modal shifters which are relevant together with the difference in travellers’ time costs. This issue is a bit complicated because the ruling public transport pricing policy makes an important difference. The correct CBA rule for dealing with the effects of the modal shift is that, if the additional revenue from previous motorists would exactly cover the public transport incremental cost, no public transport cost item should enter the CBA. The disbenefit triangle obtained by the ‘‘rule of half’’ in the car travel market would represent the complete net of the total costs and benefits of the modal shifters. In case the additional revenue from public transport fares falls short of the incremental cost, the deficit should appear on the cost-side, and in case the additional revenue exceeds the incremental cost, an additional benefit corresponding to the surplus should appear on the benefit-side. The public transport incremental cost should in this connection be represented by the social incremental cost, which means that if the increased capacity consists of additional buses and trains, the waiting cost savings of existing public transport users due to higher frequency of service should be deducted from the additional cost of the public transport operator. Alternatively, if the capacity increase is brought about by using bigger buses and longer trains no such deduction should be made, but the marginal cost of the producer of public transport services is clearly much lower than the average cost in this case. Therefore the net effect of additional public transport given by SIKA (2006), – £5 millions, seems mistaken. Although the degree of tax-financing is relatively high, the level of public transport fares in Stockholm exceeds the price-relevant marginal cost, so in this instance Transek (2006) seems right. All in all, I think that the total annual costs of introducing the congestion charging system in Stockholm given in SIKA (2006) as £48 millions are the best estimates available, both the sunk set-up costs, and the system operation costs. One could have expected that the latter costs would be somewhat lower after the initial runningin period, but according to an early report from the administration responsible for the Stockholm congestion charging, no such tendency can be discerned. There is no new benefit estimation available based on the traffic conditions in the autumn of 2007, after the congestion charging in Stockholm was made permanent, so the benefits estimated on the basis of the effects of the trial will do. The slightly lesser traffic reduction observed in the autumn of 2007 speaks for a general overestimation of the benefit-side both in Transek (2006) and SIKA (2006). As regards the net benefits of public transport riders, however, the figure given in the latter report seems to be an underestimation by no less than £13 millions, which is the difference on this item between Transek (2006) and SIKA (2006). In my view the total benefits, calculated on the basis of the effects observed during the trial, thus come to £55 millions per year, which is given in the last (JOJ) column of Table 4. Instead of a negative net total benefit coming out of the pessimistic CBA in SIKA (2006), a positive value of £7 millions for the congestion charging in Stockholm seems more right, implying a benefit/costratio of 1.19. As is seen in the first column of Table 4 the total net benefits for London during the first period of thirty months can be summarized as amounting to £67 million per year. The benefit/cost-ratio is 1.47 for London.

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3. The problem of high charge collection costs The benefit/cost-ratio may seem fair enough as the return on an investment in both cases, but the sore point is clearly the excessive charge collection costs. The total costs of the charging systems are 84% of the total benefits in Stockholm. This equals the inverted value of the benefit/cost-ratio as the whole cost-side of the CBA summaries presented in Table 4 above consists of real costs of the charging system itself. The charge collection cost in London in proportion to the total benefits was about two thirds before the charge was raised and the charging area extended. As for the financial result, in Stockholm half the total revenue is at present consumed by the operation costs of the charging system, and adding first the investment costs, and then the charge-payers compliance costs to the operation costs, this proportion goes up to 72% and 84%, respectively.1 In the London case the total revenue from the congestion charges only just covered the total costs of the charging system (excluding charge-payers compliance costs) but since a good part of these costs has to do with the non-compliance, it may be fair to include the substantial penalty payments of £70 millions (Leape, 2006, p. 170). Still half the gross revenue is required to cover just the running costs of the charging system. This is unheard of in other areas of the market economy, where the real costs of the price system itself typically consume only a small percentage of the revenue brought in.

