Diving into the murky waters of transport subsidies

Te Huia appears to be a lightning rod for discussions of subsidies. Yet, Te Huia is not alone in receiving subsidies. Let's take a look.


Paul Callister

4/23/20247 min read

10 banknote on white and green textile
10 banknote on white and green textile

How useful is a ‘user pays’ philosophy if only some costs and benefits are counted? Will the performance of Te Huia (the train) be adequately reflected in its current review, or will the answer more reflect the quality of the evaluation? Te Huia appears to be a lightning rod for discussions of subsidies. In forums such as talkback radio, outrage is often expressed that passengers do not pay the full cost of the trips.

Yet, Te Huia is not alone in receiving subsidies. The bigger question is why do we subsidise some services and infrastructure, but not others? Why do some transport subsidies get lots of scrutiny from talkback radio while others are generally ignored?

Outside of transport, many examples can be found of where people do not pay the full cost of a service or facility. These include socially useful activities such as young children learning water safety skills or older people keeping healthy in aquarobics classes at a ratepayer funded public swimming pool. Or children learning to read in a free library. Even in commercial services there is often cross subsidisation, so one customer pays more for the same goods or services than another. Loyalty card schemes are an illustration, where those not using the cards effectively subsidise the card holders.

The tourism sector is full of examples where user pays models do not directly apply. Travellers will stop at a toilet provided by a local authority – in a region where they are not a ratepayer, or if from overseas, not even a taxpayer - and not having to spend a penny or a dollar for the privilege. They walk on mountain tracks or regional parks they do not pay for directly. The idea is that these free services create wider benefits across society.

Subsidising public transport within urban areas

For public transport within towns and cities across the world, most services are not paid for fully by those using them. In fact, in some places public transport can be free. In 2020, Luxembourg became the first country in the world to scrap fares on all public transport.

Public transport within cities is subsidised for a variety of reasons. Affordable fares make it accessible for low-income members of society, including providing mobility options for children for both recreation and schooling. Encouraging people to use public transport helps reduce congestion on roads thus benefitting drivers, lowers emissions, and allows older people who cannot drive or use active transport to fully participate in society. It reduces costs of living for lower paid workers and allows those without cars to reach workplaces thus boosting the economy. The tax-payer funded Goldcard allows older New Zealanders to travel free on mainly urban based public transport at some times of day. Some councils top the subsidy up with ratepayer funding to increase the times of day this free travel applies.

Subsidies for public transport do not always come from the public purse. For example, with a new Fareshare scheme, employers can subsidise their staff’s public transport costs when they travel to and from work using Auckland Transport services.

The draft GPS suggested that the current farebox subsidies be reduced.

Subsidising longer distance trains

Support for longer distance low emission land based public transport in Aotearoa New Zealand seems to attract particular opposition. But there are few long-distance services attracting subsidies. The main ones are the Wairarapa trains, the Capital Connection linking Palmerston North and Wellington, and Te Huia linking Auckland and Hamilton.

Within the Greater Wellington Regional Council area, the Metlink operated trains on the Wairarapa line have a farebox recovery rate of 25%. It is difficult to put a figure on subsidy per passenger as there are various fares ranging from full fares, frequent traveller concessions and Goldcard travel.

The KiwiRail operated Capital Connection has a farebox recovery rate of 85%. The full cost of a one-way adult ticket from Palmerston North to Wellington is $35, but many passengers travel shorter distances or get a monthly pass ($19/trip). The overall subsidy per passenger per trip will about $4.

The reasons for keeping fares affordable on these services are similar to those for city-based travel. But for longer distance travel, allowing people to avoid being on dangerous roads, with large trucks increasingly common, becomes even more important. Getting cars off the roads also reduces the need to expand expensive highways and reduce maintenance on local roads. We should also be encouraging people to switch from cars and planes for those longer trips in order to reduce emissions.

At the Future is Rail conference in 2023, the National Party suggested that subsidised intercity rail, such as linking Wellington and Napier, is not needed when a fully commercial coach service is provided by InterCity. The comment ignores that travelling longer distances by coach would be considered uncomfortable by many New Zealanders, perhaps most. It also ignores the limited-service standards of our New Zealand coaches, which impact some passengers much more than others: the coaches have poor accessibility for people with restricted mobility, and the lack of onboard toilets restricts who can use the services. In fact, these services do receive some indirect subsidies. The bus stops and off-board toilets are paid for by local authorities, not passengers.

