On the 14th March, the New Zealand Government announced a three-month reduction in fuel excise duty (and road user charges) of 25 cents + GST per litre and a 50% reduction in public transport fares. The reason given was a “cost of living package aimed at giving Kiwi families immediate relief through the current global energy crisis triggered by the war in Ukraine”.
Fuel prices rise, but this time it's different...
Prime Minster Jacinda Ardern says it’s because of “a spike in prices” and said prices have increased by 13% over the last month – clearly then the issue isn’t the price of fuel increasing generally, but the rate of recent increases against a backdrop of overall increased inflation. Finance Minister Grant Robertson was also careful with his use of words. He talked about prices stabilising, not normalising, and he reinforced the issue of on-going general fuel price volatility.
In my opinion, short term volatility and long-term rising fuel prices (stability) is the new normal. This is our reality.
The problem with fuel is for most people it’s like oxygen that enables life
We wouldn’t cut off our supply to oxygen, and fuel is the same. The consequence isn’t just providing relief to Kiwi families like the Prime Minister described, it’s more fundamental where if we don’t pay the cost of fuel, we limit our access to opportunities such as work, education, and health. Simply put, if the cost of oxygen goes up, we will always pay because it’s required for living.
In this instance the policy response is twofold.
One is a reduced tax meaning when (not if) the tax is reinstated, and the cost of fuel rebounds to be more in line with expectations, there is probably no lasting behavioural change – for the reason I’ve previously explained, that is because we will always pay.
The other is a subsidy, meaning when the subsidy is removed, the fare price may not have to increase. That is because the short-term pricing response might result in a positive experience for people and a permanent behavioural response with say a disproportionate increase in demand. That could mean public transport fares remain lower because more people are using it, and potentially significantly more, even more than the 45% of passengers that have abandoned public transport as a result of Covid-19. Conversely, if people have a bad experience because of reliability issues such as driver shortages, or an uneasy feeling that buses are ‘germ incubators’, it might be many years before they give public transport another go.
This second response, and the positive outcomes that come with that, is the real nugget within the government’s announcement.
Why then has it required a central government response to try and encourage more people onto our local public transport networks? The answer is central government requires a balanced budget when it comes to supplying regional trains, ferries, and buses, where any fare box deficit must be made up from local funding, otherwise known as rates. That creates a problem because although great in concept, local politicians are typically reluctant to take a leap of faith that somewhere they will hit a magic tipping point where the reduced cost of the fare induces massive consumption for the service (demand).
We have experience helping decision makers anticipate the potential consumption of various public transport networks and services through detailed economic modelling.
We do that using known elasticities that describe the interaction between different variables such as the cost of travel and the quality of service for that travel. The problem when testing large policy changes like making public transport fares significantly lower or even free, is that this typically sits outside the reach of the known elastic band response. That is why it is important to also consider the wider operating environment and seek expert guidance, as while we know a fare reduction will be positive, it needs to be contextualised to be understood properly.
The policy to reduce passenger transport fares by 50% for three months provides a massive opportunity to better understand people’s propensity to change. The information gathered from this real-world study will inform better regional public transport services and if done well, may even provide insight into transport choice between different network configurations.
Like all things, nothing is ever static
Just as this is a massive opportunity from a study perspective, rising fuel prices also provide people with an opportunity for personal reflection. It enables people to consider their immediate choices such as the fuel efficency of their vehicle, sharing travel, where they live, reducing travel such as working from home, and other modes of transport such as walking, scooting, and cycling. It also enables reflection on how some of those modes are powered, for example internal combustion engine or electric.
The long game for our children’s children means we need to invest in travel alternatives, and where travel needs to happen we must provide different choices other than traditional fuel types. That means that we need to invest in education and infrastructure.
Enabling investment to continue means topping up the National Land Transport Fund by the tune of about $350M because of this policy. The government says that deficit will be met from the COVID Response and Recovery Fund or said another way, borrowings. I’m ok with that because we are demonstrating a need to get off our dependency on fuel, so when fuel pricing jumps beyond expectations (for whatever reason), the effect is less on Kiwi families.
Overall, I’m encouraged by the government’s policy intervention for halving public transport fares from 1 April 2022.
I believe it’s a forward-looking and accelerated policy that if rolled out correctly and coupled with a positive user experience, including being studied correctly by our regional councils, will have a lasting impact on how we shape our public transport networks. It also helps us move towards our carbon reduction goals and that too can only be a good thing.
Great public transport has the potential to provide environmental, economic, and social benefits. Bringing communities together is just what we need post Covid-19.
Steve Abley
Chief Executive