4. Second-best alternatives Now that we have real experience of road pricing and can see the whole picture, the question is: which is the main lesson for other cities, which may hesitate about following the example of London and Stockholm in view of the huge charge collection costs? The traffic congestion has to be quite serious before it makes economic sense to introduce a similar system of congestion charging as in London and Stockholm. Therefore an urgent task is obviously to develop a considerably less costly system to charge for scarce road space. In this effort one could start by looking closer at the other two main road pricing cities, Singapore and Oslo where the operation costs of the congestion charging systems are much lower per vehicle liable for payment (Jansson, forthcoming). The crucial difference between London and Stockholm on one hand, and Singapore and Oslo, on the other, is that an in-vehicle unit is an integral part of the charging systems of the latter two cities. This eliminates the most resource-consuming part of the control of payments. The problem of cities like London as well as all big cities on the European continent (and most other towns and cities, too) is in this connection that visitors traveling by car make up a large proportion of the central-city car traffic of each particular city. To require that each visiting car should be equipped with the appropriate in-vehicle unit concerned would be very demanding. Moreover, the gantry gateways required for each inlet to the charging zone would be a huge visual intrusion in older cities like London, which would spoil the street scene of many well known and precious historic quarters. In a forthcoming paper, ‘‘The road pricing breakthrough – issues for the future’’ (Jansson, forthcoming) the problems and possibilities of different road pricing development strategies are further discussed. Here, a different idea is developed, starting from

1 That the proportion of 84% reappears is due to the somewhat odd coincidence that the total revenue (TR) happens to be almost the same as the total benefits (TB). If the effects included in the CBA were restricted to the charging zone, that coincidence would have been next to impossible. TR would exceed TB quite substantially in the realistic range of car travel demand elasticities. That TR z TB in Stockholm, and that TR is even considerably lower than TB in London are signs that a large part of TB arises outside the charging zone in both cases.

the most encouraging lesson of the London and Stockholm initiatives. Apart from the technical issues, it is almost revolutionary that the general public in some big cities is beginning to realize that traffic congestion is not a necessary evil of ‘‘progress’’. Therefore, in other cities put off by the huge costs of the congestion charging systems in London and Stockholm, it does not seem necessary to wait until the costs of a reliable road pricing system has come down to a more affordable level, doing nothing about growing urban traffic congestion, or yield to the pressure to expand central-city road capacity which would just cause further environmental degradation. There are second-best alternatives which might not be as effective as fully-fledged road pricing, but which would entail far less real resource costs and go a long way towards the final goal. 4.1. Parking policy First mention should be made of parking policy, which could be very efficient, unconventionally applied (Jansson & Wall, 2002), but it is true that some well known legal/political problems loom large. To use on-street parking and commercial parking off-street for the purpose of congestion charging would be relatively simple: just add a fixed charge representing the congestion cost of the preceding or succeeding trip to the current time-proportional parking fee at every meter on-street and off-street alike, as well as in every public or private parking-house open for all. The problem is, of course, non-commercial private parking facilities, but this problem can be solved if only the will to find a solution exists with the city government and its electorate. The starting-point of parking policy reform should be to recognize that free parking for employees at the employer’s premises in the central city is a very substantial fringe benefit, which should be taxable. Seeing what is charged for parking space in nearby commercial parking facilities, it is obvious that if the value of this fringe benefit were added to the income of the beneficiary in his/ her income-tax assessment, the indirect price of all-day free parking would be at least at the level of the London congestion charge. Of course, questioning a coveted privilege of such a powerful category of citizens as business executives and high-rank civil servants enjoying free parking (in addition to company cars), and insisting on the enforcement of the general tax law with no exception, is not an easy way. There are legal problems in this connection which star lawyers clever at twisting the law could make insuperable, unless the ultimately responsible politicians/legislators really want to carry through a reformation of parking policy. 4.2. Subsidization of public transport and ‘‘the cost of public funds’’ Subsidization of public transport may be an easier way out. One has, however, to grasp the difference between financial effects and real resource effects, and in this connection the ‘‘cost of public funds’’ is a matter of vital importance, because in pure financial terms a zero-fare policy for central-city travel by public transport would look very bad. In modern CBA it is now common to supplement the traditional analysis of real effects by the financial consequences which are translated into real terms by a shadow price called ‘‘the cost of public funds’’ (CPF). This is a key issue in this connection, which has to be faced at once. It is an issue also for the previous calculations of the total net benefit of congestion charging in London and Stockholm, but not as crucial as in the present case. By excluding all transfer payment from the Swedish CBA in Table 4 above, the basis for a fairly substantial real item included in the original CBA for the Stockholm trial is taken away. This is fair enough in my view, because the item concerned, that is, the ‘‘cost of public funds’’, should be omitted in this case. It is a complex issue, which cannot be fully treated within the space of

J.O. Jansson / Research in Transportation Economics 22 (2008) 179–187

5. Towards a zero-fare policy for central-city-bound public transport The public transport subsidization considered in what follows is envisaged in two steps. On the assumption that the present level of fares, P, is well above the price-relevant marginal cost, MC*, if not fully in line with the average cost of public transport operations, the two-step fare reduction policy is this: *