Subsidising cars

The use of cars is subsidised in various ways. But unlike the subsidies to trains, it is harder to get a good summary of the size of these subsidies. It is a murky area to look into.

Free parking is one subsidy. Wherever there is free parking using valuable public land, such as the side of roads or designated free car parking areas, this is a public subsidy generally borne by ratepayers. Minimum parking standards are another subsidy. Private carparking at malls, office blocks and recreational or educational facilities has often been a condition of consent. The cost of the land adds to the tax bill, and to the cost of owning or leasing the shop or office - which is then transferred through to higher costs for goods and services.

The space used for parking is also a “land use” problem. In New Zealand towns and cities, the excessive supply of car parking typically increases distances between amenities, with significant negative impacts on walkability. To compound the problem, excessive parking is often located at commercial and public facilities, including bus and train stations, in a way that compromises the safety of people walking and biking.

The land subsidy, coupled with the deterrence to walking and cycling that arises from poor safety around carparks, combines to shift people from travelling actively to using motorised modes of travel instead. These are significantly more costly, and impact household finances.

Those who do not drive, including teenagers, pay “subsidies” for this parking and resulting car dependent land use patterns, through their loss of freedom of movement and reduced access to opportunities. For some, this will have a lifelong impact on career, economic standing and mental health.

Ratepayers also pay for the building and upkeep of local roads, and taxpayers are increasingly called upon to fund transport projects. While public transport projects are usually cited as examples, highway projects have featured highly. Furthermore, rail projects are simply reversing the deliberate “managed decline” of the rail system over decades of much higher subsidies to driving that to rail. Similarly, bus projects typically have much higher costs than is necessary due to the perceived but faulty belief in the need to maintain traffic capacity.

Driving also increases the bill for public health extensively, impacting respiratory illness, physical inactivity-related health and mental health problems, road injuries and noise-related health problems. These are not directly paid for by motorists but by taxpayers, health insurance premiums and individuals.

The cost of CO2 and other transport emissions will add significant costs for generations to come.

There are roading projects proposed to be built that have very poor cost benefit ratios, sometimes under 1. That is the costs are higher than the benefits. While Te Huia is under review, a roading project of mega proportions has been proposed by Simeon Brown, a 4km tunnel under Wellington. As commentator Bernard Hickey notes:

“Brown argued the tunnel could save him 12 minutes on a trip to Wellington airport. That’s the equivalent of about one billion dollars per minute of saved time. Others have estimated each trip through the tunnel would cost $60 if the costs were allocated to drivers through a toll, with the cost double that if a Public Private Partnership model was used.”

Subsidising planes

Four lanes to the planes are certain to require large taxpayer subsidies. Yet, less known and talked about are the subsidies to high emission aviation. In aviation many of the benefits are captured by better off members of society. Here are a few examples of public support of aviation.

Ratepayers and/or taxpayers have paid for airport terminal upgrades. Examples include New Plymouth and Taupo. Sometimes the taxpayer pays for an airport upgrade, often to encourage tourism an example being the Chatham Islands.

There have been examples of ratepayers supporting an airline to bring a service to their region, such as Kapiti.

What very few New Zealanders know about is a subsidy to flying, provided through a GST exemption. All international travel is GST exempt. So an overseas holiday to Rarotonga is exempt of GST, but an overseas trip to Great Barrier Island in the Hauraki Gulf attracts GST. The Rarotonga flight is not in the Emissions Trading Scheme but a ferry trip or a flight to Great Barrier Island is. On the Rarotonga trip you can also pick up your duty-free goods. But it is not only the international flight that is GST exempt. This exemption includes connecting domestic flights. If you can connect to the flight by train the train fare will be subject to GST.

This exemption on connecting flights is not insignificant. Assume that one can get flights to Auckland and back from Palmerston North for $150 each way to connect with an overseas flight. A total fare of $300 should have a GST component of $45. So, a loss of $45 per person on this trip to government revenues which pay for schools, hospitals or supporting the mobility options of struggling Kiwi families. New Zealanders, especially well-off Kiwis, are big international travellers, so the total lost revenue for government is likely to be significant.

An even-handed approach to transport subsidies

Carefully evaluating the use of public money is important. But the scrutiny has to be informed by an equity lens, by goals of improving travel options for all members of society, improving safety, and by the need to dramatically and quickly reduce emissions. When all these lenses are used, investing in long distance trains provide excellent value for money. It was short sighted thinking that allowed Te Huia, the bird, to become extinct. Let us make sure we do not do the same for Te Huia the train.