The Money’s in the Infrastructure

This is just a short thought on the economics of transit capital costs and operations, which has been bouncing around in my head in the wake of service reductions at many agencies.

As any transit planner would tell you, reducing service can lead to a vicious cycle, where less frequent and therefore less convenient service causes ridership to drop, which becomes justification for further cuts. This is bad enough in a generic bus system, but at least in that case there’s little capital infrastructure that goes to waste, since most city buses just run on regular streets that are already there.

However, for something like rail transit, it’s truly crazy to cut service (unless you’re forced to by maintenance needs) due to the relative magnitude of capital investment. A brief example shows why.

Consider a 10-mile rail line built at a cost of $150m/mile, a total of $1.5b. Spread out over 30 years at 3%, the cost of construction is about $76m/year. If we run the line for 20 hours a day (4am – midnight) with 6 minutes headways, with reasonable cost per revenue-mile, it costs about $24m/year to run the line. This assumes 320 weekday equivalents, representing slightly reduced service on the weekends. The total cost is about $100m/year, of which capital costs are 75% and operating costs 25%.

Now, let’s impose an austerity plan on the line, reducing service to 16 hours a day (6am – 10pm), cutting frequency in half to 12 minutes, and further reducing weekend service to get weekday equivalents down to 300. The operating cost is reduced by over 60%, but the capital costs cannot be changed. The total cost is about $85m/year, only a 15% reduction from the base plan. As a result, passengers will get much less useful service and some will quit riding the line altogether, further worsening the financial position. And the austerity plan will likely reduce the efficiency of labor and equipment usage, again cutting into the savings.

We can see how illogical this is by considering some simple analogies to driving. Once you have bought a car and committed yourself to monthly auto loan and insurance payments, you can’t cut your costs very much by not driving. In fact, not driving may worsen your position by depriving you of employment. The capital costs are large relative to operating costs.

Likewise, if Caltrans is short on money for maintenance, it would be silly to try to rectify that problem by simply closing one or two lanes on the freeway. No one would ever suggest this because it would be considered intuitively obvious that closing freeway lanes constructed at great capital expense to save a few dollars on maintenance is not in the public interest.

The wrinkle here is that transit agencies often don’t pay for the full cost of capital projects, or don’t account for it out of the same pot of money. In that case, there really should be some mechanism to ensure that adequate operating funds are secured so that the public’s capital investment isn’t wasted. I believe the FTA requires recipients of New Starts funding to demonstrate this in a finance plan, but the enforcement may not be there. The FTA has sometimes demanded that funds be returned when not used for the capital improvements promised – see ARC and Cleveland for examples – so maybe service spans and frequencies should be spelled out in funding agreements as well.