P/MC /0 According to classical welfare economics, the first step would be costless, because it means a movement from a suboptimal position to the optimum (when just considering effects in the public transport market). The net benefit of the first step is represented by the dark triangle in Fig. 3. It would be relatively tiny in most cases, unless the initial position is unusually elevated (which would be the case where no subsidization at all applies). In addition comes a considerable positive effect on car transport costs. In big cities with very congested traffic conditions the positive effect on the car traffic could very well justify a second step of subsidization, going all the way towards zero fares. It seems welladvised to consider in the first place a zero-fare policy applied just in the central-city-bound travel market, and/or to travel within the central city, depending on the level and structure of road traffic congestion. Such a radical policy has been applied in no big city to my knowledge. Therefore it is difficult to more exactly quantify the effects that could be expected, and estimate the result in cost and benefit terms. The Stockholm trial, however, has provided a unique opportunity to do just that by a counterfactual analysis addressing the question: what would the result have been, if instead of introducing congestion charging a zero-fare policy had been adopted in Stockholm? The lucky coincidence for the counterfactual analysis

SEK

GENERALIZED COST

this paper. In Jansson (2006) the main reason for the omission is discussed in some more detail. Here the argument is set out in brief summary. In a standard, partial CBA of a transport investment, effects on other markets (than the transport markets) are assumed to be marginal and since anyway these other markets are assumed to be characterized by equality of price and marginal cost, effects outside the transport markets concerned could be ignored. This makes sense, at least if the public investment in question can be assumed to be inconsequential or neutral towards the labour market. The narrow system demarcation of a typical CBA of transport projects is sometimes criticized for disregarding wider issues, in particular the effects on the labour supply. In the present context the two main measures under discussion – imposing a congestion charge, and increasing public transport supply for work commuters, as well as offering these services free of charge, are certainly not neutral towards the labour market. The congestion charge would have a restraining influence, and the boosting of public transport services an inciting influence on the supply of labour on the central-city job market. The density of highly skilled jobs is at a maximum in the central cities of the two capitals, and the social benefit of additional jobs in the area is much higher than the private benefit (see further Venables, 2007). These effects are not included in the CBA above, neither for the London congestion charging, nor for the Stockholm trial. In view of this neglect it would be wrong to add an extra benefit on account of the newly arising revenue from the congestion charge, as well as a cost on account of a possible increase in the subsidization of public transport costs in the CBA. The public transport subsidization policy to be discussed next would greatly stimulate the central-city labour supply. Adding an extra cost of public funds, while ignoring the positive effect of additional jobs in the central city, would in this case be quite unbalanced.

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GC1

GC* = MC =P* + ACpass

GC2 = Acpass (P= 0)

Q 1 Q* Q2

Q

PUBLIC TRANSPORT VOLUME

Fig. 3. Two steps towards a zero-fare policy for central-city-bound public transport.

was that the congestion charge introduced, on average, 26 SEK (£2) per car and day happened to be almost the same as the cost of a return trip by public transport for passengers having a monthly pass (SL, 2006). There are also rebated single-ticket batches, which is the best option for less regular public transport users, by which a return trip would cost on average 33 SEK (£3.5). It could consequently be assumed that zero fares would bring over roughly the same number of car commuters to public transport as the Stockholm congestion charge.

5.1. Counterfactual analysis: suppose that a zero-fare policy had been introduced in Stockholm instead of congestion charging, what would that have implied in cost and benefit terms? The first step towards zero fares would have been undramatic in the Stockholm case, since the current level of public transport fares does not exceed the optimal level very much. The public transport in Stockholm was 49% tax-financed in 2005, and the optimal level of fares can be estimated to be about 40% of the average total cost (Jansson, 2001). Anyway, a costless measure which will produce a positive net benefit should be taken at all events. The question is, what the result would be of a second step implying a zero-fare policy. This would cause an appreciable real cost, symbolized in Fig. 3 by the light grey triangle. This cost would be counterbalanced by reduced fare collection costs, which would be relatively small bearing in mind that the zero-fare policy is assumed to be just partial. It would be quite helpful, however, in the endeavor to reduce the time at bus stops and in the underground metro system previous ticket inspectors could serve as attendants, informants and patrolmen to enhance the well-being and security of the travellers. Zero fares should also apply to off-peak central-city travel for double reasons: (i) a switch of current off-peak passengers to the peak periods should be prevented, and (ii) the price-relevant marginal cost of off-peak public transport services is anyway close to zero. The latter

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fact means that there will be substantial additional benefits of new off-peak public transport riders, which will cause no extra costs. The really large benefit would, of course, be the additional reduction of traffic congestion due to the switching from cars to public transport. In the Stockholm case, free public transport for travel between the central city and stops/stations along the lines in the suburbs where park-and-ride facilities are provided (rather than right up to the end of the lines) would change the relative generalized cost of travel by car and travel by public transport about the same as the congestion charge applied in the Stockholm trial. It should thus produce a roughly similar effect on the modal split between car and public transport. It would not result in a similar reduction of car traffic, because, as was established in the trial, only about half the evicted car trips became public transport trips. The other half went elsewhere. The resultant benefits in the car travel market would be greater than one half of the benefits obtained by the congestion charging in the Stockholm trial. Fig. 4 illustrates this point. The total benefit of the optimal congestion charge is represented by the total shaded triangle in the diagram. It is given by the integral of the difference between the social marginal cost curve and the demand curve from where these two curves intersect (at the level of traffic, X*, ruling after imposing the optimal charge) to the original point of intersection between the demand curve and the generalized cost curve as it appeared before congestion charging (GC1). Zero fares for central-city travel by public transport would shift the car traffic demand curve downwards. The effect on the car traffic volume is assumed to be half of that obtained by congestion charging. The new point of intersection between the demand curve and the GC1curve would correspond to a level of traffic, X2, right in-between the original level, X1, and the level of traffic, X*, obtained by introducing optimal road pricing.

The total benefit in the car travel market is given by the darker part of the shaded triangle, which is approximately 0.75 of the total triangle. 75% of the total benefits obtained in the car travel market by the congestion charging in Stockholm would consequently be realized by the zero-fare policy. This would amount to £41 millions per year. If the increase in public transport demand would only consist of former car travellers, a CBA of the zero-fare policy in Stockholm would be simple, because the required supply addition would be the same as that made as part of the Stockholm trial. The only difference would be that half the car trip reduction obtained thanks to the congestion charge would remain on the roads. However, it is likely that additional public transport trips would appear, in particular entirely new trips during off-peak for other purposes than travel to/from work. This addition would be an appreciable extra benefit. An additional cost of public transport would arise only if a substantial number of commuters, at present riding their bicycles or walking, would switch to public transport, because this would mean that more capacity than that required to accommodate the former car commuters has to be provided. However, a large majority of work commuters to the central city make longer trips than 5 km, and beyond this distance there are hardly any walkers. There are quite a few bicyclists, but their modal choice is to a large extent motivated by the exercise obtained, and zero fares would not make a big difference to them. Assuming that the additional public transport costs of new peak travel is by and large offset by the benefits of practically costless, additional off-peak travel, the CBA of the zero-fare policy is greatly simplified. Using the same format for the CBA as in Table 4 above, where the cost-side is made up of just the costs of the congestion charging system, the cost-side of the zero-fare policy is obviously zero. The total benefits of the zero-fare policy are in accordance with the preceding reasoning 75% of the total benefits given in the last column of Table 4, that is £41 millions. In a benefit and cost comparison of the zero-fare policy in question and the present congestion charging in Stockholm, the latter policy is apparently at a great disadvantage: £7 millions vs. £41 millions. There is an additional aspect to consider. The financial consequences that can be disregarded in a strictly real CBA are allimportant for practical policy. 5.2. Financial consequences The zero-fare policy in question is certainly very negative from a narrow financial point of view: some £100 millions less revenue will be obtained from payments by public transport riders. This is in glaring contrast to the present policy where the sum of the net revenue from the congestion charges and the net revenue from additional fare-paying public transport riders as a result of the congestion charges amounts to a positive total of £23 millions. It has been argued above that the so called ‘‘cost of public funds’’ is irrelevant for investment or pricing policy measures which are aimed at transport cost reductions for commuters. Let us anyway examine what difference it would make for the CBA if a CPF-factor is applied in the present case. In Table 5 below it is shown how the superior goodness of the zero-fare policy changes when a

Table 5 Net total benefits of congestion charging vs. a zero-fare policy, £ millions per year Fig. 4. Net benefits of optimal road pricing – total shaded triangle, and net benefits of zero fares for central-city travel by public transport – the darker area of the triangle. Note: the difference between MC* and MCcar is constituted by the marginal systemexternal cost. The total system-external costs are assumed to be roughly proportional to the traffic volume.

Alternative CPF-factors

Congestion charging

Zero fares for central-city travel by public transport

0 0.3

7 15

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CPF-factor ¼ 0.3 is applied. This is a ‘‘normal’’ value in countries where it is applied in cost-benefit analysis. By this addition the present congestion charging comes out on top in the ranking. It is not a very bold conjecture that the large positive net benefit in real terms of the zero-fare policy would not be impressive enough to convince the responsible city government to reallocate its budget and make the concomitant huge transfer payment to public transport riders. In order to make more practical sense, the counterfactual reasoning should be extended by some further consideration of the financial consequences of a zero-fare policy. In the Swedish context it would probably be necessary for the state to intervene and compensate Stockholm, for example by the additional revenue from a CO2 tax rise on petrol by 35 o¨re (£0.03) per litre. However, a further problem could be that such a general tax rise, and especially this particular use of the additional tax money, would not be acceptable to the majority in the Swedish Parliament representing all other regions except Stockholm. Bearing in mind that 70% of the local public transport in Sweden is run in the Stockholm area, an extension of the zero-fare policy to the whole nation would not require a very substantial additional commitment on the part of the national government, so by making the CO2 tax rise 50 o¨re rather than 35 o¨re, it would be possible to finance a zero-fare policy for central-city travel in all medium and large towns and cities of Sweden. By this hypothetical numerical example I want to widen our horizon. If global warming is the main problem, one should recognize that fully-fledged road pricing seems for yet some time to be an option limited to the very largest cities, which could afford the high collection costs, while zero-fare for central-city travel by public transport could be a national policy with great potential also for fighting climate change. 6. Conclusions There is a lot to be gained from a cost-efficient congestion charging system, but the charge collection costs of a foolproof system have turned out to be unexpectedly high. For those cities being still in doubt about the costs and benefits of the commitment to a fully-fledged road pricing system, there are fortunately very good alternatives, which could be implemented much faster. One second-best measure of great potential is parking policy, and another is zero-fare for central-city travel by public transport, encumbered with negligible administrative costs. To be true, a policy

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of zero-fare for central-city-bound public transport would require substantial investments in public transport capacity, but the additional capacity will anyway be required in case a proper congestion charging scheme is eventually adopted. The problem with this line of action is that, while the benefit/cost-ratio looks very healthy, the revenue/cost-ratio is disastrous. It is understandable that politicians and others used to think of ‘‘economics’’ mainly in financial terms would much prefer the road pricing policy, once it is accepted by a majority of the general public. It is also clear that the issue of ‘‘the cost of public funds’’ is all-important for the CBA of congestion charging versus public transport subsidization. However, irrespective of which of these pricing policy directions is favoured, the main urban transport investment policy direction should be enhancement of the public transport. It is good in the final policy analysis to be able to identify some common ground. No matter whether the emphasis is on road pricing or on public transport subsidization, increased capacity and quality of the public transport is the necessary condition for success. In the big picture of the real resource allocation it is not all that important whether the corresponding additional public transport demand is induced by higher prices for road services, or by lower prices for public transport services. References Algers, S. (2007). The effects of the Stockholm congestion charging trial 2006: Overview. Stockholm: WSP Analysis & Strategy and KTH. Jansson, J. O. (2001). Bortom Dennispaketet. In: Transportpolitik i fokus, Vol. 2. Stockholm: Vinnova. Jansson, J. O. (2006). The economics of services – development and policy. Cheltenham: Edward Elgar. Jansson, J.O. Urban transport pricing with the excessive charge collection costs in view. Transportation, submitted for publication. ¨ gtrafiksituationen I ¨ r va Jansson, J. O., & Wall, R. (2002). Vad betyder fri parkering fo Stockholmsområdet? EKI, Linko¨ping University. Leape, J. (2006). The London congestion charge. Journal of Economic Perspectives. Fall. Prudhomme, R. & Kopp P. (7 September, 2006). The Stockholm toll: An economic evaluation. Second draft report to SIKA. SIKA. (2006). A¨r tra¨ngselskatten samha¨llsekonomiskt lo¨nsam? SIKA PM, 4. Stockholm. SL. (2006). Fyra prisstrategier. Storstockholms Lokaltrafik. Plan-rapport, 2. Stockholm Stad. (2006). Facts and results from the Stockholm trial. City of Stockholm: Congestion Charge Secretariat. Transek. (2006). Samha¨llsekonomisk analys av Stockholmsfo¨rso¨ket. Transek report, 31. Solna. Va¨gverket. (2006). Trial implication of a congestion tax in Stockholm 3 January to 31 July 2006. Borla¨nge. Venables, A. (2007). Evaluating urban transport improvements. Journal of Transport Economics and Policy. May.